Gruh Finance Ltd., Ahmedabad V. The Jt.CIT., Range-4, Ahmedabad

ITA 1295/AHD/2009

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0868 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 26-07-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 22-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SU RENDRA KUMAR
• Assessee Lawyers: M G PATEL WITH SHRI A N SHAH
• Keywords: Business expenditure; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37; 56

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ASSESSEE BY : SHRI M.G. PATEL WITH SHRI A.N. SHAH, AR REVENUE BY : SHRI SURENDRA KUMAR, CIT-DR / DATE OF HEARING : 26/07/2016 / DATE OF PRONOUNCEMENT: 17/08/2016 SN ITA AY APPELLANT RESPONDENT 1 1295/AHD/2009 2005-06 GRUH FINANCE LTD., GRUH, MITHAKHALI SIX ROADS, ELLISBRIDGE, AHMEDABAD PAN : AAACG 7010 K JCIT, RANGE-4, AHMEDABAD 2 1556/AHD/2009 2005-06 REVENUE ASSESSEE 3 3338/AHD/2009 2006-07 ASSESSEE REVENUE 4 3260/AHD/2010 2007-08 ASSESSEE REVENUE 5 46/AHD/2011 2007-08 REVENUE ASSESSEE 6 614/AHD/2012 2005-06 ASSESSEE REVENUE 7 615/AHD/2012 2008-09 ASSESSEE REVENUE 8 625/AHD/2012 2005-06 REVENUE ASSESSEE 9 649/AHD/2012 2008-09 REVENUE ASSESSEE 10 1198/AHD/2012 2006-07 ASSESSEE REVENUE 11 1199/AHD/2012 2009-10 ASSESSEE REVENUE 12 1562/AHD/2012 2006-07 REVENUE ASSESSEE 13 1163/AHD/2012 2009-10 REVENUE ASSESSEE 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 2 / O R D E R PER AMARJIT SINGH, ACCOUNTANT MEMBER :- THESE ARE THE SET OF CROSS APPEALS FILED BY THE ASS ESSEE AND REVENUE RESPECTIVELY AGAINST THE ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-VII, AHMEDABAD, EXCEPT ITA NO. 3338/AHD/2 009 FOR AY 2006-06, WHICH IS ASSESSEES APPEAL AGAINST THE ORDER OF LD. CIT(A)-VII, AHMEDABAD. 2. THE COMMON GROUND RAISED BY THE ASSESSEE IN AYS 200 5-06, 2006-07, 2007-08, 2008-09 AND 2009-10 WITH REGARD TO NCD(NON -CONVERTIBLE DEBENTURE) EXPENSES READS AS UNDER: - THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-VI II, AHMEDABAD HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIRMING DISALLOWANCE OF RS.17,19,535/- FOR AY 2005-06, RS.55,12,739 FOR AY 20 06-07, RS.20,96,430/- FOR AY 2007-08, RS.24,37,769/- FOR AY 2008-09 AND RS.29,21,584 FOR AY 2009-10 MADE BY THE ASSESSING OF FICER OUT OF NCD EXPENSES AFTER HOLDING THAT THE SAME HAS TO BE ALLO WED EQUALLY FOR 5 YEARS AS NCD ARE FOR 5 YEARS PERIOD AND THE APPELLANT HAS AL SO NOT CHARGED THE SAME TO THE PROFIT & LOSS ACCOUNT. 2.1 WE TAKE THE LEAD CASE AS ITA NO.1295/AHD/2009 F OR AY 2005-06. THE FACTS WITH REGARD TO EXPENSE ON ACCOUNT OF NCD AS E MERGE FROM THE RECORD OF AY 2005-06 ARE THAT DURING THE COURSE OF ASSESSM ENT PROCEEDINGS THE ASSESSING OFFICER HAS OBSERVED THAT IN THE STATEMEN T OF INCOME THE ASSESSEE HAS CLAIMED EXPENSES ON ISSUE OF NCD AT RS.21,49,41 9/- AND THE SAME WAS NOT CLAIMED IN THE PROFIT AND LOSS ACCOUNT. THE AS SESSEE WAS ASKED TO EXPLAIN ABOUT ITS CLAIM OF EXPENSES ON ISSUE OF NC D AT RS.21,49,419/- IN THE STATEMENT OF INCOME BUT NOT HAVING CLAIMED IN THE P &L ACCOUNT AND TO EXPLAIN WHY SAME SHOULD NOT BE DISALLOWED. HE WAS FURTHER ASKED TO EXPLAIN THAT THE NCD ARE REDEEMABLE AFTER FIVE YEAR S, AND HOW THE ENTIRE AMOUNT OF NCD EXPENSES TO BE ALLOWED IN THE CURRENT YEAR. 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 3 2.2 THE ASSESSEE EXPLAINED THAT THE EXPENDITURE IS IN RESPECT OF NCD ( NON-CONVERTIBLE DEBENTURE) RAISED DURING THE YEAR. THESE EXPENDITURE RELATE TO BORROWING BY WAY OF ISSUE OF NCD AND THE SAME IS ALLOWABLE DEDUCTION U/S 37 OF THE INCOME-TAX ACT, 1961. THES E EXPENSES WAS REDUCED FROM THE SHARE PREMIUM ACCOUNT IN THE BOOKS OF ACCO UNTS AND NOT DEBITED TO PROFIT AND LOSS ACCOUNT BUT SEPARATELY CLAIMED A S DEDUCTION WHILE COMPUTING THE INCOME. THE ASSESSEE RELIED ON THE CASE OF TUTICORN ALKALI CHEMICALS & FERTILIZERS LTD VS. CIT, 227 ITR 172 (S C) ON THE ISSUE OF ACCOUNTING ENTRY VIS--VIS DETERMINATION OF INCOME. THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE FOLLOWING JUDGMENTS:- I) CIT VS. INDIAN DISCOUNT CO. LTD., 75 ITR 191 ( SC) II) CIT VS. MOGULLINES LTD, 46 ITR 590 (BOM) III) CIT VS. SHOORJI VALLABHDAS & CO., 46 ITR 144 (SC) IV) CIT VS. KALOORAM GOVINDRAM, 57 ITR 630 (SC) 2.3 THE ASSESSING OFFICER HAS NOT ACCEPTED THE ASSE SSEES CONTENTION AND STATED THAT IT IS AN ADMITTED FACT THAT THE SAID EX PENSES WAS INCURRED FOR THE ISSUE OF NON-CONVERTIBLE DEBENTURE REDEEMABLE AFTER FIVE YEARS. WHEN THE BENEFIT OF A PARTICULAR EXPENDITURE HAS BEEN ACCRUI NG OVER A PERIOD OF FIVE YEARS, THE ENTIRE EXPENDITURE CANNOT BE ALLOWED IN ONE YEAR AND IT IS ALSO AGAINST THE MATCHING PRINCIPLES OF INCOME AND EXPEN DITURE. HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS. CIT, 225 ITR 802 (SC ). 2.4 HE ALSO RELIED ON THE DECISION OF HONBLE BOMBA Y HIGH COURT IN THE CASE OF TAPARIA TOOL LTD, REPORTED IN 260 ITR 102 ( BOM) WHEREIN THE HONBLE HIGH COURT AFTER CONSIDERING THE JUDGMENT O F HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT C ORPORATION LTD VS. CIT, 225 ITR 802 (SC), HAS LAID DOWN THE LAW IN RESPECT OF MATCHING PRINCIPLE OF 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 4 INCOME. THE ASSESSING OFFICER HELD THAT TOTAL NCD EXPENSES OF RS.21,49,419/- WAS REQUIRED TO BE ALLOWED IN EQUAL INSTALLMENTS IN FIVE YEARS. ACCORDINGLY, HE ALLOWED 20% OF THE EXPENSES RS.4,29,884/- AS DEDUCTION IN FY 2004-05 AND THE BALANCE EXPENSES OF NCD OF RS.17,19,535/- WAS NOT ALLOWED TO THE ASSESSEE. 2.5 THE LD. CIT(A) HAS CONFIRMED THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER ON THE GROUND THAT BENEFIT TO BE ACCRUED FROM THE SAID EXPENDITURE WILL BE AVAILABLE TO THE ASSESSEE IN TH E PERIOD OF FIVE YEARS. HE ALSO HELD THAT THE CLAIM OF THE APPELLANT IS ALSO A GAINST THE MATCHING PRINCIPLES OF INCOME AND EXPENDITURE. THE LD. CIT( A) PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MA DRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS. CIT (SUPRA) AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TAPARIA TOOLS LTD (SUPRA). 2.6 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE EXPENDITURE IN RESPECT OF NCD WAS RAISED DURING THE YEAR AND THE E NTIRE EXPENDITURE IS ALLOWABLE AS DEDUCTION. HE PLACED RELIANCE ON THE F OLLOWING JUDGMENTS:- A) INDIA CEMENT LTD VS. ITO, 60 ITR 52 (SC) B) CIT VS. OFFICE OF THE OFFICIAL LIQUIDATOR, 316 ITR 181 (GUJ.) C) CIT VS. MIHIR TEXTILE LTD, 316 ITR 403 (GUJ) D) PATEL FILTERS LTD VS. CIT, 264 ITR 21 (GUJ.) 2.7 THE LD. DR RELIED ON THE ORDER OF THE LD. CIT(A ). 2.8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED T HE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE HONBLE SUPREME COURT IN THE CASE OF TAPARIA TOOLS LTD (372 ITR 605) HAS HELD THAT WHERE ASSESSEE-COMPANY ISSUED DEBENTURE FOR 5 YEARS AND THE ASSESSEE DID NOT WANT TO SPREAD OVER THE INTEREST EXPENDITURE OV ER A PERIOD OF 5 YEARS, IT CLAIMED ENTIRE DEDUCTIBLE EXPENDITURE IN THE SAME Y EAR IN THE RETURN FILED BY 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 5 IT, IN SUCH A SITUATION IT WAS PERMISSIBLE IN LAW T O THE ASSESSEE IN CONSONANCE WITH THE PROVISIONS OF THE ACT TO CLAIM THE EXPENDI TURE IN THE YEAR IN WHICH IT WAS INCURRED. THE DECISION OF HONBLE BOMBAY HI GH COURT IN TAPARIA TOOLS LTD (SUPRA) IS REVERSED BY THE HONBLE SUPREM E COURT IN THIS CASE, WHEREBY IT WAS HELD AS UNDER:- (IV) THAT THE ASSESSEE DID NOT SEEK TO SPREAD THIS EXPENDITURE OVER A PERIOD OF FIVE YEARS AS IN ITS RETURN, IT HAD CLAIMED THE ENT IRE INTEREST PAID UP FRONT AS DEDUCTIBLE EXPENDITURE IN THE SAME YEAR. WHEN THIS COURSE OF ACTION WAS PERMISSIBLE IN LAW TO THE ASSESSEE AS IT WAS IN CON SONANCE WITH THE PROVISIONS OF THE ACT WHICH PERMIT THE ASSESSEE TO CLAIM THE EX PENDITURE IN THE YEAR IN WHICH IT WAS INCURRED, THE FACT THAT A DIFFERENT TR EATMENT WAS GIVEN IN THE BOOKS OF ACCOUNT COULD NOT BE A FACTOR WHICH WOULD BAR THE ASSESSEE FROM CLAIMING THE ENTIRE EXPENDITURE AS A DEDUCTION. ONC E A RETURN IN THAT MANNER WAS FILED, THE ASSESSING OFFICER WAS BOUND TO CARRY OUT THE ASSESSMENT APPLYING THE PROVISIONS OF THE ACT AND NO T TO GO BEYOND THE RETURN. THERE IS NO ESTOPPELS AGAINST THE STATUTE AND THE ACT ENABLES AND ENTITLES THE ASSESSEE TO CLAIM THE ENTIRE EXPENDITU RE IN THE MANNER IT IS CLAIMED. THEREFORE, IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED TO THE ENTIRE DEDUCTION OF NCD EXPENDITURE OF RS.21,49,419/- FOR AY 2005-06 AND ACCORDINGLY THE BALANCE NCD EXPENDITURE OF RS.17,19 ,535/- IS ALLOWED IN AY 2005-06. THUS, THE GROUNDS OF ASSESSEES APPEAL S ON THE SAME ISSUE FOR AYS 2006-07, 2007-08, 2008-09 AND 2009-10 ARE ALSO ALLOWED FOR THE AFORESAID REASONING. 