DCIT, New Delhi V. M/s Religare Finvest Ltd., New Delhi

ITA 2559/DEL/2016

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6636 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 05-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROHIT JAIN
• Assessee Lawyers: T. KIPGAN
• Keywords: Earning of tax free income; Bad and doubtful debts; Rule 8D
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘F’ NEW DLEHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA No.2559/Del/2016 Assessment Year: 2010-11 DCIT, Circle 21(1), vs. M/s. ReligareFinvest Ltd., New Delhi. D-3, P3B, District Centre, Saket, New Delhi. PAN :AAFCS6801H (Appellant) (Respondent) Appellant by : Sh. Rohit Jain, Advocate Ms. Somya Jain, C.A. Respondent by: Sh. T. Kipgan, CIT/DR Date of hearing: 07.12.2021 Date of order : 10 .12.2021 ORDER PER K. NARASIMHA CHARY, J.M. Aggrieved by the order dated 08.03.2016 passed by the learned Commissioner of Income Tax (Appeals)-11, New Delhi (“Ld. CIT(A)”) in the case of M/s. Religare Finvest Ltd.(“the assessee”) for the assessment year 2010-11, the Revenue preferred this appeal. 2. Brief facts of the case are that the assessee is a nonbanking financial company (“NBFC”) registered with the reserve bank of India and has been engaged in the business of providing financial services such as granting loans against property, leasing of commercial vehicles, 2 providing corporate advisory services, distribution of mutual funds etc. For the assessment year 2010-11, assessee filed their return of income on 01/10/2010 declaring a total income of Rs. 119,06,91,421/- which was revised on 29/3/2012 declaring the income at Rs. 119,48,18,728/-. Assessment under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) was complete by order dated 29/3/2013 at Rs.176,96,42,820/-by making certain additions and such additions, insofar as this appeal is concerned, include the addition of Rs.47,40,16,508/-on account of disallowance of bad debts and written off, Rs. 1,46,15,417/-on account of disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (“the Rules”) and Rs. 1,95,10,255/-on account of disallowance of business promotion expenses. 3. When the assessee preferred appeal challenging the additions made in the assessment order, Ld. CIT(A) by way of impugned order deleted the additions made by the learned Assessing Officer. Revenue is therefore before us in this appeal, challenging the deletion of these three additions, which we discuss hereunder. 4. Insofar as the disallowance of bad debts written off is concerned, it could be seen from the record that during the year the assessee had written off certain loans given in the ordinary course of its business to various parties to the tune of Rs.47,40,16,508/-and claims that it was done based on prudential norms issued by the RBI. Assessee had written off the loans by diverting to the profit and loss account and crediting and reducing the same from the amount of loans and advances appearing on the asset side in the Balance Sheet. 3 5. According to the learned Assessing Officer, the assessee did not actually written off the bad debts, but only made provision created for bad and doubtful debts and therefore the same is not an allowable deduction, on the ground that the intention for alleged written off was merely to follow the prudential norms laid down by Reserve Bank of India and it has nothing to do with the actual bad debts. According to the learned Assessing Officer the decision of the Supreme Court in the case of Vijaya Bank vs. CIT 190 Taxman 257 has no application to the facts of the case inasmuch as the assessee is a NBFC and not a bank. 6. Ld. CIT(A) observed that the loans amounting to Rs. 47,40,16,508/- were advanced during the course of the lending business of the assessee and such a fact is not disputed by the learned Assessing Officer and also that the learned Assessing Officer had not brought on record any evidence to prove that the written off is nothing but a provision for doubtful debts. Ld. CIT(A) further observed that the learned Assessing Officer had not controverted the accounting data of the parties that were produced before him during the assessment proceedings showing that it was a written off of the said loan in its books of accounts. Ld. CIT(A) perused complete party wise details of the bad debts written off in respect of 4214 parties. According to the Ld. CIT(A), the learned Assessing Officer confused by the nomenclatures of the wards “provisioning” in the “internal provisioning policy” used by the assessee to determine whether a lone is a standard/good loan or an NPA or a loss asset which is to be written off and understood that there was only mere creation of provision and not actually written off. Ld. CIT(A) further observed that the assessee, in respect of loans has 4 already disallowed in the computation of income the provision for NPA to the tune of Rs.26,06,230/-and