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TMI Blog2025 (4) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the case are discussed in brief. The assessee-company is registered with Reserve Bank of India (RBI) u/s. 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") as "securitisation and reconstruction company". This terminology was later changed into "Asset Reconstruction Company". The business model of the assessee is described by the AOas under: - "A. Business Model of the assessee:- * The assessee company is an asset reconstruction company (ARC) which acquires Non- Performing Assets(NPAs) from the banks. To acquire such NPAs, ARCIL sets up various trusts in which ARCIL holds a certain minimum percentage of beneficial ownership and balance is owned by other Investors. * Trust issues Security Receipts to all such Investors including ARCIL (having compulsory a minimum holding 15%) and other Investors. Therefore, ARCIL, as well as other Investors are called as Security Receipts Holders (SRHs). Out of these funds received from ARCIL as SRH and other Investors as SRH, the trust acquires NPAs from the bank and payments are made to the banks * Subsequently, ARCIL being the sole trustee, manager and recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same by the AO, the assessee submitted that, as per RBI guidelines, the unrealised security receipts have to be written off within a maximum period of 8 years. Hence the assessee claimed deduction of amount so written off as business loss. The AO however took the view as under:- "At the outset the legal submission of the assessee is not at all acceptable. The SR write off is not allowable at all. Unless and until, there are compelling reasons and documentary evidence which could establish beyond doubt that there will be no recovery in future, only then such write off is allowable. However, in the instant, there are recoveries and that too of significant amount in subsequent years of write off (which is evident from the fact that in the current year itself, there was a recovery of Rs. 47.19 crores out of such write off made in the earlier years). Further, the guidelines of RBI are for the purpose of NPA resolution and not for determination of income and tax liability thereon under the Income tax Act." The AO also examined the Trust deed and financial statements of certain Trusts. He noticed that the trusts are stated to be Pass through entities and further, they were also making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e funds from "qualified buyers". Once the qualified buyer(s) are identified, separate trusts are formed under Indian Trusts Act, 1882 for acquiring the above said NPAs from banks. For this purpose, the trusts shall issue "security receipts" for raising funds required to acquire financial assets. (d) The assessee shall purchase minimum of 15% of the security receipts issued by the trusts as per SARFAESI Act and the qualified buyer(s) shall invest remaining amounts. (e) By utilising the funds mobilised by issuing Security Receipts, the asset reconstruction companies (assessee herein) shall acquire stressed financial assets (NPAs) from the banks through the Trust. (f) The trusts shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired out of investments made by a qualified buyer. Hence the assessee has formed various trusts, through which the assessee has acquired various financial assets. In each of the trusts, the assessee has subscribed to the Security Receipts issued by the concerned trust for minimum amount of 15% and the remaining Security receipts were subscribed by qualified investors. The amount so investe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer has not correctly appreciated the business model and the manner of functioning of the assessee company. The assessee herein is a "Asset reconstruction Company" registered under SARFAESI Act. We notice that section 7 of SARFAESI Act permits the assessee to issue "security receipts" for raising funds. Section 7 referred above reads as under:- "7. Issue of security by raising of receipts or funds by [asset reconstruction company] [Substituted by Act No. 44 of 2016.]. (1) Without prejudice to the provisions contained in the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992), any [asset reconstruction company] [Substituted by Act No. 44 of 2016.] may, after acquisition of any financial asset under sub-section (1) of section 5, offer security receipts to [qualified buyers] [Substituted by Act No. 44 of 2016.] [or such other category of investors including non-institutional investors as may be specified by the Reserve Bank in consultation with the Board, from time to time,] [Substituted 'other than by offer to public' by Act No. 44 of 2016.] for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (3), follow the same procedure, as nearly as possible as is followed at meetings of the board of directors of the [asset reconstruction company] [Substituted by Act No. 44 of 2016.] as the case may be." The above said section further provides that the assessee shall keep and maintain separate and distinct accounts for funds raised for in respect of each of the scheme framed for acquiring the financial asset (NPAs acquired by it). It is further provided in that section that the scheme framed for the purpose of offering security receipts or raising funds may be in the nature of trust, which shall be managed by the assessee. Further, the assessee shall hold the assets acquired and funds raised in trust for the benefit of qualified buyers of security receipts. 