3. THE SECOND GROUND OF THE ASSESSEE FOR AYS 2005-06 A ND 2006-07 IS AGAINST THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER OUT OF PREPAYMENT CHARGES MADE TO NHB(NATIONAL HOUSING BAN K). 3.1 FOR AY 2005-06, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE- COMPANY HAS CLAIMED IN THE STATEMENT OF INCOME A DE DUCTION ON ACCOUNT OF PRE-PAYMENT CHARGES TO NHB AMOUNTING TO RS.2,62,45, 000/-. THE ASSESSEE CLAIMED THE SAID EXPENSES IN THE PROFIT & LOSS AT R S.42,02,920/- AND THE 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 6 BALANCE EXPENDITURE HAS BEEN AMORTIZED IN THE BOOKS OF ACCOUNT. IN THIS REGARD, THE ASSESSEE WAS ASKED TO JUSTIFY FOR CLAIM ING THE ENTIRE NHB PREPAYMENT CHARGES IN THE CURRENT YEAR AND ALSO AS KED TO EXPLAIN WHY THE EXPENSES SO INCURRED FOR REFINANCING OF LOAN SHOULD NOT BE CONSIDERED AS CAPITAL LOSS. ASSESSEE HAS EXPLAINED THAT DURING T HE YEAR, THE ASSESSEE- COMPANY HAS MADE EARLY PAYMENT IN RESPECT OF LOAN T AKEN FROM NATIONAL HOUSING BANK (NHB). IN THE BOOKS OF ACCOUNT THE SA ME HAS BEEN AMORTIZED AT RS.42,02,920/- AND CLAIMED RS.2,62,45,400/- AS D EDUCTION FROM THE TOTAL INCOME ON ACTUAL PAYMENT BASIS. TREATMENT GIVEN IN THE BOOKS OF ACCOUNTS HAS NO RELEVANCE TO THE COMPUTATION OF INCOME UNDER THE PROVISIONS OF THE INCOME-TAX ACT, 1961. THE ASSESSEE ALSO RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORN ALKALI CHEMIC ALS & FERTILIZERS LTD V/S. CIT ( 227 ITR 172 (SC)) WHEREIN THE ISSUE IN R ESPECT OF ACCOUNTING ENTRY VIS--VIS DETERMINATION OF INCOME HAS BEEN DISCUSSE D WHICH IS REPRODUCED AS BELOW:- IT IS TRUE THAT THIS COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO TH E PRINCIPLES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVERRIDE SECTION 56 OR ANY OTHER PROVISION OF THE AC T. AS WAS POINTED OUT BY LORD RUSSELL IN THE CASE OF B.S.C. FOOTWEAR LTD., T HE IT LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY P ROFESSION. THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE FOLLOWING JUDGMENTS.:- I) CIT VS. INDIAN DISCOUNT CO. LTD., 75 ITR 191 ( SC) II) CIT VS. MOGULLINES LTD, 46 ITR 590 (BOM) III) CIT VS. SHOORJI VALLABHDAS & CO., 46 ITR 144 (SC) IV) CIT VS. KALOORAM GOVINDRAM, 57 ITR 630 (SC) REGARDING TREATING THE SAME AS CAPITAL LOSS BY THE AO, THE ASSESSEE SUBMITTED THAT THE SAME CANNOT BE TREATED AS CAPITA L LOSS AS IT IS BUSINESS EXPENDITURE AND CANNOT BE TREATED AS CAPITAL LOSS. 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 7 THE ASSESSING OFFICER WAS OF THE OPINION THAT THE E XPENDITURE SO INCURRED CANNOT BE ALLOWED IN ONE YEAR AS THE SAID EXPENDITURE HAS BEEN INCURRED FOR SWITCHING OVER OF LOAN AND THE BENEFIT OUT OF THE SAID EXPENDITURE WILL ACCRUE OVER THE BALANCE PERIOD OF LOAN REFINANCED. THE AO STATED THAT THIS WAS THE REASON WHY THE ASSESSEE IT SELF HAD CLAIMED SUCH EXPENSES TO THE EXTENT OF RS.42,02,920/- IN THE PRO FIT AND LOSS ACCOUNT AND THE BALANCE WAS AMORTIZED IN THE BOOKS OF ACCOUNT. THE AO PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF TAPARIA TOOLS LTD, REPORTED IN 260 ITR 102 (BOM) WHEREIN THE HON BLE HIGH COURT AFTER CONSIDERING THE JUDGMENT OF HONBLE SC IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS. CIT, 225 ITR 802 (SC ) HAS LAID DOWN THE LAW IN RESPECT OF MATCHING PRINCIPLES OF INCOME. AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE RELIANCE PLACED ON VARIOUS JUDICIAL PRONOUNCEMENTS, THE LD. ASSESSING OFFICER ALLOWED R S.42,02,920/- FOR AY 2005-06 AND BALANCE AMOUNT OF RS.2,20,42,480/- WAS DISALLOWED. ON THE SIMILAR REASONING, FOR AY, 2006-07, THE ASSESSING O FFICER DISALLOWED RS.39,87,967/- AGAINST THE TOTAL CLAIM OF RS.49,87, 459/-. 3.2 ON APPEAL, THE LD. CIT(A), AFTER CONSIDERING TH E SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE AFORESAID DISALLOWANCES FOR BOTH ASSESSMENT YEARS. KEEPING IN VIEW THE RATIONAL ON THE BASIS OF WHICH NCD EXPENSES HAVE BEEN DISALLOWED BY FOLLOWING THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN VS. CIT, 225 ITR 802 AND THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF TAPARIA TOOLS LTD, 260 ITR 102. 3.3 AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE PREFERRED THIS GROUND BEFORE THE TRIBUNAL. THE LD COUNSEL OF THE ASSESSEE RELIED ON THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORN ALKALI CHEMICALS & FE RTILIZERS LTD V/S. CIT ( 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 8 227 ITR 172 (SC)) AND CLAIMED THAT THE ENTIRE EXPEN DITURE IS ALLOWABLE AS DEDUCTION DURING THE YEAR UNDER CONSIDERATION. THE LD. DR RELIED ON THE ORDER OF THE LD. CIT(A). 3.4 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE ISSUE RAISED IN THESE TWO ASSESSMENT YEARS WITH REGARD TO NHB PREPAYMENT CHARGES IS THE SIMILAR ISSUE THAT WE ALREADY DEALT WITH WHILE DEALING THE ISSUE OF NCD EXPENSES, WHERE FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN TAPARIA TOOLS LTD (372 ITR 605), WE HELD T HAT ASSESSEE IS ENTITLED TO THE ENTIRE DEDUCTION OF NCD EXPENDITURE. IN VIEW O F THE ABOVE FACTS AND LEGAL FINDINGS, WE ALLOW THIS GROUND OF APPEAL OF T HE ASSESSEE. THUS, THE GROUNDS OF ASSESSEES APPEALS ON THE SAME ISSUE FOR AYS 2006-07 ARE ALSO ALLOWED FOR THE AFORESAID REASONING. 4. THE ASSESSEES GROUND NO.3 FOR AY 2005-06 IS AGAINS T THE ADDITION OF RS.24,01,200/- MADE BY THE ASSESSING OFFICER IN RES PECT OF NON-PERFORMING ASSETS . 4.1 DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSIN G OFFICER NOTICED THAT THE ASSESSEE HAS RECOGNIZED REVENUE/INCOME LES S TO THE EXTENT OF RS.24,01,200/- DUE TO CHANGE IN NPA NORMS BY NATION AL HOUSING BANK (NHB). THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE S AID SUM SHOULD NOT BE BROUGHT TO TAX ON ACCRUAL BASIS AS IT WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND PROVISION WAS MADE MORE THAN THE PR ESCRIBED NORMS OF NHB. IN RESPONSE THEREOF, THE ASSESSEE SUBMITTED TH AT THE NATIONAL HOUSING BANK(NHB) HAS REVISED THE NORMS FOR RECOGNIZING NON -PERFORMING ASSETS(NPA) WITH EFFECTIVE FROM MARCH 31,2005. AS P ER THE NEW NORMS,NPA 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 9 ARE RECOGNISED ON THE BASIS OF 90 DAYS OVERDUE AS A GAINST 180 DAYS PAST DUE UNDER THE OLD NORMS.AS PER THE NEW NORMS,NPA ARE TO BE TREATED AS BAD& DOUBTFULL IF THEY REMAIN OUTSTANDING FOR MORE THAN 15 MONTHS AS AGAINST 31 MONTHS UNDER THE OLD NORMS.IT WAS FURTHER STATED TH AT THE ASSESSEE COMPANY HAS MADE COMPLIANCE WITH THESE NORMS WHILE PREPARAT ION OF ACCOUNTS AND THE PROVISIONS HAVE BEEN MADE ACCORDINGLY. IT ALSO EXPLAINED THAT AS A RESULT OF CHANGE IN NORMS W.E.F. 31.03.2005 WITH RE GARD TO RECOGNIZING NPA THE INCOME HAS BEEN RECOGNIZED LESSER TO THE EXTENT OF RS24,01,200/. THIS EXPLANATION OF THE ASSESSEE WAS NOT FOUND ACCEPTAB LE TO THE ASSESSING OFFICER AND HE HELD THAT THE INTEREST ACCRUED UPTO 30.03.2005 WAS REQUIRED TO BE RECOGNIZED AS PER EARLIER NORMS EFFECTIVE TILL 3 0.03.2005 AND HE ACCORDINGLY ADDED THE ACCRUED INTEREST OF RS.24,01, 200/- IN THE INCOME OF THE ASSESSEE. 4.2 AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE T HE LD. CIT(A) WHO, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CONFIRMED THE ACTION OF THE ASSESSING OFFICER AND DISMISSED THE ASSESSEES GROUND IN THIS RESPECT. 