Asmitha Microfin Limited, Hyderabad V. Dy.CIT., Circle-1(1), Hyderabad, Hyderabad

ITA 1524/HYD/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91742 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-06-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 26-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANJALA SAHU
• Assessee Lawyers: P RAVI SESHAGIRI RAO
• Keywords: Bad and doubtful debts

Judgement Text

ITA NO 1524 OF 2014 ASMITHA MICROFIN LTD HYDERABAD PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER & SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEM BER ITA NO.1524/HYD/2014 (ASSESSMENT YEAR: 2008-09) ASMITHA MICROFIN LTD HYDERABAD PAN: AADCA 9399 Q VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI P. RAVISESHA GIRI RAO FOR REVENUE : SMT. ANJALA SAHU DATE OF HEARING : 08/06/2015 DATE OF PRONOUNCEMENT : 17 /06/2015 O R D E R PER SMT. ASHA VIJAYARAGHAVAN, J.M. THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER OF THE CIT (A)-II, HYDERABAD, DATED 22.07.2014 RELATIN G TO A.Y 2008- 09. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LD CIT (A) IS ERRONEOUS BOTH ON FACTS AND IN LAW. 2. THE LD CIT (A) ERRED IN CONFIRMING THE ADDITION OF RS.2,86,79,153 ON THE GROUND THAT THE GAIN ON ASSIGNMENT OF LOAN PORTFOLIO BY THE APPELLANT WOULD BECOME TAXABLE IN ITS ENTIRETY DURING THE ASSESSMEN T YEAR UNDER CONSIDERATION. 3. THE AO ERRED IN DISALLOWING RS.4,70,000 BEING FE E PAID FOR ISSUE OF SHARE CAPITAL WITHOUT CONSIDERING THE FACT THAT THE SAME IS ALLOWABLE U/S 35D OF RS.4,70,000. ITA NO 1524 OF 2014 ASMITHA MICROFIN LTD HYDERABAD PAGE 2 OF 6 4. THE LD CIT (A) OUGHT TO HAVE SEEN THAT BY MAKING THE ADJUSTMENT TO THE ASSIGNMENT OF THE GAIN ON SAL E OF LOAN PORTFOLIA, THE INCOME CANNOT BE BROUGHT TO TAX IN BOTH THE A.YS. THE LD CIT (A) OUGHT TO HAVE DIRE CTED THAT THE GAIN RELATING TO THE YEAR UNDER CONSIDERAT ION BUT WAS ASSESSED BY THE AO FOR THE EARLIER A.YS SHOULD NOT BE BROUGHT TO TAX AGAIN FOR THE YEAR UND ER CONSIDERATION. 2. THE ISSUE INVOLVED IN GROUND NO.2 OF THE APPEAL OF THE ASSESSEE IS SQUARELY COVERED IN FAVOUR OF THE REVEN UE AND AGAINST THE ASSESSEE BY THE DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE A.Y. 2009-2 010 RENDERED VIDE ITS ORDER DATED 30.01.2015 PASSED IN ITA.NO.13 7/HYD/2013. A COPY OF THE SAID ORDER IS PLACED ON RECORD BEFORE US AND PERUSAL OF THE SAME SHOWS THAT SIMILAR ISSUE HAS BE EN DECIDED BY THE TRIBUNAL AGAINST THE ASSESSEE FOR THE FOLLOW ING REASONS GIVEN IN PARAGRAPH NOS. 11 TO 14 OF ITS ORDER. '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 FUTURE INTEREST RECEIVABLES. THUS, OUT OF THE INTER EST 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 ENT RIES MADE, THE BASIC PRINCIPLE INVOLVED IN THIS