2017 (7) TMI 306 - AT - Income Tax

Disallowance of Commission paid to Direct Selling Agents (DSA) - Held that - With regard to the objection of the ld AO that assessee changing the fee structure at its discretion does not imply that the DSAs will not get their due fees for the work done by them. They would receive their due fees as per the changed / revised fee structure by the assessee. Thus expenditure crystallized during the year even in this scenario. The aforesaid clauses together with the other clauses in the agreement with DSA provides adequate checks and balances to protect the interests of the commission payment made by MFL (assessee herein) to DSAs. Thus the liability of expenses on account of DSA commission / brokerage amounting to ₹ 150,62,00,000/- had accrued to the assessee on disbursal of total loan facilities amounting to ₹ 708662.96 lakhs during the relevant asst year which was discharged by it during the year itself. Hence the liability to pay the commission / brokerage to DSAs had duly crystallized and hence the comments of the ld AO in this regard that it had not crystallized does not hold water. upfront claim of expenses - Held that - Upfront expenditure should be allowed in the year of incurrence on accrual basis Treatment of portfolio acquisition cost - revenue or capital - Held that - We hold that these portfolio cases are to be treated as stock in trade for NBFCs and the expenses incurred for purchasing these portfolios would be revenue in nature. We draw support in this regard from the ratio laid down by the Hon ble Delhi High Court in the case of CIT vs Goyal M.G.Gases P. Ltd reported in (2008 (4) TMI 465 - DELHI HIGH COURT )

Summary

Issues Involved:

1. Disallowance of ?81,22,83,000/- as deductible expenditure.
2. Commission paid to Direct Selling Agents (DSA).
3. Cost for arrangement of borrowings.
4. Cost incurred in the process of acquiring Portfolio.
5. Matching principle and its application.
6. Reference to the case of Taparia Tools Ltd vs JCIT.

Detailed Analysis:

1. Disallowance of ?81,22,83,000/- as deductible expenditure:

The central issue in this appeal was whether the CIT(A) was justified in upholding the disallowance of ?81,22,83,000/- claimed by the assessee as deductible expenditure. The assessee, a non-banking finance company (NBFC) registered with the RBI and engaged in asset financing, had claimed these expenses on an accrual basis in its return of income, although the expenses were amortized over the life of the loan transactions in the profit and loss account as per RBI guidelines.

2. Commission paid to Direct Selling Agents (DSA):

The assessee paid commissions to DSAs for procuring customers for loans and leases. The commission was payable within 30 days of receipt of the bill from the DSAs. The liability for these commissions accrued as soon as the loan was disbursed and the necessary formalities were completed. The assessee paid ?150,62,00,000/- to around 10,000 DSAs during the year. The AO's contention that the liability had not crystallized was dismissed, as the liability accrued upon disbursal of the loan.

3. Cost for arrangement of borrowings:

The assessee incurred expenses for procuring loans from banks and financial institutions, including processing fees, bank charges, and fees paid to arrangers. These costs were incurred at the time of borrowing and were not related to future contingencies. The total cost incurred for borrowings during the year was ?44,46,00,000/-, which was paid during the year itself. It was established that such expenses are allowable as revenue expenditure.

4. Cost incurred in the process of acquiring Portfolio:

The assessee acquired loan portfolios from other companies, incurring expenses for legal fees, professional fees, and salaries for employees involved in the acquisition process. The total cost incurred for acquiring portfolios during the year was ?5,92,52,000/-, which was paid during the year itself. These expenses were considered revenue in nature as they were incurred in the course of the assessee's business of granting loans.

5. Matching principle and its application:

The AO disallowed the upfront claim of expenses based on the matching principle, arguing that expenses should be amortized over the life of the loan. However, the assessee contended that the expenses were revenue in nature and should be allowed on an accrual basis. The CIT(A) upheld the AO's decision, but the ITAT found that the assessee had consistently claimed upfront expenses and income in the return of income, even after the issuance of RBI guidelines. The ITAT referred to the Supreme Court's decision in Taparia Tools Ltd vs JCIT, which allowed the assessee to claim the entire expenditure in the year of incurrence.

6. Reference to the case of Taparia Tools Ltd vs JCIT:

The ITAT heavily relied on the Supreme Court's decision in Taparia Tools Ltd vs JCIT, which held that the assessee could claim the entire expenditure in the year it was incurred, even if the treatment in the books of accounts was different. The Supreme Court emphasized that the treatment in the books of accounts is not determinative for tax purposes, and the provisions of the Income Tax Act should prevail. The ITAT concluded that the upfront expenditure should be allowed in the year of incurrence on an accrual basis.

Conclusion:

The ITAT allowed the assessee's appeal, directing the AO to delete the disallowance of ?81,22,83,000/-. The decision was based on the consistent treatment of upfront expenses and income in the return of income, the accrual of expenses during the year, and the Supreme Court's ruling in Taparia Tools Ltd vs JCIT. The ITAT found that the assessee's method of claiming expenses was in line with the provisions of the Income Tax Act, despite the different treatment in the books of accounts due to RBI guidelines.