TMI Blog2022 (11) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... nto offering of additional sum of Rs.1053.80 Lakhs for taxation. Also, in respect of the issue relating to recognition of income of Rs.1290.58 lakhs in respect of securitization and assignment of loans, the same has been recognised in the subsequent assessment years as and when it was received by complying with the RBI guidelines, we find that there is no prejudice caused to the revenue and, therefore, the requirement of fulfilment of twin conditions of the order being erroneous insofar as it is prejudicial to the interest of the revenue, as held by the Hon ble Supreme Court in the case of Malabar Industries [ 2000 (2) TMI 10 - SUPREME COURT] are not fulfilled. The impugned revision order passed by ld. PCIT u/s 263 of the Act holding the assessment order as erroneous in so far as it is prejudicial to the interest of revenue is not sustainable. Thus on both on facts and applicable law along with accounting norms and judicial precedents relating to the issues raised by the ld. Pr. CIT in invoking the revisionary proceedings, we have no hesitation in quashing the revision order passed by the ld. Pr. CIT u/s 263 of the Act. Accordingly, grounds raised by the assessee are allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is a Non-Banking Finance Company (NBFC) registered with Reserve Bank of India (RBI) as an Asset Finance Company (AFC). Assessee is engaged in asset financing business and finances mainly against purchase of vehicles by way of operating lease and finance lease transactions. Further, assessee is governed by RBI instructions which are binding on it. Return of income was filed on 30/10/2017 which was revised on 29/03/2019 at a total loss of Rs.123,02,72,091/-. Assessment u/s 143(3) of the Act was completed vide order dt. 22/12/2019, loss assessed at Rs.122,30,61,091/-. Subsequent to the said assessment, upon examination of records, ld. Pr. CIT raised the aforementioned three issues to hold that assessment order is erroneous insofar as it is prejudicial to the interest of the revenue. A show cause notice dt. 21/03/2022 was issued for invoking the revisionary proceedings u/s 263 of the Act. Assessee submitted its detailed reply on 26/03/2022, part of which is reproduced in the impugned order. Before us, ld. Counsel for the assessee, Shri S.K. Tulsiyan, Advocate and Ms. Puja Somani, CA, reiterated the submissions and placed on record a detailed written submission containing 17 pages a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only, owing to difference in its treatment in accounting which is governed by Accounting Standards and in computing the total income which is governed by the provisions of the Act. Summary of treatment of finance lease transactions in the books of accounts and in computing the total income under the Act, as submitted by the ld. Counsel is tabulated below:- Nature of Amount Finance Lease In the Audited Accounts per Companies Act, 2013 and generally accepted accounting standards In the Computation of Income under the Act Cost of Asset Leased out Shown as Asset on Finance under the head Loans and Advances on the Assets side of the Balance Sheet. Capital under Fixed Assets - Block Plant and Machinery - 30% Depreciation Not Charged Charged as per Income Tax Rate 30% Principal Component of Lease Rental It is adjusted with Loan and Advances in the Balance Sheet and not credited to Profit Loss account Not include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purpose of computing total income under the Act, assessee adopted similar treatment for both operating lease and the finance lease. Thus, cost of leased vehicles under the finance lease was also capitalized under the block of assets carrying depreciation @ 30% under the Act. Hence, on a matching concept, the principal component of the finance lease was also offered for taxation in the return of income which otherwise was not credited to the profit and loss account. It was thus submitted that, a sum of Rs.4759.68 lakhs, has been offered in the computation of total income towards recovery of principal component of finance lease rentals against which depreciation of Rs.3705.88 lakhs has been claimed as per the Act. Accordingly, on a net basis, an additional amount of Rs.1,053.80 lakhs [Rs.4759.68 Lakhs (minus) Rs.3705.88 lakhs] was offered in the computation of total income. For the purpose of calculating depreciation on the assets under finance lease, assessee computed the depreciation @ 30% on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssor 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 name of the Lessor. 