a general provision on loans Rs. 9,07,19,756/-created by in financial year 2009-10 which was reported separately in scheduled or of the profit and loss account for the said year. Ld. CIT(A) considered the legal position on this aspect and reached a conclusion that the writing off of the loans of Rs. 47,40,16,508/-is an actual write-off and not a provision and the same is bona fide and based on its commercial expediency of the assessee company and therefore following the decision of the Hon’ble Apex Court in the case of TRF Ltd vs. CIT 323 ITR 397, Bombay High Court in the case of DIT vs. Oman International Bank SAOG 313 ITR 128 (Bom) and Board circular No. 551 dated 23/1/1990, deleted the disallowance of Rs. 47,40,16,508/-. 7. It is the argument of the Ld. AR that the Prudential Norms are directions issued by the RBI to NBFCs, inter alia, in relation to classification of loans as good, non-performing asset (NPA), for which provision is to be created in the books of accounts, and loss asset, which is required to be written-off in the books of accounts; that the Prudential Norms define “non-performing asset” as any type of loan asset in respect of which recovery of the principal amount has remained overdue for a period of six months or more, or in respect of which the interest recovery has remained overdue for six months or more; and that the Prudential Norms also define the “loss assets” as the loans which are identified by the NBFC as non-recoverable either because such loans are unsecured or the value of security provided by the borrower has totally eroded or the borrower has committed a 5 fraudulent act or omission. The Prudential Norms direct the NBFCs that “loss assets” shall be written-off. According to him, the assessee, being a NBFC is mandatorily required to follow Prudential Norms of RBI contained in the Master Circular – “Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007” dated 1/7/2008, and therefore, in accordance with the aforesaid Prudential Norms, the assessee written-off loans where the principal amount of loan is outstanding for more than 179 days (six months) from the end of the month in which such principal had first become due and such loans not being secured by any security or the value of the security has eroded, by classifying such loans as ‘loss asset’, which were written-off in the books of accounts. On this basis, the assessee claimed deduction of the loans written off, by actually debiting the profit and loss account and reducing the same from aggregate amount of ‘Loans and Advances’ as appearing in the balance sheet of the assessee, in its profit and loss account. Basing on the decision of the Hon’ble Apex Court in the case of Vijaya Bbank vs. CIT 323 ITR 166 he submits that the provisions under section 36(1)(vii) of the Act apply to both the banking and nonbanking business. 8. With reference to the P&L account and Balance Sheet for the year ended with 31/3/2010 he demonstrated that not only the loans written off were shown as an expense in the P&L Account but also that the closing balance of loans and advances as appearing in the Balance Sheet for the year is the net amount, after writing off of loans aggregating to Rs. 47,40,16,508/-. With reference to these, he submitted that the Apex Court in the case of Vijaya Bank (supra) held that if an assessee debits an amount of doubtful debts to the P&L 6 Account and accredits the estate account likes antedate of account it” in the P&L account and makes the corresponding credit to the “current liabilities and provisions” on the liability side of the Balance Sheet, then it would constitute a provision for doubtful debts. 9. Per contra, Ld. DR relied upon the assessment order and submitted that the assessee created provision for the doubtful debts, and per se is not entitled to claim the deduction. 10. We have gone through the record in the light of the submissions made on either side. During the year under consideration, the assessee had debited a sum of Rs.47,40,16,508/-in P&L Account in the nomenclature of “loans written off”. Assessee submitted that they are entitled to claim a deduction of the written off of loans amounting to Rs. 47,40,16,508/-under the provisions of section 36(1)(vii) of the Act read with section 36 (2) (i) of the Act. Assessee also relied upon the decision of the Hon’ble Apex Court in the case of Vijaya Bank (supra). Insofar as the objection taken by the learned Assessing Officer, that the decision in the case of Vijaya Bank (supra) inasmuch as assessee is not a bank but NBFC does not hold much water because in paragraph No. 8 of such judgement, the Hon’ble Apex Court said that it is not in dispute that section 36(1)(vii) of the Act applies both to banking and nonbanking business. A reading of this order clearly establishes that the provisions under section 36(1)(vii) of the Act are not only confined to the banking business but also to nonbanking business. 