TMI Blog2016 (10) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax (Appeals)-VII, Ahmedabad, except ITA No. 3338/Ahd/2009 for AY 2006-06, which is assessee s appeal against the order of ld. CIT(A)-VII, Ahmedabad. 2. The common ground raised by the assessee in AYs 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10 with regard to NCD(non-convertible debenture) expenses reads as under:- The learned Commissioner of Income-tax (Appeals)-VIII, Ahmedabad has erred in law and on facts of the case by confirming disallowance of ₹ 17,19,535/- for AY 2005-06, ₹ 55,12,739 for AY 2006-07, ₹ 20,96,430/- for AY 2007-08, ₹ 24,37,769/- for AY 2008-09 and ₹ 29,21,584 for AY 2009-10 made by the Assessing Officer out of NCD expenses after holding that the same has to be allowed equally for 5 years as NCD are for 5 years period and the Appellant has also not charged the same to the Profit Loss Account. 2.1 We take the lead case as ITA No.1295/Ahd/2009 for AY 2005-06. The facts with regard to expense on account of NCD as emerge from the record of AY 2005-06 are that during the course of assessment proceedings the Assessing Officer has observed that in the statement of income the assessee has claimed expenses on issue of NC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to be allowed in equal installments in five years. Accordingly, he allowed 20% of the expenses ₹ 4,29,884/- as deduction in FY 2004-05 and the balance expenses of NCD of ₹ 17,19,535/- was not allowed to the assessee. 2.5 The ld. CIT(A) has confirmed the disallowance made by the Assessing Officer on the ground that benefit to be accrued from the said expenditure will be available to the assessee in the period of five years. He also held that the claim of the appellant is also against the matching principles of income and expenditure. The ld. CIT(A) placed reliance on the decision of Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd vs. CIT (supra) and the Hon ble Bombay High Court in the case of Taparia Tools Ltd (supra). 2.6 The ld. Counsel for the assessee submitted that the expenditure in respect of NCD was raised during the year and the entire expenditure is allowable as deduction. He placed reliance on the following judgments:- a) India Cement Ltd vs. ITO, 60 ITR 52 (SC) b) CIT vs. Office of the official liquidator, 316 ITR 181 (Guj.) c) CIT vs. Mihir Textile Ltd, 316 ITR 403 (Guj) d) Patel Filters Ltd vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional Housing Bank). 3.1 For AY 2005-06, the Assessing Officer observed that the assessee- company has claimed in the statement of income a deduction on account of pre-payment charges to NHB amounting to ₹ 2,62,45,000/-. The assessee claimed the said expenses in the Profit Loss at ₹ 42,02,920/- and the balance expenditure has been amortized in the books of account. In this regard, the assessee was asked to justify for claiming the entire NHB prepayment charges in the current year and also asked to explain why the expenses so incurred for refinancing of loan should not be considered as capital loss. Assessee has explained that during the year, the assessee- company has made early payment in respect of loan taken from National Housing Bank (NHB). In the books of account the same has been amortized at ₹ 42,02,920/- and claimed ₹ 2,62,45,400/- as deduction from the total income on actual payment basis. Treatment given in the books of accounts has no relevance to the computation of income under the provisions of the Income-tax Act, 1961. The assessee also relied on the decision of Hon ble Supreme Court in the case of Tuticorn Alkali Chemicals Fertilizers L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as disallowed. On the similar reasoning, for AY, 2006-07, the Assessing Officer disallowed ₹ 39,87,967/- against the total claim of ₹ 49,87,459/-. 3.2 On appeal, the ld. CIT(A), after considering the submissions of the assessee, confirmed the aforesaid disallowances for both assessment years. Keeping in view the rational on the basis of which NCD expenses have been disallowed by following the decision of Hon ble Supreme Court in the case of Madras Industrial Investment Corpn vs. CIT, 225 ITR 802 and the decision of the Hon ble Bombay High Court in the case of Taparia Tools Ltd, 260 ITR 102. 3.3 Aggrieved by the order of the CIT(A), the assessee preferred this ground before the Tribunal. The ld counsel of the assessee relied on the decision of Hon ble Supreme Court in the case of Tuticorn Alkali Chemicals Fertilizers Ltd v/s. CIT ( 227 ITR 172 (SC)) and claimed that the entire expenditure is allowable as deduction during the year under consideration. The ld. DR relied on the order of the ld. CIT(A). 3.4 We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. The issue raised in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer and dismissed the assessee s ground in this respect. 