6.2 From the perusal of the above extract, it is noted that assessee as lessor, is the absolute owner of the assets/vehicles leased under finance lease and the lessee has only the right to use the vehicles. Further, lessee shall not create any charge or encumbrance on the vehicle at any time and shall not have any objection to inspection of the vehicles by the lessor. Also, at the conclusion of the lease period, lessee is obliged to return the vehicle to the lessor and if lessor terminates the leasing of any vehicle due to the default of the lessee, the lessee must immediately surrender the vehicle to the lessor. Accordingly, from the above, it can be safely stated that, assessee is the owner of the assets leased out and the lessee only possesses the right to use those assets as per the terms and conditions laid down in the finance lease agreement. Thus, the first condition contained in Section 32 of the Act in respect of ownership of the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In our opinion, the fact that the trucks themselves were not used by the assessee is irrelevant for the purpose of the section. 6.4.3 Further, on the issue of ownership, Hon ble Supreme Court noted in para 23 that A scrutiny of the sale agreement cannot be the basis of raising question against the ownership of the vehicle. The clues qua ownership lies in the ownership agreement itself which clearly point in favour of the assessee. 6.4.4 Thus, by observing these, the Hon ble Supreme Court in para 32 held that For the foregoing reasons, in our opinion, the High Court erred in law in reversing the order of the Tribunal. Consequently, the appeals are allowed; the impugned judgments are set aside and the substantial question of law framed by the High Court extracted in para 6 (supra) are answered in favour of the assessee and against the revenue. 7. It is also noted that, the instant issue has been dealt in favour of the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, 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 instructions which are binding on it and override the provisions of the Act. For this contention reliance is placed on the decision of the Co-ordinate Bench of ITAT Delhi in the case of Tedco Investments and Financial Services Pvt. Ltd. vs. DCIT [2003] 87 ITD 298 (Del.) wherein it has been held:- (i) That, provisions of Chapter IIIB of RBI Act, 1934 overrides the provisions of Section 145(2) of the Act because of non-obstante clause appearing in Section 45Q; (ii) That, the Act, is a general Act, whereas RBI Act, is a special Act; (iii) That, it was not the case of the Department that there was excess delegation of power. Therefore, the provisions of RBI Act would override the provisions of the Act. 9.2 Ld. Counsel explained the concept of securitization that it is a process of raising funds as a treasury tool under which pool of performing assets are sold to a special purpose vehicle (SPV). The assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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.1290.58 Lakhs. ICDS-IV deals with revenue recognition according to which interest shall accrue on the time basis determined by the amount outstanding and the rate applicable. On this, consideration of the ld. Pr. CIT, reference is made to the definition of interest defined u/s 2(28A) of the Act, which reads as under:- (28A) interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;] 10.1 From the perusal of above definition, it is noted that interest is in respect of any moneys borrowed or debt incurred. However, in the present case, the loan portfolio was sold by the assessee to the SPV and therefore is no longer a lender f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 course of proceedings u/s 263 of the Act, before the Ld. PCIT, assessee had furnished the relevant details and explained the issue raised through the show cause notice by the Ld. PCIT, supporting its contentions by various decisions as narrated above. It is well settled law that for invoking the provisions of section 263 of the Act, both the conditions, that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. This ratio stands laid down by various Hon'ble Courts. 13. Before we advert to the facts and law involved in this appeal before us, it is worth apprising ourselves on the law governing the issue involved. In the first place, the assessee company has challenged the very invocation of jurisdiction by Ld. Pr. CIT of his revisional powers u/s 263 of the Act. Therefore, firstly we have to look at the rightful exercise of revisional powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court in DG Housing Projects Ltd (supra), according to which the Ld. Pr. CIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The co-ordinate bench of Mumbai ITAT (supra) has further held that the intention of the legislature could not have been to enable the Ld. Pr. CIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. Pr. CIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion. 16. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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