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), Kolkata.
2. The Ground No. 1 raised by the assessee is general in nature and does not require any specific adjudication.
3. The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of Rs. 81,22,83,000/- in the facts and circumstances of the case.
4. The brief facts of this issue is that the assessee company is a non-banking finance company (NBFC) duly registered with the Reserve Bank of India (RBI) and engaged in the business of asset financing which primarily includes having a well diversified portfolio comprising of a bunch of financial products such as commercial vehicles finance, cars & utility finance vehicles finance, construction & strategic construction equipment finance, tractor finance, Suvidha (Refinance) etc. Besides this, the assessee also provides lease of vehicles to various corporates. The assessee regularly follows the mercantile system of accounting. The assessee for the Asst Year 2013-14 had electronically filed its return of income on 28.11.2013 declaring taxable income of Rs. 164,31,05,540/-. This return was later revised on 24.3.2015 declaring the same total income but with some variation in the claim of tax deducted at source. In the return, the assessee made the upfront claim of expenses amounting to Rs. 81,22,83,000/- as deductible expenditure. This was subjected to detailed examination by the ld AO in the assessment proceedings by understanding the nature of expenses, verification of agreements with Direct Selling Agents, principles of accrual, principle of matching concept, principle of amortization, treatment in the books and treatment of the expenses and income under the Income Tax Act together with the related case laws. The assessee submitted that at the time of granting of loans and lease, it earns certain income which is in the nature of subvention income (provided by manufacturers / dealer of vehicles on financing their vehicles) and incurs certain expenses being in the nature of commission paid to Direct Selling Agents (DSAs) who source the business for the assessee by procuring customers ; cost incurred on arranging borrowings from the bank or financial institution like bank charges, legal charges etc ; cost incurred on acquiring loan portfolio (payments made to technical and legal advisors advising the acquisition) etc. These expenses and income 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 Rs. 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 Rs. 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 assessee’s claim of upfront expenses made on accrual basis in the computation of income but allowed the said expenses claimed in the profit and loss account on matching concept basis.
4.2. Before the ld CITA, the assessee reiterated the submissions made before the ld AO together with the related case laws including the judgement of the Hon’ble Supreme Court in the case of Taparia Tools Ltd vs JCIT reported in 372 ITR 605 (SC). The ld CITA after obtaining the remand report from the ld AO and after considering the submissions made by the assessee to the remand report, confirmed the impugned disallowance of upfront claim of expenses amounting to Rs. 81,22,.83,000/-. Aggrieved, the assessee is in appeal before us on the following grounds :-
2. That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of Rs. 75,35,26,000/- claimed by the appellant in respect of Direct Selling Agent commission and cost for arrangement of borrowings for the company without appreciating the fact that the said expenses are allowable on upfront basis under the Income Tax Act, 1961.
3.a.) That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of Rs. 5,87,57,000/- in respect of expenditure incurred by the appellant for acquiring portfolio without adjudicating on it separately since the Ld. AO had disallowed the same by holding it to be capital in nature and without appreciating the fact that the appellant was engaged in the business of financing.
b) That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of Rs. 5,87,57,000/- in respect of expenditure incurred by the appellant for acquiring portfolio without adjudicating on it separately and merely holding that the said expenditure was claimed upfront by the appellant under the Income Tax Act, 1961 and the appellant's upfront claim of expenses had been disallowed by the Ld. CIT(A).
