2025 (4) TMI 911 - AT - Income Tax

Disallowance of claim of write off of security receipts - assessee had written off Security receipts during the year under consideration and claimed the same as deduction - When questioned about the same by the AO the assessee submitted that as per RBI guidelines the unrealised security receipts have to be written off within a maximum period of 8 years. Hence the assessee claimed deduction of amount so written off as business loss - HELD THAT - It appears that the assessing officer has not correctly appreciated the business model and the manner of functioning of the assessee company. The assessee herein is a Asset reconstruction Company registered under SARFAESI Act. We notice that section 7 of SARFAESI Act permits the assessee to issue security receipts for raising funds. The concerned trusts have made provision for bad debts in order to determine the quantum of its income. Hence the provision for bad debts if any created by the Trusts is for the purpose of determining the income of the trusts as per the accounting principles and hence it is nothing to do with the accounting methodology followed by the assessee. So far as the assessee is concerned it has treated the investment made in Security Receipts as a separate investment and the income generated there from is offered to tax. Unrealised Security receipts were written off after the expiry of eight years. If any amount is realised after it was so written off such realisation is offered to tax. As noticed earlier the AO has misdirected himself in understanding the concept of forming trusts the accounting system followed by the trusts and assessee. There is no dispute with regard to the fact that the assessee has to follow the guidelines issued by the RBI for accounting the Security Receipts and it has to treat the Security receipts as Loss assets if it is not realised within five years. Accordingly the assessee has chosen to write it off the unrealised portion of the security receipts after expiry of eight years. There should not be any dispute that if any security receipts was not realised within a period of eight years then its recovery is doubtful. Accordingly we do not find any infirmity in the claim made for deduction of Security receipts written off by the assessee. Accordingly we confirm the order passed by Ld CIT(A) on this issue. Addition of upside income not offered to tax by the assessee - A.R submitted that the upside income would consist of Income by way of management fees/incentive and income from investments - HELD THAT - The assessee cannot be considered as the owner of the entire investments made in the Trusts or the financial assets acquired through trusts. In view of the above said position and also as per the requirements of the SARFAESI Act the Trusts are required to be considered as separate entities notionally for accounting purposes. Hence the realisation of NPAs made by the trusts cannot be considered to be the income of the assessee. We notice that the tax authorities have misdirected themselves in understanding the manner of functioning of the assessee and the trusts. We are of the view that the assessee was right in comparing the investments made by it in Security receipts with the investments made by general public in Mutual fund investments. The investors of mutual funds are not concerned with the financial activities carried on by the mutual fund and the incidence of tax shall arise in the hands of investors only when they receive any money from the Mutual fund. In our view the position of the assessee in respect of Security receipts is akin to the investment made in the mutual funds for the purpose of accounting and taxation in view of the requirements provided under SARFAESI Act. AO was not right in assessing any realisation made by the concerned trusts as income of the assessee and the Ld.CIT(A) was not justified in partially confirming a part of the said additions. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition relating to upside income recovery. Protective addition in respect of upside income relating to other Security receipt holders viz. the other beneficiaries of the Trust - The reasoning given by us for deleting the addition of upside income of Rs. 153.77 crores would equally apply to this addition also. The realisation made by the trusts cannot be considered as income of either the assessee or other investors. In any case any income pertaining to other investors cannot be considered as income of the assessee. Hence we are of the view that the AO was not justified in making protective addition of upside income relatable to the other investors in the hands of the assessee since the realisations made by the Trusts cannot be considered as income of either the assessee or other investors unless they are distributed between the security receipts holders. Accordingly we affirm the decision rendered by the Ld.CIT(A) on this issue on the above said reasoning also. Appeal filed by the Revenue is dismissed

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the disallowance of the claim for the write-off of security receipts by the assessee is justified.
Whether the addition of upside income not offered to tax by the assessee is correct.
Whether the protective addition in respect of upside income relating to other Security Receipt holders is valid.

2. ISSUE-WISE DETAILED ANALYSIS

Write-off of Security Receipts

Relevant legal framework and precedents: The assessee, an Asset Reconstruction Company, is guided by the SARFAESI Act and RBI guidelines, which mandate the write-off of unrealized security receipts after a maximum of eight years. The Supreme Court's decision in TRF Ltd vs. CIT supports the write-off of irrecoverable debts in books of accounts.
Court's interpretation and reasoning: The Tribunal found that the AO misinterpreted the business model of the assessee. The assessee's method of writing off security receipts after eight years is consistent with RBI guidelines and past practices accepted by tax authorities.
Key evidence and findings: The assessee's accounting policy and the fact that unrealized security receipts were previously allowed as deductions were pivotal. The Tribunal noted that the AO failed to appreciate the systematic accounting method followed by the assessee.
Application of law to facts: The Tribunal applied the Supreme Court's precedent, emphasizing that writing off debts in books suffices for deduction. The RBI's guidelines were also considered mandatory for the assessee.
Treatment of competing arguments: The AO's argument that the write-off was unjustified due to subsequent recoveries was rejected, as the Tribunal emphasized the consistency of the assessee's accounting practices.
Conclusions: The Tribunal upheld the CIT(A)'s decision to allow the write-off of security receipts.

Addition of Upside Income

Relevant legal framework and precedents: The issue revolves around the interpretation of income realization and taxation in the context of trusts managing NPAs under the SARFAESI Act.
Court's interpretation and reasoning: The Tribunal concluded that the AO misunderstood the nature of the trusts and the distribution of income. The assessee's position, likened to mutual fund investments, was deemed appropriate.
Key evidence and findings: The Tribunal noted that the trusts were treated as separate entities for accounting, and income was only recognized when distributed to Security Receipt holders.
Application of law to facts: The Tribunal found that the AO's approach to assessing income based on trust realizations was flawed. The income should only be taxed when distributed.
Treatment of competing arguments: The AO's argument for immediate taxation of realizations was dismissed, as the Tribunal emphasized the need for distribution as the trigger for tax liability.
Conclusions: The Tribunal set aside the CIT(A)'s partial confirmation and directed the AO to delete the addition related to upside income.

Protective Addition for Other Security Receipt Holders

Relevant legal framework and precedents: The issue pertains to the inclusion of income related to other investors in the assessee's tax liability.
Court's interpretation and reasoning: The Tribunal found that the AO's protective addition was unjustified, as the income related to other investors cannot be attributed to the assessee.
Key evidence and findings: The Tribunal emphasized that trusts' realizations should not be considered as income of the assessee or other investors until distributed.
Application of law to facts: The Tribunal applied the same reasoning as in the upside income issue, confirming that protective additions for other investors were inappropriate.
Treatment of competing arguments: The AO's rationale for the protective addition was rejected, as it misinterpreted the nature of income distribution.
Conclusions: The Tribunal affirmed the CIT(A)'s decision to delete the protective addition.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized, "The realisation made by the trusts cannot be considered as income of either the assessee or other investors, unless they are distributed between the security receipts holders."
Core principles established: The judgment reinforced the principle that income from trusts managing NPAs under the SARFAESI Act is only taxable upon distribution. The consistent application of RBI guidelines for write-offs was also affirmed.
Final determinations on each issue: The Tribunal upheld the CIT(A)'s decisions on allowing the write-off of security receipts and deleting the protective addition. The addition of upside income was also set aside, directing the AO to delete it.

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