2016 (10) TMI 989 - AT - Income Tax

Disallowance made by the Assessing Officer out of prepayment charges made to NHB(National Housing Bank) - NCD(non-convertible debenture) expenses - Held that - The issue raised in these two assessment years with regard to NHB prepayment charges is the similar issue that we already dealt with while dealing the issue of NCD expenses where following the decision of Hon ble Supreme Court in Taparia Tools Ltd (2015 (3) TMI 853 - SUPREME COURT ) we held that assessee is entitled to the entire deduction of NCD expenditure.

Summary

Issues Involved:
1. Disallowance of Non-Convertible Debenture (NCD) expenses.
2. Disallowance of prepayment charges to the National Housing Bank (NHB).
3. Addition related to non-performing assets (NPA).
4. Disallowance of bad debts.
5. Claim of deduction under Section 36(1)(viii).
6. Addition of EMI residuals.
7. Disallowance under Section 35D.
8. Penalty appeals related to the above issues.

Detailed Analysis:

1. Disallowance of Non-Convertible Debenture (NCD) Expenses:
The assessee claimed expenses on the issue of NCDs, which were not charged to the Profit & Loss Account but claimed as a deduction while computing income. The Assessing Officer (AO) disallowed the entire amount, allowing only 20% per year over five years, citing the matching principle of income and expenditure. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this decision. However, the Tribunal referred to the Supreme Court's decision in Taparia Tools Ltd (372 ITR 605), which allowed the entire expenditure in the year it was incurred. Consequently, the Tribunal allowed the assessee's appeal, permitting the full deduction of NCD expenses for the relevant assessment years.

2. Disallowance of Prepayment Charges to NHB:
The AO disallowed a portion of the prepayment charges paid to NHB, arguing that the benefit of the expenditure would accrue over the remaining period of the refinanced loan. The CIT(A) upheld this view. The Tribunal, following the Supreme Court's decision in Taparia Tools Ltd, allowed the entire expenditure in the year it was incurred, thereby allowing the assessee's appeal for the relevant assessment years.

3. Addition Related to Non-Performing Assets (NPA):
The AO added ?24,01,200 to the assessee's income, arguing that the revenue should be recognized on an accrual basis despite changes in NPA norms by NHB. The CIT(A) upheld this addition. The Tribunal remitted the issue back to the AO for verification, emphasizing the need to consider NHB guidelines effective from 31.03.2005 and provide the assessee an opportunity to be heard.

4. Disallowance of Bad Debts:
The AO disallowed the bad debt claim, stating the debt had not become bad during the year. The CIT(A) confirmed the disallowance. The Tribunal, referencing the Supreme Court's decisions in TRF Ltd and Vijaya Bank, held that it is sufficient for the debt to be written off in the accounts. Thus, the Tribunal allowed the assessee's appeal, permitting the bad debt deduction for the relevant assessment years.

5. Claim of Deduction under Section 36(1)(viii):
The AO disallowed part of the deduction claimed under Section 36(1)(viii), arguing that the loans were not held for the required five-year period. The CIT(A) confirmed this disallowance. The Tribunal referred to the ITAT's decision in the assessee's own case for earlier years, directing the AO to verify the details of the finance accounts and ensure that the character of the accounts remained unchanged. The Tribunal allowed the assessee's appeal, subject to verification and ensuring no double deduction.

6. Addition of EMI Residuals:
The AO added ?9,83,32,951 to the assessee's income, arguing that EMI residuals should be taxed in the year of sale/transfer of loan portfolios. The CIT(A) deleted this addition, stating that only accrued income for the relevant period should be taxed. The Tribunal upheld the CIT(A)'s decision, referencing earlier ITAT decisions in the assessee's case, and dismissed the Revenue's appeal.

7. Disallowance under Section 35D:
The AO disallowed the claim of ?1,71,000 under Section 35D, relating to FCD issue expenditure. The CIT(A) allowed the claim. The Tribunal, referencing the Gujarat High Court's decisions in Gujarat Ambuja Cotspin and Torrent Pharmaceuticals Ltd, held that such expenditure is capital in nature and cannot be allowed as a deduction. The Tribunal restored the AO's order, allowing the Revenue's appeal on this issue.

8. Penalty Appeals:
Given that the Tribunal deleted the respective additions in the quantum appeals, the penalties related to those additions were also deleted. The Tribunal allowed the assessee's penalty appeals and dismissed the Revenue's penalty appeals.

Conclusion:
The Tribunal's order resulted in a mixed outcome, with several of the assessee's appeals being allowed, particularly concerning the full deduction of NCD expenses, prepayment charges, bad debts, and EMI residuals. The Revenue's appeals were largely dismissed, except for the disallowance under Section 35D, which was restored. Penalty appeals were resolved in favor of the assessee.