TMI Blog2017 (7) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... not crystallized does not hold water. upfront claim of expenses - Held that:- Upfront expenditure should be allowed in the year of incurrence on accrual basis Treatment of portfolio acquisition cost - revenue or capital - Held that:- We hold that these portfolio cases are to be treated as stock in trade for NBFCs and the expenses incurred for purchasing these portfolios would be revenue in nature. We draw support in this regard from the ratio laid down by the Hon’ble Delhi High Court in the case of CIT vs Goyal M.G.Gases P. Ltd reported in (2008 (4) TMI 465 - DELHI HIGH COURT ) - I.T.A. No.514/Kol/2017 - - - Dated:- 7-6-2017 - SHRI ABY. T. VARKEY, JUDICIAL MEMBER, AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER For The Appellant : Shri S. K. Tulsiyan, Adv. For The Respondent : Shri G. Mallikarjuna, CIT. DR. ORDER M. BALAGANESH AM This appeal by assessee is arising out of order of CIT(A)-3, Kolkata vide Appeal No.2210/CIT-(A)-3/C-8(1)/2015 dated 20.02.2017 against the order under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for Assessment Year 2013-14 dated 29.03.2016 of the assessment framed by D.C.I.T, Cir-8(1), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come were claimed / offered by the assessee in its return of income, partly by routing it through the profit and loss account as per matching concept and the remaining amount of expenditure in the computation of income, on accrual basis on the basis of method of accounting followed. Thus in the return of income, the assessee claimed the net expenses of ₹ 81,22,83,000/- on accrual basis, over and above the expenses claimed in the profit and loss account. 4.1. It was explained before the ld AO that the upfront expense had been incurred by the assessee during the year under appeal and were revenue in nature and that they were claimed on accrual basis in the return of income, but in the profit and loss account, it was amortised over the life of the loan transactions as per the RBI s guideline to NBFCs dated 21.8.2012. However under the Income Tax Act, expenditure incurred are allowable as being accrued and being revenue in nature. The ld AO however held that the impugned sum of ₹ 81,22,83,000/- claimed as deduction on accrual basis is not to be allowed because the same has to be allowed on matching concept for the whole life of the loan. The ld AO thus disallowed the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the matching principle. 5) That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of ₹ 81,22,83,000/- (Rs.75,35,26,000/- + ₹ 5,87,57,0001-) in spite of the Hon'ble Supreme Court of India in the case of Taparia Tools Ltd. vs. JCIT reported in [2015] 372 ITR 605 (SC) holding that expenses claimed on upfront basis under the Income Tax Act, 196l are allowable without regard to matching principle. 6) That, the Ld. CIT(A) grossly erred in not following the ratio laid down by the Hon'ble Supreme Court of India in the case of Taparia Tools Ltd. vs. JCIT reported in [2015] 372 ITR 605 (SC) as per Article 141 of the Constitution of India, 1950 and thus having disallowed the appellant's claim of expenses made on upfront basis under the Income Tax Act, 1961. 5. We have heard the rival submissions and perused the materials available on record including the paper book comprising the following:- 1. A copy of return of income for the AY 2013-14 enclosed in pages 1 to 30 of Paper Book I 2. A copy of the audited financial statements for the year ended 31.3.2013 enclosed in pages 31 to 70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. Copy of Draft Guidelines issued by RBI on 27.9.2011 enclosed in pages 216 to 251 of Paper Book II 26. Copy of assessee s reply to ld AO s query regarding upfront claim of expenses enclosed in pages 252 to 257 of Paper Book II It would be pertinent to get into the details of various expenses incurred in this regard individually. 5.1 . Commission paid to Direct Selling Agents (DSA) The DSAs are the people who act like agents and source the business for the assessee company by procuring customers who would avail the loan and lease facilities provided by the assessee. The assessee has to pay commission to the said DSAs for the business sourced by them and such payment may vary from product to product, schemes to schemes and also may vary from time to time and is payable on the basis of a grid which is finalized on the basis of the business procured by them. After disbursal of the loan / lease facilities to the customers procured by the DSAs, the DSAs raise a bill /expenditure statement on the assessee and the assessee is under an obligation to pay commission / brokerage to the DSAs within 30 days of receipt of such bill / expenditure statement from the DSAs. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds that after excluding the cancelled proposal, DSA would have been given less payout then the excess payout earlier given and will be recovered from DSA immediately. FEES AND PAYMENT c. MFL shall endeavour to make the payment towards fees and other charges to the DSA within 30 days from the receipt of the bills / the expenditure statement from the DSA. d. In the Event of termination of this Agreement by MFL, for any act of the DSA which is a breach of this Agreement or any of its provisions thereof, the fees which are due and payable for the business done by the DSA prior to the termination shall be paid at the sole discretion of MFL and if MFL shall decide, the DSA shall not be eligible to receive any fees after termination. The fee structure is subject to change, without notice to the DSA. PRINCIPAL TO PRINCIPAL Notwithstanding anything contained in any law for the time being in force, the terms DSA shall have the connotation as implied in this Agreement and it is clarified that this Agreement is on a principal to principal basis and does not create and shall not be deemed to create any employer employee relationship between MFA and the DS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Hence the liability to pay the commission / brokerage to DSAs had duly crystallized and hence the comments of the ld AO in this regard that it had not crystallized does not hold water. 5.2. Cost for arrangement of borrowings The assessee being a NBFC procures loan / commercial paper etc from banks / financial institutions and lend it in turn, at a higher rate. In the process of procuring borrowings of the above nature, the assessee incurs various expenditure such as processing fees, bank charges, commercial paper issue charges, fees charged by arranger of borrowings etc which the assessee has to pay at the time of borrowing the funds and has nothing to do with its future contingencies. Thus the assessee incurs cost for arranging borrowings as soon as it is granted loans / finance although such loans / finances are obtained for number of years, yet these expenses are incurred at the time of procurement of these loans / finance. During the year under appeal, the assessee incurred a cost of ₹ 44,46,00,000/- for borrowings and the same was paid by it during the year itself. It is well settled that the expenditure in the process of acquiring loans are allowable as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customers for purchase of the vehicles. During the relevant asst year, subvention income amounting to ₹ 19,80,00,000/- had accrued to the assessee on financing the purchase of vehicles for several customers and the same also been received during the year was offered to tax by it during the year under appeal. 5.5. We find from the perusal of the computation of income, audited financial statements, copy of ITR acknowledgement and scrutiny assessment orders framed on the assessee for the Asst Years 2010-11 to 2011-12, that the upfront claim of expenses on account of payment of commission to DSA and cost for arrangement of borrowing were allowed by the ld AO in the assessment. In those years, the assessee used to debit the entire expenditure incurred by it in its profit and loss account, without relating it to the revenue earned due to such expenses. In other words, there was no difference in the treatment of upfront claim of expenses and subvention income both in the books of accounts as well as in the return of income. There was no dispute on this point. 5.5.1. From Asst Year 2012-13 onwards, while preparing its profit and loss account on mercantile basis, the assessee be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imposed by reference to economic activities or transactions which exist in the real world . When an economic activity is to be valued, it is open to the law makers to take into account various factors like public investments, disclosure and transparency in the matter of maintenance of accounts, reflection of true and correct profits, etc. This is precisely what is done by RBI Directions 1998. 5.6. The ratio laid down in this judgement was that Prudential Norms issued by RBI to NBFCs for income recognition does not override the provisions of the Income Tax Act. Hence the same analogy would be equally applicable to the facts of the instant case, wherein, the assessee had merely followed the amortization method of recognizing income and expenses in its books to be in consonance with RBI guidelines mandating the NBFCs to follow matching principle, but the same would not have any bearing on the determination of total income under the Income Tax Act. At the cost of repetition, we state that the assessee had not changed the treatment given for recognizing upfront income and upfront expenses as far as the computation of total income under the Income Tax Act is concerned, even after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee for its business of money-lending and bill discounting and this was also intimated by the assessee to the Reserve Bank of India as on 31st March, 1998. While it is true that the assessee may have originally taken a loan for the purposes of import of capital goods or setting up of a plant, at the time when the loan amount was utilized, it had undergone a change of character and had assumed a new character of stock-in-trade or circulating capital and, therefore, any loss suffered by the assessee on account of foreign exchange rate fluctuation would have to be treated as a revenue loss and not a capital loss. In view of the facts of the case and the decision of this Court in Woodward Governor India (P) Ltd. (supra), we do not find any error in the decision that has been taken by the Tribunal. 5.8.1. We also draw support from the decision of the Hon ble Madras High Court in the case of P.C.Dharmalinga Mudaliar vs CIT reported in (1985) 152 ITR 588 (Mad), wherein it was held that at pages 591 592 thereon :- .. This idea that it must figure as income, either in the one or the other of the relevant years, is very pithily put by Rowlatt J., in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully following the aforesaid two decisions, we hold that the costs incurred by the assessee herein for acquisition of loan portfolios would form part of its financial assets and towards its stock in trade and hence those costs incurred would only take the character of revenue expenditure. The accrual of this expenditure and its allowability thereon in the year of incurrence has already been addressed hereinabove and the same would be allowed as a revenue expenditure in full in the year of incurrence in the computation of income under the Act, irrespective of treatment of the same in the books of accounts. 5.9. We find that the ld CITA had given a reasoning for disallowing the assessee s upfront claim of expenses on the ground that the assessee in its accounts accounted for the items of income as well as expenditure on the matching principle but in its return, the assessee has claimed / offered the expenses on DSA commission, Portfolio acquisition cost and cost on arrangement of borrowings (expenditure side) and subvention income (income side) on upfront basis, whereas other related items of income such as interest, rental have been recognized over the life of underlying assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Commissioner of Income Tax (Appeals). The Commissioner, however, dismissed the appeals thereby sustaining the orders passed by the AO. The assessee then approached the Income Tax Appellate Tribunal and thereafter the High Court of Bombay but was unsuccessful as the appeals preferred by him before the two fora have been dismissed maintaining the method of deduction adopted by the AO. To put it otherwise, instead of entire amount paid by the assessee in the particular assessment year, full deduction is not given and this deduction is spread over a period of five years. Thus, the question is as to whether deduction of the entire amount of interest paid should be allowed or the stance of Revenue needs to be affirmed. 6. As pointed out above, the assessee maintains its accounts on mercantile basis. Further, the entire amount for which deduction was claimed was, in fact, actually paid to the debenture holder as upfront interest payment. It is also a matter of record that this amount became payable to the debenture holder in accordance with the terms and conditions of the non-convertible debenture issue floated by the assessee, on the exercise of option by the aforesaid deben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this section, unless the context otherwise requires - Xx xx xx ( 2) paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head Profits and gains of business or profession ; Xx xx xx As per the aforesaid definition, even if the amount is not actually paid but 'incurred', according to the method of accounting, the same would be treated as 'paid'. Since the assessee was following mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actually paid but simply 'incurred'. However, in the instant case, it is not in dispute that the amount of interest was actually paid as well in the assessment year in which it was claimed. As per the aforesaid definition, even if the amount is not actually paid but 'incurred', according to the method of accounting, the same would be treated as 'paid'. Since the assessee was following mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actually paid but simply 'incurred'. However, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id merely because it had spread over this books of account over a period of five years. Here, the submissi oinnt eorfe slet airnn ietds counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of accounts is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of accounts. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfiled and, thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred. 13. The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the discount issue of debentures itself. The Court found that the assessee could sitnil lt hbee aylelaorw eodf to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilize the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of ₹ 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained [See - Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of I nicno mthee TAacxt (Central), Calcutta, (1972) 3 SCC 252; Tuticorin Alkali Chemicals Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras, (1997) 6 SCC 117 ; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta, (1978) 4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta, (1999) 8 SCC 338]. 19. At the most, an inference can be drawn that by sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nn.com 429 (Gujarat) d) CIT vs Bilahari Investment (P) Ltd reported in (2008) 169 Taxman 95 (SC) We find that all these decisions placed reliance on the decision of the Hon ble Bombay High Court in the case of Taparia Tools Ltd vs JCIT reported in (2003) 260 ITR 102 (Bom), which has been subsequently reversed by the Hon ble Supreme Court in the very same case reported in 372 ITR 605 (SC). Hence the entire ratio laid down in the aforesaid 4 decisions, relied upon by the ld AO for the facts of the instant case, stand reversed by the decision of the Hon ble Supreme Court in Taparia Tools (372 ITR 605 SC). 5.12. In a nutshell, we hold that the accrual of upfront expenditure cannot be disputed as the ld AO himself had allowed part of the expenditure as deduction in respect of that portion of the expenditure that is debited in the profit and loss account. The present case is even on a stronger footing in as much as not only the liability had arisen in the year under appeal, but it was even quantified and discharged as well in that very accounting year. We find that the ld AO had taxed the upfront subvention income in the year of accrual itself thereby contradicting his stand on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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