4) That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of Rs. 81,22,83,000/- (Rs.75,35,26,000/- + Rs. 5,87,57,000/-) on the alleged ground that the appellant failed to follow the matching principle and hence the appellant's claim of expenses on upfront basis was against and in violation 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 Rs. 81,22,83,000/- (Rs.75,35,26,000/- + Rs. 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 of Paper Book I
3. A copy of the computation of income for AY 2013-14 – enclosed in pages 71 of Paper Book I
4. A copy of a specimen agreement for appointment of DSA– enclosed in pages 72 to 83 of Paper Book I
5. A copy of a specimen loan agreement – enclosed in pages 84 to 88 of Paper Book I
6. A copy of a specimen lease agreement – enclosed in pages 89 to 112 of Paper Book I
7. A copy of a specimen Memorandum of Understanding (MOU) between Hyundai Construction Equipment India Pvt Ltd and the assessee for extending finance for purchase of Hyundai Cars – enclosed in pages 113 to 117 of Paper Book I
8. Copy of assessee’s submission before ld CITA – enclosed in pages 1 to 43 of Paper Book II
9. Copy of remand report of ld AO – enclosed in pages 44 to 50 of Paper Book II
10. Copy of assessee’s reply to remand report – enclosed in pages 51 to 61 of Paper Book II
11. Copy of RBI’s guidelines dated 21.8.2012 – enclosed in pages 62 to 89 of Paper Book II
12. Copy of detailed sheet showing payment of commission to DSAs on sourcing business (specimen) – enclosed in page 90 of Paper Book II
13. Copy of Audited financial statements for AY 2010-11 – enclosed in pages 91 to 122 of Paper Book II
14. Copy of ITR Acknowledgement for AY 2010-11 – enclosed in page 123 of Paper Book II
15. Copy of Computation of income for AY 2010-11 – enclosed in page 124 of Paper Book II
16. Copy of Assessment Order u/s 143(3) of the Act dated 31.1.2013 for AY 2010-11 – enclosed in pages 125 to 131 of Paper Book II
17. Copy of Audited financial statements for AY 2011-12 – enclosed in pages 132 to 157 of Paper Book II
18. Copy of ITR Acknowledgement for AY 2011-12 – enclosed in page 158 of Paper Book II
19. Copy of Computation of income for AY 2011-12 – enclosed in page 159 of Paper Book II
20. Copy of Assessment Order u/s 143(3) of the Act dated 25.3.2014 for AY 2011-12 – enclosed in pages 160 to 165 of Paper Book II
21. Copy of Audited financial statements for AY 2012-13 – enclosed in pages 166 to 203 of Paper Book II
22. Copy of ITR Acknowledgement for AY 2012-13 – enclosed in page 204 of Paper Book II
23. Copy of Computation of income for AY 2012-13 – enclosed in page 205 of Paper Book II
24. Copy of Assessment Order u/s 144/145(3) of the Act dated 25.3.2015 for AY 2012-13 – enclosed in pages 206 to 215 of Paper Book II
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. These DSAs usually run into thousands of individuals. For work done by the DSAs and the payment of commission / brokerage to the DSAs in the above manner, the assessee has agreements with the DSAs. We find from the speciment copy of such agreement enclosed in pages 72 to 83 of Paper Book I, DSAs are obligated to perform this function, among others :-
Clause 5 of the agreement – OBLIGATIONS OF DSA
The DSA agrees and undertakes that the DSA shall :
n. Ensure delivery of the vehicle to the Customer only after intimation of Magma Fincorp Ltd’s (MFL’s) approval of the Customer and only after completion of all the formalities like registration of the vehicle, noting of MFL’s charge in the registration book in terms of the loan agreement signed between the Customer and MFL, insuring the vehicle and such other similar requirement(s) are completed. After the loan disbursement by MFL a copy of the Registration Certificate within 45 days with endorsement in favour of MFL, the Insurance Policy within 45 days with the Hypothecation notings and Invoice (within a day) with the lien favouring MFL and all other collateral security documents as may be specified by MFL from time to time shall be delivered to MFL. In the event the said documents are not submitted to MFL within specified days of disbursement of the loan, the entire loan will become payable forthwith and the DSA will be responsible for the foreclosure of all such loans. In the event of non submission of such documents, the DSA hereby authorizes MFL to set off all such sums against any payouts due to the DSA from MFL.
