Asmitha Microfin Limited, Hyderabad V. The Addl.CIT, Range-1, Hyderabad

ITA 137/HYD/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87257 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 07-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Business expenditure; Bad and doubtful debts; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 137/HYD/2013 ASSESSMENT YEAR: 2009-10 ASMITHA MICROFIN LTD., HYDERABAD [PAN: AADCA 9399 Q] VS ADDL. COMMISSIONER OF INCOME TAX, RANGE-1, HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI S. RAMA RAO, AR FOR REVENUE : SHRI D. SUDHAKAR RAO, DR DATE OF HEARING : 26 - 11 - 201 4 DATE OF PRONOUNCEMENT : 30 - 01 - 20 15 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN ASSESSEE'S APPEAL FILED AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-II, HYDERABAD D ATED 16-10-2012. ASSESSEE RAISED THE FOLLOWING TWO GROUNDS WHICH ARE RELEVANT FOR CONSIDERATION IN THIS APPEAL: I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN L AW, BY CONFIRMING THAT SURPLUS ON VALUE REALIZED, AGGREGAT ING TO RS.13,09,44,315/- BEING THE GROSS FUTURE RECEIVABLE VALUE OF I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 2 -: INTEREST, (TO THE EXTENT NOT ACCRUING UPTO THE END OF THE FINANCIAL YEAR) BY THE DISCOUNTING OF THE MATURIT Y VALUE OF LOAN PORTFOLIO OF RS.3,02,40,48,665/- ON ASSIGNMENT OF THE SAID VALUE OF LOAN PORTFOLIO TO COMMERCIAL BANKS AS INCOME ACCRUING DURING THE YEAR. II. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COM MISSIONER OF INCOME TAX (APPEALS) HAS ALSO ERRED IN LAW, IN C ONFIRMING THE DISALLOWANCE OF RS.3,22,00,000/- BEING THE VALU E OF EMPLOYEE STOCK OPTION GRANTED AND OPTED BY THE EMPL OYEES, NOT A BUSINESS EXPENDITURE AND AS A NOTIONAL CAPITA L EXPENDITURE. 2. BRIEFLY STATED, ASSESSEE IS A MICRO FINANCE INST ITUTION AND FILED RETURN OF INCOME DECLARING RS.35,29,35,971/-. IN T HE SCRUTINY OF RETURN, ASSESSING OFFICER NOTICED THAT ASSESSEE DID NOT OFF ER ENTIRE GAINS RECEIVED ON SALE OF PORTFOLIO LOANS BUT AMORTIZED THE SAME A ND OFFERED ONLY PART GAIN DURING THE YEAR. HE ALSO NOTICED THAT ON ONE CLOSED LOAN PORTFOLIO SOLD TO HDFC BANK ENTIRE GAIN WAS OFFERED TO TAX. IN ADDITION TO THE ISSUE OF GAIN ON SALE OF LOAN PORTFOLIO, ASSESSING OFFICER ALSO DISALLOWED CLAIM OF EXPENDITURE ON ACCOUNT OF ESOPS TO AN EXTE NT OF RS.3,22,00,000/-. THE LD.CIT(A) CONFIRMED THE ADDI TIONS OF THE ABOVE AMOUNTS, HENCE ASSESSEE IS IN APPEAL. 3. WE HAVE HEARD THE LD.COUNSEL FOR ASSESSEE AND LD .DR IN DETAIL AND PERUSED THE PAPER BOOK PLACED ON RECORD. 4. GROUND NO.1 IS ON THE ISSUE OF CONFIRMING AN AM OUNT OF RS.13,09,44,315/- BEING THE AMOUNT RECEIVED BY DISC OUNTING THE MATURITY VALUE OF LOAN PORTFOLIO ON ASSIGNMENT TO C OMMERCIAL BANKS AS INCOME DURING THE YEAR. ASSESSEE BEING MICRO FINAN CE INSTITUTION, SELLS ITS LOAN PORTFOLIOS TO COMMERCIAL BANKS FOR OBTAINI NG CAPITAL REFINANCING FUNDS. AS A PART OF THE BUSINESS ACTIVITY, THE EXI STING LOAN PORTFOLIOS ARE BUNDLED AND SOLD TO SCHEDULE COMMERCIAL BANKS SO TH AT ASSESSEE I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 3 -: RECEIVES REVOLVING CREDIT LIMITS IN ITS BUSINESS. AS PER THE PRACTICE, ASSESSEE SOLD ITS EXISTING LOAN PORTFOLIOS TO AN EX TENT OF RS.302.40 CRORES DURING THE YEAR INCLUDING THE FUTURE INTEREST RECEI VABLES. ASSESSEE OFFERED GAIN DURING THE YEAR, ON PROPORTIONATE BASI S OUT OF FUTURE RECEIVABLE INTEREST AND AMORTIZED BALANCE OF THE AM OUNT TO AN EXTENT OF RS.13,09,44,315/- TO LATER YEARS, ON THE REASON THA T THE AMOUNT TO THAT EXTENT BEING ON THE GROSS FUTURE RECEIVABLE VALUE O F INTEREST HAS NOT ACCRUED UP TO THE END OF FINANCIAL YEAR. SINCE THE AMOUNT WAS DISCOUNTED ONLY, THE GAIN