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2019 (9) TMI 974 - AT - Income TaxIncome recognition in hire purchase transaction - Internal Rate Return (IRR) method OR Equated Sum (ESM) method - Whether tribunal was right in holding that the interest income on hire purchase transactions accrued only under the Internal Rate Return (IRR) method and form part of the mercantile system of accounting? - HELD THAT - As relying on M/S. SUNDARAM FINANCE LIMITED. 2019 (3) TMI 1068 - MADRAS HIGH COURT we direct the AO to tax the interest income on EMI method or ESM, which has been consistently followed by the assessee and allow the consequential relief in accordance with law. Thus, the assessee s appeals on this issue are allowed. Provision for non-performing assets (NPAs) - HELD THAT - Since the assessee s claim require verification, we deem it fit to restore this matter back to the AO for a fresh examination and due decision after affording adequate opportunity to the assessee. Thus, the assessee s appeal grounds on this issue are treated as partly allowed for both assessment years 2004-05 and 2005-06. Disallowing amount recovered in respect of bad debts written off in the books of amalgamating companies as an exempt income in its hands - HELD THAT - After the amalgamation, the amalgamated company i.e., the assessee company, has all the rights the amalgamating companies had in their business which were transferred to it and also it owes all the liabilities the amalgamating companies owe and transferred to it. In exercise of such rights only, the assessee company recovered sum during the assessment years 2004-05 2005-06 respectively, from the bad-debts written off by the erstwhile amalgamating companies and therefore such recoveries are nothing but the business receipts of the amalgamated company i.e., the assessee and hence they are assessable in it its hands. This decision is also in accordance with the decision of CIT v. T. Veerabadra Rao 1985 (7) TMI 2 - SUPREME COURT relied on by the Ld.CIT(A), supra. Disallowance of the business origination costs actually incurred by the assessee during the assessment year 2005- 06 - HELD THAT - As per the decision normally revenue expenditure incurred in a particular year has to be allowed in that year and if the assessee claims that expenditure in that year, the Department cannot deny the same. Fact that assessee has deferred the expenditure in the books of account is irrelevant. However, if the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied. Since the assessee claimed the entire amount on the ground that it is a revenue expenditure instead of spreading over the amount to the period of contract, applying the case TAPARIA TOOLS LIMITED VERSUS JOINT COMMISSIONER OF INCOME TAX 2015 (3) TMI 853 - SUPREME COURT balance may also be allowed. Capital loss on account of sale of Sundaram Mutual Fund (dividend option) - whether CIT(A) erred in directing the Assessing Officer to allow the capital loss without reducing the dividend income which was claimed as exempt, in contravention to the provision of sec. 94(7) ? - HELD THAT - In the light of the decision of Walfort Share Stock Brokers Ltd. 2008 (8) TMI 222 - BOMBAY HIGH COURT and the Hon ble Apex court s decision In Commissioner Of Income-Tax. vs Walfort Share And Stock Brokers (P) Limited. . 2010 (7) TMI 15 - SUPREME COURT we find that on the facts and circumstances, supra, the reasonings of the Ld.CIT(A) on both issues, supra, do not require any interference and hence dismiss the corresponding grounds of the revenue on both issues. Disallowance of broken period interest on purchase/sale of securities - HELD THAT - Assessee is in the business of regular sale and purchase of Government securities, however, has classified them as investment. The sale and purchase of government securities have been considered for computation of capital gain or loss, as the case may be, and in almost every sale or purchase of government security capital loss has been booked after taking the benefit of indexation. For the impugned assessment years also the assessee company has claimed capital loss despite these instruments being in the nature of having fixed rate of return at the tenure of the instrument. The broken period interest on purchase and 'Sale of securities were accounted as revenue items in the books in accordance with the Accounting Standard-13 issued by the Institute of Chartered Accountants of India. However, for tax purpose, the assessee treated them as part of cost/consideration as the case may be, based on the decision of Supreme Court in Vijaya Bank's case 1990 (9) TMI 5 - SUPREME COURT rendered u/s 18 of the Act which is no more in the statute from 01.4.1989 and hence it is clear that the Ld.CIT(A) has not appreciated the facts and circumstances of this issue properly. The courts have held that if the securities are regularly purchased and sold they could be stock in trade in such case the income or loss could be revenue in nature etc. In the facts and circumstances, these issue requires readjudication afresh and hence we deem it fit to remit the issues back to the AO for a fresh examination for the assessment years 2004-05 2005-06
