TaxTMI 
TaxTMI 
2024 (9) TMI 287
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.... by the Revenue in ITA No.515/CHNY/2023 for the assessment year 2018-19 is arising out of the order of the National Faceless Appeal Centre (NFAC), Delhi in Order No.ITBA/NFAC/S/250/2022-23/1049150445(1) dated 27.01.2023. The impugned assessments were framed by the DCIT/ACIT, Corporate Circle 1(2), Chennai u/s. 143(3) of the Income-tax Act, 1961 (hereinafter the 'Act') vide orders dated 18.03.2015 & 31.12.2019 for the assessment years 2012-13 & 2017-18 respectively and by the National e-Assessment Centre, Delhi u/s. 143(3) r.w.s. 144B of the Act vide order dated 20.04.2021 for the assessment year 2018-19. The facts and circumstances and the issue involved in all these appeals are common and hence, by way of this common order, these appeals are being disposed off. ITA No.847/CHNY/2020, Assessment year 2012-13 2. At the outset, it is noticed that the appeal filed by the assessee is barred by limitation by 185 days as noted by the Registry. It is noticed from Form 36 that the order of CIT(A) dated 19.02.2020 was communicated to the assessee on 19.02.2020 itself. The assessee has to file appeal before the Tribunal against the impugned order on or before 19.04.2020 but assessee actuall....
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....lant to direct the learned AO, that, a deduction to the extent of proportionate prepaid finance charges disallowed in the preceding year is ought to be allowed in the current year to the Appellant." 4. Brief facts are that the AO noticed that the assessee in its computation of income claimed prepaid finance charges amounting to Rs. 19,96,29,043/- and he asked to clarify or show-cause as to how the prepaid finance charges are allowable. The assessee submitted amortization schedule of such expenses over the subsequent financial years and claimed that the finance charges are in respect of payments made for availing loan such as processing charges, bank charges and stamping charges. It was also claimed that loan period covers more than one financial year and therefore, on payment basis, the same has been claimed in the computation of income. It was claimed that during the year under consideration, the company has incurred expenses as finance charges paid at the time of obtaining such loss and since the tenure of the loan may extent to more than one financial year, the company amortizes such expenditure in its books of accounts over the tenure of the loan. The assessee drew our attenti....
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....o Rs. 19,96,29,043/-. 6.2 In the grounds of appeal, the appellant contested that for the financial books purposes, the expenditure incurred by the appellant was amortised over the tenure of the loan facility but for tax purposes, the amount which is expended during the year is claimed as a deduction and it is not justified to hold that the prepaid finance charges claimed as expenditure pertains to a subsequent period and does not pertains to the previous year in which it is claimed. 6.3 In [1997]91 Taxman 340 (SC) Madras Industrial Investment Corpn Ltd vs Commissioner of Income-tax, Hon'ble Supreme Court of India held issuing debentures at a discount is another such instance where ,although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. 6.4 Similarly in present appeal, though the liability to pay the finance charges occurred in the year of availing loan facility, yet the payment was to secure a benefit ove....
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....issue of deductibility of any expenditure. In the present case, there is no dispute with regard to the fact that the assessee has incurred the expenditure towards finance charges and also paid during the impugned assessment year itself. Since, the assessee has already paid finance charges, in our considered view, deduction should be allowed towards finance charges including prepaid finance charges, if any, in the year of payment itself, even though, said expenditure has been treated as deferred revenue expenditure or prepaid expenditure in the books of accounts and claimed over a period of loan. The ld. CIT(A), without appreciating relevant facts simply sustained additions made by the Assessing Officer and thus, we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete additions made towards disallowance of prepaid finance charges." 7. On the other hand, the ld.CIT-DR relied on the assessment order and that of the order of CIT(A), wherein the AO came to the conclusion regarding disallowance of prepaid finance charges on the basis of decision of Hon'ble Supreme Court in the case of Madras Industrial Corporation Ltd., vs. CIT reported in (1997) 225 ITR 8....