ON VALUE OF AMOUNT PERTAI NING TO THE ACCRUED INTEREST WAS OFFERED AS INCOME AND THE BALANCE AMOU NT ON THE FUTURE RECEIVABLES IN THE NEXT FINANCIAL YEAR WAS DEFERRED TO THE LATER YEAR. ASSESSING OFFICER AFTER EXAMINING THE CLAUSES OF TH E AGREEMENT, GUIDANCE NOTE OF ICAI ON ACCOUNTING OF SECURITIZATION OF ASS ETS AND ALSO THE AGREEMENTS ENTERED BY ASSESSEE WITH THE COMMERCIAL BANKS FOR PORTFOLIO BUYOUT, COLLECTION AGENTS AGREEMENT HAS COME TO CON CLUSION THAT ASSESSEE HAS POSTPONED THE REVENUE OF THE ABOVE AMO UNT WITHOUT VALID REASONS AND IN VIOLATION OF GUIDANCE NOTE ON SECURI TIZATION OF ASSETS. HIS CONCLUSIONS IN PARA V IN PAGE 4 OF THE ORDER IS AS UNDER: 'A) THE TRANSACTION IS A COMPLETE BUYOUT OF LOAN PO RTFOLIO BY THE BANKERS AND THE ASSET IS DERECOGNIZED FROM THE BOO KS OF THE ASSESSEE; B) THE COLLECTION AGENT'S AGREEMENT FIXES CERTAIN FEE FOR COLLECTION AND ATTENDANT WORK AND IT IS FOR THE ASSESSEE TO T AKE A DECISION WHETHER HE SHOULD INCUR HUGE COST FOR DOING WORK F OR A NOMINAL FEE OR NOT. MERELY, BECAUSE HUGE COSTS ARE INVOLVED I N COLLECTION WORK, THE TRANSACTION CANNOT BE TREATED AS A SERVICE STR IP TRANSACTION. C) THE AGREEMENT FOR PORTFOLIO BUYOUT AND COLLECTI ON ARE SEPARATE AND DISTINCT. THE SALE OF PORTFOLIO IS UNCONDITIO NAL. AS PER PARA 6 OF THE GUIDANCE NOTE, SERVICING OF THE ASSET BY ITSEL F CAN NOT LEAD TO A SITUATION OF PARTIAL DE-RECOGNITION OF ASSET AND T HEREBY REVENUE FROM THE ASSET; I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 4 -: D) THE PROCEDURE PRESCRIBED FOR COLLECTION AND THE COSTS INVOLVED IN SERVICE ARE NOT MATERIAL FOR RECOGNITION OF REVENU E FROM THE SALE OF PORTFOLIO; E) THE DIFFICULTY IN ESTIMATION OF SERVICING COSTS OR OBLIGATION TO SERVICE THE PORTFOLIO ARE NOT RELEVANT FOR RECOGNI TION OF REVENUE FROM SALE OF PORTFOLIO AS BOTH ARE DISTINCT AND SEPARAT E FUNCTIONS PERFORMED BY THE ASSESSEE; F) THE INTEREST INCOME RECEIVED ON SALE OF PORTFOL IO HAS NO LINK WITH SERVICE COST. ALSO, THERE IS NO INTEREST STRIP OR SERVICE STRIP IN THE AGREEMENT TO SELL THE PORTFOLIO; G) KEEPING OF CASH COLLATERALS (10% OF THE VALUE O F PURCHASE CONSIDERATION AS WELL AS PART OF THE COLLECTION AM OUNTS IN EXCESS OF PRINCIPAL) INDICATES ONLY A CONTINGENT LIABILITY. THE SECOND PART OF THE CASH COLLATERAL IS OUT OF THE FUNDS BELONGING TO THE ASSIGNEE ONLY. ONLY THE FIRST PART IS OUT OF THE AMOUNTS RECEIVED BY THE ASSESSEE. NO ONE PREVENTS THE ASSESSEE IN CLAIMING TRADING L OSS, IF ANY TIME, THE CASH COLLATERAL IS LIQUIDATED. IN THE PRESENT CASE, EVEN SUCH LIQUIDATION NEVER HAPPENED; H) THE STATEMENT THAT EVEN IF BORROWINGS ARE NOT R EALIZED, THE ASSESSEE MEETS THE OBLIGATIONS IN PRACTICE IS ONLY A SELF-SERVING STATEMENT. AS PER THE AGREEMENT, THERE IS NO BINDI NG ON THE ASSESSEE TO PAY ITS OWN AMOUNTS WHEN LOANS ARE NOT COLLECTED FROM THE BORROWERS. IF FOR THE SAKE OF ITS CONVENIENCE , THE ASSESSEE ADOPTS A PRACTICE (SUBJECT TO PROOF), THIS DOES NO T MEAN THAT THE REVENUE HAS TO BE DEFERRED. 5. ASSESSEE CARRIED THE MATTER TO LD.CIT(A) AND GAV E DETAILED SUBMISSIONS MAINLY RELYING ON THE ACCOUNTING PRINCI PLES BEING FOLLOWED AND ACCOUNTING STANDARDS AND GUIDANCE NOTE ISSUE BY THE ICAI PARTICULARLY AS-9 ON REVENUE RECOGNITION. LD.CIT(A ) AFTER CONSIDERING THE DETAILED SUBMISSIONS AND VARIOUS CLAUSES OF THE AGREEMENT, HOWEVER, DID NOT AGREE WITH THE CONTENTIONS AND SUMMED UP TH E ISSUE AS UNDER VIDE PARA 4.10 OF THE ORDER. A) THE TRANSACTION IS A COMPLETE BUYOUT OF LOAN PO RTFOLIO BY THE BANKERS AND THE ASSET IS DERECOGNIZED FROM THE BOO KS OF THE ASSESSEE; I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 5 -: B) THE COLLECTION AGENT'S AGREEMENT FIXES CERTAIN FEE FOR COLLECTION