4.3 AGGRIEVED BY THE AFORESAID ORDER OF THE CIT(A), THE ASSESSEE IS FURTHER IN APPEAL BEFORE US. 4.4 LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO NATIONAL HOUSING BANK GUIDELINES DATED 31.03.2005, PLACED IN THE PAP ER-BOOK. HE CONTENDED THAT THE NATIONAL HOUSING BANK (NHB) HAS REVISED TH E NORMS FOR RECOGNIZING NON-PERFORMING ASSETS (NPA) EFFECTIVE O N 31.03.2005. HE ALSO CONTENDED THAT AS PER THE NEW NORMS, NPA ARE RECOGN IZED ON THE BASIS OF 90 DAYS OVERDUE AS AGAINST 180 DAYS PAST DUE UNDER THE OLD NORMS. HE SUBMITTED THAT THE NHB GUIDELINES FOR RECOGNIZING N PA WAS EFFECTIVE FROM 31.03.2005 AND THE ACCOUNTS HAVE BEEN CLOSED ON 31. 03.2005, THEREFORE, THE ASSESSEE HAS RIGHTLY FOLLOWED THE NEW NORMS OF NHB FOR RECOGNIZING NPA, 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 10 THE ACTION OF ASSESSING OFFICER IN THIS REGARD IS N OT JUSTIFIED AND THE SAME MAY BE DELETED. 4.5 THE LD. DR, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE LOWER AUTHORITIES. 4.6 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE THAT THE NH B GUIDELINES FOR RECOGNIZING NPA WERE EFFECTIVE FROM 31.03.2005 AND THE ACCOUNTS OF THE ASSESSEE HAVE BEEN CLOSED ON 31.03.2015. HOWEVER, THE SAME NEEDS TO BE VERIFIED AT THE LEVEL OF ASSESSING OFFICER. THEREF ORE, IN THE INTEREST OF SUBSTANTIAL JUSTICE, THIS ISSUE IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING AFRESH AFTER TAKING INTO CONSIDERATION ALL MATERIAL FACTS AS INDICATED ABOVE AFTER PROVIDING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS, THIS GROUND OF THE ASSESSEE IS ALLOWED FOR ST ATISTICAL PURPOSES. 5. NEXT GROUND OF THE ASSESSEE RELATES TO THE DISALLOW ANCE OF BAD DEBTS MADE BY THE ASSESSING OFFICER FOR A.Y.2005-06 TOA.Y . 2009-10 IN THE A.Y.2005-06, THE ASSESSING OFFICER HAS NOT A LLOWED THE BAD DEBT CLAIM OF THE ASSESSEE HOLDING THAT THE SAME HAS NOT BECO ME BAD DURING THE YEAR UNDER CONSIDERATION. THE LD. CIT(A) INCLINED HIS VI EWS TO THE AOS FINDING THAT THE DEBT UNDER REFERENCE CANNOT BE CLAIMED BAD WHEN THE PROCEEDINGS TO RECOVER THE DEBT ARE BEING CARRIED OUT BY THE AP PELLANT. HE ALSO RELIED UPON THE DECISIONS OF HONBLE GUJARAT HIGH COURT IN THE CASES OF AHMEDABAD ELECTRICITY CO VS. CIT, 262 ITR 97 AND D HALL ENTERPRISE AND ENGINEERING PVT LTD VS. CIT, 295 ITR 48, EMPHASIZIN G THE REQUIREMENT THAT THE ASSESSEE SHOULD PROVE THAT THE DEBT HAS BECOME BAD IN THAT PARTICULAR YEAR. ON APPEAL, THE LD. CIT(A) CONFIRMED THESE DI SALLOWANCES. 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 11 5.1 AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 5.2 LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THE BAD DEBTS WRITTEN OFF DURING THE YEAR AY 2005-06 OF RS.2,44,43,353/- WAS IN RESPECT OF INDIVIDUAL HOME LOANS WHICH WERE NOT RECOVERED. HE REFERRED T O VARIOUS PAGES OF SUBMISSION IN THIS REGARD FURNISHED IN THE PAPER-BO OKS. IT WAS STATED THAT INTEREST EARNED THEREON HAS BEEN DULY CREDITED TO T HE PROFIT & LOSS A/C IN THE EARLIER YEAR AND JUSTIFY ITS CLAIM OF BAD-DEBT. HE FURTHER SUBMITTED THAT IT IS BUSINESS LOSS OF THE ASSESSEE TO BE ALLOWABLE U NDER THE INCOME-TAX ACT BECOUSE OF ITS BUSINESS OF PROVIDING LOANS FOR HOU SING AND NON-HOUSING PURPOSES. THE ASSESSEE ALSO EXPLAINED BEFORE THE A SSESSING OFFICER THAT WHEN THE REPAYMENT OF LOAN IS NOT EFFECTED IN NORMA L COURSE, THE RECOVERY TEAM TAKES NECESSARY STEPS TO RECOVER THE OUTSTANDI NG AMOUNT, EVEN AFTER TAKING NECESSARY STEPS IF RECOVERY NOT EFFECTED THE N THE MATTER IS REFERRED TO THE LEGAL TEAM ON THE ADVISE OF THE ADVOCATES FOR FILING THE SUITS BEFORE THE APPROPRIATE AUTHORITIES.W HERE RECOVERY OF LOAN AMOUNT WITH OUTSTANDING DUES BECOMES IRRECOVERABLE EVEN AFTER LEGAL ACTION, THE OUTSTANDING AMOUNT IS WRITTEN OFF. IT WAS ALSO SUBMITTED THAT AS PER THE AMENDED PROVISIONS OF SECTION 36(1)(VIII), ONCE THE AMOUNT IS WRITTEN OFF AS BAD DEBT, THE SAME HAS TO BE ALLOWED AS DEDUCTION UNDER THE SAID PROVISION . RELIANCE IS PLACED ON THE JUDGMENT OF HONBLE HIGH COURTS IN THE CASE OF (I) CIT VS. MORGEN SECURITIES & CREDITS PVT LTD, 292 ITR 339 (DEL), (I I) CIT VS. AUTOMETERS LTD, 292 ITR 345 (DEL), (III) CIT VS. GIRISH BHAGWAT PRA SAD, 256 ITR 772 (GUJ) AND DCIT VS. PATIDAR GINNING & PRESSING CO, 157 CTR 177 (GUJ). HE FURTHER PLACED RELIANCE ON THE HONBLE APEX COURT JUDGMENTS IN THE CASE OF TRF VS. CIT, 323 ITR 397 (SC) AND VIJAYA BANK VS. CIT, 37 D TR 401 (SC.). HE HAS ALSO REFERRED TO THE JUDGEMENT OF VIJAY BANK VS. CI T, 37 DTR 401 (SC) DECIDED BY THE HONBLE SUPREME COURT. 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 12 5.3 LD. DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 5.4 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF TRF L TD (SUPRA) HAS HELD THAT IT IS NOT NECESSARY FOR ASSESSEE TO ESTABLISH THAT DEBT, IN FACT, HAS BECOME IRRECOVERABLE, IT IS ENOUGH IF BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN ACCOUNTS OF ASSESSEE. THE HONBLE APEX COURT IN TH E CASE OF VIJAYA BANK (SUPRA) HAS HELD AS UNDER:- THE FIRST QUESTION WHICH ARISES FOR DETERMINATION CONCERNS THE MANNER IN WHICH ACTUAL WRITE OFF TAKES PLACE UNDER THE ACCOUN TING PRINCIPLES. PRIOR TO FINANCE ACT, 2001, MANY ASSESSEES USED TO TAKE THE B ENEFIT OF DEDUCTION UNDER S. 36(1)(VII) BY MERELY DEBITING THE IMPUGNED B AD DEBT TO THE P&L A/C AND, THEREFORE, THE PARLIAMENT STEPPED IN BY WAY OF EXPLANATION TO SAY THAT MERE REDUCTION OF PROFITS BY DEBITING THE AMOUNT TO THE P&L A/C PER SE WOULD NOT CONSTITUTE ACTUAL WRITE OFF. TO THIS EXTENT, SU BMISSIONS OF THE REVENUE ARE SUSTAINABLE. HOWEVER, AS STATED BY THE TRIBUNAL, IN THE PRESENT CASE, BESIDES DEBITING THE P&L A/C AND CREATING A PROVISION FOR B AD AND DOUBTFUL DEBT, THE ASSESSEE-BANK HAD CORRESPONDINGLY/SIMULTANEOUSLY OB LITERATED THE SAID PROVISION FROM ITS ACCOUNTS BY REDUCING THE CORRESP ONDING AMOUNT FROM LOANS AND ADVANCES/DEBTORS ON THE ASSET SIDE OF THE BALANCE SHEET AND, CONSEQUENTLY, AT THE END OF THE YEAR, THE FIGURE IN THE LOANS AND ADVANCES OR THE DEBTORS ON THE ASSET SIDE OF THE BALANCE SHEET WAS SHOWN AS NET OF THE PROVISION 'FOR IMPUGNED BAD DEBT'. AFTER THE EXPLAN ATION, THE ASSESSEE IS NOW REQUIRED NOT ONLY TO DEBIT THE P&L A/C BUT SIMU LTANEOUSLY ALSO REDUCE LOANS AND ADVANCES OR THE DEBTORS FROM THE ASSET SI DE OF THE BALANCE SHEET TO THE EXTENT OF THE CORRESPONDING AMOUNT SO THAT, AT THE END OF THE YEAR, THE AMOUNT OF LOANS AND ADVANCES/DEBTORS IS SHOWN AS NE T OF PROVISIONS FOR IMPUGNED BAD DEBT. IN THE CIRCUMSTANCES, THE ASSESS EE WAS ENTITLED TO THE BENEFIT OF DEDUCTION UNDER S. 36(1)(VII) AS THERE WAS AN ACTUAL WRITE OFF BY THE ASSESSEE IN ITS BOOKS, AS INDICATED ABOVE. WE, THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAI D DECISIONS OF HONBLE APEX COURT IN THE CASE OF TRF LTD AND VIJAY A BANK (SUPRA), DELETE THE DISALLOWANCE OF BAD DEBTS MADE BY THE ASSESSING OFFICER. THUS, THE 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 13 GROUNDS OF ASSESSEES APPEALS ON THE IDENTICAL ISSU E FOR AYS 2006-07, 2007- 08, 2008-09 AND 2009-10 ARE ALSO ALLOWED FOR THE AF ORESAID REASONING. 6. NEXT GROUND OF THE ASSESSEE RELATES TO CLAIM OF DE DUCTION U/S 36(1)(VIII). 