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2015 (6) TMI 525 - ITAT HYDERABAD

2015 (6) TMI 525 - ITAT HYDERABAD - TMI - Accrual of income - Addition on gain on assignment of loan portfolio - sale of portfolio - Held that:- This issue involved in the appeal of the assessee is squarely covered in favour of the Revenue and against the Assessee by the decision of Coordinate Bench of this Tribunal in assessee’s own case for the A.Y. 2009-2010 [2015 (2) TMI 937 - ITAT HYDERABAD] wherein held that at the time of sale of portfolio, there is a gain of ₹ 1.54 Crores. This amo .....

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greement. 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 t .....

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d. CIT(A), the same may be remitted back to the Ld. CIT(A) for deciding the same afresh depending on his decision on a similar issue for the initial year. Since the learned D.R. has also not 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 involved in assessee’s own case for A.Y. 2007- 2008 for which the appeal is pending with him. - Decided in favour of assessee for statistical purposes. - .....

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. The learned CIT(A) erred in confirming the addition of ₹ 15,45,89,893 on the ground that the gain on assignment of loan portfolio by the appellant would become taxable in its entirety during the assessment year under consideration 3. The learned A.O. erred in not allowing deduction u/s.35D of ₹ 4,00,000. 4. The learned CIT(A) ought to have seen that by making the adjustment to the assignment of the gain on sale of loan portfolio, the income cannot be brought to tax in both the asse .....

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. CIT(A) in confirming the addition of ₹ 15,45,89,893 made by the A.O. by bringing to tax the entire gain on assignment of loan portfolio. 4. The assessee in the present case is a company which is carrying on the business as micro finance institution. The return of income for the year under consideration was filed by it on 28.09.2010 declaring total income of ₹ 90,79,46,733. In the said year, the assessee had sold certain portion of its loan portfolio to banks by way of direct assign .....

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. 2011- 2012. During the course of assessment proceedings, copies of relevant deeds of assignments entered into by the assessee with different Banks under Type-1 model were obtained and examined by the A.O. On such examination, he found that the assessee has sold the loan portfolio in outright fashion and received the purchase consideration. He therefore required the assessee to explain as to why the entire net gain received on assignment should not be brought to tax in the year under considerat .....

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. These collections are deposited in a pool and remitted to the assignee banks on due dates; c) Assessee has to incur substantial expenditure on servicing the loans and collecting the receivables. d) The cost is to be incurred during the tenure of the agreement and it is difficult 'to estimate the same. e) In view of the uncertainties in estimation of the cost of fulfilling the obligations, it would not be proper to recognize the income upfront by merely arriving at the difference between th .....

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folio as part of purchase consideration is deferred to the extent of performance under the sale contract on proportionate basis over the period of contract with Banks; i) Out of the interest receivable of ₹ 19,42,78,577/- an amount of ₹ 3,96,88,684/- is recognized as income during the year and balance amount of ₹ 1545,89,893/ - is deferred to subsequent years following the above principle; 4.1. The above submissions of the assessee were considered by the A.O. in the light of gu .....

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r. c) The agreement for portfolio buyout and collection are separate and distinct. The sale of portfolio is unconditional. As per para 6 of the guidance note, servicing of the asset by itself can not lead to a situation of partial derecognition of asset and thereby revenue from the asset. Further, the servicer is not entitled exercise any general or particular or lien with respect to a borrower against the assigned receivables. As per the terms of the service agreement, the assignee has the righ .....

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separate functions performed by the assessee; f) The interest income received on sale of portfolio has no link with service cost. Also, there is no interest strip or service strip in the agreement to sell the portfolio; g) Keeping of cash collaterals indicates only a contingent liability. Only the first part is out of the amounts received by the assessee. The assessee is not prevented from claiming trading loss, If any, as and when the assignee invokes the guarantee; h) The assessee s liability, .....