AND ATTENDANT WORK AND IT IS FOR THE ASSESSEE TO T AKE A DECISION WHETHER HE SHOULD INCUR HUGE COST FOR DOING WORK F OR A NOMINAL FEE OR NOT. MERELY, BECAUSE HUGE COSTS ARE INVOLVED I N COLLECTION WORK, THE TRANSACTION CANNOT BE TREATED AS A SERVICE STR IP TRANSACTION; C) THE AGREEMENT FOR PORTFOLIO BUYOUT AND COLLECTI ON ARE SEPARATE AND DISTINCT. THE SALE OF PORTFOLIO IS UNCONDITIO NAL. AS PER PARA 6 OF THE GUIDANCE NOTE, SERVICING OF THE ASSET BY ITSEL F CAN NOT LEAD TO A SITUATION OF PARTIAL DE-RECOGNITION OF ASSET AND T HEREBY REVENUE FROM THE ASSET; D) PORTFOLIO SELL OUT HAS BEEN REDUCED FROM THE CU RRENT ASSETS IN THE BALANCE SHEET OF THE APPELLANT; E) THE PROCEDURE PRESCRIBED FOR COLLECTION AND THE COSTS INVOLVED IN SERVICE ARE NOT MATERIAL FOR RECOGNITION OF REVENU E FROM THE SALE OF PORTFOLIO; F) CLAUSE 9 REPRODUCED ABOVE SHOWS CLEARLY HOW THE TRANSACTION TO BE TREATED ONLY WHEN IN PARTIAL DERECOGNITION TH E EXPENDITURE AND CONSIDERATION NEED TO BE AMORTISED OVER THE TERM O F SECURED BORROWING OR RECOGNIZED IMMEDIATELY IN THE STATEME NT OF P&L AND NOT IN TOTAL DERECOGNITION. G) THE DIFFICULTY IN ESTIMATION OF SERVICING COSTS OR OBLIGATION TO SERVICE THE PORTFOLIO ARE NOT RELEVANT FOR RECOGNI TION OF REVENUE FROM SALE OF PORTFOLIO AS BOTH ARE DISTINCT AND SEPARAT E FUNCTIONS PERFORMED BY THE ASSESSEE; H) THE INTEREST INCOME RECEIVED ON SALE OF PORTFOL IO HAS NO LINK WITH SERVICE COST. ALSO, THERE IS NO INTEREST STRIP OR SERVICE STRIP IN THE AGREEMENT TO SELL THE PORTFOLIO; I) KEEPING OF CASH COLLATERALS (10% OF THE VALUE O F PURCHASE CONSIDERATION AS WELL AS PART OF THE COLLECTION AM OUNTS IN EXCESS OF PRINCIPAL) INDICATES ONLY CONTINGENT LIABILITY. T HE SECOND PART OF THE CASH COLLATERAL IS OUT OF THE FUNDS BELONGING TO T HE ASSIGNEE ONLY. ONLY THE FIRST PART IS OUT OF THE AMOUNTS RECEIVED BY THE ASSESSEE. NO ONE PREVENTS THE ASSESSEE IN CLAIMING TRADING L OSS, IF ANY TIME, THE CASH COLLATERAL IS LIQUIDATED. IN THE PRESENT CASE, EVEN SUCH LIQUIDATION NEVER HAPPENED; J) THE STATEMENT THAT EVEN IF BORROWINGS ARE NOT R EALIZED, THE ASSESSEE MEETS THE OBLIGATIONS IN PRACTICE IS ONLY A SELF-SERVING I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 6 -: STATEMENT. AS PER THE AGREEMENT, THERE IS NO BIND ING ON THE ASSESSEE TO PAY ITS OWN AMOUNTS WHEN LOANS ARE NOT COLLECTED FROM THE BORROWERS. IF FOR THE SAKE OF ITS CONVENIENCE , THE ASSESSEE ADOPTS A PRACTICE (SUBJECT TO PROOF), THIS DOES NO T MEAN THAT THE REVENUE HAS TO BE DEFERRED. K) AS PER COLLECTION AGENT AGREEMENT THE GROUNDS ON WHICH THE COLLECTION AGENT IS TREATED AS DEFAULTER DOES NOT SPEAK OF MAKING IT LIABLE FOR THE NON-RECOVERY OF LOANS. ONLY THING REQUIRED IS TO REMIT THE AMOUNTS REALIZED/COLLECTED TO THE ASSIGNEE'S O N THE PAYOUT DATES. 6. LD.COUNSEL REFERRING TO THE ORDERS OF AUTHORITIE S AND THE PAPER BOOK FILED, EXPLAINED THAT ASSESSEE SELLS THE LOAN PORTFOLIO TO THE BANKS AND OBTAINS REVOLVING CREDIT. AS A PART OF THE BUY OUT, ASSESSEE HAS TO KEEP CERTAIN DEPOSITS WITH THE BANKS TO THE EXTENT OF 10% ON THE CAPITAL ADVANCED AND ALSO TO THE EXTENT OF 10% ON THE DISCO UNT VALUE OF FUTURE RECEIVABLES. REFERRING TO ACCOUNT POLICIES BEING FO LLOWED AND THE GUIDELINES ISSUED, IT WAS THE SUBMISSION THAT EVEN THOUGH ASSESSEE HAS DISCOUNTED THE LOAN PORTFOLIO AND RECEIVABLE INTERE ST ON THE LOAN PORTFOLIO TO THE EXTENT OF INTEREST RECEIVABLE DURING THE YEA R WAS ONLY CONSIDERED FOR THE PURPOSE OF OFFERING GAIN, WHEREAS THE GAIN ATTRIBUTABLE TO FUTURE INTEREST I.E., INTEREST ACCRUING LATER ACCOUNTING Y EAR WAS OFFERED IN THAT YEAR. IT WAS SUBMITTED THAT ONE LOAN PORTFOLIO TO HDFC BANK AND DCB BANK WERE CLOSED DURING THE YEAR. THEREFORE, THE E