4.3 Aggrieved by the aforesaid order of the CIT(A), the assessee is further in appeal before us. 4.4 Ld. Counsel for the assessee drew our attention to National Housing Bank guidelines dated 31.03.2005, placed in the paper-book. He contended that the National Housing Bank (NHB) has revised the norms for recognizing non-performing assets (NPA) effective on 31.03.2005. He also contended that as per the new norms, NPA are recognized on the basis of 90 days overdue as against 180 days past due under the old norms. He submitted that the NHB guidelines for recognizing NPA was effective from 31.03.2005 and the accounts have been closed on 31.03.2005, therefore, the assessee has rightly followed the new norms of NHB for recognizing NPA, the action of Assessing Officer in this regard is not justified and the same may be deleted. 4.5 The ld. DR, on the other hand, supported the orders of the lower authorities. 4.6 We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. We find force in the submission of the assessee that the NHB guidelines for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the appropriate authorities.Where recovery of loan amount with outstanding dues becomes irrecoverable even after legal action, the outstanding amount is written off. It was also submitted that as per the amended provisions of Section 36(1)(viii), once the amount is written off as bad debt, the same has to be allowed as deduction under the said provision. Reliance is placed on the judgment of Hon ble High Courts in the case of (i) CIT vs. Morgen Securities Credits Pvt Ltd, 292 ITR 339 (Del), (ii) CIT vs. Autometers Ltd, 292 ITR 345 (Del), (iii) CIT vs. Girish Bhagwat Prasad, 256 ITR 772 (Guj) and DCIT vs. Patidar Ginning Pressing Co, 157 CTR 177 (Guj). He further placed reliance on the Hon ble Apex Court judgments in the case of TRF vs. CIT, 323 ITR 397 (SC) and Vijaya Bank vs. CIT, 37 DTR 401 (SC.). He has also referred to the judgement of Vijay Bank vs. CIT, 37 DTR 401 (SC) decided by the Hon ble Supreme Court. 5.3 Ld. DR, on the other hand, supported the orders of the lower authorities. 5.4 We have heard the rival contentions, perused the material available on record and gone through the orders of the lower authorities. We find that the Hon ble Supreme Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had claimed deduction u/ 36(1)(viii) to the amount of ₹ 8,00,00,000/-. However, the Assessing officer noticed that the assessee was claiming deductions u/s 36(1)(viii) which was not derived from long term housing finance business. It was also found that assessee was transferring/assigning their housing loan portfolios to HDFC without holding for a period of 5 years. In this connection the Assessing officer stated that as per Explanation (e) to clause (viii) to sub-section (1) of Section 36 of the Act long term finance means only loan or allowances where the terms under which money are loaned or advanced provide for repayment along with interest there of during a period of not less than 5 years. The assessee claimed that in Section 36(1), nowhere it is provided that deduction u/s 36(1)(viii) will not be allowed if the tenure of the loan is reduced to less than 5 years.Once long term housing finance was made and necessary reserves created and maintained as provided in the Section, deduction u/s 36(1)(viii) is available. The assessee has also claimed on assigned/transferred of loan portfolios, the part of the interest received from the loanee was the interest income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the assessee computed deduction u/s 36(1)(viii) by including bad debt recovered at ₹ 18,73,000/- which was otherwise not an income derived from long term housing finance business. Similarly, the AO also noticed that the EMI residual related to earlier year transferred to the P L A/c for taxation for the FY 2004-05 at ₹ 3,81,42,000/- has been considered by the assessee as part of long term housing business which was in fact income arising out of such loan portfolio transferred by the assessee company in earlier years without holding the same for 5 years. The AO decided such above cited income as not derived from long term housing finance business and placed reliance on the following judicial decisions:- i. Cambay Electric Supply Industrial Co. Ltd vs. CIT, 113 ITR 84 (SC); ii. Eastern Seafood Exports P Ltd, 215 ITR 64 (Mad.); iii. CIT vs. Sterling Foods, 237 ITR 579 (SC); iv. CIT vs. Cement Distributors Ltd, 208 ITR 355 (Del.); v. CIT vs. Cochin Refineries Ltd, 135 ITR 278 (Ker.); vi. Pandian Chemicals Ltd vs. CIT, 262 ITR 278 (SC) 6.2 In view of above stated facts the AO has disallowed deductions u/s 36(1)(viii) of the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT, Ahmedabad vide combined order of ITA No.2238/Ahd/2007 for AY 2004-05 and ITA No.2601/Ahd/2008 for AY 2000-01. The finding of the Bench on this issue for the AY 2004-05 are reproduced as under:- 19. As far as the bad debts recovered by the assessee are concerned, the AO haws observed that ratio of operating income