2024 (9) TMI 287 - AT - Income Tax

Disallowance made for prepaid finance charges - assessee submitted amortization schedule of such expenses over the subsequent financial years and claimed that the finance charges are in respect of payments made for availing loan such as processing charges bank charges and stamping charges - HELD THAT - We noted that the Tribunal in assessment year 2011-12 2023 (9) TMI 1546 - ITAT CHENNAI has recorded a clear finding that assessee for the purpose of income tax computation claimed total finance charges including prepaid finance charges on the ground that the said expenditure has been incurred wholly and exclusively for the purpose of business and further expenditure needs to be allowed as deduction in the year of payment. Since the assessee has already paid finance charges respectfully following the Tribunal s decision in assessee s own case for assessment year 2011-12 deduction should be allowed towards finance charges including prepaid finance charges if any in the year of payment itself even though said expenditure has been treated as deferred revenue expenditure or prepaid expenditure in the books of accounts and claimed over a period of loan. Accordingly we delete the disallowance and allow the appeal of assessee on this issue. Excess interest spread income earned on assignment of receivables - HELD THAT - As the assessee is governed by RBI norms and Accounting Standrds for the purpose of disclosure in the books of accounts and hence to follow the norms issued by RBI in respect of securitisation transaction and income arising thereon was disclosed accordingly. As noted that this issue fully stands covered by the Tribunal decision in assessee s own case for assessment year 2016-17 2022 (8) TMI 1012 - ITAT CHENNAI and the facts being identical we respectfully following the same delete the addition and allow the appeal of assessee. Disallowance of excess deduction in relation to provision for bad and doubtful debts under section 36()(via)(d) - HELD THAT - In our view the provision the way the assessee is interpreting as equal to 5% rather not exceeding 5%. This interpretation will lead to absurd results. In our view the upper limit is 5% of the total income and deduction is allowable as per section 36(1)(viia)(d) of the Act is not equal to 5% but that is upper limit only. Hence as originally debited in the books of accounts the provision for bad and doubtful debts of Rs. 49.45 crores the assessee is eligible and AO has rightly added the differential amount of Rs. 13.87 crores as the assessee is not eligible for the same and the CIT(A) has also rightly confirmed the same. Alternatively claimed by assessee before CIT(A) that the proposed disallowance by the AO u/s. 36(1)(viia)(d) of the Act is in relation to provision for bad and doubtful debts reversal of provision for standard assets and diminution in value of investments has no barring and correlation with section 36(1)(viia)(d ) has not been examined neither by AO nor by CIT(A) - As regards to the alternative claim since the facts are not examined and the legal position for claim of provision for bad and doubtful debts what is the impact of this reversal the AO will examine and decide the issue as per law and hence the alternative plea of the assessee is remanded back to the file of the AO for fresh adjudication. In term of the above this issue of assessee s appeal is allowed for statistical purposes

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of prepaid finance charges.
3. Addition for excess interest spread (EIS) income earned on assignment of receivables.
4. Disallowance of excess deduction in relation to provision for bad and doubtful debts.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the assessee for the assessment year 2012-13 was barred by a delay of 185 days. The delay was attributed to the pandemic period of Covid-19. The assessee cited the Hon'ble Supreme Court's order in Miscellaneous Application No.665 of 2021 dated 23.03.2020, which directed that delays during the period from 15.03.2020 to 14.03.2021 be condoned. Respectfully following the Supreme Court's directions, the delay was condoned, and the appeal was admitted.

2. Disallowance of Prepaid Finance Charges:
The first issue in ITA No.847/CHNY/2020 for the assessment year 2012-13 was regarding the disallowance of prepaid finance charges amounting to INR 19,96,29,043. The AO disallowed the charges, stating that the liability should be spread over the period of the loan. The CIT(A) upheld this disallowance, relying on the Supreme Court's decision in Madras Industrial Investment Corpn Ltd vs CIT, which held that liabilities should be spread over the period of benefit. However, the Tribunal noted that in the assessee's own case for the assessment year 2011-12, it was held that once actual payment is made, the entire payment should be allowed as a deduction in the year of payment itself. Respectfully following this precedent, the Tribunal directed the AO to delete the disallowance of prepaid finance charges.

3. Addition for Excess Interest Spread (EIS) Income Earned on Assignment of Receivables:
The next issue was the addition of INR 26,99,20,000 for excess interest spread income earned on the assignment of receivables. The AO added this amount, stating that the income had accrued and should be taxed in the year of securitization. The CIT(A) upheld this addition, stating that the income had accrued and could not be deferred by accounting entries. However, the Tribunal, following its decision in the assessee's own case for the assessment year 2016-17, held that the income from EIS is contingent upon various conditions and should be recognized over the life of the underlying receivables. The Tribunal deleted the addition for the assessment year 2012-13 and confirmed the CIT(A)'s order for the assessment years 2017-18 and 2018-19, dismissing the Revenue's appeals.

4. Disallowance of Excess Deduction in Relation to Provision for Bad and Doubtful Debts:
In ITA No.384/CHNY/2023 for the assessment year 2017-18, the issue was the disallowance of excess deduction in relation to the provision for bad and doubtful debts. The AO disallowed INR 13,87,96,281, stating that the provision created was only INR 49.45 crores, whereas the assessee claimed INR 63.33 crores. The CIT(A) upheld the AO's disallowance, interpreting the provision of section 36(1)(viia)(d) as allowing a deduction not exceeding 5% of the total income. The Tribunal agreed with the CIT(A) but remanded the alternative claim regarding the reversal of provision for standard assets and diminution in value of investments back to the AO for fresh adjudication.

Conclusion:
The appeals filed by the assessee in ITA No.847/CHNY/2020 were allowed, and ITA No.384/CHNY/2023 was allowed for statistical purposes. The appeals filed by the Revenue in ITA Nos. 514 & 515/CHNY/2023 were dismissed.

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