2016 (7) TMI 621 - AT - Income Tax

Disallowance of debenture issue expenses - revenue or capital expenditure - Held that - It emerges out from the record that the assessee had incurred expenditure for issuance of fully convertible debenture. It has claimed 1/10th of the expenditure. In this year, such expenditure was claimed at ₹ 11,63,048/-. The ld.CIT(A) has allowed this claim of the assessee. Expenditure incurred on issue of convertible debenture is a capital expenditure. It cannot be allowed as deduction. Similar view has been taken in the case of Torrent Pharmaceuticals Ltd. Vs. ACIT, (2015 (1) TMI 706 - GUJARAT HIGH COURT). Since assessee has incurred the expenditure on issue of convertible debenture, which is directly related to the expansion of capital base of the company, the Hon ble High Court held that such expenditure is to be treated as capital expenditure. The ld.counsel for the assessee was unable to controvert this contention of the ld.DR - Decided against assessee Addition being EMI residual income - Held that - In the case before us, whatever be certainty of the assessee realizing the profits in future as a result of this arrangement, these profits can only be brought to tax when these actually accrue and arise and that stage comes only when the recoveries are made from the individual borrowers. It is also not in dispute, in the light of the categorical finding given by the CIT(A), that the related incomes are brought to tax in subsequent period when these income accrue and arise. As for the reference to Hon ble Supreme Court s judgment in the case of CIT Vs Shiv Prakash Janak Raj & Co Pvt Ltd 1996 (9) TMI 5 - SUPREME Court , that was a case in which accrual had admittedly taken place. That is not the situation before us. In these circumstances, we see no infirmity in the well reasoned conclusion arrived at by the CIT(A) in deleting the addition - Decided in favour of assessee. Disallowance of deduction under section 36(1)(viii) - Held that - Perusal of section along with clause (e) no where reveals that the assessee is bound to maintain the account for five years, otherwise the Legislature would provide the deduction after completion of 5 years of such loan account. It only puts a condition about the nature of account. An assessee is entitled for deduction for the purpose of this section from the first year itself. The meaning construed by us can be further fortified by considering section 155 of the Income Tax Act. Under this section AO has been empowered to withdraw certain deduction to an assessee. For example investment allowance is being granted to an assessee u/s.32A in respect of ship and such ship was transferred before expiry of eight years in violation to the conditions, then u/s.155 it will be construed that such allowance was granted wrongly. Similarly, a provision has been made to withdraw number of such other benefits given under the Act. But, this section does not talk withdrawal of deduction granted u/s.36(1)(vii) of the Act. Therefore, we are of the view that the ld.Revenue authorities have erred in construing the meaning of clause (e) to section 36(1)(viii) of the Income Tax Act. We remit this issue to the file of the AO with a direction that he will verify the details of finance accounts, and if there is no change in the character of accounts i.e. their life span is more than five years, which continues even after assignment, then, interest income from those accounts upto the date of assignment would qualify for deduction under section 36(1)(viii) of the Act in the hands of the assessee. Denial of claim under section 36(1)(viii) - Held that - The assessee has sold import entitlement, and in that context, it was construed that such income was not derived from industrial undertaking. In the present case, income derived by the assessee is from long term finance i.e. interest income. It was reduced by virtue of written off of certain debts which has direct nexus with the income derived by the assessee. This year, these entries have been reversed by recovery of this bad debt. Thus, nexus is available. The AO is not justified to exclude the amount of bad debts recovered by the assessee for calculating the claim under section 36(1)(viii) of the Act. With regard to EMI residual considering the finding of the AO, in the light of the discussion made by the ITAT in the Asstt.Year 2000-01 and 2001-02 extracted supra, we are of the view that the income from EMI residual offered for taxation is an income which represents difference of interest charged by the assessee for the services rendered by it for collecting EMI etc. on behalf of the HDFC. It is not linked with long term finance. Therefore, this income will not form part of the eligible profit derived from long term finance for the purpose of calculating 40% of the amount to claim deduction under section 36(1)(viii) of the Act.

Summary

Issues Involved:
1. Disallowance of debenture issue expenses.
2. Deletion of EMI residual income addition.
3. Disallowance of deduction under section 36(1)(viii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Debenture Issue Expenses:
The Revenue's appeal for the Asstt.Year 2000-01 included a grievance regarding the disallowance of debenture issue expenses. The ld.CIT(A) had allowed 1/5th of the debenture issue expenses, deleting the disallowance of ?11,63,048 made by the AO. The Revenue contended that this issue was covered in their favor by the decision of the Hon’ble jurisdictional High Court, which held that expenditure incurred on the issue of convertible debenture is a capital expenditure and cannot be allowed as a deduction. The Tribunal agreed with the Revenue, allowing this ground of appeal and restoring the AO's order.

2. Deletion of EMI Residual Income Addition:
The second issue involved the deletion of an addition of ?6,70,36,967 being EMI residual income. The AO had brought to tax the entire difference between the recovery value of housing loans and the amount payable to the buyer of the loan portfolio in the relevant year. However, the CIT(A) deleted this addition, noting that income should be taxed only when it accrues, and the accrual occurs when recoveries from borrowers exceed the amount payable to the buyer. The Tribunal upheld the CIT(A)'s decision, emphasizing that anticipated profits cannot be taxed until realized, following the principles of conservatism and prudence in accounting.

3. Disallowance of Deduction under Section 36(1)(viii):
The assessee's appeal for the Asstt.Year 2000-01 and 2004-05 involved the disallowance of deduction under section 36(1)(viii). The AO disallowed ?27,34,000 for the Asstt.Year 2000-01, arguing that the loan portfolio assigned to HDFC did not meet the "long-term finance" criteria as defined in the Act. The Tribunal noted that the character of the loan as long-term finance does not change upon assignment, and the deduction should be allowed if the loan tenure exceeds five years. The Tribunal remitted the issue back to the AO for verification, ensuring no double deduction is claimed.

For the Asstt.Year 2004-05, the AO disallowed ?2,41,88,321, including bad debt recovery and EMI residual income. The Tribunal held that bad debt recovery should be included in the eligible profit for deduction under section 36(1)(viii), as it directly relates to long-term finance. However, EMI residual income, being service charges for acting as an agent for HDFC, does not qualify as income derived from long-term finance, and thus, the disallowance was upheld.

Conclusion:
The Tribunal allowed the Revenue's appeal partially for the Asstt.Year 2000-01, restoring the AO's order on debenture issue expenses and upholding the CIT(A)'s deletion of EMI residual income addition. The assessee's appeals were partly allowed, directing the AO to verify the loan tenure for deduction under section 36(1)(viii) and including bad debt recovery in the eligible profit while excluding EMI residual income.