TMI Blog2015 (2) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 - ITAT BANGALORE] the difference (discount) between the market price of the shares and their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no 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 directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anything to its employees but incurs the obligation of issuing shares at a discounted price at a future date. This is nothing but "expenditure" u/s 37(1). The obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme. On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirming an amount of ₹ 13,09,44,315/- being the amount received by discounting the maturity value of loan portfolio on assignment to commercial banks as income during the year. Assessee being micro finance institution, sells its loan portfolios to commercial banks for obtaining capital refinancing funds. As a part of the business activity, the existing loan portfolios are bundled and sold to schedule commercial banks so that assessee receives revolving credit limits in its business. As per the practice, assessee sold its existing loan portfolios to an extent of ₹ 302.40 Crores during the year including the future interest receivables. Assessee offered gain during the year, on proportionate basis out of future receivable interest and amortized balance of the amount to an extent of ₹ 13,09,44,315/- to later years, on the reason that the amount to that extent being on the gross future receivable value of interest has not accrued up to the end of financial year. Since the amount was discounted only, the gain on value of amount pertaining to the accrued interest was offered as income and the balance amount on the future receivables in the next financial year was defer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee meets the obligations in practice is only a self-serving statement. As per the agreement, there is no binding 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 not mean that the revenue has to be deferred. 5. Assessee carried the matter to Ld.CIT(A) and gave detailed submissions mainly relying on the accounting principles 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 the issue as under vide para 4.10 of the order. a) The transaction is a complete buyout of loan portfolio by the bankers and the asset is derecognized from the books of the assessee; b) The collection agent's agreement fixes certain fee for collection and attendant work and it is for the assessee to take a decision whether he should incur huge cost for doing work for a nominal fee or not. Merely, because huge costs are involved in collection wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans. Only thing required is to remit the amounts realized/collected to the Assignee's on the payout dates. 6. Ld.Counsel referring to the orders of authorities and the Paper Book filed, explained that assessee sells the loan portfolio to the banks and obtains revolving credit. As a part of the buyout, 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 discount value of future receivables. Referring to account policies being followed and the guidelines issued, it was the submission that even though assessee has discounted the loan portfolio and receivable interest on the loan portfolio to the extent of interest receivable during the year was only considered for the purpose of offering gain, whereas the gain attributable to future interest i.e., interest accruing later accounting year 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 entire gain was offered to tax during the year as noted by the Assessing Officer in page 2 of the order. However, it was submitted that even though the loan portfolios were sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very month. It is the contention that assignment of loans has been accruing in accordance with AS-9 which covers revenue recognition norms, guidance note on accounting for securitization issued by the ICAI and keeping in view an important principle of accounting i.e., matching principles. Assessee mainly considers para 5 of the AS-9 on revenue recognition 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 consideration 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 consideration, the total purchase consideration was ₹ 302.40 Crores which includes discounted value of future interest receivables to an extent of ₹ 18.87 Crores. Out of this, ₹ 5.78 Crores were amortized and recognized during the FY.2008-09 (this AY) and balance amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (10% of Purchase consideration kept with ICICI Bank as Cash collateral, which is to be released only on completion of the Tenure) For Cash Collateral -2 (Purchase Consideration minus Book value) Kept with ICICI Bank and released in 9 Monthly instalments 19- Mar-09 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 to Book value will kept as CC-2 and released in monthly rests) 19- Mar-09 For broken period Interest Charged by Bank Interest- ICICI Buy Out Dr 18,70,332 Entry passed when Assignment takes place ICICI Buyout Loan - 2 (Loan) A/c Cr 18,70,332 (Broken period Interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies are passed every month on Maturity of FD's placed with ICICI bank till the completion of Tenure Fixed Deposit pledged with ICICI Bank Ltd Cr 15,04,878 (First month Maturity amount received, FD pledged by ICICI bank for Loan 6) 15- Mar-10 Maturity of FD kept as Cash Collateral -1 This entry 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 Cr 2,43,37,656 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 ₹ 25,75,50,626/- out of which discount was given to an extent of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the transaction stated above. Therefore, at the time of sale of portfolio, there is a gain of ₹ 1.54 Crores. This amount received by assessee is in a way discounted interest 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 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 discount, the amount did accrue and received on the date of entering agreement. As can be seen from the above example, out of the total amount of ₹ 2,96,16,526/- receivable in a later year, assessee discounted ₹ 1,41,74,070/- and has received an amount of ₹ 1,54,42,456/- as gain, out of the total price received of ₹ 24,33,76,256/- [that total amount ₹ 24,33,76,256 - ₹ 22,79,34,100 = 1,54,42,456]. Thus, in a way, out of the book value of ₹ 22.79 Crores of portfolio, assessee did receive ₹ 24.33 Crores thereby having the gain of ₹ 1.54 Crores. Since the transaction happened on 19th M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyees Stock Option granted and opted by the employees holding it as not business expenditure but a notional capital expenditure. 16. At the outset, it was fairly admitted that this issue was covered by the orders of Special Bench of ITAT, Bangalore in the case of Biocon Ltd., Vs. DCIT 144 ITD 21 (2013). The Hon'ble Special Bench held as under: (i) The difference (discount) between the market price of the shares and their issue price is expenditure in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no 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 directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anything to its employees but incurs the obligation of issuing shares at a discounted price at a future date. This is nothing but expenditure u/s 37(1); (ii) The liability cannot be regarded as being conti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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