TaxTMI 
TaxTMI 
2016 (10) TMI 989
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....rming disallowance of Rs. 17,19,535/- for AY 2005-06, Rs. 55,12,739 for AY 2006-07, Rs. 20,96,430/- for AY 2007-08, Rs. 24,37,769/- for AY 2008-09 and Rs. 29,21,584 for AY 2009-10 made by the Assessing Officer out of NCD expenses after holding that the same has to be allowed equally for 5 years as NCD are for 5 years period and the Appellant has also not charged the same to the Profit & Loss Account. 2.1 We take the lead case as ITA No.1295/Ahd/2009 for AY 2005-06. The facts with regard to expense on account of NCD as emerge from the record of AY 2005-06 are that during the course of assessment proceedings the Assessing Officer has observed that in the statement of income the assessee has claimed expenses on issue of NCD at Rs. 21,49,419/- and the same was not claimed in the profit and loss account. The assessee was asked to explain about its claim of expenses on issue of NCD at Rs. 21,49,419/- in the statement of income but not having claimed in the P&L account and to explain why same should not be disallowed. He was further asked to explain that the NCD are redeemable after five years, and how the entire amount of NCD expenses to be allowed in the current year. 2.2 The asse....
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....the claim of the appellant is also against the matching principles of income and expenditure. The ld. CIT(A) placed reliance on the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd vs. CIT (supra) and the Hon'ble Bombay High Court in the case of Taparia Tools Ltd (supra). 2.6 The ld. Counsel for the assessee submitted that the expenditure in respect of NCD was raised during the year and the entire expenditure is allowable as deduction. He placed reliance on the following judgments:- a) India Cement Ltd vs. ITO, 60 ITR 52 (SC) b) CIT vs. Office of the official liquidator, 316 ITR 181 (Guj.) c) CIT vs. Mihir Textile Ltd, 316 ITR 403 (Guj) d) Patel Filters Ltd vs. CIT, 264 ITR 21 (Guj.) 2.7 The ld. DR relied on the order of the ld. CIT(A). 2.8. We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. The Hon'ble Supreme Court in the case of Taparia Tools Ltd (372 ITR 605) has held that where assessee-company issued debenture for 5 years and the assessee did not want to spread over the interest expenditure over a period of ....
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....B prepayment charges in the current year and also asked to explain why the expenses so incurred for refinancing of loan should not be considered as capital loss. Assessee has explained that during the year, the assessee- company has made early payment in respect of loan taken from National Housing Bank (NHB). In the books of account the same has been amortized at Rs. 42,02,920/- and claimed Rs. 2,62,45,400/- as deduction from the total income on actual payment basis. Treatment given in the books of accounts has no relevance to the computation of income under the provisions of the Income-tax Act, 1961. The assessee also relied on the decision of Hon'ble Supreme Court in the case of Tuticorn Alkali Chemicals & Fertilizers Ltd v/s. CIT ( 227 ITR 172 (SC)) wherein the issue in respect of accounting entry vis-à-vis determination of income has been discussed which is reproduced as below:- "It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissi....
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....dras Industrial Investment Corpn vs. CIT, 225 ITR 802 and the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd, 260 ITR 102. 3.3 Aggrieved by the order of the CIT(A), the assessee preferred this ground before the Tribunal. The ld counsel of the assessee relied on the decision of Hon'ble Supreme Court in the case of Tuticorn Alkali Chemicals & Fertilizers Ltd v/s. CIT ( 227 ITR 172 (SC)) and claimed that the entire expenditure is allowable as deduction during the year under consideration. The ld. DR relied on the order of the ld. CIT(A). 3.4 We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. The issue raised in these two assessment years with regard to NHB prepayment charges is the similar issue that we already dealt with while dealing the issue of NCD expenses, where following the decision of Hon'ble Supreme Court in Taparia Tools Ltd (372 ITR 605), we held that assessee is entitled to the entire deduction of NCD expenditure. In view of the above facts and legal findings, we allow this ground of appeal of the assessee. Thus, the grounds of assessee's appeals on the....
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....rms, NPA are recognized on the basis of 90 days overdue as against 180 days past due under the old norms. He submitted that the NHB guidelines for recognizing NPA was effective from 31.03.2005 and the accounts have been closed on 31.03.2005, therefore, the assessee has rightly followed the new norms of NHB for recognizing NPA, the action of Assessing Officer in this regard is not justified and the same may be deleted. 4.5 The ld. DR, on the other hand, supported the orders of the lower authorities. 4.6 We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. We find force in the submission of the assessee that the NHB guidelines for recognizing NPA were effective from 31.03.2005 and the accounts of the assessee have been closed on 31.03.2015. However, the same needs to be verified at the level of Assessing Officer. Therefore, in the interest of substantial justice, this issue is set aside to the file of the Assessing Officer for deciding afresh after taking into consideration all material facts as indicated above after providing due opportunity of hearing to the assessee. Thus, this ground of the asses....
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....td, 292 ITR 339 (Del), (ii) CIT vs. Autometers Ltd, 292 ITR 345 (Del), (iii) CIT vs. Girish Bhagwat Prasad, 256 ITR 772 (Guj) and DCIT vs. Patidar Ginning & Pressing Co, 157 CTR 177 (Guj). He further placed reliance on the Hon'ble Apex Court judgments in the case of TRF vs. CIT, 323 ITR 397 (SC) and Vijaya Bank vs. CIT, 37 DTR 401 (SC.). He has also referred to the judgement of Vijay Bank vs. CIT, 37 DTR 401 (SC) decided by the Hon'ble Supreme Court. 5.3 Ld. DR, on the other hand, supported the orders of the lower authorities. 5.4 We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. We find that the Hon'ble Supreme Court in the case of TRF Ltd (supra) has held that it is not necessary for assessee to establish that debt, in fact, has become irrecoverable, it is enough if bad debt is written off as irrecoverable in accounts of assessee. The Hon'ble Apex Court in the case of Vijaya Bank (supra) has held as under:- "The first question which arises for determination concerns the manner in which actual write off takes place under the accounting principles. Prior to Finance Act, 2001, many asses....
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....ion (1) of Section 36 of the Act "long term finance" means only loan or allowances where the terms under which money are loaned or advanced provide for repayment along with interest there of during a period of not less than 5 years. The assessee claimed that in Section 36(1), nowhere it is provided that deduction u/s 36(1)(viii) will not be allowed if the tenure of the loan is reduced to less than 5 years.Once long term housing finance was made and necessary reserves created and maintained as provided in the Section, deduction u/s 36(1)(viii) is available. The assessee has also claimed on assigned/transferred of loan portfolios, the part of the interest received from the loanee was the interest income of the assessee on long term finance business and basic character of loans does not change at any point of time. The Assessing Officer has not accepted the contention of the assessee on the reasoning as under:- "8.3 (a) The section 36(l)(viii) as stood in the relevant assessment year stipulated as under "in respect of any special reserve created [and maintained] by a financial corporation which is engaged in providing long- term finance for [industrial or agricultural deve....
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....t of such loan portfolio transferred by the assessee company in earlier years without holding the same for 5 years. The AO decided such above cited income as not derived from long term housing finance business and placed reliance on the following judicial decisions:- i. Cambay Electric Supply Industrial Co. Ltd vs. CIT, 113 ITR 84 (SC); ii. Eastern Seafood Exports P Ltd, 215 ITR 64 (Mad.); iii. CIT vs. Sterling Foods, 237 ITR 579 (SC); iv. CIT vs. Cement Distributors Ltd, 208 ITR 355 (Del.); v. CIT vs. Cochin Refineries Ltd, 135 ITR 278 (Ker.); vi. Pandian Chemicals Ltd vs. CIT, 262 ITR 278 (SC) 6.2 In view of above stated facts the AO has disallowed deductions u/s 36(1)(viii) of the following income:- (i) Bad Debts recovery - Rs. 18,73,000 (ii) Interest earned on the loan portfolio Sold/transferred before 5 years, during the current financial year and included therein - Rs. 1,27,02,648 (iii) Fees and other charges earned on the loan portfolio sold/transfer before 5 years, during the current financial year and included therein - Rs. 9,78,625 (iv) EMI residual offered for taxation in current....