6.1 DURING THE AY 2005-06 THE ASSESSEE HAD CLAIMED DEDUCTION U/ 36(1)(VIII) TO THE AMOUNT OF RS.8,00,00,000/-. HOW EVER, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE WAS CLAIMING DEDUCTIONS U/S 36(1)(VIII) WHICH WAS NOT DERIVED FROM LONG TERM HOUSING FINANCE BUSINESS . IT WAS ALSO FOUND THAT ASSESSEE WAS TRANSFERRING/ASSIGNING THEIR HOUSING L OAN PORTFOLIOS TO HDFC WITHOUT HOLDING FOR A PERIOD OF 5 YEARS. IN THIS C ONNECTION THE ASSESSING OFFICER STATED THAT AS PER EXPLANATION (E) TO CLAUS E (VIII) TO SUB-SECTION (1) OF SECTION 36 OF THE ACT LONG TERM FINANCE MEANS ONL Y LOAN OR ALLOWANCES WHERE THE TERMS UNDER WHICH MONEY ARE LOANED OR ADV ANCED PROVIDE FOR REPAYMENT ALONG WITH INTEREST THERE OF DURING A PER IOD OF NOT LESS THAN 5 YEARS. THE ASSESSEE CLAIMED THAT IN SECTION 36(1), NOWHERE IT IS PROVIDED THAT DEDUCTION U/S 36(1)(VIII) WILL NOT BE ALLOWED IF THE TENURE OF THE LOAN IS REDUCED TO LESS THAN 5 YEARS.ONCE LONG TERM HOUSING FINANCE WAS MADE AND NECESSARY RESERVES CREATED AND MAINTAINED AS PROVI DED IN THE SECTION, DEDUCTION U/S 36(1)(VIII) IS AVAILABLE. THE ASSESSE E HAS ALSO CLAIMED ON ASSIGNED/TRANSFERRED OF LOAN PORTFOLIOS, THE PART O F THE INTEREST RECEIVED FROM THE LOANEE WAS THE INTEREST INCOME OF THE ASSE SSEE ON LONG TERM FINANCE BUSINESS AND BASIC CHARACTER OF LOANS DOES NOT CHAN GE AT ANY POINT OF TIME. THE ASSESSING OFFICER HAS NOT ACCEPTED THE CONTENT ION OF THE ASSESSEE ON THE REASONING AS UNDER:- 8.3 (A) THE SECTION 36(L)(VIII) AS STOOD IN THE RELEV ANT ASSESSMENT YEAR STIPULATED AS UNDER 'IN RESPECT OF ANY SPECIAL RESE RVE CREATED [AND MAINTAINED] BY A FINANCIAL CORPORATION WHICH IS ENGA GED IN PROVIDING LONG- TERM FINANCE FOR [INDUSTRIAL OR AGRICULTURAL DEVELO PMENT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA OR BY A PUBLIC COM PANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARRYING ON THE BU SINESS OF PROVIDING LONG- 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 14 TERM FINANCE FOR CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSES, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUSINESS OF PROVIDING LONG-TERM FINANCE (COMPU TED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' [BEFO RE MAKING ANY DEDUCTION UNDER THIS CLAUSE]) CARRIED TO SUCH RESERVE ACCOUNT: ]..........' FURTHER THE EXPLANATIONS TO SECTION 36(1 )(VIII) STIP ULATES AS UNDER '[EXPLANATION.IN THIS CLAUSE, (A) 'FINANCIAL CORPORATION' SHALL INCLUDE A PUBLIC C OMPANY AND A GOVERNMENT COMPANY; (B) 'PUBLIC COMPANY' SHALL HAVE THE MEANING ASSIGNE D TO IT IN SECTION 3 OF THE COMPANIES ACT, 1956 (1 OF 1956); (C) 'GOVERNMENT COMPANY' SHALL HAVE THE MEANING ASSI GNED TO IT IN SECTION 617 OF THE COMPANIES ACT, 1956 (1 OF 1956);] [(D) 'INFRASTRUCTURE FACILITY' SHALL HAVE THE MEANING AS SIGNED TO IT IN CLAUSE (23G) OF SECTION 10;] [(E) 'LONG-TERM FINANCE' MEANS ANY LOAN OR ADVANCE W HERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PROVIDE F OR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERIOD OF NOT LESS THAN FIVE YEARS;] FROM THE PERUSAL OF THE ABOVE REFERRED PROVISIONS O F SECTION 36(L)(VIII) IT CAN BE SEEN THAT TO BE ELIGIBLE FOR DEDUCTIONS U /S 36(1 )(VIII), THE ASSESSEE SHOULD BE PROVIDING LONG TERM FINANCE AND AS PER C LAUSE (E) OF EXPLANATIONS TO SECTION 36(1)(VIII), THE LONG TERM FINANCE IS DEF INED AS THE FINANCE WHERE THE TERMS OF REPAYMENT IS NOT LESS THAN 5 YEARS. THE ASSESSEE HAS GIVEN WORKING OF INTEREST INCOME A RISING FROM SUCH LOAN PORTFOLIO TRANSFERRED BEFORE HOLDING FOR 5 YEA RS AT RS.1,27,02,648/- AND OTHER CHARGES RELATED TO SUCH TRANSFERRED LOAN PORT FOLIO AT RS.9,78,625/-. THE ASSESSING OFFICER HAS ALSO OBSERVED THAT THE ASSESS EE COMPUTED DEDUCTION U/S 36(1)(VIII) BY INCLUDING BAD DEBT RECOVERED AT RS.18,73,000/- WHICH WAS OTHERWISE NOT AN INCOME DERIVED FROM LONG TERM HOUS ING FINANCE BUSINESS. SIMILARLY, THE AO ALSO NOTICED THAT THE EMI RESIDUA L RELATED TO EARLIER YEAR TRANSFERRED TO THE P & L A/C FOR TAXATION FOR THE F Y 2004-05 AT RS.3,81,42,000/- HAS BEEN CONSIDERED BY THE ASSESSE E AS PART OF LONG TERM HOUSING BUSINESS WHICH WAS IN FACT INCOME ARISING O UT OF SUCH LOAN PORTFOLIO TRANSFERRED BY THE ASSESSEE COMPANY IN EARLIER YEAR S WITHOUT HOLDING THE SAME FOR 5 YEARS. THE AO DECIDED SUCH ABOVE CITED INCOME AS NOT DERIVED 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 15 FROM LONG TERM HOUSING FINANCE BUSINESS AND PLACED RELIANCE ON THE FOLLOWING JUDICIAL DECISIONS:- I. CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD VS. CIT, 113 ITR 84 (SC); II. EASTERN SEAFOOD EXPORTS P LTD, 215 ITR 64 (MAD.); III. CIT VS. STERLING FOODS, 237 ITR 579 (SC); IV. CIT VS. CEMENT DISTRIBUTORS LTD, 208 ITR 355 (DEL.) ; V. CIT VS. COCHIN REFINERIES LTD, 135 ITR 278 (KER.); VI. PANDIAN CHEMICALS LTD VS. CIT, 262 ITR 278 (SC) 6.2 IN VIEW OF ABOVE STATED FACTS THE AO HAS DISALL OWED DEDUCTIONS U/S 36(1)(VIII) OF THE FOLLOWING INCOME:- (I) BAD DEBTS RECOVERY - RS. 18,73,000 (II) INTEREST EARNED ON THE LOAN PORTFOLIO - RS. 1 ,27,02,648 SOLD/TRANSFERRED BEFORE 5 YEARS, DURING THE CURRENT FINANCIAL YEAR AND INCLUDED THEREIN (III) FEES AND OTHER CHARGES EARNED ON - RS. 9 ,78,625 THE LOAN PORTFOLIO SOLD/TRANSFER BEFORE 5 YEARS, DURING THE CURRENT FINANCIAL YEAR AND INCLUDED THEREIN (IV) EMI RESIDUAL OFFERED FOR TAXATION - RS.3,81,4 1,794 IN CURRENT YEAR AND INCLUDED THEREIN 6.3 THE LD. CIT(A) CONFIRMED THE ABOVE DISALLOWANCE S ON THE REASONING THAT IN TERMS OF LOAN TRANSFERRED WITHIN THE PERIOD OF 5 YEARS THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 36(1)(VIII). THE LD. CIT (A) HELD THAT EXCLUSION OF RS.1,27,02,648/- ON PORTFOLIO TRANSFERRED TO HDF C IN COMPUTING THE DEDUCTION U/S 36(1)(VIII) IS JUSTIFIED, SIMILARLY T HE FEES AND CHARGES AMOUNTING TO RS.9,78,625/- DO NOT FALL WITHIN THE P URVIEW OF SECTION 36(1)(VIII). THE LD. CIT(A) ALSO HELD THAT BAD DE BT RECOVERY AMOUNTING TO RS.18,73,000/- WAS NOT ESTABLISHED BY THE ASSESSEE WITH ANY COGENT MATERIALS AS INCOME FROM LONG TERM HOUSING FINANCE. REGARDIN G EMI RESIDUARIES OFFERED DURING THE YEAR AT RS.3,81,41,794/-, LD. CI T(A) HELD THAT THE DEBT 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 16 CONTRIBUTING TO THE ABOVE SOURCE OF INCOME NO LONG ER OWNED BY THE ASSESSEE AND THE HDFC HAS BEEN AVAILING DEDUCTION I N RESPECT OF INTEREST FROM SUCH ASSIGNMENTS. 6.4 THE LD. CIT(A) HELD THAT THE RE-COMPUTATION OF DEDUCTION U/S 36(1)(VIII) RESULTING IN ADDITION OF RS.1,58,64,178 /- IS THEREFORE CONFIRMED. DURING THE COURSE OF PROCEEDINGS BEFORE US,THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE JUDGMENT IN THE CASE OF CIT VS. WEIZM ANN, [2013] 33 TAXMANN.COM 171 (KAR.), RURAL ELECTRIFICATION CORPO RATION LTD, 221 CTR (AAR) 210. THE LD. COUNSEL FOR THE ASSESSEE ALSO ST ATED THAT THE CLAIM OF THE ASSESSEE REGARDING BAD DEBT RECOVERY OF RA.18,73,00 0/- FOR DEDUCTION U/S 36(1)(VIII) IS COVERED IN FAVOUR OF THE ASSESSEE VI DE COMBINED ORDER OF ITAT, AHMEDABAD FOR AY 2004-05 AND 2000-01 AND REFERRED T O THE VARIOUS PAGES OF PAPER-BOOK. 6.6 THE LD. DR RELIED ON THE ORDER OF THE LOWER AUT HORITIES. 6.7 WE HAVE CAREFULLY GONE THROUGH THE RECORD AND W E ARE OF THE VIEW THAT THIS ASPECT OF THE ASSESSEES GROUND, I.E., BA D DEBT RECOVERY OF RS.18,73,000/- FOR DEDUCTION U/S 36(1)(VIII), IS CO VERED BY FINDING OF THE CO- ORDINATE BENCH OF ITAT, AHMEDABAD VIDE COMBINED ORD ER OF ITA NO.2238/AHD/2007 FOR AY 2004-05 AND ITA NO.2601/AHD /2008 FOR AY 2000-01. THE FINDING OF THE BENCH ON THIS ISSUE FO R THE AY 2004-05 ARE REPRODUCED AS UNDER:- 19. AS FAR AS THE BAD DEBTS RECOVERED BY THE ASSES SEE ARE CONCERNED, THE AO HAWS OBSERVED THAT RATIO OF OPERATING INCOME FROM L ONG TERM FINANCE IS 97.01%. IN THE YEAR IN WHICH THE LOANS HAVE GONE BA D AND THE ASSESSEE HAS WRITTEN OFF THEM, THE ELIGIBLE PROFIT DERIVED FROM LONG TERM HOUSING FINANCE WAS REDUCED BY THE AMOUNT WRITTEN OFF BY THE ASSESS EE AS BAD DEBT. IN THIS YEAR, WHEN THE ASSESSEE RECOVERED BAD DEBTS, ITS IN COME FROM LONG TERM FINANCE WOULD BE ENHANCED BY THAT MUCH AMOUNT. THUS , THE AO HAS ERRED IN REJECTING THE CLAIM OF THE ASSESSEE. THE AO HAS MA DE REFERENCE TO THE 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 17 JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. STERLING FOODS, 237 ITR 579 (SC). IN THAT CASE WHILE CONSTRUI NG EXPRESSION DERIVED, THE HONBLE COURT HAS OBSERVED THAT THER E SHOULD BE A NEXUS BETWEEN THE INCOME DERIVED FROM INDUSTRIAL UNDERT AKING. THE ASSESSEE HAS SOLD IMPORT ENTITLEMENT, AND IN THAT CONTEXT, IT WA S CONSTRUED THAT SUCH INCOME WAS NOT DERIVED FROM INDUSTRIAL UNDERTAKIN G. IN THE PRESENT CASE, INCOME DERIVED BY THE ASSESSEE IS FROM LONG TERM FI NANCE I.E. INTEREST INCOME. IT WAS REDUCED BY VIRTUE OF WRITTEN OFF OF CERTAIN DEBTS WHICH HAS DIRECT NEXUS WITH THE INCOME DERIVED BY THE ASSESSEE. THIS YEAR, THESE ENTRIES HAVE BEEN REVERSED BY RECOVERY OF THIS BAD DEBT. THUS, NEXUS IS AVAILABLE. THE AO IS NOT JUSTIFIED TO EXCLUDE THE AMOUNT OF BAD DEBTS RECOVE RED BY THE ASSESSEE FOR CALCULATING THE CLAIM UNDER SECTION 36(1)(VIII) OF T HE ACT. 6.8 REGARDING THE CLAIM OF THE ASSESSEE PERTAINING TO RS.1,27,02,648/- INTEREST EARNED ON THE LOAN PORTFOLIO SOLD/TRANSFER BEFORE 5 YEARS, THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF CO- ORDINATE BENCH OF ITAT, AHMEDABAD IN ASSESSEES OWN CASE FOR AYS 2004-05 AN D 2000-01 DATED 11.07.2016. THE LD. DR RELIED ON THE DECISION OF LOWER AUTHORITIES. 