Income Tax Appellate Tribunal - Hyderabad
Asmitha Microfin Ltd.,, Hyderabad vs Assessee on 5 June, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B" : HYDERABAD
BEFORE SHRI P. M. JAGTAP, ACCOUNTANT MEMBER
AND
SHRI V. DURGA RAO, JUDICIAL MEMBER
ITA.No.990/Hyd/2014
Assessment Year 2010-2011
Asmitha Microfin Ltd., Addl. Commissioner of
Hyderabad. vs. Income Tax, Range-1,
PAN AADCA9399Q Hyderabad.
(Appellant) (Respondent)
For Assessee : Mr. P. Raviseshagiri Rao
For Revenue : Mr. D. Sudhakar Rao
Date of Hearing : 02.06.2015
Date of Pronouncement : 05.06.2015
ORDER
PER P.M. JAGTAP, A.M.
This appeal filed by the assessee is directed against the Order of the Ld. CIT(A)-II, Hyderabad dated 14.03.2014 and the grievance of the assessee is projected in the following grounds raised therein
1. "The order of the Ld. CIT(A) is erroneous to the extent it is prejudicial to the appellant herein.
2. The learned CIT(A) erred in confirming the addition of Rs.15,45,89,893 on the ground that the gain on assignment of loan portfolio by the appellant would become taxable in its entirety during the assessment year under consideration
3. The learned A.O. erred in not allowing deduction u/s.35D of Rs.4,00,000.
2 ITA.No.990/Hyd/2014Asmitha Microfin Ltd., Hyderabad.
4. The learned CIT(A) ought to have seen that by making the adjustment to the assignment of the gain on sale of loan portfolio, the income cannot be brought to tax in both the assessment years. The Ld. CIT(A) ought to have directed that the gain relating to the year under consideration but was assessed by the A.O. for the earlier assessment years should not be brought to tax again for the year under consideration.
5. Any other grounds that may be urged at the time of hearing."
2. Ground Nos. 1 and 5 raised by the assessee in this appeal are general in nature which do not call for any specific adjudication.
3. In Ground No.2, the assessee has challenged the action of the Ld. CIT(A) in confirming the addition of Rs.15,45,89,893 made by the A.O. by bringing to tax the entire gain on assignment of loan portfolio.
4. The assessee in the present case is a company which is carrying on the business as micro finance institution. The return of income for the year under consideration was filed by it on 28.09.2010 declaring total income of Rs.90,79,46,733. In the said year, the assessee had sold certain portion of its loan portfolio to banks by way of direct assignment of receivables. The assigning transaction entered into by the assessee were of two types. It had received an amount of Rs.19,42,78,577 during the year under consideration being the net gain on assignment of loan portfolio under Type-1 model. Out of this gain, an amount of Rs.3,96,88,684 was offered to tax by the assessee in the year under consideration while the balance amount of Rs.15,45,89,893 was amortized and offered to tax as income for the next assessment year i.e., A.Y. 2011- 3 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
2012. During the course of assessment proceedings, copies of relevant deeds of assignments entered into by the assessee with different Banks under Type-1 model were obtained and examined by the A.O. On such examination, he found that the assessee has sold the loan portfolio in outright fashion and received the purchase consideration. He therefore required the assessee to explain as to why the entire net gain received on assignment should not be brought to tax in the year under consideration itself instead of allowing part amortization as claimed by the assessee. In reply, detailed submission was offered by the assessee which, as summarized by the A.O. in the assessment order was under :
a) "The assignment of loans has been accounted in accordance with AS - 9 and guidance note on "Accounting for Securitization" issued by ICAI.
b) Assessee continues to service the assets by way of maintenance of record of assigned portfolio, deals with the borrowers and collects the dues. These collections are deposited in a pool and remitted to the assignee banks on due dates;
c) Assessee has to incur substantial expenditure on servicing the loans and collecting the receivables.
d) The cost is to be incurred during the tenure of the agreement and it is difficult ~ 'to estimate the same.
e) In view of the uncertainties in estimation of the cost of fulfilling the obligations, it would not be proper to recognize the income upfront by merely arriving at the difference between the proceeds received and the book value of the assigned portfolio.4 ITA.No.990/Hyd/2014
Asmitha Microfin Ltd., Hyderabad.
f) Assessee has given cash collateral ranging from 5% to 10% and also guaranteed 10% of the assets assigned and hence, initial loss, if any, in recoveries to be made is to be borne by the assessee upto 20% of the assets.
