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TMI Blog2025 (3) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in law and in facts in not appreciating that the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.09.2021 is invalid and bad in the eyes of law. 2. The Ld. CIT(A) has erred in law and in facts in passing the appellate order u/s 250 of the Act in violation of principles of natural justice. 3. The Ld. CIT(A) has erred in law and in facts in passing the order u/s. 250 of the Act dated 15.07.2024 partly confirming the additions made in the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.09.2021 which is bad and invalid in the eyes of law. 4. The Ld. CIT(A) has erred in law and in facts in partly confirming the action of Ld. AO in making disallowance of provision for claim payout amounting to Rs. 682,09,65,697/- [Rs. 903,60,99,374/- (-) Rs. 221,51,33,677/-]." 3. The Assessee has also raised the following additional ground on 21/10/2024: "1. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and in facts in not deleting entire addition of Rs. 978,76,84,517/- made by the Ld. Assessing Officer being the closing balance of provision for claim payout as on 31.03.2019. 2. On the facts and circumstances of the case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee seeking explanation in this regard. In the aforesaid notice it was stated that the Assessee had claimed deduction for Provision for Claim Pay Out on accrual basis whereas the Guarantee Fees was accounted for and offered to tax on receipt basis. It was alleged that the Assessee was following a hybrid system of accounting which was not permitted. Thus, the Assessee was asked to justify the deduction for Provision for Claim Pay Out of INR.9,03,60,99,374/- claimed by the Assessee. In response to the aforesaid show cause notice, the Assessee filed reply explaining that Assessee was following accrual system of accounting (and not hybrid system of accounting). The Guarantee Fees accrued to the Assessee and was paid to the Assessee on execution of contract for providing guarantee cover. Thus, in the case of the Assessee the guarantee cover started on payment of guarantee fee only and therefore, the accrual as well as the receipt was on the same date. However, the Assessing Officer was not convinced. The Assessing Officer concluded that the Assessee was following hybrid system of accounting and made addition of INR.978,76,84,517/-, being closing balance of Provision for Claim Pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust Deed along with Notification [S.O.1443(E)], dated 18/04/2016, whereby the Scheme known as Credit Guarantee Funds for Micro Units (hereinafter referred to as 'Scheme') was notified, it becomes clear that the Assessee-trust was established to increase access to and availability of micro-loans to the eligible micro units and by providing guarantee cover to lenders (Banks/NBFCs/Financial Intermediaries) giving loans and advances without collaterals and/or third party guarantees to the eligible Micro Units. As per paragraph 4.1 of the Trust Deed the Scheme was to be operationalised and implemented by the Trustees (National Credit Guarantee Trustee Company Limited). The Scheme guaranteed payment to Banks/NBFCs/MFIs/Other financial intermediaries in the event of default in repayment of micro loans extended to the eligible borrowers. The relevant extract of the Scheme reads as under: "CHAPTER II : SCOPE AND EXTENT OF THE SCHEME 3. Guarantees by the Fund i. Subject to the other provisions of the Scheme, the Fund undertakes in relation to loans extended to an eligible micro unit by a lending institution which has entered into the necessary agreement for this purpose with the Fund, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate as prescribed by the Fund from time to time, certifying the following: (a) All accounts in the portfolio conform to eligible micro loans sanctioned after the date of April 08, 2015. (b) All accounts covered in the initial portfolio as well as new accounts added in the portfolio subsequently, are standard accounts. (c) All accounts which have turned NPA within the portfolio and for which claim has not been lodged have to be included in the portfolio on which the guarantee fee is payable. iv. The statutory auditor/management shall certify the amount of non-performing asset of the crystallized portfolio as on the date of March 31 every year, by the second quarter of every financial year from the date of crystallization of the portfolio, during the currency of the portfolio. v. The lending institution shall closely monitor the borrower account and follow up for repayment. vi. The payment of guarantee claim by the Fund to the lending institution does not in any way take away the responsibility of the lending institution to recover the entire outstanding amount of the credit from the borrower with applicable interest. The lending institution shall exercise all the necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee fee shall be charged for such sanctioned cases in the portfolio and no guarantee cover would be applicable. b) During subsequent years. The guarantee fee will be paid on the sanctioned amount corresponding to the outstanding balance (including on accounts which have turned NPA) of the crystallized portfolio during the currency of the portfolio and Guarantee will be valid unto the end of that financial year Guarantee fee with respect to NPA accounts in the portfolio would continue to be paid till lodgment of claim for such accounts, at a rate specified by the