9911796707
TMI Blog2022 (8) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is in the range of 4 years to 16 years. The assessee would collect the debts on due date and deposit the receivables in a separate Collection and Payout Account . The surplus generated by the SPV (which would be in range of 7% approx.) in this account would be distributed as per unique mechanism which is known as Waterfall mechanism . The assessee is following consistent method of accounting to recognize the revenue in this manner. Following this consistent method, the income on these transactions has been offered in subsequent years also. The income thus offered by the assessee is on the reasoning that interest spread pertains to future years and its accrual and receipt is contingent upon certain conditions which cannot be estimated on the date of agreement. The said treatment of EIS is stated to be in line with the prudential norms prescribed by RBI and the principles of prudence - similar practice is followed by the industry. Notably, if income is utilized as per the agreed waterfall mechanism, there would be situations where the residual EIS paid to assessee could be nil or significantly lesser or even higher (if shortfalls in previous months are collected in a subsequent mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not been recognized under Income Tax Act and only the real income has to be assessed to tax. Thus we direct Ld. AO to accept the accounting methodology of the assessee and delete the impugned addition. The corresponding ground thus raised stand allowed. Deduction of education cess - HELD THAT:- This issue has now been settled by Finance Act, 2022 wherein amendment to Sec.40(a)(ii) has been brought retrospectively with effect from AY 2005-06 by way of insertion of Explanation-3 which read as Explanation 3-For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term tax shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax; Considering the same, we would hold that no such deduction is available to the assessee. This ground stand dismissed. - HON BLE SHRI V. DURGA RAO, JUDICIAL MEMBER AND HON BLE SHRI MANOJ KUMAR AGGARWAL, AM Appellant by: Shri Ajit Kumar Jain- Ld. AR Respondent by: Shri M. Rajan-Ld. CIT-DR ORDER Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2016-17 arises out of the order of learned Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cess and Higher Education Cess' while computing the total income. On facts and in the circumstances of the case, and in law, your Appellant would like to rely on the decision by Hon'ble Bombay High Court in case of Sesa Goa Limited vs JCIT and Hon'ble Rajasthan High Court in case of Chambal Fertilizers and Chemicals Ltd., wherein, it has been held that, the amount paid towards 'cess' cannot be considered equivalent to amount paid towards any 'tax'. On facts and in the circumstances of the case, and in law, your Appellant wishes to draw attention to the fact that this ground was not taken in the appeal filed with the learned CIT(A). However, such omission was neither deliberate nor contumacious but has come up out of the legal position which has come to the notice of the Appellant subsequent to completion of appellate proceedings before the learned CIT(A). 2. The registry has noted a delay of 176 days in the appeal, the condonation of which has been sought by Ld. AR vide petition dated 02.10.2020. It has been submitted that due to nationwide lockdown arising out of Covid-19 Pandemic, the offices were non-operational and there was limited movement of emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. In other words, the assessee would get immediate compensation from SPV to give up pool of assets. The SPV, in turn, would sell the security interest to thirdparty investors. For the same, the assessee entered into securitisation agreement with various stake holders during the year. 4.3 Upon perusal of sample agreement entered into by the assessee with IDBI Trusteeship Services Ltd. (IDBI), it was noted that the assessee as a seller was also appointed as the servicer for collecting and depositing the receivables. In other words, the assessee plays a dual role i.e., seller as well as servicer. IDBI paid purchase consideration of Rs.551.84 Crores to the assessee. The assessee, in turn, unconditionally and irrevocably sells, transfers, assigns and conveys all the right, title benefit and interest in the receivables and the underlying security together with all other rights, benefits, powers, risks, guarantees and indemnities in relation thereto as contained in the underlying documents. The IDBI would hold the assets in trust for and for the benefits of the beneficiaries and shall be deemed to be the full, true and absolute owner of all such assigned assets. 4.4 The execution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the pool of receivables and interest yield which is payable to the investors. Further, the assessee is required to maintain cash collateral as determined by the credit rating agency. The said cash collateral along with opening overdues and EIS is termed as 'credit enhancement'. In the event of shortfall in collection of receivables, the said credit enhancement is utilized to meet shortfalls in payment to investor. The second last priority of the Trust is to re-instate the cash collateral; the last priority being the payment of EIS to the appellant. In case of shortfall in collection, the Trust is permitted to utilize the EIS and accordingly, the last priority for the trust is to pay the proceeds collected to pay the EIS to the appellant. The entire process of securitization would have many stages i.e., (i) Securitisation of receivable to the trust / SPV as on the date of entering into the securitisation agreement As on the date of