g) In practice, assessee fulfills its repayment obligations to banks as per schedule, even when the dues have not been collected from the borrowers;
h) The interest income received in advance on assignment of portfolio as part of purchase consideration is deferred to the extent of performance under the sale contract on proportionate basis over the period of contract with Banks;
i) Out of the interest receivable of
Rs.19,42,78,577/- an amount of
Rs.3,96,88,684/- is recognized as income during the year and balance amount of Rs.1545,89,893/ - is deferred to subsequent years following the above principle;
4.1. The above submissions of the assessee were considered by the A.O. in the light of 'guidance note on accounting for securitization' issued by ICAI and on such consideration, he recorded his findings/observations as under:
a) "The transaction is a complete buyout of loan portfolio by the bankers and the asset is derecognized from the books of the assessee;
b) The collection agent's agreement f servicing agreement fixes certain fee for collection and attendant work and the costs involved are to be borne by the assignor. Thus, the control over cost of servicing is with the assignor.
c) The agreement for portfolio buyout and collection are separate and distinct. The sale of portfolio is unconditional. As per para 6 of the guidance note, servicing of the asset by itself can not lead to a situation of partial derecognition of asset 5 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
and thereby revenue from the asset. Further, the servicer is not entitled exercise any general or particular or lien with respect to a borrower against the assigned receivables. As per the terms of the service agreement, the assignee has the right to terminate the services of the servicer and appoint alternate servicer. This further proves that the portfolio buyout and servicing of the portfolio are not linked.
d) The procedure prescribed for collection and the costs involved in service are not material for recognition of revenue from the sale of portfolio;
e) The difficulty in estimation of servicing costs or obligation to service the portfolio are not relevant for recognition of revenue from sale of portfolio as both are distinct and separate functions performed by the assessee;
f) The interest income received on sale of portfolio has no link with service cost. Also, there is no interest strip or service strip in the agreement to sell the portfolio;
g) Keeping of cash collaterals indicates only a contingent liability. Only the first part is out of the amounts received by the assessee. The assessee is not prevented from claiming trading loss, If any, as and when the assignee invokes the guarantee;
h) The assessee's liability, if any, on account of NPAs f defaults from borrowers is limited to the extent of guarantee given by the assessee.
i) As per the agreement, the assessee can't claim or exercise any right of deduction or lien (general or specific) or set off on, over or in respect of any assigned receivables, amounts or writings or things held by it.
4.2. On the basis of the above findings/observations, the A.O. held that there was no reason to amortize even partly the gain earned by the assessee on assignment of loan 6 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
portfolio. He held that such amortization was contrary to para- 7 of the relevant guidance note which clearly stated that once the asset was derecognized, the consideration should be treated as gain or loss arising on securitization and disclosed separately in the statement of P & L account. According to the A.O., the entire gain of Rs.19,42,78,577 thus was required to be recognised by the assessee as its income in the year under consideration instead of only Rs.3,96,88,684 declared by the assessee. He therefore added the balance amount of Rs.15,45,89,893 to the total income of the assessee in the assessment completed under section 143(3) vide order dated 22.02.2013.
5. Against the order passed by the A.O. under section 143(3), an appeal was preferred by the assessee before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) confirmed the addition of Rs.15,45,89,893 made by the A.O. on account of gain on assignment of loan portfolio for the following reasons given in para 4.8 of his impugned order.
"4.8. ... it is evident that there seems to be no reason as to why the gain on sale of loan portfolio has to be amortized and the income should be offered in A.Y.2010-11 and in A.Y. 2011-12 instead of offering the entire amount in A.Y.2010-11. It is fairly simple and straight case where, the appellant has already recovered the net gain of Rs.19,42,78,577 /- has to offer the same to tax. The appellant is unnecessarily trying to complicate the issue by referring to RBI Guidelines, Guidance Note given by the Institute of Chartered Accountants Association of India. Through the assignment deed, the appellant sold its loan portfolio to the banks. Through 'collection agent agreement' the appellant took the responsibility of collecting the principal and 7 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
interest on behalf of the bank. These two activities are totally different. By way of selling the loan portfolio the net gain of Rs.19,42,78,577/- was already received by tl1e appellant. Even in the worst scenario, where the appellant fails to recover the loans due from the borrowers, his risk is restricted to the extent of collateral given to the banks. Even if the borrowers default, if the recoveries are adjusted against collateral deposits, as and when such eventuality arises such claim can be made u/s.36(1)(vii). In any case, the fears expressed by the appellant with reference to recovery are merely hypothetical and Irrelevant, In summary, for the reasons mentioned in the above paras, I find no reason as to why the taxing of Rs.15,45,89,893/- is to be postponed for A.Y. 2011-