NTIRE GAIN WAS OFFERED TO TAX DURING THE YEAR AS NOTED BY THE ASSESSING OF FICER IN PAGE 2 OF THE ORDER. HOWEVER, IT WAS SUBMITTED THAT EVEN THOUGH THE LOAN PORTFOLIOS WERE SOLD TO THE BANKS, MORE PARTICULARLY TO ICICI BANK, ASSESSEE WAS ASSIGNED THE JOB OF COLLECTING AMOUNTS AND REMITTIN G IT TO THE BANK ON WHICH ASSESSEE GETS COMMISSION. IN THE CASE OF ANY DEFAULT ON THE LOAN PORTFOLIO, THERE IS LIABILITY ON THE ASSESSEE AND T HEREFORE ON PRUDENTIAL REVENUE RECOGNITION NORMS, ENTIRE INCOME CANNOT BE OFFERED TO TAX. IT WAS FURTHER SUBMITTED THAT SAME PRINCIPLE IS BEING FOLLOWED YEAR AFTER I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 7 -: YEAR AND THE REVENUE HAS ACCEPTED THE SAME UP TO AY .2007-08. IT WAS FURTHER SUBMITTED THAT THERE IS NO LOSS TO THE REVE NUE AS INCOME IS OFFERED IN THE IMMEDIATELY SUCCEEDING YEAR AND OFFE RED THE SAME AND GENERALLY DOES NOT GO MORE THAN TWO YEARS. LD.COUN SEL ALSO SUBMITTED THAT THE PORTFOLIO SALE IS CONDITIONAL AND THE PRIN CIPAL AMOUNT AND FUTURE INTEREST ARE DISCOUNTED SEPARATELY. IN SUPPORT OF THE ENTRIES PASSED, ASSESSEE PLACED ON RECORD THE ENTRIES PASSED IN ONE PORTFOLIO SALE IN ORDER TO EXPLAIN HOW INCOME IS CONSIDERED ACCRUED , ONLY TO THE EXTENT OF INTEREST ACCRUING DURING THE FINANCIAL YEAR. IT WA S SUBMITTED THAT IF THE PORTFOLIO LOAN WAS FOR A PERIOD OF TWELVE MONTHS AN D IF PART OF THE INTEREST FALLS IN THE LATER ACCOUNT YEAR, THEN WHEN THE SAME WAS DISCOUNTED, THE GAIN ON THE INTEREST ACCRUING DURING THE YEAR WAS O NLY CONSIDERED AS INCOME AND THE BALANCE IS OFFERED IN THE LATER YEAR . SINCE THERE IS NO REVENUE LOSS OVER A PERIOD OF TIME, ASSESSING OFFIC ER'S ADDITION IS NOT CORRECT TO THAT EXTENT. HE ALSO EXPLAINED THE PRIN CIPLES INVOLVED IN SECURITIZATION OF ASSETS AND AS-9 WHICH ASSESSEE I S FOLLOWING. 7. LD.DR HOWEVER, RELIED ON THE DETAILED ANALYSIS M ADE BY THE ASSESSING OFFICER AND LD.CIT(A). 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DO CUMENTS AND AGREEMENT PLACED ON RECORD. THERE IS NO DISPUTE WI TH REFERENCE TO THE FACT THAT ASSESSEE HAS TRANSFERRED BY WAY OF DIRECT ASSIGNMENT TO AND IN FAVOUR OF BANKS (PURCHASER), CERTAIN IDENTIFIED LOA N RECEIVABLES TOGETHER WITH ALL RIGHTS AND INTEREST RECEIVABLE FOR A PURCH ASE CONSIDERATION PAID BY THE PURCHASER UPON EXECUTION OF DEED AND ASSIGNM ENT. THE PURCHASE CONSIDERATION IS GENERALLY ARRIVED AT BY CALCULATIN G THE VALUE OF RECEIVABLES BASED ON DISCOUNTED CASH FLOW METHOD WH ICH IS EQUIVALENT TO INTEREST RATE, IF IT IS VIEWED AS A BORROWING. ASS ESSEE ALSO SIGNED AN AGREEMENT TO COLLECT THE RECEIVABLES ASSIGNED AND E NSURING THE PAYMENT I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 8 -: OF THE SAME TO THE BANKS ON SPECIFIED DATES EVERY M ONTH. IT IS THE CONTENTION THAT ASSIGNMENT OF LOANS HAS BEEN ACCRUI NG IN ACCORDANCE WITH AS-9 WHICH COVERS REVENUE RECOGNITION NORMS, G UIDANCE NOTE ON ACCOUNTING FOR SECURITIZATION ISSUED BY THE ICAI AN D KEEPING IN VIEW AN IMPORTANT PRINCIPLE OF ACCOUNTING I.E., MATCHING PR INCIPLES. ASSESSEE MAINLY CONSIDERS PARA 5 OF THE AS-9 ON REVENUE RECO GNITION WHICH IS MAINLY CONCERNED WITH THE TIMING OF RECOGNITION OF REVENUE, THE STATEMENT OF PROFIT AND LOSS OF AN ENTERPRISE. IT IS THE ARGUMENT THAT WHEN UNCERTAINTIES EXIST REGARDING DETERMINATION OF THE AMOUNT OR ITS ASSOCIATED COSTS, THESE UNCERTAINTIES MAY INFLUENCE THE TIMING OF REVENUE RECOGNITION. IT IS ALSO THE CONTENTION THAT CONSID ERATION RECEIVED TOGETHER WITH THE NOMINAL FEE FOR SERVICES IS TO BE MATCHED AGAINST DISCOUNTING CHARGES, WHICH IS AKIN TO INTEREST, SERVICING COST AND LOAN ARISING OF DEFAULT BY END BORROWERS. IN THE YEAR UNDER CONSID ERATION, THE TOTAL PURCHASE CONSIDERATION