2016 (9) TMI 58 - HC - Income Tax

Disallowance of EMI Residual - tribunal deleted addition - Held that - The assessee had sold during the year a portfolio of individual home loans aggregating ₹ 8109.09 lakhs by way of stock-in-trade on the date of transfer, which represented the principal value only of the loan portfolios of various persons for which the assessee was entitled to earn income by way of services with reference to the differential rate of interest as per the specific agreements with the beneficiaries. The above amount of ₹ 8109.09 lakhs did not have any profit element during the corresponding financial year 2000-01. However, in the light of the agreement with the beneficiaries, the assessee was entitled to retain the differential amount of interest recovered from the borrowers in excess of the agreed rate of interest. Evidently, therefore, the differential amount (residual EMI) would accrue to the assessee only as and when such interest amount in excess of the agreed amount was recovered by it. Such amount would, therefore, be taxable in the year in which the same had accrued to the assessee. It is an admitted position that the EMI residual income had subsequently been brought to tax in the year in which the related recoveries were made. In these circumstances, the view taken by the Tribunal does not suffer from any legal infirmity, warranting interference. The appeals, therefore, fail and are accordingly summarily dismissed. - Decided against revenue

Summary

Issues:
- Challenge to the order of the Income Tax Appellate Tribunal regarding the deletion of disallowance of EMI Residual account
- Taxability of EMI residual income in the assessment year
- Interpretation of when income accrues and arises for tax purposes

Analysis:

1. The appeals before the High Court arose from a common order passed by the Income Tax Appellate Tribunal concerning the deletion of disallowance of EMI Residual account for assessment years 2001-02, 2002-03, and 2003-04. The appellant, the revenue, challenged the Tribunal's order by questioning whether the Tribunal erred in deleting the disallowance of EMI Residual account amounting to specific lakhs for each assessment year.

2. The respondent assessee had advanced loans to customers, recovering EMIs comprising principal and interest amounts. The Assessing Officer observed that the assessee sold a portfolio of individual home loans but remained responsible for recoveries until full repayment. The surplus amount termed EMI residual was computed, and a portion was set aside for contingencies. The Assessing Officer sought to tax the entire EMI residual amount in the assessment year, contrary to the assessee's approach of recognizing income when recoveries exceeded loan amounts payable. The Commissioner (Appeals) and subsequently the Tribunal supported the assessee's position, emphasizing that income accrues when actual recoveries are made.

3. The High Court noted that the EMI residual income would accrue to the assessee only when interest amounts in excess of agreed rates were recovered. This income was taxed in the year of accrual, as evidenced by subsequent tax declarations. The Court upheld the Tribunal's decision, emphasizing that profits should be taxed when they actually accrue, aligning with the principle that income arises when recoveries are made. Consequently, the appeals challenging the Tribunal's order were dismissed, affirming the tax treatment of EMI residual income based on accrual and realization principles.