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TMI Blog2015 (2) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax (Appeals) has also erred in law, in confirming the disallowance of Rs. 3,22,00,000/- being the value of Employee Stock Option granted and opted by the employees, not a business expenditure and as a notional capital expenditure. 2. Briefly stated, assessee is a Micro Finance Institution and filed return of income declaring Rs. 35,29,35,971/-. In the scrutiny of return, Assessing Officer noticed that assessee did not offer entire gains received on sale of portfolio loans but amortized the same and offered only part gain during the year. He also noticed that on one closed loan portfolio sold to HDFC bank entire gain was offered to tax. In addition to the issue of gain on sale of loan portfolio, Assessing Officer also disallowed claim of expenditure on account of ESOPs to an extent of Rs. 3,22,00,000/-. The Ld.CIT(A) confirmed the additions of the above amounts, hence assessee is in appeal. 3. We have heard the Ld.Counsel for assessee and Ld.DR in detail and perused the Paper Book placed on record. 4. Ground No.1 is on the issue of confirming an amount of Rs. 13,09,44,315/- being the amount received by discounting the maturity value of loan portfolio on assignment to commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial for recognition of revenue from the sale of portfolio; e) The difficulty in estimation of servicing costs or obligation to service the portfolio are not relevant for recognition of revenue from sale of portfolio as both are distinct and separate functions performed by the assessee; f) The interest income received on sale of portfolio has no link with service cost. Also, there is no interest strip or service strip in the agreement to sell the portfolio; g) Keeping of cash collaterals (10% of the value of purchase consideration as well as part of the collection amounts in excess of principal) indicates only a contingent liability. The second part of the cash collateral is out of the funds belonging to the assignee only. Only the first part is out of the amounts received by the assessee. No one prevents the assessee in claiming trading loss, if any time, the cash collateral is liquidated. In the present case, even such liquidation never happened; h) The statement that even if borrowings are not realized, the assessee meets the obligations in practice is only a self-serving statement. As per the agreement, there is no binding on the assessee to pay its own amounts when loans a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as part of the collection amounts in excess of principal) indicates only contingent liability. The second part of the cash collateral is out of the funds belonging to the assignee only. Only the first part is out of the amounts received by the assessee. No one prevents the assessee in claiming trading loss, if any time, the cash collateral is liquidated. In the present case, even such liquidation never happened; j) The statement that even if borrowings are not realized, the assessee meets the obligations in practice is only a self-serving statement. As per the agreement, there is no binding on the assessee to pay its own amounts when loans are not collected from the borrowers. If for the sake of its convenience, the assessee adopts a practice (subject to proof), this does not mean that the revenue has to be deferred. k) As per collection agent agreement - the grounds on which the collection agent is treated as defaulter does not speak of making it liable for the non-recovery of loans. Only thing required is to remit the amounts realized/collected to the Assignee's on the payout dates. 6. Ld.Counsel referring to the orders of authorities and the Paper Book filed, expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s addition is not correct to that extent. He also explained the principles involved in securitization of assets and AS-9 which assessee is following. 7. Ld.DR however, relied on the detailed analysis made by the Assessing Officer and Ld.CIT(A). 8. We have considered the issue and examined the documents and agreement placed on record. There is no dispute with reference to the fact that assessee has transferred by way of direct assignment to and in favour of banks (purchaser), certain identified loan receivables together with all rights and interest receivable for a purchase consideration paid by the purchaser upon execution of deed and assignment. The purchase consideration is generally arrived at by calculating the value of receivables based on discounted cash flow method which is equivalent to interest rate, if it is viewed as a borrowing. Assessee also signed an agreement to collect the receivables assigned and ensuring the payment of the same to the banks on specified dates every month. It is the contention that assignment of loans has been accruing in accordance with AS-9 which covers revenue recognition norms, guidance note on accounting for securitization issued by the IC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd released only after completion of the tenure Fixed Deposit Pledged with ICICI Bank Ltd Dr 2,43,37,656 Entry passed when Assignment takes place ICICI Buyout Loan - 2 (loan) A/c Cr 2,43,37,656 (10% of Purchase consideration kept with ICICI Bank as Cash collateral, which is to be released only on completion of the Tenure) For Cash Collateral -2 (Purchase Consideration minus Book value) Kept with ICICI Bank and released in 9 Monthly instalments 19- Mar-09 Fixed Deposit Pledged with ICICI Bank Ltd., Dr 1,54,42,466 Entry passed when Assignment takes place ICICI Buyout Loan - 2(Loan) A/c Cr 1,54,42,466 (Difference of Amount from Purchase consideration to Book value will kept as CC-2 and released in monthly rests) 19- Mar-09 For broken period Interest Charged by Bank Interest- ICICI Buy Out Dr 18,70,332 Entry passed when Assignment takes place ICICI Buyout Loan - 2 (Loan) A/c Cr 18,70,332 (Broken period Interest Charged by Bank) For Transferring of Portfolio from AML Books 19- Mar-09 ICICI Buyout Loan - 2 (Loan) A/c Dr 22,79,34,100 Entry passed when Assignment takes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as far as principal amount is concerned, no discount was considered as the entire portfolio was given at the book value only. Only interest receivable sold to the purchaser, however, was discounted. Thus, as seen from the above example out of Rs. 2.96 Crores receivable, assessee discounted to an extent of Rs. 1.41 Crores and showed the gain of Rs. 1.54 Crores. It is assessee's contention that the entire amount of Rs. 2.96 Crores, being future interest receivable, is not accruing during the year. Therefore, the gain on discounting of that is not an amount accrued during the year and so, the same is deferred to later year. It is this amount which is under dispute. As this transaction given as an example above has occurred on 19th March 09 and as no interest is receivable during that month, assessee has deferred the entire amount of gain to the later year. There are many such transactions entered regularly by assessee during the course of year and to the extent of amount discounted, assessee is accordingly offering income on the proportion of interest accrued during the year. 12. This system of account being done by assessee is more or less similar to the bill discounting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises on the date of discount. The assessee was a non-banking finance company engaged in lease, hire purchase, bills discounting and mortgage loans. The Assessing Officer held that the whole of the income from bill discounting accrued at the time of discounting the bill. This was confirmed by the Tribunal. The assessee claimed the provision it had made towards bad debts under the RBI norms was deductible. The Assessing Officer and the Tribunal rejected the claim. Held, (i) that the Tribunal was right in concluding that the uncertainty regarding the discharge of the bill or rediscounting has no relevance. The transaction of discounting is complete at the moment the customer is given 90 per cent of the value of the bill. The discount is equivalent to the interest and it accrued at that point. (ii) That the debts were shown as written off on the basis of the formula given by the Reserve Bank of India. Writing off the debt as bad requires judgment on the part of the person carrying on the business but in the present case, the debts had been 'written off' merely on the basis of the RBI norms and nothing more. Thus, they were not deductible under section 36. 14. Since, princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The fact that some options may lapse due to non-exercise/ resignation etc does not make the entire liability contingent; (iii) However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme; (iv) There is likely to be a difference in the quantum of discount at the stage of vesting of the stock options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the option depending on the market price of the shares then prevailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Incometax Act. (v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought ..... X X X X Extracts X X X X X X X X Extracts X X X X
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