WAS RS.302.40 CRORES WHICH I NCLUDES DISCOUNTED VALUE OF FUTURE INTEREST RECEIVABLES TO AN EXTENT OF RS.18.87 CRORES. OUT OF THIS, RS.5.78 CRORES WERE AMORTIZED AND RECOGNIZED DURING THE FY.2008-09 ( THIS AY) AND BALANCE AMOUNT OF RS.13.09 WAS RECOGNIZED SUBSEQUENTLY IN THE PREVIOUS YEAR 2009-1 0 I.E., NEXT ASSESSMENT YEAR. 9. IN ORDER TO UNDERSTAND THE ISSUE, THE ACCOUNTING ENTRIES PASSED BY ASSESSEE WERE PLACED ON RECORD. FOR THE SAKE OF EX PLANATION, THE SALE OF PORTFOLIO IN ICICI 6A, DT.19-03-2009 WERE EXPLAINE D. ( IN RS) DATE OF TRANSACTION : 19 - 03 - 2009 BOOK VALUE OF THE LOAN 22,79,34,100 FUTURE INTEREST 2,96,16,526 DISCOUNTING CHARGES 1,41,74,070 PURCHASE CONSIDERATION RECEIVED 24,33,76,556 NET GAIN ON TRANSACTION 1,54,42,456 UN AMORTIZED GAIN 1,54,42,456 I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 9 -: 10. THUS, AS CAN BE SEEN FROM THE ABOVE, ON A BOOK VALUE OF RS.22.79 CRORES LOAN PORTFOLIO AND FUTURE INTEREST RECEIVABL E ON THE ABOVE LOAN OF RS.2.96 CRORES, ASSESSEE ENTERED INTO AGREEMENT FOR SALE AND RECEIVED PURCHASE CONSIDERATION OF RS.24.34 CRORES. ASSESSE E RECEIVED GAIN OF RS.1,54,42,456/- AND THE ENTIRE AMOUNT WAS DEFERRED TO LATER YEAR. THE ENTRIES PASSED BY ASSESSEE IN THIS REGARD ARE AS UN DER: DATE PARTICULARS DR./ CR. AMOUNT RS. AMOUNT RS. REMARKS 19- MAR-09 FOR AMOUNT RECEIVED FROM ICICI BANK T/WS PORTFOLIO ASSIGNMENT ENTRY PASSED WHEN ASSIGNMENT TAKES PLACE ICICI BANK (BANK) A/C DR 20,17,26,102 ICICI BUYOUT LOAN 2 (LOAN) A/C CR 20,17,26,102 (AMOUNT RECEIVED FROM ICICI BANK T/WS PORTFOLIO ASS IGNMENT) 19- MAR-09 FOR CASH COLLATERAL -1 (10% OF PURCHASE CONSIDERATI ON) KEPT WITH ICICI BANK AND RELEASED ONLY AFTER COMPLETION OF THE TENURE FIXED DEPOSIT PLEDGED WITH ICICI BANK LTD DR 2,43,37,656 ENTRY PASSED WHEN ASSIGNMENT TAKES PLACE ICICI BUYOUT LOAN 2 (LOAN) A/C CR 2,43,37,656 (10% OF PURCHASE CONSIDERATION KEPT WITH ICICI BANK AS CASH COLLATERAL, WHICH IS TO BE RELEASED ONLY ON COMPLETION OF THE TENURE) 19- MAR-09 FOR CASH COLLATERAL -2 (PURCHASE CONSIDERATION MINUS BOOK VALUE) KEPT WITH ICICI BANK AND RELEASED IN 9 MONTHLY INSTALMENTS FIXED DEPOSIT PLEDGED WITH ICICI BANK LTD., DR 1,54,42,466 ENTRY PASSED WHEN ASSIGNMENT TAKES PLACE ICICI BUYOUT LOAN 2(LOAN) A/C CR 1,54,42,466 (DIFFERENCE OF AMOUNT FROM PURCHASE CONSIDERATION T O BOOK VALUE WILL KEPT AS CC-2 AND RELEASED IN MONTHLY RESTS) 19- MAR-09 FOR BROKEN PERIOD INTEREST CHARGED BY BANK ENTRY PASSED WHEN ASSIGNMENT TAKES PLACE INTEREST- ICICI BUY OUT DR 18,70,332 ICICI BUYOUT LOAN 2 (LOAN) A/C CR 18,70,332 (BROKEN PERIOD INTEREST CHARGED BY BANK) 19- MAR-09 FOR TRANSFERRING OF PORTFOLIO FROM AML BOOKS ENTRY PASSED WHEN ASSIGNMENT TAKES PLACE ICICI BUYOUT LOAN 2 (LOAN) A/C DR 22,79,34,100 LOAN TO MEMBERS A/C CR 22,79,34,100 (PORTFOLIO OF AML IS TRANSFERRED FROM THE BOOKS) 19- MAR-09 FOR BOOKING OF NET GAIN (FUTURE INTEREST MIMUS DISCOUNTING CHARGES) ICICI BUYOUT LOAN 2 (LOAN) A/C DR. 1,54,42,456 ENTRY PASSED I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 10 -: UNAMORTIZED GAIN ON ASSIGNMENT (LIABILITY) A/C CR 1,54,42,456 WHEN ASSIGNMENT TAKES PLACE 30-APR- 09 FOR BOOKING OF NET GAIN RELATED TO CURRENT FINANCIA L YEAR SIMILARLY ENTRIES ARE PASSED EVERY MONTH FOR TRANSFERRING GAIN FROM UNAMORTIZE D GAIN ON PROPORTION BASIS TILL THE COMPLETION OF TENURE UNAMORTIZED GAIN ON ASSIGNMENT (LIABILITY) A/C DR. 7,88,164 GAIN ON ASSIGNMENT A/C CR 7,88,164 (BOOKING OF GAIN FROM UNAMORTIZED GAIN FOR FIRST MO NTH) 31- MAR-09 BANK A/C DR DR 5,13,17,763 SIMILARLY ENTRIES ARE PASSED EVERY MONTH FOR TRANSFERRING AMOUNTS COLLECTED FROM CLIENTS TO BANK ICICI BUYOUT LOAN RECOVERY (LIABILITY CR 5,13,17,763 MONTHLY DUE COLLECTED FROM