11. The second ground of denial of the deduction by the learned Assessing Officer is that the intention for alleged written off was merely to follow the Prudential norms laid down by RBI and has nothing to do 7 with the actual bad debts and as a matter of fact, the action of the assessee in writing of the loans is not an actual right of bad debts, but a mere provision created for bad and doubtful debts, which is not an allowable deduction under the Act. On this aspect there is no dispute that firstly the assessee made a provision for bad and doubtful debts by debiting the amount of bad debt to the P&L Account thereby reducing the profits of the year. Secondly, schedule of Loans and Advances as appearing in the balance sheet for the year ended 31/3/2010 shows that the closing balance of loans and advances as appearing in the balance sheet for the year ended 31 st of March 2010 was reduced and is the net amount, after write-off of loans aggregating to Rs.47,40,16,508/-. 12. In the case of Vijaya Bank v. Commissioner of Income Tax: 323 ITR 166, the assessee made a provision for bad and doubtful debt by debiting the amount of bad debt to the Profit and Loss Account so as to reduce the profits of the year, and also the provision account so created was debited and simultaneously the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated. Further, loans and advances or the sundry debtors of the assessee as at the end of the year lying in the Balance Sheet was shown as net of "provisions for doubtful debt" created by way of debit to the Profit and Loss Account of the year. Learned Assessing Officer disallowed deduction on the ground that the entry made by the assessee was a mere provision and could not be equated with actual write off of bad debts in terms of the section. Ld. CIT(A) and the Tribunal allowed the assessee’s claim, but the High Court reversed the order of the CIT(A) and the Tribunal. On appeal by the assessee, Hon’ble 8 Apex Court, while reversing the order of the High Court and referring to its earlier ruling in the case of Southern Technologies Ltd. v. JCIT: 320 ITR 577 held that the credit entry in each and every individual debtor’s account was not necessary to constitute actual write off of bad debts. Hon’ble apex Court explained the impact of Explanation to section 36(1)(vii) and the concept of write off as follows: “To understand the above dichotomy, one must understand ‘how to write off’. If an assessee debits an amount of doubtful debt to the P&L Account and credits the asset account like sundry debtor’s Account, it would constitute a write off of an actual debt. However, if an assessee debits ‘provision for doubtful debt’ to the P&L Account and makes a corresponding credit to the ‘current liabilities and provisions’ on the Liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, assessee would not be entitled to deduction after April 1, 1989.” Hon’ble Apex Court observed that if the assessee had not only debited the P&L account but also correspondingly reduced the amount from Debtors A/c on the assets side of the Balance Sheet and, consequently, at the end of the year, the figure shown on the assets side was net of the alleged provision, amounted to actual write off for the purpose of availing benefit of deduction under the section. 13. Having considered the material placed on record, Ld. CIT(A) reached a conclusion on facts that the assessee had already disallowed in the computation of income the provision for NPA of Rs. 26,06,230/- and general provision of loans to the tune of Rs. 9,07,19,756/-created by it for the financial year 2009-10 which was reported separately in schedule R of the profit and loss account for the said year. Ld. CIT(A) further found that the learned Assessing Officer did not make any 9 adverse comments in respect of the reduction of loans and advances by an amount of Rs.47,40,16,508/-in the Balance Sheet of the assessee which is clearly a writing off of bad debts in the books of accounts of the assessee. Basing on the record Ld. CIT(A) recorded a finding that the writing off of the loans of Rs.47, 40,16, 508/-is an actual writing off and not a provision and the same is bona fide and based on its commercial expediency of the assessee. 14. On a careful consideration of the matter and analysing the facts in the light of the addition of the Hon’ble Apex Court in the case of Vijaya Bank (supra), we are of the considered opinion that in this matter the assessee not only debited the amount of doubtful debt to the P&L Account but in fact registered the value of assets in the Balance Sheet, and therefore we find that it’s not the case of mere creating provision but actual writing off of the bad debts, and accordingly the assessee is entitled to the deduction under section 36(1)(vii) of the Act. On this premise we uphold the findings of the Ld. CIT(A) and dismiss ground No. 1 of the appeal. 15. Now coming to ground No. 2, it relates to disallowance u/s. 14A of the Income-tax Act (for short “the Act”) read with Rule 8D of the Income-tax Rules. It could be seen from the record that during the year under consideration, the assessee received a dividend income to the tune of Rs.3,36,85,137/- and claimed the same as exempt. According to the assessee, no expenditure was incurred for earning the same, but as a matter of precaution, they have disallowed a sum of Rs.3,06,93,175/- u/s. 14A of the Act initially, but subsequently on 24.12.2012, they revised the computation of disallowance to Rs.33,12,333/- towards 10 0.5% of the average value of investment. Learned Assessing Officer, however, computed the disallowance u/s. 8D(2)(ii) towards interest component to the tune of Rs.1,46,15,417/- and Rs.33,12,333/- under Rule 8D(2)(iii) and since the assessee had already disallowed Rs.33,12,333/-, the Assessing Officer added Rs.1,46,15,417/-. Learned CIT(A) deleted the same and restricted the disallowance to Rs.33,12,333/- on the ground that only such investment which yielded exempt income aloneshould be considered and such investments were made in the year 2007-08. 16. Submission of the ld. Counsel before us is that in the year under consideration, only the investment in Karnataka Bank Ltd. alone yielded dividend and such investment in Karnataka Bank Ltd. was invested during the assessment year 2007-08; and that during such year, the perusal of balance sheet as on 31.03.2007 shows the cash reserves of Rs.81.70 crores and it was far exceeding the initial investment of Rs.35.35 crores in Karnataka Bank Ltd. He submits that this aspect was considered by the coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2007-08 in ITA No. 1947/Del/2018 and batch and by order dated 24.08.2020, the Tribunal upheld the contention of the assessee. 17. Learned DR places reliance on the CBDT Circular No. 05/2014 dated 11.02.2014 and also the decision of Supreme Court in the case of Max Opp. Investment Ltd. Vs. CIT (2018) 91 taxmann.com 154 and submits that the ld. Assessing Officer is right in making the addition. 11 18. We have gone through the record in the light of submissions made on either side. In so far as the application of section 14A read with Rule 8D is concerned, at the stage of this appeal, assessee does not dispute the same. It is not the case of the Revenue also that the assessee incurred any direct expense for earning exempt income. So also in respect of the disallowance u/r. 8D(2)(iii) towards 0.5% of the investment and both the assessee and the ld. Assessing Officer are on the same page and according to them, it comes to Rs.33,12,333/-, hence, it also not in dispute. Only dispute is relating to the disallowance u/r. 8D(2)(ii) of the rules, i.e., interest component. In view of the decision of Hon’ble jurisdictional High court in the case of Acb India Ltd. vs. ACIT 374 ITR 108, for the purpose of computing the disallowance u/s. 14A of the Act only such investments which yielded exempt income during the year should be taken into consideration, but not the entire investment. Going by that principle, we find that during the year, the investment in Karnataka Bank Ltd. alone yielded dividend income. Assessee’s contention that such an initial investment to the tune of Rs.35.35 crores was made in the assessment year 2007-08 and for that year, the assessee had free cash reserves to the tune of Rs.81.70 croes, was considered by the coordinate Bench of this Tribunal in ITA No. 1947/Del/2018 and batch (supra) and the Tribunal accepted the contention of the assessee as far as the investment in shares of Karnataka Bank Ltd. was concerned. It is, therefore, clear that no disallowance could be made towards interest expense u/r. 8D(2)(ii) of the rules. We accordingly uphold the finding of the ld. CIT(A) on this aspect and dismiss ground No. 2 of this appeal. 12 19. Now coming to third ground which relates to disallowance of business promotion expenses to the tune of Rs.1,95,10,255/-, the facts are that the assessee incurred business promotion expenses of Rs.2,35,81,618, out of which the expenses of Rs.1,95,10,255/- were incurred by Religare Enterprise Ltd. (“REL”) on behalf of the assessee and the assessee reimbursed REL and claimed deduction. According to the Assessing Officer, the assessee did not submit any agreement pursuant to which such payments were made to REL; that such expenditure were for the development of brand and, therefore, capital in nature; and that they relate to F.Y. 2010-11 corresponding to assessment year 2011-12. 20. Learned CIT(A), however, on a careful consideration of the entire material before him found that the expenses incurred by the REL was for advertisement, sponsorship expenses and other expenses and that these expenses have been incurred in F.Y. 2009-10 and since the specific portion of the expenses were allocable to the assessee in this case, the assessee reimbursed the same to REL. He, therefore, found that the expenses are Revenue in nature but not capital. 