2015 (6) TMI 525 - AT - Income Tax

Accrual of income - Addition on gain on assignment of loan portfolio - sale of portfolio - Held that - This issue involved in the appeal of the assessee is squarely covered in favour of the Revenue and against the Assessee by the decision of Coordinate Bench of this Tribunal in assessee s own case for the A.Y. 2009-2010 2015 (2) TMI 937 - ITAT HYDERABAD wherein held that at the time of sale of portfolio, there is a gain of ₹ 1.54 Crores. This amount received by assessee is in a way discounted interest on the future receivables. Since this amount is already received by assessee, question of postponing the accrual does not arise. Had assessee been accounting the interest receivables as and when accrued, without sale of the portfolio, it has to be admitted that future interest cannot be taken as income. However, when assessee bundles it and sells it as a portfolio for a discount, the amount did accrue and received on the date of entering agreement. As can be seen from the above example, out of the total amount of ₹ 2,96,16,526/- receivable in a later year, assessee discounted ₹ 1,41,74,070/- and has received an amount of ₹ 1,54,42,456/- as gain, out of the total price received of ₹ 24,33,76,256/- that total amount ₹ 24,33,76,256 ₹ 22,79,34,100 1,54,42,456 . Thus, in a way, out of the book value of ₹ 22.79 Crores of portfolio, assessee did receive ₹ 24.33 Crores thereby having the gain of ₹ 1.54 Crores. Since the transaction happened on 19th March, the entire amount is to be accounted as income on that transaction as a gain. - Decided against assessee. Disallowance of deduction u/s.35D - Held that - Since the issue relevant to the assessee s claim for deduction under section 35D as involved in the year under consideration is consequential to the similar issue involved in the initial year i.e., A.Y. 2007-2008 for which the appeal is pending before the Ld. CIT(A), the same may be remitted back to the Ld. CIT(A) for deciding the same afresh depending on his decision on a similar issue for the initial year. Since the learned D.R. has also not raised any objection in this regard, we remit this matter back to the Ld. CIT(A) for deciding the same afresh depending on his decision on a similar issue involved in assessee s own case for A.Y. 2007- 2008 for which the appeal is pending with him. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Confirmation of addition of Rs. 15,45,89,893 on the gain from the assignment of the loan portfolio.
2. Disallowance of deduction under section 35D amounting to Rs. 4,00,000.
3. General grounds and other grounds not specifically adjudicated.

Detailed Analysis:

Issue 1: Confirmation of Addition of Rs. 15,45,89,893
The assessee, a microfinance institution, filed a return of income declaring Rs. 90,79,46,733. During the year, it sold a portion of its loan portfolio to banks, receiving Rs. 19,42,78,577 as net gain from the assignment under Type-1 model. The assessee recognized Rs. 3,96,88,684 as income for the year and amortized the remaining Rs. 15,45,89,893 for the next assessment year (A.Y. 2011-2012). The AO, upon examining the deeds of assignments, found that the assessee sold the loan portfolio outright and received the purchase consideration. He concluded that the entire net gain should be taxed in the year of receipt rather than allowing amortization, citing the guidance note on accounting for securitization by ICAI. Consequently, the AO added Rs. 15,45,89,893 to the total income.

The CIT(A) confirmed this addition, stating that there was no reason to amortize the gain and that the entire amount should be taxed in the year of receipt. The CIT(A) emphasized that the sale of the loan portfolio and the collection agent agreement were distinct activities, and the risk to the assessee was limited to the extent of collateral provided to the banks.

The Tribunal upheld the CIT(A)'s order, referencing a similar decision in the assessee's case for A.Y. 2009-2010. The Tribunal noted that the assessee's method was akin to bill discounting, where the income accrues at the time of discounting. The Tribunal concluded that since the assessee received the discounted amount as part of the sale consideration, the gain should be recognized in the year of receipt.

Issue 2: Disallowance of Deduction under Section 35D
The AO disallowed the assessee's claim for deduction under section 35D amounting to Rs. 4,00,000, which was confirmed by the CIT(A). The assessee argued that the relevant expenditure was incurred in the previous year related to A.Y. 2007-2008, and although initially allowed, the AO subsequently reopened the assessment and disallowed the deduction. The assessee's appeal against this disallowance was pending before the CIT(A).

The Tribunal remitted this matter back to the CIT(A) for fresh consideration, depending on the decision in the appeal for A.Y. 2007-2008. The Tribunal allowed this ground for statistical purposes.

Issue 3: General Grounds and Other Grounds
Ground Nos. 1 and 5 were general in nature and did not call for specific adjudication. Ground No. 4 was not pressed by the assessee during the hearing and was dismissed as not pressed.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the addition of Rs. 15,45,89,893 and remitting the issue of deduction under section 35D back to the CIT(A) for fresh consideration. The general grounds and unpressed grounds were dismissed. The order was pronounced in the open Court on 05.06.2015.