4.9. Accordingly, the assessee has formed separate Trusts for stressed financial assets (NPAs) acquired under one scheme. For raising funds, the concerned Trusts have issued Security Receipts, in which the assessee has invested a minimum amount of 15% of the value of the Security Receipts issued by the trust and the rest of the security receipts have been purchased by the qualified buyers. The Ld.AR submitted that the Trust i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of acquisition of the financial asset concerned. (iii) The Board of Directors of the SC/RC may increase the period of realisation of financial assets so that the total period of realisation shall not exceed eight years from the date of acquisition of financial assets concerned." (** Securitisation Companies/Reconstruction Companies) Further, as per clause 12 of the Guidelines, the financial assets including the Security Receipts will be classified as non-performing, if it is outstanding for a period exceeding 36 months. They shall be treated as "LOSS ASSETS", if the Security receipts are not realised within the period mentioned in clause 7(ii) and (iii) of the Guidelines mentioned above. Further, it is provided that the assessee should provide for write off of 100% of the value of Security receipts if it is classified as Loss assets. Accordingly, the assessee chose to write off the value of unrealised Security Receipts after expiry of maximum period of 8 years in the books of accounts, instead of the minimum period of five years. 4.11. However, it is pertinent to note that the concerned Trusts shall hold the financial assets till it is realised or till the trust itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting principles and hence, it is nothing to do with the accounting methodology followed by the assessee. So far as the assessee is concerned, it has treated the investment made in Security Receipts as a separate investment and the income generated there from is offered to tax. Unrealised Security receipts were written off after the expiry of eight years. If any amount is realised after it was so written off, such realisation is offered to tax. 4.14. As noticed earlier, the AO has misdirected himself in understanding the concept of forming trusts, the accounting system followed by the trusts and assessee. There is no dispute with regard to the fact that the assessee has to follow the guidelines issued by the RBI for accounting the Security Receipts and it has to treat the Security receipts as "Loss assets" if it is not realised within five years. Accordingly, the assessee has chosen to write it off the unrealised portion of the security receipts after expiry of eight years. There should not be any dispute that, if any security receipts was not realised within a period of eight years, then its recovery is doubtful. Accordingly, we do not find any infirmity in the claim made for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the realisation made by the trusts have been considered as realisation made by the assessee himself, which is not correct. He submitted that, only when any amount is distributed by the trust to the Security Receipt holders, the incidence of tax would arise in the hands of the security receipt holders (including assessee, being one of the security receipt holders). The assessee submitted that the investments made by it in Security receipts are akin to Mutual fund investments. Hence the assessee is not concerned with the realisation made by the trusts from the financial assets (NPAs). During the course of assessment proceedings, the AO did not accept the above said submissions of the assessee. Accordingly, he took the view that a sum of Rs. 153.77 lakhs relating to upside income has not been offered to tax. Accordingly, the AO assessed the same. 5.3. The Ld.CIT(A) examined the number of financial assets acquired through each of the assignment agreement. He noticed that only 41 trusts (out of 319 trusts) are having multiple assignment agreements and hence the analogy drawn by the AO will apply to those 41 trusts only. The realisation out of 41 trusts was seen at Rs. 68.92 crores. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of upside income relating to other Security receipt holders, viz., the other beneficiaries of the Trust. We noticed earlier that the AO had taken the view that the methodology adopted by the assessee to declare upside income was not correct and accordingly added a sum of Rs. 153.77 crores. Following the same analogy, the AO took the view that the income pertaining to other Security Receipt holders should have been offered to tax. The AO made his own computation by drawing certain presumptions and accordingly made protective addition of Rs. 245.51 crores in the hands of the assessee. 6.1. Since the income estimated by the AO is not related to the assessee, but other investors, the Ld.CIT(A) deleted this addition. 6.2. We heard the parties on this issue and perused the record. In our view, the reasoning given by us for deleting the addition of upside income of Rs. 153.77 crores would equally apply to this addition also. The realisation made by the trusts cannot be considered as income of either the assessee or other investors. In any case, any income pertaining to other investors cannot be considered as income of the assessee. Hence, we are of the view that the AO was not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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