SALE OF PORTFOLIO IS THAT AS FAR AS PRINCIPAL AMOUNT IS CONCERNED, NO DISCOUNT WAS CONS IDERED AS THE ENTIRE PORTFOLIO WAS GIVEN AT THE BOOK VALUE ONLY. ONLY INTEREST RECEIVABLE SOLD TO THE PURCHASER, HOWEVER, WAS DISC OUNTED. THUS, AS SEEN FROM THE ABOVE EXAMPLE OUT OF RS.2.96 CRORES R ECEIVABLE, 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 INTEREST REC EIVABLE, IS NOT ACCRUING DURING THE YEAR. THEREFORE, THE GAIN ON DI SCOUNTING OF THAT IS NOT AN AMOUNT ACCRUED DURING THE YEAR AND SO, TH E SAME IS DEFERRED TO LATER YEAR. IT IS THIS AMOUNT WHICH IS UNDER DISPUTE. AS THIS TRANSACTION GIVEN AS AN EXAMPLE ABOVE HAS OCCURRED ON 19TH MARCH ITA NO 1524 OF 2014 ASMITHA MICROFIN LTD HYDERABAD PAGE 3 OF 6 09 AND AS NO INTEREST IS RECEIVABLE DURING THAT MON TH, ASSESSEE HAS DEFERRED THE ENTIRE AMOUNT OF GAIN TO THE LATER YEA R. THERE ARE MANY SUCH TRANSACTIONS ENTERED REGULARLY BY ASSESSEE DUR ING THE COURSE OF YEAR AND TO THE EXTENT OF AMOUNT DISCOUNTED, ASSESS EE IS ACCORDINGLY OFFERING INCOME ON THE PROPORTION OF INTEREST ACCRU ED 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 SYSTE M, 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 TH E TRANSACTION HAS NOT ACCRUED AS THE FUTURE INTEREST RECEIVABLE IS NO T AN ACCRUED INCOME. HOWEVER, THIS ASPECT CANNOT BE ACCEPTED AS ASSESSEE HAS RECEIVED THE DISCOUNTED AMOUNT AS A PART OF SALE CO NSIDERATION. EVEN THOUGH, THERE ARE CERTAIN DEPOSITS KEPT WITH THE BA NKS FOR THE PURPOSE, THE FACT IS THAT OUT OF THE TOTAL PORTFOLI O INCLUDING THE FUTURE INTEREST OF RS.25.75 CRORES, ASSESSEE DID RECEIVE R S.24.33 CRORES AS CAN BE SEEN IN THE TRANSACTION STATED ABOVE. THEREF ORE, AT THE TIME OF SALE OF PORTFOLIO, THERE IS A GAIN OF RS.1.54 CRORE S. THIS AMOUNT RECEIVED BY ASSESSEE IS IN A WAY DISCOUNTED INTERES T ON THE FUTURE RECEIVABLES. SINCE THIS AMOUNT IS ALREADY RECEIVED BY ASSESSEE, QUESTION OF POSTPONING THE ACCRUAL DOES NOT ARISE. HAD ASSESSEE BEEN ACCOUNTING THE INTEREST RECEIVABLES AS AND WHEN ACC RUED, WITHOUT SALE OF THE PORTFOLIO, IT HAS TO BE ADMITTED THAT F UTURE INTEREST CANNOT BE TAKEN AS INCOME. HOWEVER, WHEN ASSESSEE BUNDLES IT AND SELLS IT AS A PORTFOLIO FOR A DISCOUNT, THE AMOUNT DID ACCRUE A ND RECEIVED ON THE DATE OF ENTERING AGREEMENT. AS CAN BE SEEN FROM THE ABOVE EXAMPLE, OUT OF THE TOTAL AMOUNT OF RS.2,96,16,526/- RECEIVA BLE IN A LATER YEAR, ASSESSEE DISCOUNTED RS.1,41,74,070/- AND HAS RECEIV ED AN AMOUNT OF RS.1,54,42,456/- AS GAIN, OUT OF THE TOTAL PRICE RE CEIVED OF RS.24,33,76,256/- [THAT TOTAL AMOUNT RS.24,33,76,25 6 - 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 RECEIVE RS.24.33 CRORES THEREBY HAVING THE GAIN OF RS.1.54 CRORES. S INCE THE TRANSACTION HAPPENED ON 19TH MARCH, THE ENTIRE AMOU NT 