12. Therefore, the addition made by the A.O. is sustained."
6. We have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the learned Representatives of both the sides, this issue involved in the appeal of the assessee is squarely covered in favour of the Revenue and against the Assessee by the decision of Coordinate Bench of this Tribunal in assessee's own case for the A.Y. 2009-2010 rendered vide its order dated 30.01.2015 passed in ITA.No.137/Hyd/2013. A copy of the said order is placed on record before us and perusal of the same shows that similar issue has been decided by the Tribunal against the assessee for the following reasons given in paragraph Nos. 11 to 14 of its order.
"11. As can be seen from the above, assessee's book value and the future interest receivable totaling to Rs.25,75,50,626/- out of which discount was given to an extent of Rs.1,41,74,070/- and mainly on future interest receivables. Thus, out of the interest receivables of Rs.2,96,16,526/- as future interest, assessee discounted the same for an amount of Rs.1,41,74,070/- and received the gain of Rs.1,54,42,456/-. Thus, short of the accounting entries made, the basic principle involved in this sale of portfolio is that as far as principal 8 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
amount is concerned, no discount was considered as the entire portfolio was given at the book value only. Only interest receivable sold to the purchaser, however, was discounted. Thus, as seen from the above example out of Rs.2.96 Crores receivable, assessee discounted to an extent of Rs.1.41 Crores and showed the gain of Rs.1.54 Crores. It is assessee's contention that the entire amount of Rs.2.96 Crores, being future interest receivable, is not accruing during the year. Therefore, the gain on discounting of that is not an amount accrued during the year and so, the same is deferred to later year. It is this amount which is under dispute. As this transaction given as an example above has occurred on 19th March 09 and as no interest is receivable during that month, assessee has deferred the entire amount of gain to the later year. There are many such transactions entered regularly by assessee during the course of year and to the extent of amount discounted, assessee is accordingly offering income on the proportion of interest accrued during the year.
12. This system of account being done by assessee is more or less similar to the bill discounting system, which is generally followed by many in the business. In the bill discounting system, a person who discounts the bill takes the interest amount upfront when he discounts the bill by way of 'front end discount', the income accrues at that point of time. What is material is the certainty of the date of discount. In this case, assessee contends that the gain on the transaction has not accrued as the future interest receivable is not an accrued income. However, this aspect cannot be accepted as assessee has received the discounted amount as a part of sale consideration. Even though, there are certain deposits kept with the banks for the purpose, the fact is that out of the total portfolio including the future interest of Rs.25.75 Crores, Assessee did receive Rs.24.33 Crores as can be seen in the transaction stated above. Therefore, at the time of sale of portfolio, there is a gain of Rs.1.54 Crores. This amount received by assessee is in a way discounted interest on the future receivables. Since this amount is already received by assessee, question of postponing the accrual does not arise. Had assessee been accounting the interest receivables as and when accrued, without sale of the portfolio, it has to be admitted that future interest cannot be taken as income. However, when assessee bundles it and sells it as a portfolio for a discount, the amount did accrue and received on the date of entering agreement. As can be seen from the above example, out of the total amount of Rs.2,96,16,526/- receivable in a later year, assessee discounted Rs.1,41,74,070/- and has received an amount of Rs.1,54,42,456/- as gain, out of the total price received of Rs.24,33,76,256/- [that total amount Rs.24,33,76,256 - Rs.22,79,34,100 = 1,54,42,456]. Thus, in a 9 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
way, out of the book value of Rs.22.79 Crores of portfolio, assessee did receive Rs.24.33 Crores thereby having the gain of Rs.1.54 Crores. Since the transaction happened on 19th March, the entire amount is to be accounted as income on that transaction as a gain.
13. Similar issue was considered by the Hon'ble Madras High Court in the case of TVS Finance and Services Ltd., Vs. JCIT [318 ITR 435 (Mad)] on the issue of accrual of income and timing of accrual on discounting of bills. The Hon'ble Madras High Court held as under:
"Where bills are discounted the accrual of interest is certain and arises on the date of discount.
