AI Drafter 
TaxTMI 
TaxTMI 
2025 (4) TMI 911
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....from NPAs pertaining to others investors. 2. The facts relating to the case are discussed in brief. The assessee-company is registered with Reserve Bank of India (RBI) u/s. 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") as "securitisation and reconstruction company". This terminology was later changed into "Asset Reconstruction Company". The business model of the assessee is described by the AOas under: - "A. Business Model of the assessee:- * The assessee company is an asset reconstruction company (ARC) which acquires Non- Performing Assets(NPAs) from the banks. To acquire such NPAs, ARCIL sets up various trusts in which ARCIL holds a certain minimum percentage of beneficial ownership and balance is owned by other Investors. * Trust issues Security Receipts to all such Investors including ARCIL (having compulsory a minimum holding 15%) and other Investors. Therefore, ARCIL, as well as other Investors are called as Security Receipts Holders (SRHs). Out of these funds received from ARCIL as SRH and other Investors as SRH, the trust acquires NPAs from the bank and payments ar....
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....ceipts to the tune of Rs. 82.87 crores during the year under consideration and claimed the same as deduction. When questioned about the same by the AO, the assessee submitted that, as per RBI guidelines, the unrealised security receipts have to be written off within a maximum period of 8 years. Hence the assessee claimed deduction of amount so written off as business loss. The AO however took the view as under:- "At the outset the legal submission of the assessee is not at all acceptable. The SR write off is not allowable at all. Unless and until, there are compelling reasons and documentary evidence which could establish beyond doubt that there will be no recovery in future, only then such write off is allowable. However, in the instant, there are recoveries and that too of significant amount in subsequent years of write off (which is evident from the fact that in the current year itself, there was a recovery of Rs. 47.19 crores out of such write off made in the earlier years). Further, the guidelines of RBI are for the purpose of NPA resolution and not for determination of income and tax liability thereon under the Income tax Act." The AO also examined the Trust deed ....
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.... it. (b) Then it negotiates with the concerned banks and finalises the purchase price of the financial assets. (c) Under sec. 7 of SARFAESI Act, 2002, the assessee can raise funds from "qualified buyers". Once the qualified buyer(s) are identified, separate trusts are formed under Indian Trusts Act, 1882 for acquiring the above said NPAs from banks. For this purpose, the trusts shall issue "security receipts" for raising funds required to acquire financial assets. (d) The assessee shall purchase minimum of 15% of the security receipts issued by the trusts as per SARFAESI Act and the qualified buyer(s) shall invest remaining amounts. (e) By utilising the funds mobilised by issuing Security Receipts, the asset reconstruction companies (assessee herein) shall acquire stressed financial assets (NPAs) from the banks through the Trust. (f) The trusts shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired out of investments made by a qualified buyer. Hence the assessee has formed various trusts, through which the assessee has acquired various financial assets. In each of the t....
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....he business. Accordingly, he submitted that there is no reason to disallow the said claim and hence the Ld CIT(A) has rightly deleted this addition. 4.8. We heard the parties and perused the record. It appears that the assessing officer has not correctly appreciated the business model and the manner of functioning of the assessee company. The assessee herein is a "Asset reconstruction Company" registered under SARFAESI Act. We notice that section 7 of SARFAESI Act permits the assessee to issue "security receipts" for raising funds. Section 7 referred above reads as under:- "7. Issue of security by raising of receipts or funds by [asset reconstruction company] [Substituted by Act No. 44 of 2016.]. (1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992), any [asset reconstruction company] [Substituted by Act No. 44 of 2016.] may, after acquisition of any financial asset under sub-section (1) of section 5, offer security receipts to [qualified buyers] [Substituted by Act No. 44 of 2016.] [or such other....
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....a meeting of all the [qualified buyers] [Substituted by Act No. 44 of 2016.] and every resolution passed in such meeting shall be binding on the company. (4) The [qualified buyers] [Substituted by Act No. 44 of 2016.] shall, at a meeting called under sub-section (3), follow the same procedure, as nearly as possible as is followed at meetings of the board of directors of the [asset reconstruction company] [Substituted by Act No. 44 of 2016.] as the case may be." The above said section further provides that the assessee shall keep and maintain separate and distinct accounts for funds raised for in respect of each of the scheme framed for acquiring the financial asset (NPAs acquired by it). It is further provided in that section that the scheme framed for the purpose of offering security receipts or raising funds may be in the nature of trust, which shall be managed by the assessee. Further, the assessee shall hold the assets acquired and funds raised in trust for the benefit of qualified buyers of security receipts. 4.9. Accordingly, the assessee has formed separate Trusts for stressed financial assets (NPAs) acquired under one scheme. For raising funds, the concerned ....
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....uidelines issued by RBI in respect of Security Receipts are mentioned in Clause 6(ii) and (iii) of the above guidelines. They read as under:- "(ii) SC/RC** shall formulate the policy of realisation of financial assets under which the period for realisation shall not exceed five years from the date of acquisition of the financial asset concerned. (iii) The Board of Directors of the SC/RC may increase the period of realisation of financial assets so that the total period of realisation shall not exceed eight years from the date of acquisition of financial assets concerned." (** Securitisation Companies/Reconstruction Companies) Further, as per clause 12 of the Guidelines, the financial assets including the Security Receipts will be classified as non-performing, if it is outstanding for a period exceeding 36 months. They shall be treated as "LOSS ASSETS", if the Security receipts are not realised within the period mentioned in clause 7(ii) and (iii) of the Guidelines mentioned above. Further, it is provided that the assessee should provide for write off of 100% of the value of Security receipts if it is classified as Loss assets. Accordingly, the assessee....
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.... and for distribution of that income to the security receipts holders. Hence, the concerned trusts have made provision for bad debts in order to determine the quantum of its income. Hence, the provision for bad debts, if any, created by the Trusts is for the purpose of determining the income of the trusts as per the accounting principles and hence, it is nothing to do with the accounting methodology followed by the assessee. So far as the assessee is concerned, it has treated the investment made in Security Receipts as a separate investment and the income generated there from is offered to tax. Unrealised Security receipts were written off after the expiry of eight years. If any amount is realised after it was so written off, such realisation is offered to tax. 4.14. As noticed earlier, the AO has misdirected himself in understanding the concept of forming trusts, the accounting system followed by the trusts and assessee. There is no dispute with regard to the fact that the assessee has to follow the guidelines issued by the RBI for accounting the Security Receipts and it has to treat the Security receipts as "Loss assets" if it is not realised within five years. Accordingly, th....
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....5 crores in 4th assignment agreement is in excess of its cost of investment of 2 crores and hence the trust should have computed 3 crores as its income. 5.2. The assessee submitted that the AO has failed to appreciate the distinction between the realisations effected by the Trusts and distribution of amount by the trusts to the Security Receipt holders. He submitted that the realisation made by the trusts have been considered as realisation made by the assessee himself, which is not correct. He submitted that, only when any amount is distributed by the trust to the Security Receipt holders, the incidence of tax would arise in the hands of the security receipt holders (including assessee, being one of the security receipt holders). The assessee submitted that the investments made by it in Security receipts are akin to Mutual fund investments. Hence the assessee is not concerned with the realisation made by the trusts from the financial assets (NPAs). During the course of assessment proceedings, the AO did not accept the above said submissions of the assessee. Accordingly, he took the view that a sum of Rs. 153.77 lakhs relating to upside income has not been offered to tax. Accord....