TaxTMI 
TaxTMI 
2024 (9) TMI 287
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....49050726(1) dated 24.01.2023 and the appeal 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 ord....
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.... case, and in law, the learned CIT(A) erred in considering the submissions filed by the Appellant 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 ....
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....was to secure a benefit over a number of years. Hence the Assessing officer concluded that the liability should be spread over the period and disallowed the Prepaid finance charges claimed by the assessee amounting to 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, ....
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....ee from claiming the entire payment of interest as deduction in the year of payment. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co Ltd vs CIT [1971] 82 ITR 363, held that entries in books of accounts is not relevant to decide the 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....
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....nt ground No.2 in regard to the above issue reads as under:- 2. Addition made for excess interest spread (EIS') income earned on assignment of receivables amounting to INR 26,99,20,000 On the facts, and in the circumstances of the case, and in law, 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 ignor....
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....ed, that is, recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. Hence, according to AO, once the date of accrual is identified then income has accrued and same cannot be deferred by the accounting entries. Hence the differential amount of Rs. 26,99,20,000/- 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....
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....ssee being NBFC governed by RBI norms and Accounting Standards for the purpose of disclosures in the books of accounts and assessee is mandated to follow the norms issued by RBI in respect of securitisation transaction and income arising thereon. He argued that for the tax purpose, the assessee has required to adhere to the provisions of the Act and the taxability of 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, ....
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....ere is no dispute with regard to the fact that the assessee itself has classified said expenditure as prepaid and does not pertain to impugned assessment year. Once, the expenditure does not pertains to impugned assessment year, then the question of deduction towards said expenditure does not arise, because as per matching principal of accounting, expenditure corresponding to income earned 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 ....
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....under the IT Act. The two, viz., IT Act and the 1998 Directions operate in different fields." Also, the Assessing officers, in their assessment orders have relied on the following rulings upholding the principle that the RBI Guidelines are for the purpose of the effective supervision, management and control of monetary and credit system of country and not for taking interest income accrued 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 ....
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....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 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 of....
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....nd doubtful debts. For this, assessee has raised following Ground No.1:- 1. Ground no. 1 - Disallowance of excess deduction in relation to provision for bad and doubtful debts under section 36()(via)(d) of the Act: On the facts and circumstances of the case, and in law, the learned CIT(A) has erred in upholding the disallowance of excess deduction in relation to provision for bad and doubtful debts amounting to INR 13,87,96,281 under the provisions of section 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 t....
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....riginally debited only a sum of Rs. 49.45 crores but the provision of section 36(1)(viia)(d) of the Act stipulates that only an amount not exceeding 5% of the total income is allowable as deduction but the assessee is wrongly interpreting it as equal to 5% rather than not exceeding 5%. There is upper limit of 5% of total income and deduction is accordingly allowable as per the provisions of section 36(1)(viia)(d) of the Act. According to AO, the assessee's claim is that 5% of total income is arrived at Rs. 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 ....
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.... (d) a non-banking financial company, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). We have gone through the facts and noted that the assessee has debited only a sum of Rs. 49.45 crores in its books of accounts but claimed deduction u/s. 36(1)(viia)(d) of the Act in respect of provision for bad and doubtful debts to the extent of 5% of total income and claimed a sum of Rs. 63.33 crores. In our view, the provision the way the assessee is interpreting as equal to 5% rather not 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 propos....