6.9. WE HAVE GONE THROUGH THE MATERIAL ON RECORD CA REFULLY. IT IS NOTICED THAT CO-ORDINATE BENCH OF THIS ITAT IN THE CASE OF THE ASSESSEE (SUPRA) HELD AS UNDER:- 12. A BARE PERUSAL OF THE SECTION WOULD INDICATE TH AT IF AN ASSESSEE IS ENGAGED IN PROVIDING LONG TERM FINANCE FOR INDUSTRI AL, AGRICULTURE OR HOUSING PROJECTS, THEN, OUT OF PROFIT DERIVED FROM SUCH BUSINESS OF PROVIDING LONG TERM FINANCE, THE ASSESSEE COULD CLAIM A DEDUC TION OF 40% AND CREATE A RESERVE OF THAT AMOUNT. IT IS PERTINENT TO OBSERVE THAT IN THIS YEAR, THE ASSESSEE HAS CREATED A SPECIAL RESERVE OF RS.210 LA KHS. AS FAR AS THE CONDITIONS ENUMERATED IN SECTION 36(1)(VIII) IS CONCE RNED, THERE IS NO DISPUTE BETWEEN THE PARTIES THAT THE ASSESSEE HAS FULFILLED CONDITIONS VIZ. (A) IT IS A PUBLIC COMPANY, (B) IT IS ENGAGED IN PROVIDING FINAN CE FOR HOUSING SECTOR, (C) IT HAS DERIVED PROFIT FROM SUCH BUSINESS OF PROVIDI NG LONG TERM FINANCE. IT HAS CREATED A SPECIAL RESERVE. THE SHORT DISPUTE BETWEE N THE AO AND THE ASSESSEE IS WHETHER BY ASSIGNING OF LOAN PORTFOLIO, THE CHAR ACTER OF FINANCE ACCOUNT WHICH HAS GENERATED PROFIT OR INTEREST INCOME TO TH E ASSESSEE WOULD CHANGE. THE EMPHASIS OF THE AO IS ON THE INTERPRETATION OF CLAUSE (E) APPENDED TO EXPLANATION TO THE SECTION. ACCORDING TO THE LD.AO, T HIS CLAUSE SUGGESTS THAT LOAN ACCOUNT SHOULD BE OLDER THAN FIVE YEAR, ONLY T HEREAFTER, THE INTEREST FROM SUCH LOAN ACCOUNT WOULD QUALIFY FOR DEDUCTION. THE CASE OF THE ISSUE IS THAT 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 18 BY ASSIGNMENT OF LOAN PORTFOLIO THE CHARACTER OF LO AN ACCOUNT DOES NOT CHANGE. IT STILL REMAINS A LONG TERM FINANCE. THE RIGHT TO RECEIVE INTEREST HAS CHANGED THE HANDS. ACCORDINGLY THE NEW COMPANY IF FULFILLS O THER CONDITIONS CONTEMPLATED IN THE ACT, THEN, ASSESSEE WILL BE ENT ITLED TO CLAIM DEDUCTION, OTHERWISE, AUTOMATICALLY IT WILL NOT BE AVAILABLE T O ANY ASSESSEE AFTER THE ASSIGNMENT. 13. A PERUSAL OF SECTION ALONG WITH CLAUSE (E) NO WHE RE REVEALS THAT THE ASSESSEE IS BOUND TO MAINTAIN THE ACCOUNT FOR FIVE YEARS, OTHERWISE THE LEGISLATURE WOULD PROVIDE THE DEDUCTION AFTER COMPL ETION OF 5 YEARS OF SUCH LOAN ACCOUNT. IT ONLY PUTS A CONDITION ABOUT THE NA TURE OF ACCOUNT. AN ASSESSEE IS ENTITLED FOR DEDUCTION FOR THE PURPOSE OF THIS SECTION FROM THE FIRST YEAR ITSELF. THE MEANING CONSTRUED BY US CAN BE FUR THER FORTIFIED BY CONSIDERING SECTION 155 OF THE INCOME TAX ACT. UNDE R THIS SECTION AO HAS BEEN EMPOWERED TO WITHDRAW CERTAIN DEDUCTION TO AN ASSESSEE. FOR EXAMPLE INVESTMENT ALLOWANCE IS BEING GRANTED TO AN ASSESSE E U/S.32A IN RESPECT OF SHIP AND SUCH SHIP WAS TRANSFERRED BEFORE EXPIRY OF EIGHT YEARS IN VIOLATION TO THE CONDITIONS, THEN U/S.155 IT WILL BE CONSTRUED T HAT SUCH ALLOWANCE WAS GRANTED WRONGLY. SIMILARLY, A PROVISION HAS BEEN MA DE TO WITHDRAW NUMBER OF SUCH OTHER BENEFITS GIVEN UNDER THE ACT. BUT, THI S SECTION DOES NOT TALK WITHDRAWAL OF DEDUCTION GRANTED U/S.36(1)(VII) OF TH E ACT. THEREFORE, WE ARE OF THE VIEW THAT THE LD. REVENUE AUTHORITIES HAVE E RRED IN CONSTRUING THE MEANING OF CLAUSE (E) TO SECTION 36(1)(VIII) OF THE IN COME TAX ACT. WE REMIT THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TH AT HE WILL VERIFY THE DETAILS OF FINANCE ACCOUNTS, AND IF THERE IS NO CHANGE IN T HE CHARACTER OF ACCOUNTS I.E. THEIR LIFE SPAN IS MORE THAN FIVE YEARS, WHICH CONT INUES EVEN AFTER ASSIGNMENT, THEN, INTEREST INCOME FROM THOSE ACCOUN TS UPTO THE DATE OF ASSIGNMENT WOULD QUALIFY FOR DEDUCTION UNDER SECTIO N 36(1)(VIII) OF THE ACT IN THE HANDS OF THE ASSESSEE. THESE DIRECTIONS ARE SUBJECT TO FULFILLMENT OF OTHER CONDITIONS WHICH ARE NOT DISPUTED BEFORE US. THE LD.AO SHALL ALSO ENSURE THAT DOUBLE DEDUCTION SHOULD NOT BE MADE I.E . BY ASSESSEE AS WELL AS BY HDFC. 6.10 IN VIEW OF THE ABOVE CITED FACTS AND JUDICIAL FINDINGS, WE REMIT THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VE RIFY THE DETAILS OF FINANCE ACCOUNTS, AND IF THERE IS NO CHANGE IN THE CHARACTE R OF ACCOUNTS, I.E. THEIR LIFE SPAN IS MORE THAN 5 YEARS WHICH CONTINUES EVEN AFTE R ASSIGNMENT, THEN INTEREST INCOME FROM THOSE ACCOUNTS UPTO THE DATE O F ASSIGNMENT WOULD QUALIFY FOR DEDUCTION UNDER SECTON 36(1)(VIII) OF T HE ACT IN THE HANDS OF THE ASSESSEE. THESE DEDUCTIONS ARE SUBJECT TO FULFILLM ENT OF OTHER CONDITIONS 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 19 WHICH ARE NOT DISPUTED BEFORE US. THE LD. AO SHALL ALSO ENSURE THAT DOUBLE DEDUCTION SHOULD NOT BE MADE, I.E., BY ASSESSEE AS WELL AS BY HDFC. 7. NOW, COMING TO DEPARTMENTS APPEAL FOR AY 2005-0 6. THE GROUND NO.1 READS AS UNDER:- 1. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DELE TING THE ADDITION OF RS.9,83,32,951/- BEING THE AMOUNT OF EMI RESIDUALS ACCRUED FOR THE AY 2005-06. 7.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER NOTICED FROM THE NOTES FORMING PART OF ACCOUNTS THA T THE ASSESSEE COMPANY ACT AS RECEIVING AND PAYING AGENT FOR EFFECTIVE REC OVERY FROM BORROWER OF LOANS WHICH THE COMPANY HAS SOLD/TRANSFERRED AND AS SIGNED UNTIL THE LOANS ARE FULLY REPAID. AS A RESULT OF SALE/TRANSFER/ASS IGNMENT OF SUCH LOANS, SURPLUS OF RS.9,83,32,951/- BEING THE RESIDUAL BETW EEN THE EMI RECOVERABLE FROM SUCH INDIVIDUAL BORROWER AND PAYABLE TO THE BU YER OF LOAN WAS RECOGNIZED DURING THE YEAR AND CREDITED TO EMI RESI DUAL ACCOUNT. THE AO POINTED OUT TO THE ASSESSEE WHY SUCH EMI OF RS.9.83 CRORES SHOULD NOT BE BROUGHT TO TAX. THE ASSESSEE EXPLAINED THAT THE SA ME CANNOT BE TAXED AS INCOME OF THE YEAR ON THE FOLLOWING GROUNDS:- 5.1 IN THE COMPUTATION OF INCOME FILED ALONG WITH THE RETURN OF INCOME, A SUM OF RS.1,45,79,144/- HAS BEEN REDUCED FROM THE T OTAL INCOME. THE APPELLANT HAS SOLD/TRANSFERRED/ASSIGNED INDIVIDUAL LOAN PORTFOLIOS IN EARLIER YEAR AND PROFIT IN RESPECT OF THE SAID LOAN PORTFOL IOS WAS DULY BOOKED IN PROFIT OF RELEVANT PREVIOUS YEAR. DURING THE YEAR UNDER CO NSIDERATION, DUE TO EARLIER PAYMENT OF LOANS AND, THEREFORE, REVERSAL ENTRY IN RESPECT OF PROFIT OF THOSE TRANCHE WHICH WAS BOOKED IN EARLIER YEAR HAS BEEN P ASSED. TOTAL AMOUNT OF REVERSAL ENTRY OF INCOME IS OF RS.5,27,35,943/-. 5.2 DURING THE YEAR UNDER CONSIDERATION, THE APPELL ANT HAS SOLD/TRANSFERRED OR ASSIGNED INDIVIDUAL HOME LOANS AGGREGATING TO RS .40,13,87,920/-. AS A RESULT OF THE SALE/TRANSFER/ASSIGNMENT, ENTIRE SURP LUS OF RS.9,83,32,951/- BEING THE DIFFERENCE BETWEEN EMI RECOVERABLE FROM S UCH INDIVIDUAL BORROWERS DURING THE REMAINING TENURE OF LOAN AND P AYABLE TO THE BUYER FOR THE REMAINING TENURE OF THE LOAN WAS RECOGNIZED DUR ING THE YEAR IN BOOKS OF ACCOUNT. OUT OF THE SAID EMI RESIDUAL, THE APPELLAN T COMPANY HAS FURTHER 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 20 SET ASIDE RS.3,10,17,864/- BEING RESERVE FOR CONTIN GENCIES TO MEET ANY CONTINGENCY ARISING OUT OF PREPAYMENT AND THE BALAN CE OF RS.6,73,15,087/- IS TRANSFERRED TO PROFIT & LOSS ACCOUNT. THE SAID AMOU NT PERTAINS TO THE WHOLE UN-EXPIRED PERIOD OF LOAN PORTFOLIO. 