o. Ensure that, in case the customer decides against availing the loan, the refund is procured from the dealer for the monies paid towards the loan amount to the dealer and in case the same is not collected within 48 hours of such cancellation, the DSA will pay interest for the delay in procuring the refund and the interest payable will be charged and payable by the DSA @ 18% per annum from the date of the payment till the procurement of the refund to MFL.
p. In case any proposal booked by DSA is cancelled in subsequent month (excluding pre-terminated cases), then payout of that month, to which the cancelled proposal is pertained, will be recalculated after excluding the cancelled proposal. In case MFL finds 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 DSA and / or its Personnel. The DSA and / or its Personnel shall not be entitled to, by act, word, deed or otherwise, make any statement on behalf of MFL or in any manner bind MFL or hold out or represent that the DSA is representing or acting as agent of MFL, except as provided and permitted in this Agreement. The activities of the DSA and its Personnel shall not be construed to be MFL’s activities. Save and except as may be expressly permitted by MFL, the DSA and its Personnel shall not at any time use the name / logo of MFL in any sales or marketing publication or advertisement, or in any other manner without prior written consent of MFL.
From the aforesaid clauses in the DSA agreement, it could be safely concluded that the expense on account of commission / brokerage accrues on the assessee as soon as it receives the bill from DSA on the basis of procurement of business and on completion of insurance and registration formalities stated supra. Thus although the loan or lease extended by the assessee to the customers procured by DSA continues for a certain period of time as stated in the loan / lease agreement, the fees charged by the DSAs for procuring customers for the said loan lease has to be paid to the DSAs immediately on disbursal of the loan / lease subject to fulfillment of certain insurance / registration formalities as stated supra. Accordingly, the assessee during the year under appeal, had paid DSA commission /brokerage to the tune of Rs. 150,62,00,000/- to around 10 thousand DSAs for procuring customers. With regard to the objection of the ld AO that assessee changing the fee structure at its discretion does not imply that the DSAs will not get their due fees for the work done by them. They would receive their due fees as per the changed / revised fee structure by the assessee. Thus expenditure crystallized during the year even in this scenario. The aforesaid clauses together with the other clauses in the agreement with DSA provides adequate checks and balances to protect the interests of the commission payment made by MFL (assessee herein) to DSAs. Thus the liability of expenses on account of DSA commission / brokerage amounting to Rs. 150,62,00,000/- had accrued to the assessee on disbursal of total loan facilities amounting to Rs. 708662.96 lakhs during the relevant asst year which was discharged by it during the year itself. 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 Rs. 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 revenue expenditure as the liability for paying the same accrues immediately and it need not be amortised over the period of the loan.
5.3. Cost incurred in the process of acquiring Portfolio
Since the assessee is engaged in the business of granting loans, it often requires loan portfolios from other companies thus expanding its own loan portfolio and augmenting its business. During the relevant asst year, the assessee had acquired portfolios of ‘Loan against Property’ cases amounting to Rs. 49765.59 lakhs and ‘Auto Lease’ cases amounting to Rs. 25611.41 lakhs from GE Money Financial Services Ltd and Religare Finvest Ltd respectively. In the process of acquiring the above loan portfolios, the assessee incurred expenses to the tune of Rs. 5,92,52,000/- being legal fees paid to advocates, professional fees paid to advisors, salary paid to employees in the team working towards the acquisition etc. These expenses accrued to the assessee as soon as it acquired the loan portfolios and the services of the legal and technical advisors and that of the employees were already utilized. During the year under appeal, the assessee incurred a cost of Rs. 5,92,52,000/- on acquiring the loan portfolios and the same was paid by it during the year itself.
