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TMI Blog2022 (11) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld. Pr. CIT for the purpose of invoking the revisionary proceedings and referred in the grounds of appeal are:- (i) Capital work in progress amounting to Rs.690.18 Lakhs which have been written off in the profit and loss account under the head 'other expenses' ought to have been disallowed being expenditure of capital nature. (ii) Claim of depreciation of Rs.4754.29 lakhs on the assets which are in finance lease and for which lessee is entitled to claim depreciation and not the lessor. Thus, resulting into an excess claim of depreciation by the assessee. (iii) Assessee has not recognised gross income on securitization and assignment of loan aggregating to Rs.1290.58 lakhs. 2.1. In respect of the first issue, ld. Pr. CIT noted that submission made by the assessee dt. 26/03/2022, is tenable and, therefore, no interference is drawn on the view taken by ld. AO regarding the allowability of expenses of Rs.690.13 lakhs treated as revenue expenses. Accordingly, the assessment order was not set aside on this ground by the ld. Pr.CIT. Considering the finding given by the ld. Pr. CIT on the first issue, assessee requested to withdraw Ground No. 3 is this respect. Thus, Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee from the lessees under the finance lease are bifurcated into two components, viz., principal and interest. Principal component of the lease rental is adjusted with the said 'loans advanced' amounts in the balance sheet and the interest component is credited to the profit and loss account. He thus submitted that, method of accounting for these transactions both, under the operating lease and finance lease has been consistently followed by the assessee which is in consonance with the accounting standards generally accepted in India. He further submitted that, for the purpose of computing total income under the Act, it has to be computed in accordance with the provisions of the Act, more particularly by applying Section 4, Section 5 and Chapter IV, [dealing with computation of total income] r.w.s. 14 of the Act. It was stated that income of every assessee has to be assessed according to the statutory framework laid out in Chapter IV, Part D of the Act which deals with heads of income. He thus pointed out that certain adjustments have to be made to the profit reported in the profit and loss account prepared from the books of accounts regularly maintained by the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that depreciation cannot be allowed to the lessor on the assets which are financed under the finance lease transactions, since all the risks and rewards incidental to the ownership are borne by the lessee and the lessor's ownership is nominal and symbolic. It was also pointed out by the ld. Counsel that AS - 19 is silent as to how to calculate the depreciation under the Act, on these assets as it only deals with the treatment for the purpose of maintaining of the books of account as per the Companies Act, 2013. 5. At this juncture, attention was drawn towards the judgment of the Hon'ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT [2015] 55 taxmann.con 361 (SC) for the proposition that it is trite law that accounting entries in the books of account are not determinative of taxability of income or deductibility of any expenditure. From the audited financial statement forming part of the paper book, ld. Counsel referred to the profit and loss account statement to point out that, assessee has offered to tax, the interest component in respect of finance lease transactions, which has been duly credited in the profit and loss account. He further submitted that, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty or asset, and that on termination of this Agreement for whatever cause, Lessee will be required to surrender the Vehicle in the manner provided herein. 5.6 With regard to the registration of the Vehicles; Lessee undertakes the following: (a) For the purposes of the Motor Vehicles Act, 1988 (59 of 1988), as may be amended from time to time ("the Act"), and the provisions thereof, or under any law or regulation pertaining to the ownership or use thereof if the Vehicle provided on Lease hereunder requires registration, the Lessee shall at all times, ensure and provide necessary document required for effective registration of Vehicle, indicating, wherever such law or regulation so permits, the ownership of the Vehicle by the Lessor. Where the relevant law or regulation does not permit registration of Vehicle in the name of any person other than the effective user thereof, the Parties understand that notwithstanding registration of Vehicle in the name of Lessee, Lessor is and shall always remain the absolute legal owner of Vehicle. The Lessee shall ensure that suitable endorsement is duly made in the registration certificate book ( Form 23 A of the Act) , in favour and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the owner of the vehicles which are leased out by it through its customers and; Whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles on the ground that they were hired out to the appellant's customers" 6.4.1 While answering the above questions in favour of the revenue, the Hon'ble High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled to claim depreciation in respect of these vehicles. Hence, these appeals by the assessee. Hon'ble Supreme Court noted in para 13 that "the provision of depreciation in the Act reads that the asset must be "owned, fully or partly by the assessee and used for the purposes of business". Therefore, it imposes a twin requirement of "ownership" and "usage for business" for a claim u/s 32 of the Act." 6.4.2 Before giving its finding, Hon'ble Supreme Court at para 18 held that "Hence, the assessee meets the second requirement discussed above. The assessee did use the vehicles in the course of its leasing business. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judicial precedents, the issue raised by the ld. Pr. CIT in respect of claim of depreciation on assets leased under finance lease is neither erroneous nor prejudicial to the interest of the revenue as claimed and submitted by the ld. Counsel for the assessee. 9. In respect of the third issue, wherein the ld. Pr. CIT has noted that, assessee has not recognised gross income on securitization and assignment of loans, attention was drawn to note no. 35(d) to the audited financial statements placed at page 42 & 43 of the paper book wherein disclosures relating to securitization have been made by the assessee. In the said note the assessee has disclosed that, "the company recognises excess interest spread (EIS) on securitization transactions in line with RBI Circular "revision to the guidelines on securitization transactions" issued on 21st August, 2012, which requires recognition of EIS only when redeemed in cash. Accordingly, the gross income on securitization and assignments of loans aggregating to Rs. 1290.58 lakhs for the year ended 31/03/2017 (2016: Rs.3287.54 Lakhs) has not been recognised." 9.1 Admittedly, it is a fact that assessee being a NBFC is governed by the RBI instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' is made by the SPV as per the waterfall mechanism which is utilized in order of priority and the last priority in the waterfall mechanism is payment of EIS to the seller (assessee in the present case). Thus, the EIS becomes due to the assessee only when the actual amount is received by the assessee after payment to the investors and meeting the expenses as listed in the waterfall mechanism contained in the securitization agreement. 9.3 Fact in the present case is that, EIS of Rs. 1290.58 Lakhs was not accounted as income in the books of accounts of the assessee during AY 2017- 18 as the same was not received for which due disclosure was made in notes to accounts vide note no. 35(d) referred above. In this respect, ld. Counsel also submitted that this income of EIS has been accounted in the books of account for AY 2018-19 and 2019-20 and offered for taxation in those respective years. It was also pointed out that, treatment of EIS on cash basis is in compliance with the prudential norms, prescribed by the RBI. 10. Ld. Pr. CIT on this issue has also made a reference to the income computation and disclosure statement - IV (ICDS-IV) for the purpose of understatement of income of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to apply the Rule of consistency, reliance was placed on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang v. Commissioner of Income-tax [1992] 193 ITR 321 (SC). 11. Further, it was pointed out that ld. Pr. CIT himself has noted by referring to RBI guidelines that "RBI issued guidelines stating therein that the gain on assignment is required to be recognised over the tenure of the loan. Hence, from AY 2012-13 the company has stopped to recognise the same only when redeemed in cash." 11.1 From this above observation of the ld. Pr. CIT, it is evident that it was in his know-how that EIS income is to be recognised only when it is redeemed in cash which is in accordance with the RBI guidelines and are binding on the assessee. Thus, considering the above facts of the present case and the judicial precedents, following the rule of consistency and more particularly, when the EIS income of Rs.1290.58 Lakhs having been offered in the subsequent years as and when it was received, there is no prejudice to the interest of the revenue and the impugned order cannot be held to be erroneous, as claimed by the ld. Counsel. 12. Be that as it may, we observe that in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. 15. We find that Ld. Pr. CIT in Para 11 of the impugned order has taken note of the amendment made in section 263 w.e.f. 01.06.2015. This amendment relates to Explanation 2 inserted in section 263 of the Act. The co-ordinate bench of Mumbai ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer [2016] 70 taxmann.com 227 (Mum) to hold that the said Explanation can ..... 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