CLIENTS IS KEPT AS LIABI LITY 10- MAY-09 ICICI BUYOUT LOAN RECOVERY (LIABILITY) DR. 5,13,17,763 CR 5,13,17,763 15- MAY-09 MATURITY OF FD KEPT AS CASH COLLATERAL -2 SIMILARLY ENTRIES ARE PASSED EVERY MONTH ON MATURITY OF FD'S PLACED WITH ICICI BANK TILL THE COMPLETION OF TENURE ICICI BANK (BANK) DR 15,04,878 FIXED DEPOSIT PLEDGED WITH ICICI BANK LTD CR 15,04,878 (FIRST MONTH MATURITY AMOUNT RECEIVED, FD PLEDGED B Y ICICI BANK FOR LOAN 6) 15- MAR-10 MATURITY OF FD KEPT AS CASH COLLATERAL -1 THIS ENTR Y PASSES ONLY AFTER COMPLETION OF THE TENURE FOR RELEASING OF FD KEPT AS CC-1 WITH ICICI BANK ICICI BANK (BANK) DR 2,61,08,294 FIXED DEPOSIT PLEDGED WITH ICICI BANK LTD CR 2,43,37,656 INTEREST ON FD CR 17,70,638 (MATURITY AMOUNT RECEIVED AGAINST FD PLEDGED WITH ICICI BANK ON COMPLETION OF THE LOAN TENURE) 11. AS CAN BE SEEN FROM THE ABOVE, ASSESSEE'S BOOK VALUE AND THE FUTURE INTEREST RECEIVABLE TOTALING TO RS.25,75,50, 626/- OUT OF WHICH DISCOUNT WAS GIVEN TO AN EXTENT OF RS.1,41,74,070/- AND MAINLY ON I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 11 -: FUTURE INTEREST RECEIVABLES. THUS, OUT OF THE INTE REST RECEIVABLES OF RS.2,96,16,526/- AS FUTURE INTEREST, ASSESSEE DISCO UNTED THE SAME FOR AN AMOUNT OF RS.1,41,74,070/- AND RECEIVED THE GAIN OF RS.1,54,42,456/-. THUS, SHORT OF THE ACCOUNTING ENTRIES MADE, THE BAS IC PRINCIPLE INVOLVED IN THIS SALE OF PORTFOLIO IS THAT AS FAR AS PRINCIP AL AMOUNT IS CONCERNED, NO DISCOUNT WAS CONSIDERED AS THE ENTIRE PORTFOLIO WAS GIVEN AT THE BOOK VALUE ONLY. ONLY INTEREST RECEIVABLE SOLD TO THE P URCHASER, HOWEVER, WAS DISCOUNTED. THUS, AS SEEN FROM THE ABOVE EXAMPLE O UT OF RS.2.96 CRORES RECEIVABLE, ASSESSEE DISCOUNTED TO AN EXTENT OF RS. 1.41 CRORES AND SHOWED THE GAIN OF RS.1.54 CRORES. IT IS ASSESSEE' S CONTENTION THAT THE ENTIRE AMOUNT OF RS.2.96 CRORES, BEING FUTURE INTER EST RECEIVABLE, IS NOT ACCRUING DURING THE YEAR. THEREFORE, THE GAIN ON D ISCOUNTING OF THAT IS NOT AN AMOUNT ACCRUED DURING THE YEAR AND SO, THE S AME IS DEFERRED TO LATER YEAR. IT IS THIS AMOUNT WHICH IS UNDER DISPU TE. AS THIS TRANSACTION GIVEN AS AN EXAMPLE ABOVE HAS OCCURRED ON 19 TH MARCH 09 AND AS NO INTEREST IS RECEIVABLE DURING THAT MONTH, ASSESSEE HAS DEFERRED THE ENTIRE AMOUNT OF GAIN TO THE LATER YEAR. THERE ARE MANY S UCH TRANSACTIONS ENTERED REGULARLY BY ASSESSEE DURING THE COURSE OF YEAR AND TO THE EXTENT OF AMOUNT DISCOUNTED, ASSESSEE IS ACCORDINGLY OFFER ING INCOME ON THE PROPORTION OF INTEREST ACCRUED DURING THE YEAR. 12. THIS SYSTEM OF ACCOUNT BEING DONE BY ASSESSEE I S MORE OR LESS SIMILAR TO THE BILL DISCOUNTING SYSTEM, WHICH IS GE NERALLY FOLLOWED BY MANY IN THE BUSINESS. IN THE BILL DISCOUNTING SYST EM, A PERSON WHO DISCOUNTS THE BILL TAKES THE INTEREST AMOUNT UPFRON T 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 TRANSA CTION HAS NOT ACCRUED AS THE FUTURE INTEREST RECEIVABLE IS NOT AN ACCRUED INCOME. HOWEVER, THIS ASPECT CANNOT BE ACCEPTED AS ASSESSEE HAS RECEIVED THE I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 12 -: DISCOUNTED AMOUNT AS A PART OF SALE CONSIDERATION. EVEN THOUGH, THERE ARE CERTAIN DEPOSITS KEPT WITH THE BANKS FOR THE PU RPOSE, THE FACT IS THAT OUT OF THE TOTAL PORTFOLIO INCLUDING THE FUTURE INT EREST OF RS.25.75 CRORES, ASSESSEE DID RECEIVE RS.24.33 CRORES AS CAN BE SEEN IN THE TRANSACTION STATED ABOVE. THEREFORE, AT THE TIME OF SALE OF PO RTFOLIO, THERE IS A GAIN OF RS.1.54 CRORES. THIS AMOUNT RECEIVED BY ASSESSEE I S IN A WAY DISCOUNTED INTEREST ON THE FUTURE RECEIVABLES. SIN CE THIS AMOUNT IS ALREADY RECEIVED BY ASSESSEE, QUESTION OF POSTPONIN G THE ACCRUAL DOES NOT ARISE. HAD ASSESSEE BEEN ACCOUNTING THE INTERE ST RECEIVABLES AS AND