TaxTMI 
TaxTMI 
2015 (2) TMI 937
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....stances of the case, the Commissioner of Income Tax (Appeals) has also erred in law, in confirming the disallowance of Rs. 3,22,00,000/- being the value of Employee Stock Option granted and opted by the employees, not a business expenditure and as a notional capital expenditure. 2. Briefly stated, assessee is a Micro Finance Institution and filed return of income declaring Rs. 35,29,35,971/-. In the scrutiny of return, Assessing Officer noticed that assessee did not offer entire gains received on sale of portfolio loans but amortized the same and offered only part gain during the year. He also noticed that on one closed loan portfolio sold to HDFC bank entire gain was offered to tax. In addition to the issue of gain on sale of loan portfolio, Assessing Officer also disallowed claim of expenditure on account of ESOPs to an extent of Rs. 3,22,00,000/-. The Ld.CIT(A) confirmed the additions of the above amounts, hence assessee is in appeal. 3. We have heard the Ld.Counsel for assessee and Ld.DR in detail and perused the Paper Book placed on record. 4. Ground No.1 is on the issue of confirming an amount of Rs. 13,09,44,315/- being the amount received by discounting the maturit....
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....or collection and the costs involved in service are not material for recognition of revenue from the sale of portfolio; e) The difficulty in estimation of servicing costs or obligation to service the portfolio are not relevant for recognition of revenue from sale of portfolio as both are distinct and separate functions performed by the assessee; f) The interest income received on sale of portfolio has no link with service cost. Also, there is no interest strip or service strip in the agreement to sell the portfolio; g) Keeping of cash collaterals (10% of the value of purchase consideration as well as part of the collection amounts in excess of principal) indicates only a contingent liability. The second part of the cash collateral is out of the funds belonging to the assignee only. Only the first part is out of the amounts received by the assessee. No one prevents the assessee in claiming trading loss, if any time, the cash collateral is liquidated. In the present case, even such liquidation never happened; h) The statement that even if borrowings are not realized, the assessee meets the obligations in practice is only a self-serving statement. As per the agreement, the....
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....ortfolio; i) Keeping of cash collaterals (10% of the value of purchase consideration as well as part of the collection amounts in excess of principal) indicates only contingent liability. The second part of the cash collateral is out of the funds belonging to the assignee only. Only the first part is out of the amounts received by the assessee. No one prevents the assessee in claiming trading loss, if any time, the cash collateral is liquidated. In the present case, even such liquidation never happened; j) The statement that even if borrowings are not realized, the assessee meets the obligations in practice is only a self-serving statement. As per the agreement, there is no binding on the assessee to pay its own amounts when loans are not collected from the borrowers. If for the sake of its convenience, the assessee adopts a practice (subject to proof), this does not mean that the revenue has to be deferred. k) As per collection agent agreement - the grounds on which the collection agent is treated as defaulter does not speak of making it liable for the non-recovery of loans. Only thing required is to remit the amounts realized/collected to the Assignee's on the payout....
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.... in the later year. Since there is no revenue loss over a period of time, Assessing Officer's addition is not correct to that extent. He also explained the principles involved in securitization of assets and AS-9 which assessee is following. 7. Ld.DR however, relied on the detailed analysis made by the Assessing Officer and Ld.CIT(A). 8. We have considered the issue and examined the documents and agreement placed on record. There is no dispute with reference to the fact that assessee has transferred by way of direct assignment to and in favour of banks (purchaser), certain identified loan receivables together with all rights and interest receivable for a purchase consideration paid by the purchaser upon execution of deed and assignment. The purchase consideration is generally arrived at by calculating the value of receivables based on discounted cash flow method which is equivalent to interest rate, if it is viewed as a borrowing. Assessee also signed an agreement to collect the receivables assigned and ensuring the payment of the same to the banks on specified dates every month. It is the contention that assignment of loans has been accruing in accordance with AS-9 which....
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.... 20,17,26,102 (Amount received from ICICI Bank t/ws portfolio assignment) 19- Mar-09 For Cash Collateral -1 (10% of Purchase Consideration) Kept with ICICI Bank and released only after completion of the tenure Fixed Deposit Pledged with ICICI Bank Ltd Dr 2,43,37,656 Entry passed when Assignment takes place ICICI Buyout Loan - 2 (loan) A/c Cr 2,43,37,656 (10% of Purchase consideration kept with ICICI Bank as Cash collateral, which is to be released only on completion of the Tenure) For Cash Collateral -2 (Purchase Consideration minus Book value) Kept with ICICI Bank and released in 9 Monthly instalments 19- Mar-09 Fixed Deposit Pledged with ICICI Bank Ltd., Dr 1,54,42,466 Entry passed when Assignment takes place ICICI Buyout Loan - 2(Loan) A/c Cr 1,54,42,466 (Difference of Amount from Purchase consideration to Book value will kept as CC-2 and released in monthly rests) 19- Mar-09 For broken period Interest Charged by Bank Interest- ICICI Buy Out Dr 18,70,332 Entry passed when Assignment takes place ICICI Buyout Loan - 2 (Loan) A....
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....vable totaling to Rs. 25,75,50,626/- out of which discount was given to an extent of Rs. 1,41,74,070/- and mainly on future interest receivables. Thus, out of the interest receivables of Rs. 2,96,16,526/- as future interest, assessee discounted the same for an amount of Rs. 1,41,74,070/- and received the gain of Rs. 1,54,42,456/-. Thus, short of the accounting entries made, the basic principle involved in this sale of portfolio is that as far as principal amount is concerned, no discount was considered as the entire portfolio was given at the book value only. Only interest receivable sold to the purchaser, however, was discounted. Thus, as seen from the above example out of Rs. 2.96 Crores receivable, assessee discounted to an extent of Rs. 1.41 Crores and showed the gain of Rs. 1.54 Crores. It is assessee's contention that the entire amount of Rs. 2.96 Crores, being future interest receivable, is not accruing during the year. Therefore, the gain on discounting of that is not an amount accrued during the year and so, the same is deferred to later year. It is this amount which is under dispute. As this transaction given as an example above has occurred on 19th March 09 and as no....
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....19th March, the entire amount is to be accounted as income on that transaction as a gain. 13. Similar issue was considered by the Hon'ble Madras High Court in the case of TVS Finance and Services Ltd., Vs. JCIT [318 ITR 435 (Mad)] on the issue of accrual of income and timing of accrual on discounting of bills. The Hon'ble Madras High Court held as under: "Where bills are discounted the accrual of interest is certain and arises on the date of discount. The assessee was a non-banking finance company engaged in lease, hire purchase, bills discounting and mortgage loans. The Assessing Officer held that the whole of the income from bill discounting accrued at the time of discounting the bill. This was confirmed by the Tribunal. The assessee claimed the provision it had made towards bad debts under the RBI norms was deductible. The Assessing Officer and the Tribunal rejected the claim. Held, (i) that the Tribunal was right in concluding that the uncertainty regarding the discharge of the bill or rediscounting has no relevance. The transaction of discounting is complete at the moment the customer is given 90 per cent of the value of the bill. The discount is equivalent....
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....ent" in nature because the rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honor its commitment of allowing the vesting of 25% of the option. The liability is incurred at the end of the first year though it is discharged at the end of the fourth year when the options are exercised by the employees. The fact that some options may lapse due to non-exercise/ resignation etc does not make the entire liability contingent; (iii) However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme; (iv) There is likely to be a difference in the quantum of discount at the stage of vesting of the stock options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the ....