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. J CIT [318 ITR 435 (MAD)] ON THE ISSUE OF ACCRUAL OF INCOME AND TIMING OF ACCRUAL ON DISCOUNTING OF BILLS. THE HON'BLE MADRAS HIGH COURT HELD AS UNDER: ITA NO 1524 OF 2014 ASMITHA MICROFIN LTD HYDERABAD PAGE 4 OF 6 'WHERE BILLS ARE DISCOUNTED THE ACCRUAL OF INTEREST IS CERTAIN AND ARISES ON THE DATE OF DISCOUNT. THE ASSESSEE WAS A NON-BANKING FINANCE COMPANY ENGA GED IN LEASE, HIRE PURCHASE, BILLS DISCOUNTING AND MORTGAGE LOANS . THE ASSESSING OFFICER HELD THAT THE WHOLE OF THE INCOME FROM BILL DISCOUNTING ACCRUED AT THE TIME OF DISCOUNTING THE BILL. THIS W AS CONFIRMED BY THE TRIBUNAL. THE ASSESSEE CLAIMED THE PROVISION IT HAD MADE TOWARDS BAD DEBTS UNDER THE RBI NORMS WAS DEDUCTIBLE. THE A SSESSING OFFICER AND THE TRIBUNAL REJECTED THE CLAIM. HELD, (I) THAT THE TRIBUNAL WAS RIGHT IN CONCLUDING THAT THE UNCERTAINTY REGARDING THE DISCHARGE OF THE BILL OR REDISCOUNTING HAS NO RELEVANCE. THE TRANSACTION OF DISCOUNTING IS COM PLETE AT THE MOMENT THE CUSTOMER IS GIVEN 90 PER CENT OF THE VAL UE OF THE BILL. THE DISCOUNT IS EQUIVALENT TO THE INTEREST AND IT ACCRU ED AT THAT POINT. (II) THAT THE DEBTS WERE SHOWN AS WRITTEN OFF ON TH E BASIS OF THE FORMULA GIVEN BY THE RESERVE BANK OF INDIA. WRITING OFF THE DEBT AS BAD REQUIRES JUDGMENT ON THE PART OF THE PERSON CAR RYING ON THE BUSINESS BUT IN THE PRESENT CASE, THE DEBTS HAD BEE N 'WRITTEN OFF' MERELY ON THE BASIS OF THE RBI NORMS AND NOTHING MO RE. 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 ORDER S OF ASSESSING OFFICER AND CIT(A) ON THE ISSUE. IN FACT, BOTH ASSE SSING OFFICER AND CIT(A) ANALYZED THE ACCOUNTING PRINCIPLES, AGREEMEN TS AND CAME TO CONCLUSION THAT THE AMOUNTS HAVE ACCRUED AT THE TIM E OF SALE OF PORTFOLIO. WE AFFIRM THE SAME AND HOLD THAT THE AMO UNT OF RS.13,09,44,315/- BEING THE AMOUNT OF DISCOUNTED FU TURE INTEREST RECEIVED BY ASSESSEE DURING THE YEAR IS TAXABLE IN THE YEAR. ACCORDINGLY, WE UPHOLD THE ORDERS OF ASSESSING OFFI CER AND REJECT THE GROUND OF ASSESSEE.' 3. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERAT ION AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMI LAR TO A.Y. 2009- 2010, WE RESPECTFULLY FOLLOW THE DECISION OF THE CO ORDINATE BENCH OF THIS TRIBUNAL RENDERED FOR A.Y. 2009-2010 AND UP HOLD THE IMPUGNED ORDER OF THE LD. CIT(A) CONFIRMING THE ADD ITION OF RS.2,86,79,153/-MADE BY THE A.O. ON ACCOUNT OF GAIN ON ITA NO 1524 OF 2014 ASMITHA MICROFIN LTD HYDERABAD PAGE 5 OF 6 ASSIGNMENT OF LOAN PORTFOLIO BY THE ASSESSEE. GROUN D NO.2 OF THE ASSESSEE'S APPEAL IS ACCORDINGLY DISMISSED. 4. IN GROUND NO.3, THE ASSESSEE HAS DISPUTED THE DI SALLOWANCE OF RS. 4 LAKHS MADE BY THE A.O. UNDER SECTION 35D WHIC H IS CONFIRMED BY THE LD. CIT(A). 