WHEN ACCRUED, WITHOUT SALE OF THE PORTFOLIO, IT HAS TO BE ADMITTED THAT FUTURE INTEREST CANNOT BE TAKEN AS INCOME. HOWEVER , WHEN ASSESSEE BUNDLES IT AND SELLS IT AS A PORTFOLIO FOR A DISCOU NT, THE AMOUNT DID ACCRUE AND RECEIVED ON THE DATE OF ENTERING AGREEME NT. AS CAN BE SEEN FROM THE ABOVE EXAMPLE, OUT OF THE TOTAL AMOUNT OF RS.2,96,16,526/- RECEIVABLE IN A LATER YEAR, ASSESSEE DISCOUNTED RS .1,41,74,070/- AND HAS RECEIVED AN AMOUNT OF RS.1,54,42,456/- AS GAIN, OUT OF THE TOTAL PRICE RECEIVED OF RS.24,33,76,256/- [THAT TOTAL AMO UNT RS.24,33,76,256 RS.22,79,34,100 = 1,54,42,456]. THUS, IN A WAY, OU T OF THE BOOK VALUE OF RS.22.79 CRORES OF PORTFOLIO, ASSESSEE DID RECEI VE RS.24.33 CRORES THEREBY HAVING THE GAIN OF RS.1.54 CRORES. SINCE TH E TRANSACTION HAPPENED ON 19 TH MARCH, THE ENTIRE AMOUNT IS TO BE ACCOUNTED AS INCOME ON THAT TRANSACTION AS A GAIN. 13. SIMILAR ISSUE WAS CONSIDERED BY THE HON'BLE MAD RAS HIGH COURT IN THE CASE OF TVS FINANCE AND SERVICES LTD., VS. JCIT [318 ITR 435 (MAD)] ON THE ISSUE OF ACCRUAL OF INCOME AND TIMING OF ACC RUAL ON DISCOUNTING OF BILLS. THE HON'BLE MADRAS HIGH COURT HELD AS UNDER : 'WHERE BILLS ARE DISCOUNTED THE ACCRUAL OF INTEREST IS CERTAIN AND ARISES ON THE DATE OF DISCOUNT. I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 13 -: THE ASSESSEE WAS A NON-BANKING FINANCE COMPANY ENG AGED IN LEASE, HIRE PURCHASE, BILLS DISCOUNTING AND MORTGA GE LOANS. THE ASSESSING OFFICER HELD THAT THE WHOLE OF THE INCOM E FROM BILL DISCOUNTING ACCRUED AT THE TIME OF DISCOUNTING THE BILL. THIS WAS CONFIRMED BY THE TRIBUNAL. THE ASSESSEE CLAIMED T HE PROVISION IT HAD MADE TOWARDS BAD DEBTS UNDER THE RBI NORMS WAS DEDUCTIBLE. THE ASSESSING OFFICER AND THE TRIBUNAL REJECTED TH E CLAIM. HELD, (I) THAT THE TRIBUNAL WAS RIGHT IN CONCLUDIN G THAT THE UNCERTAINTY REGARDING THE DISCHARGE OF THE BILL OR REDISCOUNTING HAS NO RELEVANCE. THE TRANSACTION OF DISCOUNTING IS C OMPLETE AT THE MOMENT THE CUSTOMER IS GIVEN 90 PER CENT OF THE VA LUE 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 T HE BASIS OF THE FORMULA GIVEN BY THE RESERVE BANK OF INDIA. WRITI NG OFF THE DEBT AS BAD REQUIRES JUDGMENT ON THE PART OF THE PERSON CA RRYING ON THE BUSINESS BUT IN THE PRESENT CASE, THE DEBTS HAD BE EN 'WRITTEN OFF' MERELY ON THE BASIS OF THE RBI NORMS AND NOTHING M ORE. THUS, THEY WERE NOT DEDUCTIBLE UNDER SECTION 36. 14. SINCE, PRINCIPLES OF BILL DISCOUNTING AND ACCOU NTING ENTRIES ARE SIMILAR TO THE PORTFOLIO SALE/SECURITIZATION OF LOA N PORTFOLIOS, BEING THE METHOD INVOLVED BEING SAME, WE UPHOLD THE ORDERS OF ASSESSING OFFICER AND CIT(A) ON THE ISSUE. IN FACT, BOTH ASSESSING O FFICER AND CIT(A) ANALYZED THE ACCOUNTING PRINCIPLES, AGREEMENTS AND CAME TO CONCLUSION THAT THE AMOUNTS HAVE ACCRUED AT THE TIME OF SALE O F PORTFOLIO. WE AFFIRM THE SAME AND HOLD THAT THE AMOUNT OF RS.13,09,44,31 5/- BEING THE AMOUNT OF DISCOUNTED FUTURE INTEREST RECEIVED BY AS SESSEE DURING THE YEAR IS TAXABLE IN THE YEAR. ACCORDINGLY, WE UPHOL D THE ORDERS OF ASSESSING OFFICER AND REJECT THE GROUND OF ASSESSEE . 15. GROUND NO.2 IS ON THE ISSUE OF DISALLOWANCE OF RS.3.22 CRORES BEING VALUE OF EMPLOYEES STOCK OPTION GRANTED AND O PTED BY THE EMPLOYEES HOLDING IT AS NOT BUSINESS EXPENDITURE B UT A NOTIONAL CAPITAL EXPENDITURE. I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 14 -: 16. AT THE OUTSET, IT WAS FAIRLY ADMITTED THAT THIS ISSUE WAS COVERED BY THE ORDERS OF SPECIAL BENCH OF ITAT, BANGALORE IN T HE CASE OF BIOCON LTD., VS. DCIT 144 ITD 21 (2013). THE HON'BLE SPECIAL B ENCH HELD AS UNDER: (I) THE DIFFERENCE (DISCOUNT) BETWEEN THE MARKET P RICE OF THE SHARES AND THEIR ISSUE PRICE IS 'EXPENDITURE' IN THE HAND