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TMI Blog2015 (12) TMI 1364X X X X Extracts X X X X X X X X Extracts X X X X ..... s actually become bad and whether loss can be claimed as a deduction for bad debts in the current year, suffice to note that the assessee has written off the amount in this year and, following the law laid down by Hon’ble Supreme Court in the case of TRF Limited Vs CIT [2010 (2) TMI 211 - SUPREME COURT ], the deduction is to be allowed in the year of write off. - Decided in favour of assessee. Disallowance of depreciation in respect of sale and lease-back transactions of assets - Held that:- We are in respectful agreement with the views so expressed by the coordinate bench. In this view of the matter, we deem it fit and proper to remit the matter to the file of the Assessing Officer for adjudication de novo in the light of the above legal position and the allow the relief, as admissible. As long as assessee is the legal owner of the asset and has used the asset in the course of his business, he is to be allowed depreciation in respect of that asset. The use in leasing business is also a use of the asset. The matter needs to be re-examined in this light. While doing so, the Assessing Officer will give a reasonable opportunity of hearing to the assessee, decide the matter by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming the disallowance in respect of depreciation of ₹ 29,56,367/- made by the Assessing Officer in respect of sale and lease-back transactions of assets after relying on ITAT, Mumbai bench decision in case of ICICI Ltd. 4. So far as first grievance of the assesse is concerned, the relevant material facts are as follows. During the course of the assessment proceedings, the Assessing Officer noted that the assesse has claimed a deduction of ₹ 1,0,00,000 in respect of the bad debt written off in respect of IFB Finance Limited. The Assessing Officer also noted that the amount written off represents amount of debentures issued by the IFBFL to the assesse company. The assessee s claim was that these debentures were issued to the assesse in satisfaction of his a loan, advanced during normal course of business, interest on which was assessed as business income in the hands of the assesse. It was also pointed out that undisputedly the assesse was a non-banking finance company, in which public are substantially interested, and the assesse is engaged in the business of providing long term finance for housing, besides providing finance and leasing of assets, and bill di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss activities and interest on the same was assessed as business income. On these facts, the amount due to IFBFL being written off can only be considered to be incidental to the business carried on by the assesse. It is wholly immaterial as to how the debentures are reflected in the balance sheet drawn up by the assesse as that aspect of the matter is governed by the statutory requirements rather than realities of business. In any case, as is the well settled legal position, the accounting entries cannot be determinative of the true character of business transactions. 7. In the case of A V Thomas Co Vs CIT [(1963) 48 ITR 67 (SC)], Hon ble Supreme Court has, dealing with the question as to what will constitute a bad debt, for the purpose of deduction as a bad debt, will constitute, observed as follows: Now, a question under section 10(2)(xi) can only arise if there is a bad or doubtful debt. Before a debt can become bad or doubtful it must first be a debt. What is meant by debt in this connection was laid down by Rowlatt J. in Curtis v. J . G. Oldfield Ltd. [1925] 9 Tax Cas 319 as follows: When the rule speaks of a bad debt it means a debt which is a debt that wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue against the assessee by observing that, Applying these tests, it is quite obvious that an advance paid by the assessee company to another to purchase shares cannot be said to be incidental to the trading activities of the assessee company but then what clearly is important is whether the amount written off can be said to be incidental to the business activities of the assessee. 9. Viewed thus, acquisition of debentures, on the facts of the case before us, was in the course of the business carried on by the assessee and, therefore, it cannot be seen on standalone basis divorced from the peculiar facts under which the assessee company came to own these debentures and incur the loss on non-redemption of these debentures. The form of transaction is not important. What is important is that the de facto transaction was of finance and the amount advanced during the course of the financing business had become bad. It is a matter of record, as noted by the CIT(A), that the assessee pursued the matter before Hon ble Calcutta High Court in winding up petition against IFB Finance Limited, and all this was essentially, and undisputedly, integral part of the financing business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up these developments as follows: 4.3 We have carefully perused the order of the lower authorities and the relevant material evidences brought on record before us. We have also carefully gone through the decisions relied upon by both the parties. In so far as the issue relating to the claim of depreciation on leased transactions is concerned, we find force in the submission of the Ld. Sr. Counsel that the Hon'ble Supreme Court in the case of ICDS vs. CIT, 350 ITR 527 had the occasion to consider the question - whether the Assessee is entitled to depreciation on vehicles financed by it which is neither owned by the Assessee nor used by the Assessee? The Hon'ble Supreme Court after perusing the lease agreement and other related factors held that the lessor is the owner of the vehicles. As an owner, it used the assets in the course of its business satisfying both the requirements of Sec. 32 of the Act and hence is entitled to claim depreciation. 4.3.1 A similar view was taken by the Hon'ble Delhi High Court in the case of Cosmos Films (supra) wherein the Hon'ble Delhi High Court has considered the implications of Sec. 19 of Sale of Goods Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries from the individual borrowers until the point of time when all these loans are fully recovered. Under this arrangement, the assessee is entitled to retain interest in excess of the agreed rate of interest recovered from the borrowers. It was in this backdrop that the assessee computed the surplus of ₹ 932.42 lakhs being the difference between EMI recoverable form the borrowers during the remain loan tenure, and the amount payable by the assessee to the buyer of assessee s home loan portfolio. This represented, what was termed as, EMI residual. Out of this amount, the assessee further set aside a sum of ₹ 428.31 lakhs on account of contingencies of pre-payments The balance amount of ₹ 507.29 lakhs was transferred to the profit and loss account. In the computation of income, it appears, that the assessee reduced this amount from net profit and then offered only ₹ 132.02 lakhs as income of the relevant year. This computation was on the basis of income actually earned so far as interest differential was concerned. The Assessing Officer, however, was not satisfied with the same. He was of the view that entire difference between recovery value of housing loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed even if such loss has not been actually realised. The principle is thus unambiguous. The principles of conservatism, and considerations of prudence, in the accounting treatment require that no anticipated profits be treated as income until the profits are realized, and, at the same time, an anticipated loss to be deducted from commercial profits, at the first sign of its reasonable possibility. There may seem to be, at first sight, an element of dichotomy in this approach inasmuch as anticipated losses are taken into account and anticipatory profits are ignored, but that is the impact of accounting principles sanctioned by the statute and the law laid down by Hon ble Supreme Court. No matter how reasonable is it to assume that the assessee will make these profits, these profits cannot be brought to tax at this stage. That is what the legal position, for the detailed reasons set out above, is. 22. 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 bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned representatives fairly agree that whatever we decide for the assessment year 2001-02 on this issue will apply mutatis mutandis on this assessment year as well. Vide our order earlier hereinabove, we have remitted the matter to the file of the Assessing Officer. The same fate and the same directions will apply here as well. Accordingly, for this issue, the matter stands remitted to the file of the Assessing Officer in terms of our observations in paragraphs 12 to 15 above. 31. The appeal filed by the assessee is thus allowed in the terms indicated above. 32. In the appeal filed by the Assessing Officer, the Assessing Officer has raised the following grievances: 1. The Ld. CIT(A) has erred in law and on facts of the case in deleting the addition, which was made by the A.O. considering whole of the amount credited to EMI residual account by assessee company during the year due to sale/transfer assignment of individual home loans to M/s HDFC Ltd. as income accrued to assessee. 2. The Ld. CIT(A) has erred in law and on facts of the case in directing to delete the disallowance of deduction to the tune of ₹ 1,10,86,036/- u/s. 36(1)(viii) of the I.T. Act disreg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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