from long term finance is 97.01%. In the year in which the loans have gone bad and the assessee has written off them, the eligible profit derived from long term housing finance was reduced by the amount written off by the assessee as bad debt. In this year, when the assessee recovered bad debts, its income from long term finance would be enhanced by that much amount. Thus, the AO has erred in rejecting the claim of the assessee. The AO has made reference to the judgment of the Hon ble Supreme Court in the case of CIT Vs. Sterling Foods, 237 ITR 579 (SC). In that case while construing expression derived , the Hon ble Court has observed that there should be a nexus between the income derived from industrial undertaking. The assessee has sold import entitlement, and in that context, it was construed that such income was not derived from industrial undertaking. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns a long term finance. The right to receive interest has changed the hands. Accordingly the new company if fulfills other conditions contemplated in the Act, then, assessee will be entitled to claim deduction, otherwise, automatically it will not be available to any assessee after the assignment. 13. A perusal of section along with clause (e) no where reveals that the assessee is bound to maintain the account for five years, otherwise the Legislature would provide the deduction after completion of 5 years of such loan account. It only puts a condition about the nature of account. An assessee is entitled for deduction for the purpose of this section from the first year itself. The meaning construed by us can be further fortified by considering section 155 of the Income Tax Act. Under this section AO has been empowered to withdraw certain deduction to an assessee. For example investment allowance is being granted to an assessee u/s.32A in respect of ship and such ship was transferred before expiry of eight years in violation to the conditions, then u/s.155 it will be construed that such allowance was granted wrongly. Similarly, a provision has been made to withdraw number of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I Residual Account. The AO pointed out to the assessee why such EMI of ₹ 9.83 crores should not be brought to tax. The assessee explained that the same cannot be taxed as income of the year on the following grounds:- 5.1 In the computation of income filed along with the Return of Income, a sum of ₹ 1,45,79,144/- has been reduced from the total income. The Appellant has sold/transferred/assigned individual loan portfolios in earlier year and profit in respect of the said loan portfolios was duly booked in profit of relevant previous year. During the year under consideration, due to earlier payment of loans and, therefore, reversal entry in respect of profit of those tranche which was booked in earlier year has been passed. Total amount of reversal entry of income is of ₹ 5,27,35,943/-. 5.2 During the year under consideration, the Appellant has sold/transferred or assigned individual home loans aggregating to ₹ 40,13,87,920/-. As a result of the sale/transfer/assignment, entire surplus of ₹ 9,83,32,951/- being the difference between EMI recoverable from such individual borrowers during the remaining tenure of loan and payable to the Buyer for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of interest collected from the loanee by way of service charges. Therefore, on account of such transactions, out of the amount receivable as service charge for rendering the services over the period of loan, as mentioned above, the part of the said amount which is for the relevant year and which has accrued at the year end only can be the subject matter of tax for the year. (c) It is also submitted that the agreement does not oblige buyer to continue to retain the services of the Appellant as agent for recovery of loans throughout the period for which the installments are outstanding. Attention is invited to Clause 5.5 of the Agreement which reads as under: The seller shall act and continue to act as the Receiving and Paying Agent until all the Receivables shall have been paid. In the event of the occurrence of any Event or Default, and if so decided by the Beneficiary, the Seller shall cease to act as the Receiving and Paying Agent. In that event the Beneficiary may, at its option, terminate the appointment of the Seller as the Receiving and Paying Agent after giving 20 days notice. The Beneficiary shall appoint any bank or institution as the new Receiving and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of expenditure in one year though benefit of the same was available to it over a period of 12 years. The Supreme Court observed as under :- Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety of years even if the assesses has written it off in his books over a number of years. However, the facts may justify an assessee who has ; incurred expenditure in a particular year to spread and claimed it over a period of ensuing years. In fact allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. It is submitted that the above judgment of the Supreme Court is in the field of expenditure. However, the principles laid down in the said judgment are equally applicable in the field of computing of income for the purpose of taxing of the income. (h) Regarding the accounting entries passed in respect of EMI Residual Income in the books of accounts, it is submitted that the accounting entries cannot be made base for deciding the taxability of income. Attention is invited to the Supreme Court's decision in the case of Tuticorn Alkali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the facts of the case and the submissions of the Ld.A.R. carefully. There is no dispute about the fact that the appellant sold the home loan portfolios and the EMI residual under reference are relatable to future years. The income accrued during the period under reference has been offered in the statement of income. The appellant will offer the balance of EMI residuary is for taxation in the years to follow. Therefore, under these circumstances, there does not appears to be any justification for taxing the future income which has not accrued to the appellant during the relevant period, merely on the basis of book entries. 8.6 It is seen that similar addition was made on the identical facts in the income of the appellant in the A.Yrs.2001-02 to 2004-05. The additions so made were deleted by my Ld. Predecessor by his appellate orders for respective assessment years. My Ld. Predecessor while deleting the addition on similar facts and circumstances in the A.Y.2003-04 observed as under: 3.1 Ad addition to taxable income could be made only on the concept of real income (accrued income) or on the basis of legal fiction. In this case, it is neither. Whatever accounting entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. Counsel for the assessee contended that this is covered issue and the Co-ordinate Bench of ITAT, Ahmedabad in assessee s own case vide a combined order for AY 2004-05 and 2000-01 in ITA No.2238/Ahd/2007 and 2601/Ahd/2008 has confirmed the order of the ld. CIT(A) in which the similar addition made by the Assessing Officer was deleted. 7.5 We have heard both the parties and gone through the material as per record carefully. It is seen that the identical issue was considered by the Co- ordinate Bench of the ITAT as cited above on the basis of similar issue decided by the ITAT in the AY 2001-02. The findings of the Tribunal on this issue read as under:- 5. As far as second ground is concerned, an identical issue was considered by the ITAT in the Asstt.Year 2001-02. The finding of the Tribunal on this issue reads as under: 18. In the appeal filed by the Assessing Officer, the assessee has raised the following grievance: The ld. CIT(A) erred in law and on facts of the case in deleting the disallowance of EMI residual account amounting to ₹ 803.40 lacs, without appreciating the definition of income as explained by the Hon ble Supreme Court in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowers are more than payable to the buyer of loan portfolio. It was also noted that the EMI residual income has been subsequently brought to tax in the year in which related recoveries have taken place. The Assessing Officer is aggrieved of the relief so given by the CIT(A) and is in appeal before us. 20. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 21. In the landmark judgment of Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)], Hon ble Supreme Court has observed that While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed, the appeal filed by the Assessing Officer is dismissed. 6. There is no disparity of facts. The ground raised by the AO is identical, as was raised in the Asstt.Year 2001-02. Following the decision of the Co- ordinate Bench, we do not find any merit in this ground of appeal, which is accordingly rejected. 7.6 We have considered the same and found that the ground raised by the AO are identical as was raised in AY 2001-02 and in AY 2000-01; and following the decision of Co-ordinate Bench we do not find any merit in the ground of appeal of Revenue which is accordingly rejected. Similarly, the appeal of the Department on the identical issues of EMI Residual for AY 2007-08 to AY 2009-10 are also rejected. 8. Ground No.2 of the Revenue s appeal for AY 2005-06 reads as under:- The ld. CIT(A) erred in law and on facts in allowing the disallowance of ₹ 1,71,000/- made by the Assessing Officer under the provision of Section 35D of the Act. 8.1 In their return of income the assessee had claimed deduction u/s 35D of the Act at ₹ 1,71,000/- being the FCD issue expenditure; the AO disallowed the claim on the basis of earlier year s disallowance made on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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