5.3 AS MENTIONED IN PARAGRAPH 5.1 ABOVE, REVERSAL EN TRY BEING INCOME OF RS.5,27,35,943/- HAS BEEN PASSED DURING THE YEAR UN DER CONSIDERATION WHICH IS A NOTIONAL ENTRY AND THE SAME IS REQUIRED TO BE ADDED WHILE COMPUTING THE INCOME UNDER THE INCOME TAX ACT, 1961, AND, THEREFOR E, ADDITION OF RS. 1,45,79,144/- HAS BEEN MADE BEING THE DIFFERENCE BE TWEEN THE AMOUNT OF RS.5,27,35,943/- BEING REVERSAL ENTRY OF INCOME AND RS.6,73,15,087/- BEING THE INCOME IN RESPECT OF EMI RESIDUAL RECOGNIZED IN THE BOOK OF THE YEAR UNDER CONSIDERATION. IN OTHER WORDS, AMOUNT OF RS.6 ,73,15,087/- HAS BEEN ADDED TO THE INCOME AND AMOUNT OF RS.5,27,35,943/- HAS BEEN EXCLUDED FROM THE TOTAL INCOME FOR THE REASON THAT THE SAME CANNO T BE SAID TO HAVE ACCRUED FOR THE YEAR UNDER CONSIDERATION. THIS TREATMENT IS IN LINE WITH THE GUIDANCE NOTE ON 'ACCOUNTING FOR SECURITISATION' ISSUED BY TH E INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 5.4 THUS, AFTER EXCLUDING EMI RESIDUAL INCOME OF RS .6,73,15,087/-, AN AMOUNT OF RS.3,81,41,794/- HAS BEEN OFFERED FOR TAX ATION AND ADDED TO THE TOTAL INCOME WHICH IN FACT HAS ACTUALLY ACCRUED DUR ING THE YEAR UNDER CONSIDERATION WHICH HAS BEEN OFFERED FOR TAXATION I N THE STATEMENT OF INCOME. 5.5 THE ASSESSING OFFICER ASKED THE APPELLANT TO EXP LAIN WHY THE AMOUNT OF RS.9,83,32,951/- BE NOT BROUGHT TO TAX. WITH REGARD TO THIS, IT IS SUBMITTED THAT THE SAME CANNOT BE TAXED AS INCOME OF THE YEAR ON THE FOLLOWING GROUNDS: (A) AS EXPLAINED ABOVE, THE AMOUNT IN QUESTION P ERTAINS TO THE ENTIRE UN- EXPIRED PERIOD OF LOAN PORTFOLIO. THE SAME CANNOT B E SAID TO HAVE ACCRUED FOR THE YEAR UNDER CONSIDERATION AND THEREF ORE, THE SAME CANNOT BE BROUGHT TO THE TAX AS INCOME OF THE YEAR UNDER CONSIDERATION. (B) IN THE PRESENT CASE, THE APPELLANT IS APPOINTE D AS AGENT BY BUYER FOR THE PURPOSE OF RECOVERY OF LOAN AMOUNT ASSIGNED TO BUYER AND FOR PERFORMING THAT TASKS, THE APPELLANT IS ENTITLED TO CERTAIN PORTION OF INTEREST COLLECTED FROM THE LOANEE BY WAY OF SERVIC E CHARGES. THEREFORE, ON ACCOUNT OF SUCH TRANSACTIONS, OUT OF THE AMOUNT RECEIVABLE AS SERVICE CHARGE FOR RENDERING THE SERVICES OVER THE PERIOD OF LOAN, AS MENTIONED ABOVE, THE PART OF THE SAID AMOUNT WHICH IS FOR THE RELEVANT YEAR AND WHICH HAS ACCRUED AT THE YEAR END ONLY CAN BE THE SUBJECT MATTER OF TAX FOR THE YEAR. (C) IT IS ALSO SUBMITTED THAT THE AGREEMENT DOES NO T OBLIGE BUYER TO CONTINUE TO RETAIN THE SERVICES OF THE APPELLANT AS AGENT FOR RECOVERY OF 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 21 LOANS THROUGHOUT THE PERIOD FOR WHICH THE INSTALLME NTS ARE OUTSTANDING. ATTENTION IS INVITED TO CLAUSE 5.5 OF T HE AGREEMENT WHICH READS AS UNDER: 'THE SELLER SHALL ACT AND CONTINUE TO ACT AS THE RE CEIVING AND PAYING AGENT UNTIL ALL THE RECEIVABLES SHALL HAVE B EEN PAID. IN THE EVENT OF THE OCCURRENCE OF ANY EVENT OR DEFAULT , AND IF SO DECIDED BY THE BENEFICIARY, THE SELLER SHALL CEASE TO ACT AS THE RECEIVING AND PAYING AGENT. IN THAT EVENT THE BENEF ICIARY MAY, AT ITS OPTION, TERMINATE THE APPOINTMENT OF THE SEL LER AS THE RECEIVING AND PAYING AGENT AFTER GIVING 20 DAYS NOT ICE. THE BENEFICIARY SHALL APPOINT ANY BANK OR INSTITUTION A S THE NEW RECEIVING AND PAYING AGENT HEREUNDER UPON SUCH TERM S AND CONDITIONS AS THE BENEFICIARY AND THE NEW RECEIVING AND PAYING AGENT MAY MUTUALLY AGREE. ALL THE FEES PAYABLE TO SU CH NEW RECEIVING AND PAYING AGENT SHALL BE BORNE BY AND BE TO THE ACCOUNT OF THE BENEFICIARY. ' (D) THIS CLAUSE MAKES IT CLEAR THAT THERE IS NO GUARANTEE THAT THE COMPANY SHALL CONTINUE TO ACT AS AGENT FOR BUYER. IN THE EV ENT OF NON-ACTING AS AGENT, QUESTION OF GETTING REMUNERATION WILL NOT AR ISE. EVEN OTHERWISE, THE APPELLANT IS ENTITLED TO SERVICE CHA RGES FOR CARRYING OUT THE WORK OF COLLECTING THE AMOUNT FROM THE LOANEE O VER A PERIOD OF YEARS. UNDER THE CIRCUMSTANCES, THE DIFFERENCE BETW EEN THE AMOUNT OF INSTALLMENTS IN RESPECT OF INTEREST TO BE COLLECTED AND BE PAID TO BUYER CANNOT BE SAID TO BE INCOME OF THE CURRENT YEAR IN AS MUCH AS THE SAID INCOME IS FOR RUNNING SERVICES OVER A PERIOD OF YEA RS. (E) IN VIEW OF THE ABOVE, THE SAID DIFFERENCE C ANNOT BE TREATED AS INCOME OF THE APPELLANT FOR THE CURRENT YEAR BECAUSE; (I) IT IS CONDITIONAL UPON THE COMPANY TO CONTINUE TO ACT AS AGENT OF BUYER FOR THE WHOLE PERIOD; AND (II) IT IS BY WAY OF REMUNERATION FOR PROVIDING SERV ICES FOR THE WHOLE PERIOD AND THEREFORE, MUST BE TAXED TO THE EXTENT T HE INCOME RELATES TO THE YEAR ONLY. (F) THE APPELLANT FURTHER SUBMITS THAT THE EMI RECE IVABLE RECOGNIZED IN THE BOOKS WILL ARISE ONLY IF THE BORROWER CONTINUES TO SERVE THE LOAN FOR THE AGREED TERM OF LOAN. HOWEVER IN CASE IF THE BOR ROWER EXERCISES THE OPTION OF MAKING THE PREPAYMENT OF LOAN, THE EMI RE SIDUAL CALCULATED MAY NOT ACTUALLY BECOME REALIZABLE AND WILL HAVE TO BE REVERSED IN BOOK IN THE YEAR OF PREPAYMENT, AS THE LOAN IS FORE CLOSED BEFORE THE EXPIRY OF THE AGREED TENURE, FOR THE THIS REASON DU RING THE UNDER ASSESSMENT REVERSAL ENTRY HAS BEEN PASSED AS MENTIO NED IN ABOVE PARA. IN SUCH CASE NO INCOME FOR THE PERIOD AFTER THE PRE PAYMENT OF LOAN WILL 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 22 ACTUALLY BE REALIZED AND THE SAME IS REVERSED IN TH E BOOKS. THUS, THE INCOME RECOGNIZED IN THE BOOKS HAS NOT ACTUALLY ACC RUED AND THE SAME IS CONTINGENT ON THE TENURE OF THE LOAN. THUS, IN L IEU OF THIS CONTINGENCY THE INCOME CANNOT BE TAXED THOUGH THE S AME HAS BEEN RECOGNIZED IN THE BOOKS. (G) ATTENTION IS ALSO INVITED TO THE DECISION OF THE SUPREME COURT OF INDIA IN CASE OF MADRAS INDUSTRIAL INVESTMENTS CORPORATIO N LTD. V. ITC [225 ITR 802]. IN THAT CASE AN ASSESSEE HAD CLAIMED DEDUCTION OF EXPENDITURE IN ONE YEAR THOUGH BENEFIT OF THE SAME WAS AVAILABLE TO IT OVER A PERIOD OF 12 YEARS. THE SUPREME COURT OBSERV ED AS UNDER :- 'ORDINARILY, REVENUE EXPENDITURE WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALL OWED IN ITS ENTIRETY OF YEARS EVEN IF THE ASSESSES HAS WRITTEN IT OFF IN HIS BOOKS OVER A NUMBER OF YEARS. HOWEVER, THE FACTS MAY JUST IFY AN ASSESSEE WHO HAS ; INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SPREAD AND CLAIMED IT OVER A PERIOD OF ENSUING YEARS. IN FACT ALLOWING THE ENTIRE EXPENDITURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YEAR.' IT IS SUBMITTED THAT THE ABOVE JUDGMENT OF THE SUPR EME COURT IS IN THE FIELD OF EXPENDITURE. HOWEVER, THE PRINCIPLES LAID DOWN IN THE SAID JUDGMENT ARE EQUALLY APPLICABLE IN THE FIELD OF COM PUTING OF INCOME FOR THE PURPOSE OF TAXING OF THE INCOME. (H) REGARDING THE ACCOUNTING ENTRIES PASSED IN RE SPECT OF EMI RESIDUAL INCOME IN THE BOOKS OF ACCOUNTS, IT IS SUBMITTED TH AT THE ACCOUNTING ENTRIES CANNOT BE MADE BASE FOR DECIDING THE TAXABI LITY OF INCOME. ATTENTION IS INVITED TO THE SUPREME COURT'S DECISION IN THE CASE OF TUTICORN ALKALI CHEMICALS AND FERTILIZERS LTD. V. C. I.T. [227 ITR 172 (SC)J, WHEREIN ISSUE IN RESPECT OF ACCOUNTING ENTRY VIS-A-VIS DETERMINATION OF INCOME HAS BEEN DISCUSSED WHICH IS REPRODUCED HEREIN BELOW: - 'IT IS TRUE THAT THIS COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A COMP ANY OR VALUE OF THE ASSETS OF COMPANY. BUT WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIO NS FROM THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN ACCOR DANCE WITH ACCOUNTANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVE RRIDE SECTION 56 OR ANY OTHER PROVISIONS OF THE ACT. AS WAS POINTED OU T BY LORD RUSSELL IN THE CASE OF B.S.C. FOOTWEAR LTD. 91970) [77 ITR 8 57], 860 (CA), THE INCOME TAX LAW DOES NOT MARCH STEP BY STEP IN T HE FOOT STEPS OF THE ACCOUNTANCY PROFESSION. ' 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 23 RELIANCE IS ALSO PLACED ON THE FOLLOWING JUDGMENTS: (A) CIT V. INDIAN DISCOUNT CO. LTD. [75 ITR 191 (SC) ] (B) CIT V. MOGULLINES LTD. [46 ITR 590 (BOM)] (C) CIT V. SHOORJI VALLABHDAS & CO. [46 ITR 144 (SC) ] (D) CIT V. ASHOKBHAI CHIMANBHAI [56 ITR 42] (E) CIT V. KALOORAM GOVINDRAM (57 ITR 630 (SC)] (I) IT IS ALSO SUBMITTED THAT AS PER THE SCHEME OF INCOME TAX, ACTUALLY ACCRUED INCOME CAN BE BROUGHT TO TAX AND NOT THE HY POTHETICAL INCOME, WHICH HAS NOT ACCRUED, CAN BE BROUGHT TO TAX. RELIA NCE IS PLACED ON THE FOLLOWING JUDGMENTS: (A) STATE BANK OF TRAVANKORE V. CIT [158 ITR 102 (SC )] (B) GODHARA ELECTRICITY CO.LTD. V. CIT[225 ITR 746 ( SC)] (C) CIT V. BIRLA GWALIORLTD. [89 ITR 266 (SC)] (D) PUNE ELECTRIC SUPPLY CO. LTD. V. CIT [57 ITR 521 (SC) ; (J) IT IS ALSO POINTED OUT THAT SIMILAR ISSUE WA S INVOLVED IN ASSESSMENT YEAR 2001-02, 2002-03, 2003-04 AND 2004-05 AND THE LEARN ED CIT(A)-VIII, AHMEDABAD HAS DECIDED THE ISSUE IN OUR FAVOUR. IT IS THEREFORE REQUESTED NOT TO MAKE ANY ADDITION WITH THIS REGARD. 