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t of loan portfolio. He held that such amortization was contrary to para- 7 of the relevant guidance note which clearly stated that once the asset was derecognized, the consideration should be treated as gain or loss arising on securitization and disclosed separately in the statement of P & L account. According to the A.O., the entire gain of ₹ 19,42,78,577 thus was required to be recognised by the assessee as its income in the year under consideration instead of only ₹ 3,96,88,6 .....

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by the A.O. on account of gain on assignment of loan portfolio for the following reasons given in para 4.8 of his impugned order. 4.8. … it is evident that there seems to be no reason as to why the gain on sale of loan portfolio has to be amortized and the income should be offered in A.Y.2010-11 and in A.Y. 2011-12 instead of offering the entire amount in A.Y.2010-11. It is fairly simple and straight case where, the appellant has already recovered the net gain of ₹ 19,42,78,577 /- h .....

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loan portfolio the net gain of ₹ 19,42,78,577/- was already received by tl1e appellant. Even in the worst scenario, where the appellant fails to recover the loans due from the borrowers, his risk is restricted to the extent of collateral given to the banks. Even if the borrowers default, if the recoveries are adjusted against collateral deposits, as and when such eventuality arises such claim can be made u/s.36(1)(vii). In any case, the fears expressed by the appellant with reference to r .....

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d in favour of the Revenue and against the Assessee by the decision of Coordinate Bench of this Tribunal in assessee s own case for the A.Y. 2009-2010 rendered vide its order dated 30.01.2015 passed in ITA.No.137/Hyd/2013. A copy of the said order is placed on record before us and perusal of the same shows that similar issue has been decided by the Tribunal against the assessee for the following reasons given in paragraph Nos. 11 to 14 of its order. 11. As can be seen from the above, assessee .....

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hat as far as principal amount is concerned, no discount was considered as the entire portfolio was given at the book value only. Only interest receivable sold to the purchaser, however, was discounted. Thus, as seen from the above example out of ₹ 2.96 Crores receivable, assessee discounted to an extent of ₹ 1.41 Crores and showed the gain of ₹ 1.54 Crores. It is assessee's contention that the entire amount of ₹ 2.96 Crores, being future interest receivable, is not a .....

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amount discounted, assessee is accordingly offering income on the proportion of interest accrued during the year. 12. This system of account being done by assessee is more or less similar to the bill discounting system, which is generally followed by many in the business. In the bill discounting system, a person who discounts the bill takes the interest amount upfront when he discounts the bill by way of 'front end discount', the income accrues at that point of time. What is material is .....

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377; 24.33 Crores as can be seen 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 .....

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9,34,100 = 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 March, the entire amount is to be accounted as income on that transaction as a gain. 13. Similar issue was considered by the Hon'ble Madras High Court in the case of TVS Finance and Services Ltd., Vs. JCIT [318 ITR 435 (Mad)] on the issue of accrual of income and ti .....

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ision it had made towards bad debts under the RBI norms was deductible. The Assessing 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 complete at the moment the customer is given 90 per cent of the value of the bill. The discount is equivalent to the interest and it accrued at that point. (ii) That the debts were shown as w .....

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d being same, we uphold the orders of Assessing Officer and CIT(A) on the issue. In fact, both Assessing Officer and CIT(A) analyzed the accounting principles, agreements and came to conclusion that the amounts have accrued at the time of sale of portfolio. We affirm the same and hold that the amount of ₹ 13,09,44,315/- being the amount of discounted future interest received by assessee during the year is taxable in the year. Accordingly, we uphold the orders of Assessing Officer and rejec .....

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ngly dismissed. 7. In Ground No.3, the assessee has disputed the disallowance of ₹ 4 lakhs made by the A.O. under section 35D which is confirmed by the Ld. CIT(A). 8. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As submitted by the Ld. Counsel for the assessee, the relevant expenditure in respect of which deduction under section 35D is claimed by the assessee for the year under consideration, was actually incurred i .....

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