The assessee was a non-banking finance company engaged in lease, hire purchase, bills discounting and mortgage loans. The Assessing Officer held that the whole of the income from bill discounting accrued at the time of discounting the bill. This was confirmed by the Tribunal. The assessee claimed the provision it had made towards bad debts under the RBI norms was deductible. The Assessing Officer and the Tribunal rejected the claim.
Held, (i) that the Tribunal was right in concluding that the uncertainty regarding the discharge of the bill or rediscounting has no relevance. The transaction of discounting is complete at the moment the customer is given 90 per cent of the value of the bill. The discount is equivalent to the interest and it accrued at that point.
(ii) That the debts were shown as written off on the basis of the formula given by the Reserve Bank of India. Writing off the debt as bad requires judgment on the part of the person carrying on the business but in the present case, the debts had been 'written off' merely on the basis of the RBI norms and nothing more. Thus, they were not deductible under section
36.
14. Since, principles of bill discounting and accounting entries are similar to the portfolio sale/securitization of loan portfolios, being the method involved being same, we uphold the orders of Assessing Officer and CIT(A) on the issue. In fact, both Assessing Officer and CIT(A) analyzed the accounting principles, agreements and came to conclusion that the amounts have accrued at the time of sale of portfolio. We affirm the same and hold that the amount of Rs.13,09,44,315/- being the amount of discounted future interest received by assessee 10 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
during the year is taxable in the year. Accordingly, we uphold the orders of Assessing Officer and reject the ground of assessee."
6.1. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2009-2010, we respectfully follow the decision of the Coordinate Bench of this Tribunal rendered for A.Y. 2009-2010 and uphold the impugned order of the Ld. CIT(A) confirming the addition of Rs.15,45,89,893 made by the A.O. on account of gain on assignment of loan portfolio by the assessee. Ground No.2 of the assessee's appeal is accordingly dismissed.
7. In Ground No.3, the assessee has disputed the disallowance of Rs. 4 lakhs made by the A.O. under section 35D which is confirmed by the Ld. CIT(A).
8. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As submitted by the Ld. Counsel for the assessee, the relevant expenditure in respect of which deduction under section 35D is claimed by the assessee for the year under consideration, was actually incurred in the previous year relevant to A.Y. 2007-2008. He has submitted that although the deduction claimed under section 35D in respect of the said initial year was originally allowed by the A.O., he subsequently reopened the assessment for the said year i.e., A.Y. 2007-2008 and disallowed the deduction claimed by the assessee under section 35D. He has submitted that the assessee has disputed the disallowance made under section 35D in A.Y. 2007-2008 in the appeal filed before the Ld. CIT(A) which is still pending. He has contended that since the issue relevant to the assessee's 11 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad.
claim for deduction under section 35D as involved in the year under consideration is consequential to the similar issue involved in the initial year i.e., A.Y. 2007-2008 for which the appeal is pending before the Ld. CIT(A), the same may be remitted back to the Ld. CIT(A) for deciding the same afresh depending on his decision on a similar issue for the initial year. Since the learned D.R. has also not raised any objection in this regard, we remit this matter back to the Ld. CIT(A) for deciding the same afresh depending on his decision on a similar issue involved in assessee's own case for A.Y. 2007- 2008 for which the appeal is pending with him. Ground No.3 of the assessee's appeal is accordingly treated as allowed for statistical purposes.
9. At the time of hearing, Ld. Counsel for the assessee has not pressed Ground No.4 raised by the assessee in this appeal. The same is accordingly dismissed as not pressed.
10. In the result, appeal of the assessee is treated as partly allowed for statistical purposes.
Order pronounced in the open Court on 05.06.2015.
Sd/- Sd/- (V. DURGA RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 05th June, 2015. VBP/- 12 ITA.No.990/Hyd/2014 Asmitha Microfin Ltd., Hyderabad. Copy to 1. Asmitha Microfin Ltd., Hyderabad.
C/o. Mr. S. Rama Rao, Advocate, 102, Shriya's Elegance, 3-6-643, Street No.9, Himayatnagar, Hyderabad.
2. Addl. Commissioner of Income Tax, Range-1, Hyderabad.
3. Commissioner of Income Tax (Appeals)-II, Hyderabad.
4. Commissioner of Income Tax-I, Hyderabad.
5. D.R. I.T.A.T. "B" Bench, Hyderabad.
6. Guard File