7.2 THE AO HAS NOT ACCEPTED THE EXPLANATION OF THE ASSESSEE AND STATED THAT IN VIEW OF THE DETAILED REASONS MENTIONED IN T HE ORDERS OF EARLIER YARS FOR AY 2001-02 TO AY 2004-05, THE ABOVE SUM OF RS.9 ,83,32,951/- WAS ADDED BACK TO THE TOTAL INCOME BEING THE EMI RESIDUAL NOT ACCOUNTED BY THE ASSESSEE AS INCOME. 7.3 THE LD. CIT(A) DELETED THE ADDITION ON THE BASI S OF FOLLOWING FINDINGS:- 8.5 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSIONS OF THE LD.A.R. CAREFULLY. THERE IS NO DISPUTE ABOUT THE FAC T THAT THE APPELLANT SOLD THE HOME LOAN PORTFOLIOS AND THE EMI RESIDUAL UNDER REFERENCE ARE RELATABLE TO FUTURE YEARS. THE INCOME ACCRUED DURING THE PERI OD UNDER REFERENCE HAS BEEN OFFERED IN THE STATEMENT OF INCOME. THE APPELL ANT WILL OFFER THE BALANCE OF EMI RESIDUARY IS FOR TAXATION IN THE YEARS TO FOLLO W. THEREFORE, UNDER THESE CIRCUMSTANCES, THERE DOES NOT APPEARS TO BE ANY JUS TIFICATION FOR TAXING THE FUTURE INCOME WHICH HAS NOT ACCRUED TO THE APPELLAN T DURING THE RELEVANT PERIOD, MERELY ON THE BASIS OF BOOK ENTRIES. 8.6 IT IS SEEN THAT SIMILAR ADDITION WAS MADE ON THE IDENTICAL FACTS IN THE INCOME OF THE APPELLANT IN THE A.YRS.2001-02 TO 2004 -05. THE ADDITIONS SO 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 24 MADE WERE DELETED BY MY LD. PREDECESSOR BY HIS APPE LLATE ORDERS FOR RESPECTIVE ASSESSMENT YEARS. MY LD. PREDECESSOR WHI LE DELETING THE ADDITION ON SIMILAR FACTS AND CIRCUMSTANCES IN THE A.Y.2003-0 4 OBSERVED AS UNDER: '3.1 AD ADDITION TO TAXABLE INCOME COULD BE MADE ONL Y ON THE CONCEPT OF REAL INCOME (ACCRUED INCOME) OR ON THE BASIS OF L EGAL FICTION. IN THIS CASE, IT IS NEITHER. WHATEVER ACCOUNTING ENTRIES TH EY HAVE MADE ARE OF NO RELEVANCE UNLESS THEY REPRESENT THE ACCRUAL OF I NCOME FOR THE RELEVANT YEAR. IN THE APPELLANT'S CASE, THE REAL IN COME ON THE BASIS OF ACCRUAL READ WITH THE AGREEMENT BETWEEN THE APPELLA NT AND HDFC HAS BEEN CORRECTLY OFFERED IN THE COMPUTATION STATEMENT AND NOTHING MORE IS REQUIRED TO BE ADDED. FURTHER, THE APPELLANT HAS NOT SOLD ITS HOUSING LOAN PORTFOLIO WITH BOTH PRINCIPAL AND FUTU RE INTEREST COMPONENTS. IT HAS ONLY SOLD THE PRINCIPAL LOAN PAR T OUTSTANDING AS ON THE DATE AT PAR AND THE FUTURE INTEREST COMPONENTS ARE TO BE RECOVERED FROM THE BORROWERS AND PASSED IT ON TO HDFC. HDFC H AS NOT PAID TO THE APPELLANT ANYTHING TO COVER THE FUTURE INTEREST ACCRUALS. AS SUCH THE OBSERVATION OF THE A.O. THAT THE ENTIRE INTEREST INCOME IS TAXABLE IN THIS YEAR IS OUT OF PLACE AND DOES NOT HAVE ANY LEG AL BASIS. 3.2 IT IS ALSO RELEVANT TO NOTE THAT SIMILAR ADDITI ONS HAVE BEEN DISALLOWED BY MY PREDECESSORS. NO NEW MATERIALS HAV E BEEN BROUGHT ON RECORD AND THE FACTUAL POSITION BEING IDENTICAL, I DO NOT FIND ANY REASON TO DIFFER WITH THE FINDINGS OF MY PREDECESSO RS ON THIS ISSUE. EVEN FOR THE SAKE OF ARGUMENT, IF THE ACCOUNTING EN TRIES WERE TO BE REJECTED AS IMPROPER, EVEN THEN ONLY THE ACCRUED IN COME WILL BE TAXED IN THIS YEAR AND THAT IS WHAT THE APPELLANT HAS ALR EADY OFFERED. THE AGREEMENT BETWEEN THE APPELLANT AND THE HDFC HAS TO BE UNDERSTOOD IN A HOLISTIC PERSPECTIVE AND ANY DISJOINTED VIEW W OULD LEAD TO INCORRECT UNDERSTANDING. IN THE LIGHT OF THE FOREGO ING DISCUSSIONS AND AS LAID DOWN BY THE APEX COURT CITED ABOVE (227 ITR 172), ADDITION MADE BY THE A.O. IN THIS CASE IS NOT SUSTAIN ABLE AN D I DIRECT HIM TO DELETE THE SAID ADDITION AS IT ONLY REPRESENTS INCO ME FOR THE FUTURE YEARS.' 8.7 IN VIEW OF THE ABOVE DISCUSSION, IT IS HELD THA T IN THE YEAR UNDER REFERENCE ONLY THE ACCRUED INCOME FOR THE RELEVANT PERIOD IS TO BE TAXED IN RESPECT OF LOAN PORTFOLIO SOLD TO HDFC AND BEING PART OF APPEL LANT SHARE. THE FUTURE SHARE OF THE APPELLANT SUBJECT TO RECOVERY DURING T HE UNEXPIRED PERIOD LOANS CANNOT BE TAXED AS FOR THE YEAR UNDER REFERENCE THE RE IS NO RIGHT TO RECEIVE THE SAID AMOUNT AS ON 31.3.2005 FROM ANYBODY, NOT EVEN FROM HDFC. IN VIEW OF THIS, THE A.O. IS DIRECTED TO DELETE THE ADDITION OF RS.9,83,32,951/-. THE APPELLANT SUCCEEDS IN THIS GROUND OF APPEAL. 7.4 THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THIS IS COV ERED ISSUE AND THE CO- 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 25 ORDINATE BENCH OF ITAT, AHMEDABAD IN ASSESSEES OWN CASE VIDE A COMBINED ORDER FOR AY 2004-05 AND 2000-01 IN ITA NO .2238/AHD/2007 AND 2601/AHD/2008 HAS CONFIRMED THE ORDER OF THE LD. CI T(A) IN WHICH THE SIMILAR ADDITION MADE BY THE ASSESSING OFFICER WAS DELETED. 7.5 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AS PER RECORD CAREFULLY. IT IS SEEN THAT THE IDENTICAL IS SUE WAS CONSIDERED BY THE CO- ORDINATE BENCH OF THE ITAT AS CITED ABOVE ON THE BA SIS OF SIMILAR ISSUE DECIDED BY THE ITAT IN THE AY 2001-02. THE FINDING S OF THE TRIBUNAL ON THIS ISSUE READ AS UNDER:- 5. AS FAR AS SECOND GROUND IS CONCERNED, AN IDENTIC AL ISSUE WAS CONSIDERED BY THE ITAT IN THE ASSTT.YEAR 2001-02. THE FINDING OF THE TRIBUNAL ON THIS ISSUE READS AS UNDER: 18. IN THE APPEAL FILED BY THE ASSESSING OFFICER, T HE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: THE LD. CIT(A) ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF EMI RESIDUAL ACCOUNT AMOUNTING TO RS.803.40 LACS, WITHOUT APPRECIATING THE DEFINITION OF INCOME AS EX PLAINED BY THE HONBLE SUPREME COURT IN THE CASE OF SHIV PRAKASH JA NAK RAJ & CO. REPORTED AT 222 ITR 583. 19. SO FAR AS THIS ISSUE IS CONCERNED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. DURING THE COURSE OF THE ASSESSMENT PROCEE DINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS SOLD IS PORTF OLIO OF INDIVIDUAL HOME LOANS AGGREGATING TO RS 8,109.09 LAKHS BUT THE ASSE SSEE IS OBLIGED TO ACT AS RECEIVING AND PAYING AGENT FOR EFFECTING RECOVER IES FROM THE INDIVIDUAL BORROWERS UNTIL THE POINT OF TIME WHEN ALL THESE LO ANS ARE FULLY RECOVERED. UNDER THIS ARRANGEMENT, THE ASSESSEE IS ENTITLED TO RETAIN INTEREST IN EXCESS OF THE AGREED RATE OF INTEREST RECOVERED FRO M THE BORROWERS. IT WAS IN THIS BACKDROP THAT THE ASSESSEE COMPUTED THE SUR PLUS OF RS 932.42 LAKHS BEING THE DIFFERENCE BETWEEN EMI RECOVERABLE FORM THE BORROWERS DURING THE REMAIN LOAN TENURE, AND THE AMOUNT PAYAB LE BY THE ASSESSEE TO THE BUYER OF ASSESSEES HOME LOAN PORTFOLIO. THIS R EPRESENTED, WHAT WAS TERMED AS, EMI RESIDUAL. OUT OF THIS AMOUNT, THE AS SESSEE FURTHER SET ASIDE A SUM OF RS 428.31 LAKHS ON ACCOUNT OF CONTIN GENCIES OF PRE- PAYMENTS. THE BALANCE AMOUNT OF RS 507.29 LAKHS WAS TRANSFERRED TO THE PROFIT AND LOSS ACCOUNT. IN THE COMPUTATION OF INCO ME, IT APPEARS, THAT THE ASSESSEE REDUCED THIS AMOUNT FROM NET PROFIT AND TH EN OFFERED ONLY RS 132.02 LAKHS AS INCOME OF THE RELEVANT YEAR. THIS C OMPUTATION WAS ON THE BASIS OF INCOME ACTUALLY EARNED SO FAR AS INTEREST DIFFERENTIAL WAS 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 26 CONCERNED. THE ASSESSING OFFICER, HOWEVER, WAS NOT S ATISFIED WITH THE SAME. HE WAS OF THE VIEW THAT ENTIRE DIFFERENCE BET WEEN RECOVERY VALUE OF HOUSING LOANS AND AMOUNT PAYABLE TO THE BUYER OF LO AN PORTFOLIO SHOULD BE BROUGHT TO TAX IN THIS YEAR ITSELF. HE ALSO HELD THAT EVEN THE AMOUNT OF CONTINGENCY SET ASIDE BY THE ASSESSEE AT RS 428.31 LAKHS COULD NOT BE ALLOWED AS IT IS ONLY A CONTINGENT, AND NOT REAL, L IABILITY. HE THUS PROCEEDED TO BRING TO TAX THE BALANCE AMOUNT OF RS. 803.40 LAKHS ( I.E. EMI RESIDUAL OF RS 935.42 LAKHS MINUS THE AMOUNT AL READY OFFERED TO TAX AMOUNTING TO RS 132.02 LAKHS) IN THIS ASSESSMENT YEA R. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER, ASSESSEE CA RRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO DELETED THE ADDITION ON THE GROUND THAT THE INCOME IS TO BE BROUGHT TO TAX ONLY WHEN IT ACCRUES AND THE ACCRUAL TAKES PLACE ONLY IN THE YEAR IN WHICH THE AMOUNTS RECOVER ED FROM THE BORROWERS ARE MORE THAN PAYABLE TO THE BUYER OF LOA N PORTFOLIO. IT WAS ALSO NOTED THAT THE EMI RESIDUAL INCOME HAS BEEN SU BSEQUENTLY BROUGHT TO TAX IN THE YEAR IN WHICH RELATED RECOVERIES HAVE TAKEN PLACE. THE ASSESSING OFFICER IS AGGRIEVED OF THE RELIEF SO GIVE N BY THE CIT(A) AND IS IN APPEAL BEFORE US. 20. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED T HE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 21. IN THE LANDMARK JUDGMENT OF CHAINRUP SAMPATRAM VS CIT [(1953) 24 ITR 481 (SC)], HONBLE SUPREME COURT HAS OBSERVE D THAT WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACCOUNT, ANTICI PATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BR OUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED P ROFIT BEFORE ITS ACTUAL REALISATION. THIS IS THE THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS T HE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMER CIAL PRACTICE AND ACCOUNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCI AL ACCOUNTING, UNLESS OF COURSE, SUCH PRINCIPLES HAVE BEEN SUPERSE DED OR MODIFIED BY LEGISLATIVE ENACTMENTS, UNREALISED PROFITS IN THE S HAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF AN AC COUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOUNT IN A B USINESS THAT IS CONTINUING ARE NOT BROUGHT INTO THE CHARGE AS A MAT TER OF PRACTICE, THOUGH, AS ALREADY STATED, LOSS DUE TO A FALL IN PR ICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALISED. THE PRINCIPLE IS THUS UNAMBIGUOUS. THE PRINCIPLES OF CONSERVATISM, AND CO NSIDERATIONS 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 A NTICIPATED LOSSES ARE 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 27 TAKEN INTO ACCOUNT AND ANTICIPATORY PROFITS ARE IGN ORED, BUT THAT IS THE IMPACT OF ACCOUNTING PRINCIPLES SANCTIONED BY THE S TATUTE AND THE LAW LAID DOWN BY HONBLE SUPREME COURT. NO MATTER HOW R EASONABLE IS IT TO ASSUME THAT THE ASSESSEE WILL MAKE THESE PROFITS, T HESE PROFITS CANNOT BE BROUGHT TO TAX AT THIS STAGE. THAT IS WHAT THE LEGA L 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 ARRANGEME NT, THESE PROFITS CAN ONLY BE BROUGHT TO TAX WHEN THESE ACTUALLY ACCRUE A ND ARISE AND THAT STAGE COMES ONLY WHEN THE RECOVERIES ARE MADE FROM THE INDIVIDUAL BORROWERS. IT IS ALSO NOT IN DISPUTE, IN THE LIGHT OF THE CATEGORICAL FINDING GIVEN BY THE CIT(A), THAT THE RELATED INCOMES ARE B ROUGHT TO TAX IN SUBSEQUENT PERIOD WHEN THESE INCOME ACCRUE AND ARIS E. AS FOR THE REFERENCE TO HONBLE SUPREME COURTS JUDGMENT IN TH E CASE OF CIT VS SHIV PRAKASH JANAK RAJ & CO PVT LTD [(1996) 222 ITR 5 83 (SC)], THAT WAS A CASE IN WHICH ACCRUAL HAD ADMITTEDLY TAKEN PL ACE. THAT IS NOT THE SITUATION BEFORE US. IN THESE CIRCUMSTANCES, WE SEE NO INFIRMITY IN THE WELL REASONED CONCLUSION ARRIVED AT BY THE CIT(A) A ND DECLINE TO INTERFERE IN THE MATTER. 23. THE APPEAL FILED BY THE ASSESSING OFFICER IS THU S DISMISSED. 24. TO SUM UP, FOR THE ASSESSMENT YEAR 2001-02 IN Q UANTUM ASSESSMENT PROCEEDINGS, WHILE THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED, THE APPEAL FILED BY THE ASSESSING OFFICER IS DISMISSED. 6. THERE IS NO DISPARITY OF FACTS. THE GROUND RAISE D BY THE AO IS IDENTICAL, AS WAS RAISED IN THE ASSTT.YEAR 2001-02. FOLLOWING THE DECISION OF THE CO- ORDINATE BENCH, WE DO NOT FIND ANY MERIT IN THIS GR OUND OF APPEAL, WHICH IS ACCORDINGLY REJECTED. 7.6 WE HAVE CONSIDERED THE SAME AND FOUND THAT THE GROUND RAISED BY THE AO ARE IDENTICAL AS WAS RAISED IN AY 2001-02 AN D IN AY 2000-01; AND FOLLOWING THE DECISION OF CO-ORDINATE BENCH WE DO N OT FIND ANY MERIT IN THE GROUND OF APPEAL OF REVENUE WHICH IS ACCORDINGLY RE JECTED. SIMILARLY, THE APPEAL OF THE DEPARTMENT ON THE IDENTICAL ISSUES OF EMI RESIDUAL FOR AY 2007-08 TO AY 2009-10 ARE ALSO REJECTED. 8. GROUND NO.2 OF THE REVENUES APPEAL FOR AY 2005- 06 READS AS UNDER:- THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN ALLOWIN G THE DISALLOWANCE OF RS.1,71,000/- MADE BY THE ASSESSING OFFICER UNDER TH E PROVISION OF SECTION 35D OF THE ACT. 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 28 8.1 IN THEIR RETURN OF INCOME THE ASSESSEE HAD CLAI MED DEDUCTION U/S 35D OF THE ACT AT RS.1,71,000/- BEING THE FCD ISSUE EXP ENDITURE; THE AO DISALLOWED THE CLAIM ON THE BASIS OF EARLIER YEARS DISALLOWANCE MADE ON THE SIMILAR GROUND. THE LD. CIT-DR CONTENDED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE REVENUE BY THE CO-ORDINATE BENCH OF ITAT ORDERS FOR AY 2000-01 DATED 11.07.2016 AND BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT. THE RELEVANT FINDINGS OF THE ITAT (SUPRA) READ AS UNDER:- 4. IT IS PERTINENT TO MENTION THAT SECTION 35D OF THE INCOME TAX ACT, PROVIDES THAT CERTAIN EXPENDITURE MENTIONED THEREIN INCURRED BEFORE THE COMMENCEMENT OF BUSINESS AND WHICH HAVE BEEN AMORTI ZED IS ALLOWED AS DEDUCTION. HOWEVER, AFTER THE BUSINESS HAS BEEN COM MENCED THE EXPENDITURE MENTIONED THEREIN CAN BE AMORTIZED AND ALLOWED DEDU CTION U/S.35D OF THE ACT ONLY IF THE SAID EXPENDITURE IS INCURRED IN CONN ECTION WITH THE EXTENSION OF INDUSTRIAL UNDERTAKING. IT EMERGES OUT FROM THE RECORD THAT THE ASSESSEE HAD INCURRED EXPENDITURE FOR ISSUANCE OF FULLY CONV ERTIBLE DEBENTURE. IT HAS CLAIMED 1/10 TH OF THE EXPENDITURE. IN THIS YEAR, S UCH EXPENDITURE WAS CLAIMED AT RS.11,63,048/-. THE LD.CIT(A) HAS ALLOWED THIS CLAIM OF THE ASSESSEE. HOWEVER, IN THE CASE OF GUJARAT AMBUJA COT SPIN VS. CIT, HONBLE JURISDICTIONAL HIGH COURT HAS HELD THAT EXPENDITURE INCURRED ON ISSUE OF CONVERTIBLE DEBENTURE IS A CAPITAL EXPENDITURE. IT CANNOT BE ALLOWED AS DEDUCTION. SIMILAR VIEW HAS BEEN TAKEN IN THE CASE OF TORRENT PHARMACEUTICALS LTD. VS. ACIT, 55 TAXMANN.COM 170 (G UJ). SINCE ASSESSEE HAS INCURRED THE EXPENDITURE ON ISSUE OF CONVERTIBL E DEBENTURE, WHICH IS DIRECTLY RELATED TO THE EXPANSION OF CAPITAL BASE O F THE COMPANY, THE HONBLE HIGH COURT HELD THAT SUCH EXPENDITURE IS TO BE TREA TED AS CAPITAL EXPENDITURE. THE LD. COUNSEL FOR THE ASSESSEE WAS UNABLE TO CONT ROVERT THIS CONTENTION OF THE LD. DR. WE, THEREFORE, ALLOW THIS GROUND OF APP EAL OF THE REVENUE AND SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ORDER OF THE AO ON THIS ISSUE. 8.2 WE HAVE CONSIDERED THE MATERIAL ON RECORD AND T HE LEGAL FINDINGS AND ACCORDINGLY, ALLOW THIS GROUND OF THE REVENUE AND R ESTORE THE ORDER OF THE ASSESSING OFFICER IN THIS ISSUE. 9. NOW, WE CONSIDER THE FOLLOWING PENALTY APPEALS: - ITA NO.614/AHD/2012 AY 2005-06, BY ASSESSEE ITA NO.625/AHD/2012 AY 2005-06, BY REVENUE 13 NOS GROUP OF ITAS ASSESSEE: GRUH FINANCE LTD 29 ITA NO.1198/AHD/2012 AY 2006-07, BY ASSESSEE ITA NO.1562/AHD/2012 AY 2006-07, BY REVENUE IN THE QUANTUM APPEALS FOR RESPECTIVE YEARS, WE HA VE DELETED THE RESPECTIVE ADDITIONS ON WHICH THE PENALTY HAS BEEN MADE. WHEN THE ADDITION IN RESPECT OF WHICH THE PENALTY IS SUSTAIN ED BY THE CIT(A) HAS BEEN DELETED BY THE ITAT, THE PENALTY IN RESPECT OF SUCH ADDITION CANNOT SURVIVE. THUS, THE APPEALS OF THE ASSESSEE IN THIS REGARD AR E ALLOWED AND THAT OF REVENUE ARE DISMISSED. 10. IN THE COMBINED RESULT, ASSESSEES APPEAL BEARI NG ITA NOS.1295/AHD/2009, 3338/AHD/2009, 3260/AHD/2010, 61 5/AHD/2012 & 1199/AHD/2012 ARE ALLOWED FOR STATISTICAL PURPOSES, REVENUES APPEALS BEARING ITA NOS.46/AHD/2011, 625/AHD/2012, 649/AHD/ 2012, 1562/AHD/2012 & 1163/AHD/2012 ARE DISMISSED; REVENU ES APPEAL BEARING ITA NO. 1556/AHD/2009 IS PARTLY ALLOWED AND ASSESSEES APPEAL BEARING ITA NOS. 614/AHD/2012 & 1198/AHD/2012 ARE A LLOWED. ORDER PRONOUNCED IN THE COURT ON 17 TH AUGUST, 2016 AT AHMEDABAD. SD/- SD/- (R.P. TOLANI) JUDICIAL MEMBER (AMARJIT SINGH) ACCOUNTANT MEMBER AHMEDABAD; DATED 17/08/2016 *BIJU T. / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD