TaxTMI 
TaxTMI 
2016 (10) TMI 989
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...., 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 assessee explained that the expenditure is in respect of NCD....
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....re. 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 5 years, it claimed entire deductible expenditure in the same year in the return filed by it, in such a situation it was per....
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....sidered 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 permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting....
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....f 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 same issue for AYs 2006-07 are also allowed for the aforesaid reasoning. 4. The assessee's ground No.3 for AY 2005-06 is against the addition of Rs. 24,01,200/- made by the Assessing Off....
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....he 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 assessee is allowed for statistical purposes. 5. Next ground of the assessee relates to the disallowance of bad debts made by the Assessing Officer for A.Y.2005-06 toA.Y. 2009-10 In the A.Y.2005-06, the As....
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....iance 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 assessees used to take the benefit of deduction under s. 36(1)(vii) by merely debiting the impugned bad debt to the P&L a/c and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits ....
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....ears. 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 development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in I....
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....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 year and included therein - Rs. 3,81,41,794 6.3 The ld. CIT(A) confirmed the above disallowances on the reasoning that in terms of loan transferred within the period of 5 years the assessee is not eligible for deduction u/s 36(1)(viii). The Ld.CIT (A) held that exclusion of Rs. 1,27,02,648/- on portfolio transferred to HDFC in computing the deducti....
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.... 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 Act." 6.8 Regarding the claim of the assessee pertaining to Rs. 1,27,02,648/- interest earned on the loan portfolio sold/transfer before 5 years, the Ld. Counsel for the assessee relied on the order of Co-ordinate Bench of ITAT, Ahmedabad in assessee's own case for AYs 2004-05 and 2000-01 dated 11.07.2016. The ld. DR relied on the decision of lower authorities. 6.9.....
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....in 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. their life span is more than five years, which continues even after assignment, then, interest income from those accounts upto the date of assignment would qualify for deduction under section 36(1)(viii) of the Act in the hands of the assessee. These directions are subject to fulfillment of other conditions which are not disputed before us. The ld.AO shall also ensure that double deducti....
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..../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 income of Rs. 5,27,35,943/- has been passed during the year under consideration which is a notional entry and the same is required to be added while computing the income under the Income Tax Act, 1961, and, therefore, addition of Rs. 1,45,79,144/- has been made being the difference between the amount of Rs. 5,27,35,943/- being reversal entry of income and Rs. 6,73,15,087/- being the income in respect of EMI Residual ....
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.... 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 is entitled to service charges for carrying out the work of collecting the amount from the loanee over a period of years. Under the circumstances, the difference between the amount of installments in respect of interest to be collected and be paid to buyer cannot be said to be income of the current year in as much as the said income is for running services over a period of years. (e) In view of the above, the said difference cannot be treated as income of the Appel....
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....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 from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provisions of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. 91970) [77 ITR 857], 860 (CA), the income tax law does not march step by step in the foot steps of the accountancy profession. " Reliance is also placed on the following judgments: (a) CIT v. Indian Discount Co.....
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....ome 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 principal and future interest components. It has only sold the principal loan part outstanding as on the date at par and the future interest components are to be recovered from the borrowers and passed it on to HDFC. HDFC has not paid to the appellant anything to cover the future interest accruals. As such the observation of the A.O. that the entire interest income is taxable in this year is out of place and does not have any legal basis. 3.2 It is also relevant to note that similar additions have been disallowed by my predecessors. No new materials have been brought on record and the factual position being identical, I do not find ....
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....nting 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 for effecting recoveries from the individual borrowers until the point of time when all these loans are fully recovered. Under this arrangement, the assessee is entitled to retain interest in excess of the agreed rate of interest recovered from the borrowers. It was in this backdrop that the assessee computed the surplus of Rs. 932.42 lakhs being the difference between EMI recoverable form the borrowers during the remain loan tenure, and the amount payable by the assessee to the buyer of assessee's home loan portfolio. This represented, what was termed as, EMI residual. Out of this amount, the assessee further set aside a sum of Rs. 428.31 lakhs on account of contingencies of pre-....
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....puted 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 allowed even if such loss has not been actually realised." The principle is thus unambiguous. The principles of conservatism, and considerations of prudence, in the accounting treatment require that no anticipated profits be treated as income until the profits are realized, and, at the same time, an anticipated loss to be deducted from commercial profits, at the first sign of its reasonable possibility. There may seem to be, at first sight, an element of dichotomy in this approach inasmuch as anticipated losses are taken into account and anticipatory profits are ignored, but that is the impact of accounting principles sanctioned by the statute and the law laid down by Hon'ble Supreme Court. No matt....
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....m 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 expenditure mentioned therein incurred before the commencement of business and which have been amortized is allowed as deduction. However, after the business has been commenced the expenditure mentioned therein can be amortized and allowed deduction u/s.35D of the Act only if the said expenditure is incurred in connection with the extension of industrial undertaking. It emerges out from the record that the assessee had incurred expenditure for issuance of fully convertible debenture. It has claimed 1/10 th of the expenditure. In this year, such expenditure was claimed at Rs. 11,63,048/-. The ld.CIT(A) has allowed this claim of the assessee. However, in the case of Gujarat Ambuja Cotspin Vs. CIT, Hon'ble jurisdictional High Court has held that e....