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....w, the learned CIT(A) erred in upholding the addition of the present value of excess interest spread as appearing in the securitisation agreement, in the year in which the loan receivables are securitised as against accruing it over the life of the underlying receivables. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding that the Appellant had transferred all the substantial risks and rewards in the receivables on signing the securitization agreement. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) ha serred in appreciating the fact that the interest spread is pertaining to future years and its accrual and receipt was contingent on conditions which cannot be reasonably estimated on the date of agreement. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has erred in ignoring the principle of real income and subjected the assessee to pay tax on amount for which the assessee has no right to receive. Without prejudice to the above and on the facts and in the circumstances of the case, and in law, the learned CIT(A) erred in not considering the submissions ....
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....000/- was brought to tax and added to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A). 11. The CITA) after considering the submissions of the assessee confirmed the action of the AO by observing in para 10 as under:- "10. Income from assignment of receivables: 10.1 During the year the assessee company sold receivables/assigned receivables to various banks for consideration of Rs. 708,83,90,385/-. During the year under consideration, the assessee changed its accounting policy or recognizing interest spread arising from selling loan receivables under bilateral assignment. Earlier such interest was recognised upfront whereas from the current year the interest is being recognised over the residual tenor of the receivables, Thus the assessee did not offer interest of Rs 2699.20 lakhs for tax stating that the same is to be recognized in future. Assessing Officer verified the agreements with banks and noticed that the assessee company is servicing the assignment in collecting the receivables for which a service fee is also paid to the assessee company and the agreement also provides scope for alternate servicer which means the assignee can al....
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....f income is governed by the principles of accrued or arise as per section 4 or 5 of the Act. Thus, only when the income accrues to the company, the company is obligated to offer the same to tax. The income in respect of EIS is contingent upon various conditions and hence, the recognized revenue at the time of sale or rendering of services and offering the same to tax thereof has no reasonable certainty of ultimate collection. Hence, he argued that the Tribunal in assessee's own case for assessment year 2016-17 in ITA No.848/CHNY/2020 has considered this issue in great detail and finally held in paras 7 to 9 as under:- "7. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has reiterated its arguments made before the Assessing Officer, in light of certain judicial precedents and argued that the treatment in the books of accounts is not relevant to decide allowability of any expenditure, but what is required to be seen is whether the expenditure has been incurred wholly and exclusively for the purpose of business and further said expenditure pertains to relevant financial year or not. The ld. CIT(A), afte....
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....ned for the relevant period alone needs to be accounted. The Assessing Officer and CIT(A), after considering relevant facts has rightly disallowed prepaid finance charges and their order should be upheld." 13. On the other hand, the ld.CIT-DR argued that the assessee company has been selling/assigning its receivables to various banks as a matter of its business policy and only assessment year 2012-13, it used to disclose the profit earned on such assignment upfront but from assessment year 2012-13, it started to amortise the profit over several years depending on the terms of receivables. He argued that in the last hearing before ITAT for the assessment year 2016-17, it was pleaded that the assessee is following consistent method of accounting to recognize revenue in this manner, but assessee had changed its method of accounting in assessment year 2012-13 and this was not disclosed before the ITAT during hearing of assessment year 2016-17. It was alleged that the assessee obtained a favourable order from ITAT from suppression of facts. In this context, it was argued that the Tribunal in the previous date of hearing, directed the assessee to provide clarifications regarding its rev....
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....d as per section 5 of the Act: i) JCIT Spl Range 2 vs India Equipment Leasing Ltd (2008) 111 ITD 37 ii) ITO versus Trade Link Securities Ltd (2014) 46 Taxmann.com 190 (Kolkata) The ld.CIT(DR) further submitted that when it comes to expenditure, the assessee claims whole of the finance charges on the footing of 'having incurred the expenditure' in respect of its claim for deduction on account of prepaid finance charges, which the department denies on the basis of "matching principle". It is therefore, interesting to note that while the assessee is canvassing for deferment of taxing its revenue, it is taking a contrary stand in respect of staking its claim for pre-paid finance charges on the basis of 'actual payment'. The ld.CIT-DR placed reliance on the Coordinate Bench decision of ITAT, Hyderabad in the case of Asmitha Microfin Ltd., in ITA No.137/HYD/2013, wherein the Tribunal held as under:- "12. This system of account being done by assessee is more or less similar to the bill discounting system, which is generally followed by many in the business. In the bill discounting system, a person who discounts the bill takes the interest amount upfront when he discounts th....
