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TMI Blog2024 (9) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has already paid finance charges, respectfully following the Tribunal s decision in assessee s own case for assessment year 2011-12 deduction should be allowed towards finance charges including prepaid finance charges, if any, in the year of payment itself, even though, said expenditure has been treated as deferred revenue expenditure or prepaid expenditure in the books of accounts and claimed over a period of loan. Accordingly, we delete the disallowance and allow the appeal of assessee on this issue. Excess interest spread income earned on assignment of receivables - HELD THAT:- As the assessee is governed by RBI norms and Accounting Standrds for the purpose of disclosure in the books of accounts and hence, to follow the norms issued by RBI in respect of securitisation transaction and income arising thereon was disclosed accordingly. As noted that this issue fully stands covered by the Tribunal decision in assessee s own case for assessment year 2016-17 [ 2022 (8) TMI 1012 - ITAT CHENNAI] and the facts being identical, we respectfully following the same, delete the addition and allow the appeal of assessee. Disallowance of excess deduction in relation to provision for ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .ITBA/NFAC/S/250/2022-23/1049150445(1) dated 27.01.2023. The impugned assessments were framed by the DCIT/ACIT, Corporate Circle 1(2), Chennai u/s. 143(3) of the Income-tax Act, 1961 (hereinafter the Act ) vide orders dated 18.03.2015 31.12.2019 for the assessment years 2012-13 2017-18 respectively and by the National e-Assessment Centre, Delhi u/s. 143(3) r.w.s. 144B of the Act vide order dated 20.04.2021 for the assessment year 2018-19. The facts and circumstances and the issue involved in all these appeals are common and hence, by way of this common order, these appeals are being disposed off. ITA No.847/CHNY/2020, Assessment year 2012-13 2. At the outset, it is noticed that the appeal filed by the assessee is barred by limitation by 185 days as noted by the Registry. It is noticed from Form 36 that the order of CIT(A) dated 19.02.2020 was communicated to the assessee on 19.02.2020 itself. The assessee has to file appeal before the Tribunal against the impugned order on or before 19.04.2020 but assessee actually filed this appeal on 21.10.2020, thereby there was a delay of 185 days. The assessee has filed condonation application for condonation of delay stating that the period i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant. 4. Brief facts are that the AO noticed that the assessee in its computation of income claimed prepaid finance charges amounting to Rs. 19,96,29,043/- and he asked to clarify or show-cause as to how the prepaid finance charges are allowable. The assessee submitted amortization schedule of such expenses over the subsequent financial years and claimed that the finance charges are in respect of payments made for availing loan such as processing charges, bank charges and stamping charges. It was also claimed that loan period covers more than one financial year and therefore, on payment basis, the same has been claimed in the computation of income. It was claimed that during the year under consideration, the company has incurred expenses as finance charges paid at the time of obtaining such loss and since the tenure of the loan may extent to more than one financial year, the company amortizes such expenditure in its books of accounts over the tenure of the loan. The assessee drew our attention to Annexure-1 of amortization schedule for addition made in assessment year 2012-13 as under:- Particulars Amount (INR) Amount (INR) Total payment for prepaid finance charges made in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce charges claimed as expenditure pertains to a subsequent period and does not pertains to the previous year in which it is claimed. 6.3 In [1997]91 Taxman 340 (SC) Madras Industrial Investment Corpn Ltd vs Commissioner of Income-tax, Hon'ble Supreme Court of India held issuing debentures at a discount is another such instance where ,although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. 6.4 Similarly in present appeal, though the liability to pay the finance charges occurred in the year of availing loan facility, yet the payment was to secure a benefit over a number of years. Hence respectfully following the above stated decision of the Hon'ble Supreme Court of India the disallowance of the Prepaid finance charges claimed by the assessee amounting to Rs. 19,96,29,043/- is upheld. Aggrieved, assessee is in appeal before the Tribunal. 6. Before us, the ld.AR for the assessee made arguments, apart from made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding prepaid finance charges, if any, in the year of payment itself, even though, said expenditure has been treated as deferred revenue expenditure or prepaid expenditure in the books of accounts and claimed over a period of loan. The ld. CIT(A), without appreciating relevant facts simply sustained additions made by the Assessing Officer and thus, we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete additions made towards disallowance of prepaid finance charges. 