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE TRIBUNAL BY ITS ORDER DATED 30.01.2015 FOR THE A.YS 2009-10 IN ITA NO.137/HYD/2013 HAS HELD AS FOLLOWS: AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, T HE RELEVANT EXPENDITURE IN RESPECT OF WHICH DEDUCTION UNDER SECTION 35D IS CLAIMED BY THE ASSESSEE FOR TH E YEAR UNDER CONSIDERATION, WAS ACTUALLY INCURRED IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-2008. HE HAS SUBMITTED THAT ALTHOUGH THE DEDUCTION CLAIMED UNDER SECTION 35D IN RESPECT OF THE SAID INITIAL YEAR WAS ORIGINALLY ALLOWED BY THE A.O., HE SUBSEQUENTLY REOPENED THE ASSESSMENT FOR THE SAID YEAR I.E., A.Y . 2007-2008 AND DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 35D. HE HAS SUBMITTED TH AT THE ASSESSEE HAS DISPUTED THE DISALLOWANCE MADE UNDER SECTION 35D IN A.Y. 2007-2008 IN THE APPEAL F ILED BEFORE THE LD. CIT(A) WHICH IS STILL PENDING. HE HA S CONTENDED THAT SINCE THE ISSUE RELEVANT TO THE ASSESSEE'S CLAIM FOR DEDUCTION UNDER SECTION 35D A S INVOLVED IN THE YEAR UNDER CONSIDERATION IS CONSEQUENTIAL TO THE SIMILAR ISSUE INVOLVED IN THE INITIAL YEAR I.E., A.Y. 2007-2008 FOR WHICH THE APPEAL IS PENDING BEFORE THE LD. CIT(A), THE SAME MAY BE REMITTED BACK TO THE LD. CIT(A) FOR DECIDING THE SA ME AFRESH DEPENDING ON HIS DECISION ON A SIMILAR ISSUE FOR THE INITIAL YEAR. SINCE THE LEARNED D.R. HAS ALSO N OT RAISED ANY OBJECTION IN THIS REGARD, WE REMIT THIS MATTER BACK TO THE LD. CIT(A) FOR DECIDING THE SAME AFRESH DEPENDING ON HIS DECISION ON A SIMILAR ISSUE INVOLV ED IN ITA NO 1524 OF 2014 ASMITHA MICROFIN LTD HYDERABAD PAGE 6 OF 6 ASSESSEE'S OWN CASE FOR A.Y. 2007- 2008 FOR WHICH T HE APPEAL IS PENDING WITH HIM. 6. FOR THIS A.Y ALSO, WE GIVE SIMILAR DIRECTION AND REMIT THIS MATTER BACK TO THE LD CIT (A) FOR DECIDING THE SAME AFRESH DEPENDING ON HIS DECISION ON A SIMILAR ISSUE INVOLV ED IN THE ASSESSEES OWN CASE FOR A.Y 2007-08 FOR WHICH THE A PPEAL IS PENDING WITH HIM. GROUND NO.3 OF THE ASSESSEE'S APP EAL IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 7. WITH RESPECT TO THE 4 TH GROUND OF APPEAL, WE DIRECT THE AO THAT THE GAIN RELATING TO THE YEAR UNDER CONSIDERAT ION BUT WAS ASSESSED BY THE AO FOR THE EARLIER A.YS SHOULD NOT BE BROUGHT TO TAX AGAIN FOR THE YEAR UNDER CONSIDERATION. 8. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH JUNE, 2015. S D/ - S D/ - (B.RAMAKOTAIAH) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 17 TH JUNE, 2015. VNODAN/SPS COPY TO: 1. ASMITHA MICROFIN LTD, C/O SRI S. RAMA RAO, ADVOCATE , FLAT NO.102, SHRIYAS ELEGANCE, 3-6-643 STREET NO.9, HIMAYATNAGAR, HYDERABAD 500029 2. DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1) HYDERABA D 3. CIT(A) II HYDERABAD 4. CIT I HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER