DCIT, CHENNAI V. Madurai Micro Finance Ltd., CHENNAI

ITA 2858/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8107 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-11-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 20-11-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A B KOLI IRS
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Diversion of income; Wrong claim; Bad and doubtful debts
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . ! , '!# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.2858/MDS/2014 ' $ %$ / ASSESSMENT YEAR : 2007-2008 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -4(1) CHENNAI. VS. M/S. MADURA MICRO FINANCE LIMITED, NO.36, IIND MAIN ROAD, KASTURIBAI NAGAR, ADYAR, CHENNAI 600 020. [PAN AAECM 4849A] ( / APPELLANT) ( /RESPONDENT) &' ( ) / APPELLANT BY : SHRI. A.B. KOLI, IRS, JCIT. *+&' ( ) /RESPONDENT BY : SHRI. R. VIJAYARAGHAVAN, ADVOCATE ( , / DATE OF HEARING : 05-11-2015 -.% ( , / DATE OF PRONOUNCEMENT : 28-01-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER OF COMMISSIONER OF INCOME TAX (APPEALS)-IV, CHENNAI IN ITA ITA NO. 2858/MDS/2014. :- 2 -: NO.414/2013-14, DATED 21.08.2014 FOR THE ASSESSMENT YEAR 2007-2008 PASSED U/S.271(1)(C) OF THE INCOME TAX ACT, 1961. 2. THE DEPARTMENT HAS RAISED THE FOLLOWING GROUNDS CHA LLENGING THE ORDER OF LD.COMMISSIONER OF INCOME TAX (APPEALS ):- 2.2 THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) OUGHT TO HAVE APPRECIATED THE FINDINGS OF THE ASSES SING OFFICER, THAT THE ASSESSEES CLAIM ON THE AMOUNT KEPT IN CAS H COLLATERAL IS NOT PERMISSIBLE AS IT IS MERE DIVERSION OF INCOME B Y OVERRIDING TITLE. 2.3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) FAILED TO NOTE THAT THIS IS A CASE WHERE QUESTIONABLE DETAILS AND PARTICULARS, RELATING TO REVENUE RECOGNITION WERE F URNISHED BY THE ASSESSEE AND SUCH DETAILS WERE SO FUNDAMENTAL TO TH E GENUINENESS AND BONAFIDE OF THE CLAIM THAT MERE FUR NISHING OF THOSE PARTICULARS MADE THE CLAIM VULNERABLE, ENTAIL ING LEVY OF PENALTY U/S.271 (1)(A) OF THE I.T. ACT, 1961. 2.4 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) OUGHT TO HAVE APPRECIATED THAT MAKING A CLAIM CONTRARY TO A STATUTORY PROVISION IS A CLEAR CASE OF FURNISHING INACCURATE PARTICULARS OF INCOME, LEADING TO CONCEALMENT OF INCOME. 2.5 HAVING REGARD TO THE HONBLE DELHI HIGH COURT S DECISION IN THE CASE OF CIT VS. ZOOM COMMUNICATION (P) LTD 327 ITR 510, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OU GHT TO HAVE UPHELD THE LEVY OF PENALTY U/S.271(1)(C) OF TH E INCOME TAX ACT, 1961. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A NON BANKING FINANCIAL COMPANY REGISTERED UNDER COMPANIE S ACT AND IN THE BUSINESS OF PROVIDING LOANS AND LENDING BUSINESS FO R VARIOUS SELF HELP GROUPS IN TAMIL NADU. FOR THE ASSESSMENT YEAR 2007 -2008, THE ASSESSEE COMPANY HAS SUBMITTED RETURN OF INCOME WIT H INCOME TAX ITA NO. 2858/MDS/2014. :- 3 -: DEPARTMENT AND IN THE SCRUTINY PROCEEDINGS THE LD .AO HAS MADE ADDITION ON ACCOUNT OF CASH COLLATERAL OFFERED TO I CICI BANK A2,10,99,000/- AS INCOME OF THE PREVIOUS YEAR AND A SSESSED TOTAL INCOME AT A7,87,40,505/-. AGGRIEVED BY THE ORDER O F THE ASSESSING OFFICER THE COMPANY HAS FILED AN APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS)-IV AND REITERATED ITS SUBMISSI ONS WITH THE JUDICIAL DECISIONS ON THE GROUND OF RETENTION OF M ONEY WERE THE CONTRACTOR COULD NOT TREAT THE RETENTION AMOUNT AS INCOME TILL THE CONTRACT PERIOD IS LAPSED OR COMPLETED BUT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS CONFIRMED THE ORDER OF THE LOWER AUTHORITIES. THE LD. ASSESSING OFFICER ISSUED NOTI CE FOR LEVY OF PENALTY U/S.271(1)(C) OF THE ACT. IN THE PENALTY PROCEEDIN GS, THE ASSESSEE HAS SUBMITTED DETAILED EXPLANATIONS AND FURNISHED DETAI LS OF CONTRACT AND COMPLIED WITH DIRECTIONS. 4. THE LD. ASSESSING OFFICER ALLEGED TO LEVY PENALTY BASED ON THE SYSTEM OF ACCOUNTING FOLLOWED BY THE COMPANY IN RESPECT OF LOANS PROVIDED FOR SELF HELP GROUPS. THE LD. AUTHORISED REPRESENTATIVE HAS EXPLAINED THAT COMPANY HAS SOLD A PORTION OF LOANS GRANTED BY ITS VARIOUS SELF HELP GROUPS TO ICICI BANK ON THE BASIS OF BILATERAL BUY OUT BASIS. A PER THE TERMS AND CONDITIONS OF THE BUYO UT DEAL THE ASSESSEE SHALL PROVIDE CASH COLLATERAL FOR THE AMOUNT EQUAL TO 2% OF PURCHASE ITA NO. 2858/MDS/2014. :- 4 -: CONSIDERATION FOR RECEIVABLES ASSIGNED TO ICICI BAN K AND SUCH COLLATERAL IS MADE BY WAY OF BANK DEPOSITS AND COMP ANY SHALL MAKE A LIEN IN FAVOUR OF ICICI BANK. THE TERMS BEING THE CASH COLLATERAL PROVIDED SHALL BE UTILIZED BY ICICI BANK TO COVER A NY SHORTFALL IN THE REPAYMENT OF LOANS BY SELF HELP GROUPS TO ICICI BAN K. IT WAS ARGUED AND SUBMITTED BEFORE THE LD.ASSESSING OFFICER THAT THE ASSESSEE BEING A COMPANY REGISTERED UNDER COMPANIES ACT, 1956 AND ALSO COMPLY WITH STATUTORY AUDIT ACCOUNTING STANDARDS REFERRED TO SEC 211 OF THE COMPANIES ACT AND IT HAS BEEN FOLLOWING SUCH SYSTEM AS PER GUIDELINES ISSUED BY THE ICAI. BUT LD. ASSESSING OFFICER ALLE GED THAT ASSESSEE HAS SUBMITTED INACCURATE PARTICULARS AND LEVIED THE PE NALTY OF A71,01,923/-. AGGRIEVED BY THE ORDER OF PENALTY U/ S.271(1)(C) THE ASSESSEE PREFERRED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 5. IN APPELLATE PROCEEDINGS THE ASSESSEE COMPANY HA S REITERATED ITS EARLIER SUBMISSIONS AND RELIED ON TH E LEGAL DECISIONS WERE THE AMOUNT OF RETENTION MONEY WAS NOT CONSIDERED AS INCOME UNTIL THE CONTRACT PERIOD EXPIRES. BUT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN QUANTUM APPEAL HAS CONFIRMED THE ADDIT ION OF ASSESSING OFFICER. MEANWHILE TIME PERIOD OF LOANS WHICH WER E SOLD TO ICICI BANK HAS EXPIRED AND THE ACTUAL AMOUNT OF LOANS NO T REPAID BY SELF ITA NO. 2858/MDS/2014. :- 5 -: HELP GROUPS WAS DETERMINED AND ICICI BANK HAS APPRO PRIATED THE AMOUNT OF CASH COLLATERAL FIXED DEPOSITS TO THE EXT ENT OF RECOVERY DEFICIT. SINCE THE RECOVERY IS LESS THAN THE ACTU AL LOANS GRANTED, THE ASSESSEE COMPANY HAS INCURRED BAD DEBTS IN THE YEAR OF APPROPRIATION OF DEPOSITS BY ICICI BANK AND DEBITED TO PROFIT AND LOSS ACCOUNT AND CLAIMED DEDUCTION. THE ASSESSEE HAS NOT FILED SECO ND APPEAL AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) PASSED U/SECS. 143(3) AND 250 OF THE ACT DUE TO CLAIM OF B AD DEBTS. THE NBFC COMPANY HAS FILED SUBMISSIONS DULY SUPPORTED BY THE JURISDICTIONAL HIGH COURT DECISION. 6. AS SUBMITTED THE ASSESSEE HAS FIXED DEPOSITS TO COVER THE PROBABLE DEFICIENCY OCCURS TO ICICI BANK IN CASE O F DIFFERENCE IN REALIZATION OF LOANS, WHICH TAKES THE CHARACTERISES OF RETENTION MONEY. FURTHER, THE ASSESSEE IS FOLLOWING AUDITING AND ACC OUNTING STANDARDS OF THE ICAI WHICH IS NOT DISPUTED. THE FACT THAT INCO ME RECOGNITION OF RETENTION MONEY SHALL BE CRYSTALLIZED ONLY AFTER CO MPLETION OF EVENTS OR EXPIRY OF PERIOD. THE LD. COMMISSIONER OF INCOME TA X (APPEALS) HAS OBSERVED AT PARE 7 AT PAGE 3 AS UNDER:- THE PROVISIONS OF AS-9 MANDATED THAT IN CASE THE RE IS ANY UNCERTAINTY RELATING THE ULTIMATE REALIZATION OF TH E INCOME, THEN THE RECOGNITION OF REVENUE HAD TO BE POSTPONED UNT IL THE UNCERTAINTY IS RESOLVED. THEREFORE, TO COMPLY WITH THE SAID STANDARD, THE APPELLANT HAD ADOPTED AN ACCOUNTING P OLICY WITH RESPECT TO RECOGNITION OF REVENUE IN RESPECT OF INC OME FROM ITA NO. 2858/MDS/2014. :- 6 -: BUYOUT OF PORTFOLIO OF LOANS. THE SAID ACCOUNTING POLICY, WHICH HAS BEEN MENTIONED AS PART OF THE NOTES FORMING PAR T OF THE AUDITED ACCOUNTS FILED ALONGWITH THE RETURN OF INCO ME READS AS UNDER:- ) REVENUE RECOGNITION I) ............ II) IN RESPECT OF LOANS SOLD ON BILATERAL BASIS WITH BANKS AND FINANCIAL INSTITUTIONS, THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE LOANS SOLD AND THE SALE CONSIDERATION RECEIVED NET OF AMOUNTS KEPT IN DEPOSITS UNDER LIEN TO BANKS AND FINANCIAL INSTITUTIONS TOWARDS POSSIBLE DEFAULT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT. CONSIDERING THE FACTS AND SYSTEM OF ACCOUNTING, LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT THERE IS NO CONC EALMENT OF INCOME OR SUBMISSION OF ANY INACCURATE PARTICULARS OF INCOME BY THE ASSESSEE AND DIRECTED ASSESSING OFFICER TO DELETE T HE PENALTY. AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE REVENU E HAS FILED AN APPEAL BEFORE THE TRIBUNAL. 7. THE LD. DEPARTMENTAL REPRESENTATIVE HAS URGED THA T THE CASH COLLATERAL IS NOT PERMISSIBLE AND TREATED AS M ERE DIVERSION OF INCOME OVERRIDING TITLE AND ASSESSEE HAS NOT FURNIS HED GENUINE DETAILS IN RESPECT OF REVENUE RECOGNITION AND PLEADED FOR S ET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND REL IED ON THE JUDICIAL DECISIONS. ITA NO. 2858/MDS/2014. :- 7 -: 8. ON THE OTHER HAND, THE LD. AUTHORISED REPRESENTATI VE OF THE ASSESSEE SUBMITTED THAT THERE IS NO CONCEALMENT OF INCOME OR FURNISHING OF INACCURATE PARTICULARS BY ASSESSEE IN THE ASSESSMENT PROCEEDINGS OR BEFORE APPELLATE PROCEEDINGS AND THE RE IS NO FRESH EVIDENCE FILED BEFORE THE COMMISSIONER OF INCOME T AX (APPEALS). THE ASSESSEE HAS EXPLAINED THE SYSTEM OF ACCOUNTING BE FORE THE LOWER AUTHORITIES AND RETAINED THE MONEY, TO BE ADJUSTED BY THE ICICI BANK FOR THE DEFICIENCY IN REALIZATION OF LOANS WHICH IS CONSIDERED AND DIFFERENCE OF LOAN RECOVERY IS CLAIMED AS BAD DEBT S. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS CONSIDERED THE ACCOUNTING STANDARDS, ACCOUNTING SYSTEM AND JUDICIAL DECISIONS AND DIRECTED TO DELETE THE PENALTY IMPOSED ON ASSESSEE IN ACCORDANC E WITH LAW AND PRAYED FOR DISMISSAL OF THE APPEAL OF THE REVENUE. 9. WE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES, MATERIAL ON RECORD, LOWER AUTHORITIES ORDER AND JUDICIAL DEC ISIONS CITED. THE ASSESSEE BEING A MICRO FINANCE COMPANY IS IN THE B USINESS OF PROVIDING FINANCIAL LOANS TO VARIOUS SELF HELP GROU PS. THE LOANS GRANTED TO SELF HELP GROUPS HAVE BEEN SOLD TO ICICI BANK ON BILATERAL BUY OUT BASIS AND AS PER THE AGREEMENT 2% OF THE LO ANS RECEIVABLE WILL BE DEPOSITED BY WAY OF FIXED DEPOSITS AND THE LIEN IS CHARGED IN ITA NO. 2858/MDS/2014. :- 8 -: FAVOUR OF ICICI BANK AND SUCH PROVISIONS ARE ACCEPT ABLE AS PER TERMS OF AGREEMENT WHICH IS NOT DISPUTED. THE ASSESSIN G OFFICER HAS VERIFIED THE AUDITED ACCOUNTS PRODUCED IN ASSESSME NT PROCEEDINGS AND THERE IS DISPUTE ABOUT THE ACCOUNTING POLICIES WHICH THE ASSESSING OFFICER ALLEGED. THE ASSESSEE COMPANY CLAIMS TH AT ITS CASE FALLS IN CAPACITY OF CONTRACTOR AND THE MONEY IS RETAINED FO R A CERTAIN PERIOD AND RETENTION MONEY SHALL NOT BE TAXABLE UNTIL THE RETENTION PERIOD IS OVER AND THE ASSESSEE RELIED ON THE DECISIONS BUT AMOUNT KEPT IN CASH COLLECTED IS NOT A PRUDENT PRACTICE AND IT SHOULD BE SUBJECTED TO TAX. IN THIS CASE THE MONEY HAS BEEN APPROPRIATED BY ICI CI BANK AFTER COLLECTION AND THE ASSESSEE HAS CLAIMED THE DEFICIE NCY IN REALIZATION AS BAD DEBTS. THE INCOME OF 2% WAS NOT CONSIDERED IN PROFIT AND LOSS ACCOUNT BY ASSESSEE. WE ARE OF THE OPINION THAT TH ESE ARE INCORRECT TREATMENT GIVEN BY THE ASSESSEE COMPANY AND HAVE NO SANCTION OF LAW AND ALSO NOT SUPPORTED BY ANY ACCOUNTING STANDARD. THE ASSESSEE CLAIM IS NOTHING BUT FALSE CLAIM AND FURNISHING INA CCURATE PARTICULARS OF INCOME. THE EXPLANATIONS GIVEN BY THE ASSESSEE CANN OT BE CONSIDERED AS BONAFIDE AND ASSESSEE TRIED TO CONCEAL THE INCOM E BY MISREPRESENTING THE CASE BY NOT BRINGING TRUE INCOM E TO THE BOOKS OF ACCOUNTS. WE RELY ON THE DECISION OF DCIT VS. RATTHA CIDADINES BOULEVARD CHENNAI (P) LTD (2015) 155 ITD 977 WHERE IT OBSERVED THAT ITA NO. 2858/MDS/2014. :- 9 -: AUDITORS REPORT CANNOT OVERRIDE PROVISIONS OF ACT AND, THUS, MERELY BECAUSE ASSESSEES FALSE CLAIM FOR DEDUCTION IS SUP PORTED BY CHARTERED ACCOUNTANTS OPINION, THIS FACT PER SE CANNOT ABSOL VE ASSESSEE FROM PENALTY UNDER SECTION 271(1)(C) OF THE ACT. ACCORD INGLY, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) AND RESTORE THE ORDER OF ASSESSING OFFICER AND ALLOW THE APPEAL OF THE REVENUE. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.2858/MDS/2014 IS ALLOWED. ORDER PRONOUNCED ON 28 TH JANUARY, 2016 AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ) (G. PAVAN KUMAR) /JUDICIAL MEMBER / CHENNAI / / DATED: 28.1.2016 KV 0 ( *',23 43%, / COPY TO: 1 . &' / APPELLANT 3. 5, () / CIT(A) 5. 389 *',' / DR 2. *+&' / RESPONDENT 4. 5, / CIT 6. 9:$ ; / GF