7. On the other hand, the ld.CIT-DR relied on the assessment order and that of the order of CIT(A), wherein the AO came to the conclusion regarding disallowance of prepaid finance charges on the basis of decision of Hon ble Supreme Court in the case of Madras Industrial Corporation Ltd., vs. CIT reported in (1997) 225 ITR 802 (SC). The ld.CIT-DR pointed out that during the last hearing in this case, the Tribunal directed the assessee to clarify that there is no overall loss to the Revenue so far as its claim for prepaid finance charges are concerned. He argued that while the details submitted by the assessee do reflect the basis of claim appearing in the P L account, it falls short of un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant had transferred all the substantial risks and rewards in the receivables on signing the securitization agreement. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) ha serred in appreciating the fact that the interest spread is pertaining to future years and its accrual and receipt was contingent on conditions which cannot be reasonably estimated on the date of agreement. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has erred in ignoring the principle of real income and subjected the assessee to pay tax on amount for which the assessee has no right to receive. Without prejudice to the above and on the facts and in the circumstances of the case, and in law, the learned CIT(A) erred in not considering the submissions filed by the Appellant to direct the learned AO, that, the relief of the present value of excess interest spread disallowed in the current year is ought to be allowed in the respective subsequent year to the Appellant. 10. Brief facts are that the AO during the course of scrutiny assessment proceedings noticed that the assessee company has sold receivables, assigning receivables to variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration of Rs. 708,83,90,385/-. During the year under consideration, the assessee changed its accounting policy or recognizing interest spread arising from selling loan receivables under bilateral assignment. Earlier such interest was recognised upfront whereas from the current year the interest is being recognised over the residual tenor of the receivables, Thus the assessee did not offer interest of Rs 2699.20 lakhs for tax stating that the same is to be recognized in future. Assessing Officer verified the agreements with banks and noticed that the assessee company is servicing the assignment in collecting the receivables for which a service fee is also paid to the assessee company and the agreement also provides scope for alternate servicer which means the assignee can also appoint another servicer in case of default by the assessee company. Therefore the Assessing Officer concluded that the company transferred substantially all the risk and rewards of the ownership of the said receivables and hence the assessee should have offered the entire profit on the assignment of receivables including Rs 2699.02 lakhs to tax during A.Y. 2012-13 only. 10.2 In the grounds of appeal, the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, he argued that the Tribunal in assessee s own case for assessment year 2016-17 in ITA No.848/CHNY/2020 has considered this issue in great detail and finally held in paras 7 to 9 as under:- 7. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has reiterated its arguments made before the Assessing Officer, in light of certain judicial precedents and argued that the treatment in the books of accounts is not relevant to decide allowability of any expenditure, but what is required to be seen is whether the expenditure has been incurred wholly and exclusively for the purpose of business and further said expenditure pertains to relevant financial year or not. The ld. CIT(A), after considering relevant submissions of the assessee and also taken note of the decision of Hon'ble Apex Court in the case of Madras Industrial Investment Corpn. Ltd vs CIT (supra), rejected arguments of the assessee and sustained additions made by the AO towards disallowance of prepaid finance charges, on the ground that said payment was to secure benefit over the number of years and thus, same cannot be allowed as deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned on such assignment upfront but from assessment year 2012-13, it started to amortise the profit over several years depending on the terms of receivables. He argued that in the last hearing before ITAT for the assessment year 2016-17, it was pleaded that the assessee is following consistent method of accounting to recognize revenue in this manner, but assessee had changed its method of accounting in assessment year 2012-13 and this was not disclosed before the ITAT during hearing of assessment year 2016-17. It was alleged that the assessee obtained a favourable order from ITAT from suppression of facts. In this context, it was argued that the Tribunal in the previous date of hearing, directed the assessee to provide clarifications regarding its revenue recognition over the years to ascertain that there is no loss to revenue on an overall basis. Although, revenue is of the view that income does accrue to the assessee on the year of assignment/ securitization of the debts the 'clarification' submitted by the assessee on this issue on the 09.02.2024 is nothing but a general description about its offer of EIS income in different assessment years. The 'clarification' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment denies on the basis of matching principle . It is therefore, interesting to note that while the assessee is canvassing for deferment of taxing its revenue, it is taking a contrary stand in respect of staking