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.... 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 to the interest and it accrued at that point. (ii) That the debts were shown as written off on the basis of the formula given by the Reserve Bank of India. Writing off the debt as bad requires judgment on the part of the person carrying on the business but in the present case, the debts had been 'written off' merely on the basis of the RBI norms and nothing more. Thus, they were not deductible under section 36. 14. Since, principles of bill discounting and accounting entries are similar to the portfolio sale/securitization of loan portfolios, being the method involved being same, we uphold the orde....
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....36(1)(viia)of the Act. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the fact that the Appellant had rightly disallowed the net provision debited to the profit and loss account amounting to INR 49,45,71,365 (including reversal of provision for standard assets and reversal of provision for diminution in value of investments) and appropriately claimed a deduction for provisions for bad and doubtful debts to the extent of five percent of total income amounting to INR 63,33,67,646 as allowable under section 36(i)(via) of the Act. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has erred in appreciating the detailed submissions and arguments made by the Appellant that the reversal of provision for items other than provision for bad and doubtful debts i.e., reversal of provision for standard assets amounting to INR 33,11,27,770 and reversal of provision for diminution in value of investments amounting to INR 5,00,00,000, should not be considered as they are not covered under section 36(i)(viia) of the Act while computing the total deduction on account of provision for bad and doubtful debts. ....
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....63.33 crores whereas it has made actual provision and debited to P&L account is only Rs. 49.45 crores and the same is not exceeding 5% of total income. Hence, according to AO, the assessee is eligible for claim of deduction only to the extent of Rs. 49.45 crores as against claim at Rs. 63.33 crores. Hence, differential amount of Rs. 13.87 crores was disallowed and added to the income of the assessee. Aggrieved, assessee preferred appeal before CIT(A). 19. The CIT(A) also confirmed the action of AO after considering the submissions of the assessee and the provisions of section 36(1)(viia)(d) of the Act, by observing as under:- "From plain reading of the section, it is crystal clear that section specifically states that in respect of any provision for bad and doubtful debts, only an amount NOT EXCEEDING 5% of the total income is allowable as deduction. In the instant case, the appellant has made provision for bad and doubtful debts at Rs. 49.45 cr. only but has claimed deduction at Rs. 63.33 crores which is equal to five percent of total taxable income which means that the appellant is claiming excess deduction of Rs. 13.87 cr. For which it has not made any provision at all. The a....
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.... exceeding 5%. This interpretation will lead to absurd results. In our view, the upper limit is 5% of the total income and deduction is allowable as per section 36(1)(viia)(d) of the Act is not equal to 5% but that is upper limit only. Hence, as originally debited in the books of accounts the provision for bad and doubtful debts of Rs. 49.45 crores, the assessee is eligible and AO has rightly added the differential amount of Rs. 13.87 crores, as the assessee is not eligible for the same and the CIT(A) has also rightly confirmed the same. 20.1 However, alternatively claimed by assessee before CIT(A) that the proposed disallowance by the AO u/s. 36(1)(viia)(d) of the Act is in relation to provision for bad and doubtful debts, reversal of provision for standard assets and diminution in value of investments has no barring and correlation with section 36(1)(viia)(d) of the Act, the same has not been examined neither by AO nor by CIT(A). It was claimed before CIT(A) and CIT(A) although has reproduced the submissions of the assessee including the chart of reversals and diminution of investments which reads as under:- Particulars Amount (INR) Provision for sub-standard and doubtful re....