21. Learned DR places heavy reliance on the assessment order. Ld. AR submits that the expenditure incurred by REL on behalf of the group/subsidiaries is allocated to the subsidiaries on the basis defined in policy manual for support service fee and recovery of expense from its subsidiary/joint ventures; that according to such manual, the advertisement and business promotion expenses would be allocated to the subsidiaries in the ratio of their turnover as per the audited financial statements of the last financial year without charging any mark-up; and 13 that REL allocated expenses of Rs.1,95,10,255/- to the assessee as its share of business promotion and advertisement expenditure. The assessee places the sample copies of debit notes in this respect. Ld. AR further submitted that while making the payment of Rs. 1.95 crores to REL, assessee deducted tax at source u/s. 194C/194J and submitted Form 16A in proof of it. 22. In respect of agreement, ld. AR submits that the group companies are guided from the policy manual for support services fee and recovery of expenses from subsidiaries which forms the basis of understanding for recovery of cost by REL from its subsidiaries and the payment of such costs by the subsidiaries and therefore, no agreement in this respect is necessary. It is further submitted that the assessee submitted invoices and debit notes and confirmed the advertisement and promotion expenses incurred. 23. We have gone through the record in the light of submissions made on either side. In so far as incurring of expenses is concerned, there is no doubt. There is no reason either for the authorities or for this tribunal to discard the policy manual for support services fee and recovery of expenses from the subsidiaries, in accordance with which the allocation of expenses were made. It is also not in dispute that the expenses were incurred for the purpose of business. In CIT vs. Salora International Limited, 308 ITR 199, Hon’ble Delhi High court held that the expenses incurred on advertisement and business promotion are to be treated as revenue expenditure. For the sake of completeness, we reproduce the relevant extract hereunder : 14 “3. The first issue that is sought to be raised in this appeal pertains to advertising expenditure of approximately Rs 3.08 crores. According to the Assessing Officer, the expenditure were incurred for launching of its products. The Assessing Officer was of the view that such expenditure was of an enduring nature and, therefore, treated one-third as "capital expenditure" and only allowed the two- thirds of the said amount as "expenditure, to the assessee ". The Commissioner of Income-tax (Appeals) allowed the entire amount after treating the expenditure as "revenue expenditure". The findings of the Commissioner of Income-tax (Appeals) were confirmed by the Income-tax Appellate Tribunal by virtue of the impugned order. Particularly, the Tribunal held that there was a direct nexus between the advertising expenditure and the business of the assessee and that the assessee had to incur such expenditure to meet the competition in the Indian market for selling its products in India. A finding was returned that unless the assessee made its products known to the market, its business would suffer. Consequently, the Tribunal held the entire expenditure on advertisement to be of a revenue nature and allowed the same. The Tribunal also noted the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT 119801124 ITR 1 wherein the Supreme Court held that there could be cases where the expenditure even if it was incurred for obtaining of a benefit of an enduring nature may, nevertheless, be on the revenue account and, in such cases, the test of "enduring benefit" may break down.” 24. In the instant case, it is also pertinent to note that as a result of advertising and business promotion activities undertaken by REL on behalf of the assessee, loans granted by assessee have significantly increased from 1711,35,45,136/- in assessment year 2009-10 to Rs.4085,59,04,068/- in assessment year 2010-11, resulting to corresponding increase of interest income earned thereon from Rs.282,80,50,151/- in A.Y. 2009-10 to Rs.407,16,62,922/- in A.Y. 2010- 11. Therefore, the business promotion expenses reimbursed by 15 assessee to REL were for the purpose of business and hence, in the light of above decision of Hon’ble Delhi High Court, we find that such expenditurehas to be treated as revenue in nature. Consequently, this ground of Revenue’s appeal is dismissed. 25. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on this the 10 th day of December, 2021. Sd/- Sd/- (R.K. PANDA) (K. NARSIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 10/12/2021 ‘aks’