its claim for pre-paid finance charges on the basis of 'actual payment . The ld.CIT-DR placed reliance on the Coordinate Bench decision of ITAT, Hyderabad in the case of Asmitha Microfin Ltd., in ITA No.137/HYD/2013, wherein the Tribunal held as under:- 12. This system of account being done by assessee is more or less similar to the bill discounting system, which is generally followed by many in the business. In the bill discounting system, a person who discounts the bill takes the interest amount upfront when he discounts the bill by way of 'front end discount', the income accrues at that point of time. What is material is the certainty of the date of discount. In this case, assessee contends that the gain on the transaction has not accrued as the future interest receivable is not an accrued income. However, this aspect cannot be accepted as assessee has received the discounted amount as a part of sale consideration. Even though, there are certain deposits kep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting 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, principles of bill discounting and accounting entries are similar to the portfolio sale/securitization of loan portfolios, being the method involved being same, we uphold the orders of Assessing Officer and CIT(A) on the issue. In fact, both Assessing Officer and CIT(A) analyzed the accounting principles, agreements and came to conclusion that the amounts have accrued at the time of sale of portfolio. We affirm the same and hold that the amount of Rs. 13,09,44,315/- being the amount of discounted future interest received by assessee during the year is taxable in the year. Accordingly, we uphold the orders of Assessing Officer and reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of five percent of total income amounting to INR 63,33,67,646 as allowable under section 36(i)(via) of the Act. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has erred in appreciating the detailed submissions and arguments made by the Appellant that the reversal of provision for items other than provision for bad and doubtful debts i.e., reversal of provision for standard assets amounting to INR 33,11,27,770 and reversal of provision for diminution in value of investments amounting to INR 5,00,00,000, should not be considered as they are not covered under section 36(i)(viia) of the Act while computing the total deduction on account of provision for bad and doubtful debts. On the facts and in the circumstances of the case, and in law, the learned CIT(A) has merely relied on the impugned argument made by the learned Assessing officer that the net disallowance of INR 49,45,7 1,365 is entirely towards provisions for bad and doubtful debts whereas it consists of various other reversal of provisions, which are not covered under section 36(i(viia) of the Act and thus to be ignored while computing the threshold for the purpose of section 36(1)(viia) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he action of AO after considering the submissions of the assessee and the provisions of section 36(1)(viia)(d) of the Act, by observing as under:- From plain reading of the section, it is crystal clear that section specifically states that in respect of any provision for bad and doubtful debts, only an amount NOT EXCEEDING 5% of the total income is allowable as deduction. In the instant case, the appellant has made provision for bad and doubtful debts at Rs. 49.45 cr. only but has claimed deduction at Rs. 63.33 crores which is equal to five percent of total taxable income which means that the appellant is claiming excess deduction of Rs. 13.87 cr. For which it has not made any provision at all. The appellant has wrongly interpreted the clause sub-clause (d) of clause (viia) of section 36(1) of the Act as the amount allowable being equal to five percent whereas the amount allowable is actually not exceeding five percent . In the instant case, the actual provision debited to P L was only Rs. 49.45 crores and since the same is not exceeding 5% of the total income, Rs. 49.45 crores was rightly allowed by the AO as a deduction as against Rs. 63.33 crores claimed by the appellant. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, alternatively claimed by assessee before CIT(A) that the proposed disallowance by the AO u/s. 36(1)(viia)(d) of the Act is in relation to provision for bad and doubtful debts, reversal of provision for standard assets and diminution in value of investments has no barring and correlation with section 36(1)(viia)(d) of the Act, the same has not been examined neither by AO nor by CIT(A). It was claimed before CIT(A) and CIT(A) although has reproduced the submissions of the assessee including the chart of reversals and diminution of investments which reads as under:- Particulars Amount (INR) Provision for sub-standard and doubtful receivables under financing activity 284,65,91,965 Less: Reversal of sub-standard and doubtful receivables under financing activity (197,08,92,831) Less: Reversal of provision for standard assets (33,11,27,770) Less: Reversal of provision for diminution in value of investments (5,00,00,000) Amount of provision of bad and doubtful debts as per Profit and Loss Account (A) 49,45,71,365 Amount claimed as deduction under section 36(1)(viia)(d) (B) 63,33,67,646 Amount disallowed by the learned AO (B-A) 13,87,96,287 As regards to the alternative claim, since the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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