5.4. Similarly the assessee had derived subvention income on assets financed which has been offered to tax on upfront basis. The same is explained briefly sa below:-
INCOME
Subvention Income on assets financed
Manufacturers of Commercial Vehicles like Tata, Hyundai, Maruti etc float certain Incentive Schemes during the time of festivals wherein incentive, in the form of commission is given to companies on achieving the set target of financing specified models of the respective manufacturers’ vehicles. This commission is treated as ‘subvention income’ by the assessee. In some cases, the dealers of the above respective manufacturers’ vehicles also provide a commission to the assessee on providing finance to customers purchasing their vehicles by way of a discount which is a deduction from their final disbursements to the dealers. The subvention income accrues to the assessee the moment a vehicle is financed by it. The assessee in all finality acquires the right to receive the said income as the accrual of the said income is not linked to the tenure of the loan extended by it to the customers for purchase of the vehicles. During the relevant asst year, subvention income amounting to Rs. 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 being a NBFC had to follow RBI Guideline No. 301/3.10.01/2012-13 dated 21.8.2012, the profit earned by it had to be amortised over the life of the transaction. Thus while drawing its profit and loss account, the assessee changed the presentation of its accounts in consonance with RBI guidelines wherein profit earned from subvention income was amortised over the life of the transaction and to maintain uniformity, expenses incurred were also amortised similarly. As a result, the expenses incurred by the assessee on payment of DSA commission and portfolio acquisition cost was amortised by it in its profit and loss account over the tenure of the loans on matching concept and as such in the computation of income, the assessee claimed the expenses of Rs. 81,22,83,000/- on accrual basis. In other words, from Asst Year 2012-13 onwards, the assessee started recognizing income and expenses based on matching concept by following the amortization method in consonance with RBI guidelines, but offered the entire subvention income upfront in the year in which accrued and similarly claimed the entire upfront expenses in the year of accrual and incurrence. Hence this goes to prove that the assessee had not changed the treatment of upfront expenses and income in the return of income. It has been consistently offering the upfront income and claiming upfront expenses as income and expenditure in the year of accrual and incurrence which has also been allowed by the ld AO upto Asst Year 2011-12 in section 143(3) proceedings. The assessee had merely changed the treatment of income and expenditure recognition for upfront income / expenditure in its books of accounts in order to comply with the RBI guidelines. It is well settled that the RBI guidelines and Circulars though binding on NBFC and its functioning are not relevant for the purpose of computation of income under the IT Act. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd vs JCIT in Civil Appeal No. 1337/2003 dated 11.1.2010 reported in (2010) 320 ITR 577 (SC). In the said judgement, the Hon’ble Apex Court in the concluding paragraph heavily relied on House of Lords judgement rendered in the case of Barclays Mercantile Business Finacne Ltd vs Mawson (Inspector of Taxes), 2005 (1) All ER 97, wherein the House of Lords observed that “ a tax is generally 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 issuance of RBI guidelines dated 21.8.2012.
5.7. We find that the ld AO had accepted the fact that the upfront expenditure per se had accrued to the assessee in the year under appeal and that is the reason he had allowed the part of such expenditure which is debited in the profit and loss account. Having done so, there is no reason for the ld AO to treat the remaining portion of upfront expenditure as deferred revenue expenditure, for allowance of the same in subsequent years. Hence it could be safely concluded that the question of accrual of expenses during the year under appeal cannot be disputed and once the same is not disputed, there is no question of allowing a part of such expenditure. Hence we are not inclined to accept the arguments of the ld DR advanced in this regard by stating that the assessee had not proved the factum of accrual of upfront expenditure in the year under appeal. Moreover, the ld AO had taxed the entire upfront subvention income in the year under appeal as offered to tax by the assessee. But he is trying to take a differential stand only when it comes to allowability of upfront expenditure. It is well settled that there is no concept of Deferred Revenue Expenditure in the provisions of the Act except otherwise stated in sections like section 35D, 35DD etc. The Act recognizes only two types of expenditure in the normal course i.e ‘capital expenditure’ and ‘revenue expenditure’. Admittedly, the subject mentioned upfront expenditure are not in the nature of capital expenditure.
