TaxTMI 
TaxTMI 
TaxTMI 
2016 (1) TMI 805
X X X X Extracts X X X X
X X X X Extracts X X X X
....non banking finance company with effect from 27.2.1998. During the course of assessment proceedings, the Learned AO noticed that the assessee had derived dividend income which is exempt to the tune of Rs. 180/- and assessee was requested to show cause as to why the proportionate expenses deemed to have been incurred in relation to the dividend income should not be disallowed u/s 14A of the Act read with Rule 8D of the Rules. In response to the said show cause notice, the assessee replied that the investment of Rs. 2,21,18,521/- was made by the assessee out of share capital and out of taxed accumulated profits over the years and no expenditure has been incurred on the investment which has been charged to profits of the assessee company as per profit and loss account. The Learned AO ignoring the submissions of the assessee directly adopted Rule 8D of the Rules and made disallowance u/s 14A of the Act to the tune of Rs. 10,21,245/-. On first appeal, the Learned CITA held that the assessee's net owned funds as on 31.3.2009 were Rs. 11.29 crores and as on 31.3.2008 was Rs. 7.02 crores. The assessee's investment in shares during the year went up only by Rs. 1.5 lacs. These facts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....facts and in the circumstances of the case, the Learned AO is justified in making an addition of Rs. 1,23,56,247/- towards interest income on hire purchase loans advanced by the assessee. 3.1. The brief facts of this issue is that assessee being a non banking finance company advanced monies under hire purchase scheme to M/s Guru Mehar Construction during the financial year 2003-04 relevant to Asst Year 2004-05 for acquiring vehicles. The hire purchase finance charges was recognized as income on mercantile basis by the assessee from the inception of the contract in respect of this party M/s Guru Mehar Construction till Asst Year 2007-08. During Asst Year 2008-09, the said hire purchase account became non-performing asset (NPA) due to default in payment of installments. The assessee being a non- banking finance company is bound to comply with the prudential norms prescribed by the Reserve Bank of India in respect of income recognition , classification of assets and provision for NPA requirements in accordance with section 45IA and 45Q of Reserve Bank of India Act. The said prudential norms of RBI mandate the assessee to recognize interest income on NPA accounts only on receipt basis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rately and judicially adjudicated by the Hon'ble Delhi High Court in the case of CIT vs Vasisth Chay Vyapar Ltd reported in 330 ITR 440 (Delhi) wherein the relevant provisions of the IT Act, RBI Act, Accounting guidelines issued by RBI and ICAI Accounting Standards on Revenue Recognitioin have been duly considered and held that in case of NBFCs, the income recognition can only be done in conformity with revenue recognition norms laid down by RBI. The relevant operative portion of the Delhi High Court judgement is reproduced herein below:- "It was not in dispute that on the application of the provisions of the RBI Act and the 1998 Directions, the ICDs advanced to 'S' by the assessee had become NPA. It was also not in dispute that the assessee-company being NBFC was bound by the aforesaid provisions. Therefore, under the aforesaid provisions, it was mandatory on the part of the assessee not to recognize the interest on the ICDs as income having regard to the recognized accounting principles. The accounting principles, which the assessee was indubitably bound to follow, were AS-9. [Para 16] Therefore, it could not be said that income in the form of interest, though no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nue recognition norms. In this factual background and in view of the over riding provisions of Sec 45Q of the RBI Act 1934, the AO was bound to follow the revenue recognition principles engrained in the RBI's Prudential Norms in assessing total income of the appellant. This proposition is also accepted by the Jurisdictional Calcutta High Court in the case of CIT Vs. KICM Investments Ltd and SLP against that decision was dismissed by the Supreme Court. In the light of these judicial decisions I have no hesitation in holding that the appellant which was an NBFC was liable to follow Prudential Accounting Norms. In terms of the said RBI directions the appellant could not have recognized revenue in respect of the loans granted to Guru Mehar Construction since it had continuously defaulted on payment of interest for more than 6 months period and thereby classified as NPA. In the circumstances merely because the appellant followed the mercantile system of accounting, the AO could not assess the alleged accrued interest of Rs. 1,23,56,247/- as income of the appellant chargeable in AY 2009-10. 5.2.7 The AO also justified the addition of the alleged interest on the ground that in its ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the FY 2008-09. Considering the totality of the facts and circumstances of the case, therefore, I hold that the AO was not justified in assessing Rs. 1,23,56,247/- as interest income of the appellant chargeable in AY 2009-10. The AO shall however inform the assessing officer of Guru Mehar Construction regarding the fact that the borrower credited appellant's account with the entire arrear of interest in one year and claimed deduction for the same in one year which is contrary to law. The AO shall also inform the Assessing Officer of the borrower about default committed by the borrower of non deduction of Tax and its consequent effect u/s. 40(a)(ia) of the Act. These directions are issued to ensure that no leakage of revenue occurs as a consequence of the relief allowed to the appellant. " 3.3.3. In view of the undisputed factual findings with related legal position on the impugned issue , we find no infirmity in the order of the Learned CITA on this ground. Hence the ground no.2 raised by the revenue is dismissed. 4. The last issue to be decided in this appeal is as to whether in the facts and in the circumstances of the case the Learned AO is justified in adding the dif....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....04.2008 was Rs. 1,30,42,291/- whereas as per the confirmation of the borrower it was Rs. 1,38,63,435/-. The addition in the impugned order was based solely on the confirmation of Guru Mehar and no other. Admittedly, the opening balance as on 01.04.2008 was the culmination of appellant's transactions with Guru Mehar conducted till 31.03.2008. It was not a case where the transactions with the borrower commenced only in FY 2008-09 and in relation to these transactions discrepancies were found. In the circumstances I find force that the alleged accounting discrepancy as on 01.04.2008 did not emanate out of financial transactions carried out during the FY 2008-09. Although the AO did not specify the section of the I T Act under which the addition was made, yet the said addition was permissible only by way of unexplained investment u/s. 69 of the Act because the outstanding loan could only be considered as appellant's " investment" . However, in order to invoke Sec 69, it was necessary for the AO to prove that the alleged unexplained investment was made or acquired during the financial year relevant to AY 2009-10. By AO's own admission the difference arose in the balance out....