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....ived from long term housing finance was reduced by the amount written off by the assessee as bad debt. In this year, when the assessee recovered bad debts, its income from long term finance would be enhanced by that much amount. Thus, the AO has erred in rejecting the claim of the assessee. The AO has made reference to the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Sterling Foods, 237 ITR 579 (SC). In that case while construing expression "derived", the Hon'ble Court has observed that there should be a nexus between the income "derived" from industrial undertaking. The assessee has sold import entitlement, and in that context, it was construed that such income was not "derived" from industrial undertaking. In the present case, income derived by the assessee is from long term finance i.e. interest income. It was reduced by virtue of written off of certain debts which has direct nexus with the income derived by the assessee. This year, these entries have been reversed by recovery of this bad debt. Thus, nexus is available. The AO is not justified to exclude the amount of bad debts recovered by the assessee for calculating the claim under section 36(1)(viii) of the A....
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....d provide the deduction after completion of 5 years of such loan account. It only puts a condition about the nature of account. An assessee is entitled for deduction for the purpose of this section from the first year itself. The meaning construed by us can be further fortified by considering section 155 of the Income Tax Act. Under this section AO has been empowered to withdraw certain deduction to an assessee. For example investment allowance is being granted to an assessee u/s.32A in respect of ship and such ship was transferred before expiry of eight years in violation to the conditions, then u/s.155 it will be construed that such allowance was granted wrongly. Similarly, a provision has been made to withdraw number of such other benefits given under the Act. But, this section does not talk withdrawal of deduction granted u/s.36(1)(vii) of the Act. Therefore, we are of the view that the ld. Revenue authorities have erred in construing the meaning of clause (e) to section 36(1)(viii) of the Income Tax Act. We remit this issue to the file of the AO with a direction that he will verify the details of finance accounts, and if there is no change in the character of accounts i.e. the....
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....espect of the said loan portfolios was duly booked in profit of relevant previous year. During the year under consideration, due to earlier payment of loans and, therefore, reversal entry in respect of profit of those tranche which was booked in earlier year has been passed. Total amount of reversal entry of income is of Rs. 5,27,35,943/-. 5.2 During the year under consideration, the Appellant has sold/transferred or assigned individual home loans aggregating to Rs. 40,13,87,920/-. As a result of the sale/transfer/assignment, entire surplus of Rs. 9,83,32,951/- being the difference between EMI recoverable from such individual borrowers during the remaining tenure of loan and payable to the Buyer for the remaining tenure of the loan was recognized during the year in books of account. Out of the said EMI residual, the Appellant company has further set aside Rs. 3,10,17,864/- being Reserve for contingencies to meet any contingency arising out of prepayment and the balance of Rs. 6,73,15,087/- is transferred to Profit & Loss account. The said amount pertains to the whole un-expired period of loan portfolio. 5.3 As mentioned in paragraph 5.1 above, reversal entry being....
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....pellant as agent for recovery of loans throughout the period for which the installments are outstanding. Attention is invited to Clause 5.5 of the Agreement which reads as under: "The seller shall act and continue to act as the Receiving and Paying Agent until all the Receivables shall have been paid. In the event of the occurrence of any Event or Default, and if so decided by the Beneficiary, the Seller shall cease to act as the Receiving and Paying Agent. In that event the Beneficiary may, at its option, terminate the appointment of the Seller as the Receiving and Paying Agent after giving 20 days notice. The Beneficiary shall appoint any bank or institution as the new Receiving and Paying Agent hereunder upon such terms and conditions as the beneficiary and the new Receiving and Paying Agent may mutually agree. All the fees payable to such new Receiving and Paying Agent shall be borne by and be to the account of the Beneficiary. " (d) This clause makes it clear that there is no guarantee that the company shall continue to act as agent for buyer. In the event of non-acting as agent, question of getting remuneration will not arise. Even otherwise, the Appellant i....