Issues Involved:
1. Method of income recognition in hire purchase transactions. 2. Provision for non-performing assets (NPAs). 3. Taxability of recovered bad debts from amalgamating companies. 4. Disallowance of business origination costs. 5. Capital loss on sale of mutual fund units. 6. Broken period interest on purchase/sale of securities. 7. Disallowance of bad debts. Detailed Analysis: 1. Method of Income Recognition in Hire Purchase Transactions: The primary issue was whether the Internal Rate of Return (IRR) method or the Equated Sum Method (ESM) should be used for income recognition in hire purchase transactions. The Tribunal referred to the decision of the jurisdictional High Court in M/s. Sundaram Finance Limited vs. ACIT, which held that the EMI method consistently followed by the assessee should be used for tax purposes. Consequently, the Tribunal directed the AO to tax the interest income on the EMI method, allowing the assessee's appeals for both assessment years 2004-05 and 2005-06. 2. Provision for Non-Performing Assets (NPAs): The assessee argued that the provision for NPAs, made as per RBI guidelines, should be allowed as a deduction. The AO had added back these provisions to taxable income, and the CIT(A) upheld this decision based on earlier Tribunal rulings. The Tribunal found that the assessee’s claims required verification and remitted the matter back to the AO for fresh examination, treating the appeal grounds as partly allowed for both assessment years. 3. Taxability of Recovered Bad Debts from Amalgamating Companies: The assessee claimed that the recovery of bad debts written off by amalgamating companies should not be taxable. The AO and CIT(A) held that such recoveries are taxable under Section 41(4) of the Act. The Tribunal upheld this view, stating that the amalgamated company inherits the rights and liabilities of the amalgamating companies, including the recovery of bad debts. Thus, the Tribunal dismissed the assessee's grounds for both assessment years. 4. Disallowance of Business Origination Costs: The assessee claimed business origination costs as revenue expenditure, which the AO disallowed, allowing only the amount debited to the P&L account. The CIT(A) upheld this disallowance. The Tribunal, relying on the Supreme Court’s decision in Taparia Tools Ltd vs. JCIT, allowed the entire claimed amount, recognizing it as revenue expenditure. 5. Capital Loss on Sale of Mutual Fund Units: The AO disallowed capital loss claims on mutual fund units, citing Section 94(7) and alleging the use of a colorable device. The CIT(A) reversed this, noting that the holding period exceeded three months and the dividends were exempt under Section 10. The Tribunal upheld the CIT(A)’s decision, dismissing the revenue's grounds. 6. Broken Period Interest on Purchase/Sale of Securities: The AO treated broken period interest as revenue items, while the assessee treated them as part of the cost/consideration for tax purposes based on the Supreme Court’s decision in Vijaya Bank’s case. The CIT(A) sided with the assessee. The Tribunal found that the issue required re-examination and remitted it back to the AO for fresh examination, treating the revenue's grounds as partly allowed. 7. Disallowance of Bad Debts: The AO disallowed the entire bad debt claim, citing a lack of recovery efforts. The CIT(A) allowed the claim, following the Tribunal’s earlier decision in the assessee’s own case for A.Y 2001-02. The Tribunal upheld the CIT(A)’s decision, dismissing the revenue's appeal on this issue. Conclusion: The Tribunal's judgment addressed multiple complex issues, providing detailed reasoning and directions for each. The appeals were partly allowed, with some issues remitted back to the AO for further examination, ensuring that the principles of consistency and proper verification were upheld.
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