S OF THE ASSESSEE BECAUSE IT IS A SUBSTITUTE TO GIVING DIRECT INCENT IVE IN CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS N O DIFFERENCE BETWEEN A CASE WHERE THE COMPANY ISSUES SHARES TO THE PUBLIC AT MARKET PRICE AND PAYS A PART OF THE PREMIUM TO THE EMPLOYEES FOR THEIR SERVICES AND ANOTHER WHERE THE SHARES ARE DI RECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH SITUATIONS, T HE EMPLOYEES STAND COMPENSATED FOR THEIR EFFORT. BY UNDERTAKING TO ISSUE SHARES AT A DISCOUNT, THE COMPANY DOES NOT PAY ANYTHING T O ITS EMPLOYEES BUT INCURS THE OBLIGATION OF ISSUING SHARES AT A D ISCOUNTED PRICE AT A FUTURE DATE. THIS IS NOTHING BUT 'EXPENDITURE' U/S 37(1); (II) THE LIABILITY CANNOT BE REGARDED AS BEING 'CO NTINGENT' IN NATURE BECAUSE THE RENDERING OF SERVICE FOR ONE YEAR IS S INE QUA NON FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE S CHEME. ONCE THE SERVICE IS RENDERED FOR ONE YEAR, IT BECOMES OBLIG ATORY ON THE PART OF THE COMPANY TO HONOR ITS COMMITMENT OF ALLOWING TH E VESTING OF 25% OF THE OPTION. THE LIABILITY IS INCURRED AT THE EN D OF THE FIRST YEAR THOUGH IT IS DISCHARGED AT THE END OF THE FOURTH Y EAR WHEN THE OPTIONS ARE EXERCISED BY THE EMPLOYEES. THE FACT T HAT SOME OPTIONS MAY LAPSE DUE TO NON-EXERCISE/ RESIGNATION ETC DOE S NOT MAKE THE ENTIRE LIABILITY CONTINGENT; (III) HOWEVER, THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PREMIUM DOES NOT ARISE AT THE STAGE THE OPTIONS ARE GRANTE D. IT ARISES AT THE STAGE THAT THE OPTIONS ARE VESTED IN THE EMPLOYEES . THE AMOUNT DEDUCTIBLE HAS TO BE DETERMINED BASED ON THE PERIO D AND PERCENTAGE OF VESTING UNDER THE ESOP SCHEME; (IV) THERE IS LIKELY TO BE A DIFFERENCE IN THE QUA NTUM OF DISCOUNT AT THE STAGE OF VESTING OF THE STOCK OPTIONS (WHEN TH E DEDUCTION IS ALLOWABLE) AND AT THE STAGE OF EXERCISE OF THE OPT IONS. THE DIFFERENCE HAS TO BE ADJUSTED BY MAKING SUITABLE NORTHWARDS O R SOUTHWARDS ADJUSTMENT AT THE TIME OF EXERCISE OF THE OPTION D EPENDING ON THE MARKET PRICE OF THE SHARES THEN PREVAILING. THE FA CT THAT THE SEBI GUIDELINES DO NOT PROVIDE FOR THE ADJUSTMENT OF DI SCOUNT AT THE TIME OF EXERCISE OF OPTIONS IS IRRELEVANT BECAUSE ACCOU NTING PRINCIPLES CANNOT AFFECT THE POSITION UNDER THE INCOMETAX ACT . I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 15 -: (V) ON FACTS, THE ASSESSEE'S METHOD OF CLAIMING A LARGER DEDUCTION IN THE FIRST YEAR DEFIES LOGIC. AS THE OPTIONS VEST E QUALLY OVER A PERIOD OF FOUR YEARS, THE DEDUCTION OUGHT TO BE CLAIMED I N FOUR EQUAL INSTALLMENTS ON A STRAIGHT LINE BASIS. 17. WHILE CONSIDERING THE ISSUE, SPECIAL BENCH HAS CONSIDERED THE DECISION OF RANBAXY LABORATORIES [124 TTJ 771 (DELH I)] WHICH WAS REVERSED AND DECISION OF S.S.I. LTD., VS. DCIT [85 TTJ 1049 (CHENNAI)] WAS APPROVED. LIKE-WISE DECISION OF SPRAY ENGINEERI NG DEVICES LTD., [53 SOT 70 (CHD)] WAS ALSO APPROVED. 18. IN VIEW OF THE ABOVE, ASSESSING OFFICER IS DIRE CTED TO WORK OUT THE DEDUCTION KEEPING IN MIND THE PRINCIPLE LAID DOWN B Y THE HON'BLE SPECIAL BENCH ON THE ISSUE. ASSESSEE SHOULD BE GIVEN DUE O PPORTUNITY TO MAKE SUBMISSIONS. THIS GROUND IS ALLOWED FOR STATISTICA L PURPOSES. 19. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 30 TH JANUARY, 2015. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIA H) JUDICIAL MEMBER ACC OUNTANT MEMBER HYDERABAD, DATED 30 TH JANUARY, 2015. TNMM I.T.A. NO. 137/HYD/2013 ASMITHA MICROFIN LTD., :- 16 -: COPY TO : 1 . ASMITHA MICROFIN LTD., HYDERABAD , C/O. SRI S.RAMA RAO, ADVOCATE, 102, SHRIYA'S ENCLAVE, 3-6-643, STREET NO .9, HIMAYATNAGAR, HYDERABAD. 2. ADDL. COMMISSIONER OF INCOME TAX, RANGE-1, HYDER ABAD. 3. CIT(A)-II, HYDERABAD 4. CIT-I, HYDERABAD 5. D.R. ITAT, HYDERABAD.