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....pread and claimed it over a period of ensuing years. In fact allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year." It is submitted that the above judgment of the Supreme Court is in the field of expenditure. However, the principles laid down in the said judgment are equally applicable in the field of computing of income for the purpose of taxing of the income. (h) Regarding the accounting entries passed in respect of EMI Residual Income in the books of accounts, it is submitted that the accounting entries cannot be made base for deciding the taxability of income. Attention is invited to the Supreme Court's decision in the case of Tuticorn Alkali Chemicals and Fertilizers Ltd. v. C.I.T. [227 ITR 172 (SC)J, wherein issue in respect of accounting entry vis-a-vis determination of income has been discussed which is reproduced herein below: - "It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of company. But when the question is whether a receipt of money is taxable or not or whether certain deductions ....
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....follow. Therefore, under these circumstances, there does not appears to be any justification for taxing the future income which has not accrued to the appellant during the relevant period, merely on the basis of book entries. 8.6 It is seen that similar addition was made on the identical facts in the income of the appellant in the A.Yrs.2001-02 to 2004-05. The additions so made were deleted by my Ld. Predecessor by his appellate orders for respective assessment years. My Ld. Predecessor while deleting the addition on similar facts and circumstances in the A.Y.2003-04 observed as under: "3.1 Ad addition to taxable income could be made only on the concept of real income (accrued income) or on the basis of legal fiction. In this case, it is neither. Whatever accounting entries they have made are of no relevance unless they represent the accrual of income for the relevant year. In the appellant's case, the real income on the basis of accrual read with the agreement between the appellant and HDFC has been correctly offered in the computation statement and nothing more is required to be added. Further, the appellant has not sold its Housing Loan Portfolio with both ....
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.... the material as per record carefully. It is seen that the identical issue was considered by the Co- ordinate Bench of the ITAT as cited above on the basis of similar issue decided by the ITAT in the AY 2001-02. The findings of the Tribunal on this issue read as under:- "5. As far as second ground is concerned, an identical issue was considered by the ITAT in the Asstt.Year 2001-02. The finding of the Tribunal on this issue reads as under: "18. In the appeal filed by the Assessing Officer, the assessee has raised the following grievance: The ld. CIT(A) erred in law and on facts of the case in deleting the disallowance of EMI residual account amounting to Rs. 803.40 lacs, without appreciating the definition of income as explained by the Hon'ble Supreme Court in the case of Shiv Prakash Janak Raj & Co. reported at 222 ITR 583. 19. So far as this issue is concerned, the relevant material facts are as follows. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has sold is portfolio of individual home loans aggregating to Rs. 8,109.09 lakhs but the assessee is obliged to act as receiving and paying agent f....
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....case in the light of the applicable legal position. 21. In the landmark judgment of Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)], Hon'ble Supreme Court has observed that "While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allow....
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.... are identical as was raised in AY 2001-02 and in AY 2000-01; and following the decision of Co-ordinate Bench we do not find any merit in the ground of appeal of Revenue which is accordingly rejected. Similarly, the appeal of the Department on the identical issues of EMI Residual for AY 2007-08 to AY 2009-10 are also rejected. 8. Ground No.2 of the Revenue's appeal for AY 2005-06 reads as under:- "The ld. CIT(A) erred in law and on facts in allowing the disallowance of Rs. 1,71,000/- made by the Assessing Officer under the provision of Section 35D of the Act." 8.1 In their return of income the assessee had claimed deduction u/s 35D of the Act at Rs. 1,71,000/- being the FCD issue expenditure; the AO disallowed the claim on the basis of earlier year's disallowance made on the similar ground. The ld. CIT-DR contended that the issue is squarely covered in favour of the Revenue by the Co-ordinate Bench of ITAT orders for AY 2000-01 dated 11.07.2016 and by the decision of the Hon'ble jurisdictional High Court. The relevant findings of the ITAT (supra) read as under:- "4. It is pertinent to mention that section 35D of the Income Tax Act, provides that certain expe....