Fund on the amount or fee based on risk based pricing/such other amount on such reference dates or specified rate act by the Fund from time to time (risk based guarantee for components given at Attachments in respect of 5 Models). The portfolio as at the end of third year from the date of crystallization will be finally settled and terminated. The outstanding balance of the terminated portfolio at the end of the third year will be deemed to be a new portfolio and could be merged with the current portfolio of that year at the discretion of the lending institution. ii. Guarantee fee shall be paid within 16 days fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the portfolio, whichever is earlier, subject to yearly renewal of the guaranteed portfolio. iii. The overall guarantee payout for an MLI would be linked to exposure norms/payout caps as may be specified by the Fund from time to time CHAPTER V: CLAIMS 10. Invocation of guarantee i. The lending institution may invoke the guarantee in respect of the 'amount in default' out of the crystallized portfolio of micro loans, subject to the condition of first loss guarantee, after 1 year from the date of crystallization of the portfolio and thereafter, at the end of every financial year. ii. The MLI shall furnish a statutory auditor/management certificate confirming that the amount due and payable to the lending institution in respect of the micro loan has not been paid and the dues have been classified by the lending institution as Non Performing Asset. Provided that the lending institution shall not make or be entitled to make any claim on the Fund in respect of the said micro loan if the loss in respect of the said credit facility had occurred owing to actions/decisions taken contrary to or in contravention of the guidelines issued by the Fund. The certificate shall als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the member lending institutions'. The Assessing Officer has interpreted the same to mean that the Guarantee Fee is recognized by the Assessee on receipt basis. In our view, the aforesaid interpretation adopted by the Assessing Officer is not correct given the facts and circumstances of the present case. Paragraph 9. ii. of the Scheme [reproduced hereinabove] specifically states - 'The guarantee cover will commence from the date of payment of guarantee fee....'. Thus, the guarantee cover generally commences on payment of Guarantee Fee only. Therefore, it cannot be said that the Assessee is following receipt basis of accounting for recognition of Guarantee Fee since in the present case there is (a) either no difference in the accrual and receipt of Guarantee Fee, or (b) the receipt of Guarantee Fee precedes the accrual of corresponding risk to providing guarantee cover. We also find merit in the contention of the Assessee that Guarantee Fee is akin to insurance premium which is payable at the start of the period covered. The moment Guarantee Fee is received the corresponding liability to pay the guarantee amount in case of a Claim Pay Out as per the terms of the Scheme and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... target borrower. Thereafter, default rates, which were reasonable in the opinion of the actuary, were adopted to arrive at the total expected Claim Pay Out (as on 31/03/2018) of INR.296,67,18,820/-. The Revenue has not doubted the bonafides of the actuarial valuation. The contention of the Revenue is that the rate of default has been determined on an ad-hoc basis. We note that the CIT(A) has allowed deduction for actual amount of Claim Pay Out. In our view, the CIT(A) has, in effect, allowed the Assessee to claim deduction for Pay Out on payment basis even though the Assessee was following accrual basis of accounting and therefore, the approach adopted by the CIT(A) cannot be countenanced. 16. During the course of hearing the Learned Authorised Representative for the Assessee had also submitted that Trustee of the Assessee- Trust (i.e., National Credit Guarantee Company) is also a trustee of other similar schemes of the Government wherein identical accounting, provisioning etc was carried out. In all other entities where assessment proceedings are carried out, the Ld. Assessing Officer had, after making inquiries relating to provision for claim payouts, has allowed the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.08 37.13 506.18 3. 2018-19 39,966.46 425.44 1,077.26 4. 2019-20 50,848.61 903.61 926.55 5. 2020-21 54,990.46 1,431.66 529.65 6. 2021-22 71,067.94 2,667.30 1,817.50 7. 2022-23 74,262.57 6.78.77 687.41 Total 6,170.91 6,034.56 Difference between provision and claims settled 136.56 % Difference between provision and claims settled 2.21% 18. We note that the CIT(A) had allowed deduction for actual Claim Pay Out. On perusal of the above details, it can be seen that the Provision for Claim Payout created for Assessment Year 2019-2020 was less than the actual Claim Pay Out. Further, on an overall basis (i.e. from A.Y. 2016-2017 till A.Y. 2022-2023), the aggregate difference between the Provisions for Claims Pay Out and actual Claim Payout was only 2.21% only. Further, the Assessee has been granted exemption from income tax under Section 10(46B) of the Act by the Finance Act, 2023. 19. In view of the aforesaid, we overturn the finding returned by the CIT(A) that the Provision for Claim Pay Out has been created on adhoc basis. In our view, the Assessee has created provisions for the liability to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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