the transaction, the appellant receives what is called a 'purchase consideration' that covers only the principal amount of the borrowings, i.e. the book value reflecting in the accounts of the appellant as on the date of securitisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores. The present value of EIS (after applying a discount factor) that is computed as a proportion of the interest that is estimated to be received by the investor over the tenure of the loan amounts to Rs.88.858 Crores, out of which an amount of Rs.30.24 Crores has been offered to tax by the assessee during this AY leaving balance of Rs.58.60 Crores which is to be offered to tax in the subsequent years. It has been submitted that following consistent method of revenue recognition, this amount has already been offered to tax in subsequent years over the life of the underlying receivables. 4.8 The income thus offered by the assessee is on the reasoning that interest spread pertains to future years and its accrual and receipt is contingent upon certain conditions which cannot be estimated on the date of agreement. The said treatment of EIS is stated to be in line with the prudential norms prescribed by RBI and the principles of prudence. Further, similar practice is followed by the industry. Further, if income is utilized as per the agreed waterfall mechanism, there would be situations where the residual EIS payable to assessee could be nil or significantly lesser or even higher (if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete and the revenue is crystallized in the year of sale since the significant risks and rewards of ownership are transferred to the buyer. As per Accounting Standard-9 (AS-9), where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. However, where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale even though payments are made by installments. When the uncertainty related to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. In the present case, it is very clear that the revenue is measurable at the time of sale itself. This is evident since the revenue in the form of excess interest spread is quantified in the agreement itself. With respect to the uncertainty involved, the agreement clearly spells out that the entire risks and rewards are transferred to the buyer and hence there is no uncertainty involved in the hands of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest income for CIFCL over the life of the Agreement Present value @ 9.7% Discounted rate Note 1 (B) Purchase Consideration + PV of interest (C)=(A)+B Principal (D)=(A)/(C)*(A ) Interest (E)=(B)/(C)*(A ) Interest income already accrue in the books and offered to tax in the FY 2015-16 (F) Upfront EIS on Day One (G)=(E)-(F) 1 PLAT INU M TRUS T SEP2 015 54 4,50,05,17,630 42,67,23,407 30,49,80,074 4,80,54,97,704 4,21,48,93,064 28,56,24,567 10,41,41,927 18,14,82,640 2 PLAT INU M TRUS T MAR 2016 52 3,46,20,80,379 26,01,56,305 18,77,03,462 3,64,97,83,841 3,28,40,30,253 17,80,50,126 7,40,92,614 10,39,57,512 3 PLAT INU M TRUS T FEB2 016 54 5,51,84,08,683 63,67,55,637 46,02,91,873 5,97,87,00,556 5,09,35,54,043 42,48,54,640 12,42,41,319 30,06,13,321 VF TOTAL 13,48,10,06,692 1,32,36,35,350 95,29,75,410 14,43,39,82,101 12,59,24,77,359 88,85,29,333 30,24,75,860 58,60,53,473 Aggrieved as aforesaid, the assessee assailed this addition before Ld. CIT(A). Appellate Proceedings 5. During appellate proceedings, the assessee reiterated the entire process of securitisation and submitted that only real income was to be taxed during the year. Alternatively, the income already offered to tax in earlier ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Payment of arrears in the Investor Payouts (iv) Yield to the Investors (v) Principal portion of the Scheduled Payouts and the Prepayment Amounts, if any, to the Investors; (vi) Reinstatement of the Credit Enhancement; (vii) Residual amount, if any, shall be paid to the Seller on a monthly basis towards Excess Interest Spread (EIS). In other words, what the assessee would actually get over the tenure of the debts is uncertain. The assessee is entitled for residual surplus only after series of payment as aforesaid. The EIS arises to the appellant due to the difference between the interest received on Loans and the Yield payable to the beneficiaries. The proportionate component of EIS becomes due to the appellant only on the respective due date of the installment subject to the collection made from the borrower. The assessee offers the income over the tenure of the debts as and when the same is crystallized and accrues to the assessee. The assessee is following consistent method of accounting to recognize the revenue in this manner. Following this consistent method, the income on these transactions has been offered in subsequent years also. The income thus offered by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income so arising on these transactions would have to be offered to tax in this year only. The transaction of sale is complete and the revenue is crystallized in the year of sale since the significant risks and rewards of ownership are transferred to the buyer. As per Accounting Standard-9 (AS-9), where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. However, where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale even though payments are made by installments. When the uncertainty related to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. We find that it is undisputed fact that the debts have been transferred by way of absolute sale and there is no recourse to the assessee in case of default by the borrowers. There is no quarrel on this point. The only point under dispute is recognition of revenue under such an arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