5.8. With regard to the treatment of portfolio acquisition cost as capital by the revenue, 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 (2010) 320 ITR 669 (Del) wherein it was held as below:-
5. The conclusion noted by the Bombay High Court ( CIT vs V.S.Dempo and Co. P Ltd (1994) 206 ITR 291 ) and which has been accepted by this Court is to the effect that the purpose of acquisition of the loan is of no consequence but what is of consequence is the utilization of the amount at the time when the devaluation took place. Insofar as the present case is concerned, the amount was utilized by the 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 his famous dictum in Curtis vs. J. & G. Oldfeld Ltd. (1925) 9 Tax Cases 319, which runs as follows :
"When the rule speaks of a bad debt it means a debt which is a debt that would have come into the balance-sheet as a trading debt in the trade that is in question and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits."
The first limb of s. 36(2)(i)(a) of the present Act only incorporates Rowlatt J.'s principle; that limb enacts very clearly that no deduction shall be allowed for a bad debt, unless such debt has been taken into account in computing the income of the assessee for the previous year or for an earlier previous year. It is implicit in this express condition that the debt should have arisen in the course of carrying on his business. In the second limb of s. 36(2)(i)(a), this condition is not repeated, for the simple reason that the second limb deals with money-lending and banking business in which the money itself is regarded as a stock-in-trade and, therefore, the money lent would certainly come into the revenue account, and, hence, it was perhaps thought to be unnecessary to emphasise the obvious by saying that money lent in a money-lending or banking business must have been taken into account in the computation of money- lending or banking business. The only requirement which was worthwhile to make mention of in a banking or money-lending business is that it must have been course of the business of the assessee. Therefore, taking t hme opnreoyv ilseinotn i nin t hse. 36(2)(i)(a) as a whole, it is necessary in every case to find if a debt in a moneylending or banking business or a debt in a non-money-lending or a non-banking business must have been incurred in the course of the assessee's business. The second limb is that in the case of non money-lending or non-banking business, a debt in order to be a bad debt must have been taken into account in the computation of the income of the assessee. This particular requirement takes care to exclude what may be called capital debts from qualifying for write-off as bad debts. We must, therefore, reject Mr. Srinivasan's construction of s. 36(2)(i)(a) as a negation of the tradition of years of statutory construction and judicial elucidation of the principle of write- off of bad debts.
5.8.2. Respectfully 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 and hence there is inherent inconsistency in the approach taken by the assessee. In this regard, we find that the related items of income to the expenses incurred by the assessee in the process of granting loans like interest, rental were also offered to tax by the assessee in its return of income, on accrual basis since they did not accrue to the assessee one time but accrued over the tenure of underlying loan or lease. The relevant asst year being one of the years of the tenure of the loan / lease, the interest or rental accrued during the year was rightly offered to tax by the assessee in its return of income on accrual basis. We find that the subvention income offered to tax by the assessee on upfront basis accrued to the assessee during the year under appeal itself, the moment a vehicle was financed by it post floating of incentive schemes by commercial vehicle manufacturers i.e immediately on extending of loan to the customers for purchase of vehicles, the manufacturers of such vehicles credited the commission due on the same to the assessee’s account and the same was offered to tax by the assessee in the year of its accrual / receipt. Similarly, lease rental and interest income accrues to the assessee over the tenure of the lease and loan given out by it, which consist of several years. Thus the amount of interest or lease rental offered by the assessee during the relevant asst year had accrued to it during the current year (being one of the years of the tenure of the loan) and hence was rightly offered to tax as such, on accrual basis. Hence there is no question of assessee’s treatment resulting in distorted results or inconsistent view. Therefore the reasoning given by the ld CITA in this regard does not hold good.
5.10. We find that the issue under dispute on an overall basis is squarely addressed by the decision of the Hon’ble Supreme Court in the case of Taparia Tools Ltd vs JCIT reported in (2015) 372 ITR 605 (SC). The brief facts of this case and decision rendered thereon are as below:-
5. In the assessment orders passed by the AO, the assessee's claim for deduction of upfront interest payment was denied. Instead, the AO chose to spread it over a period of five years thereby giving deduction only to the extent of 1/5th each in the respective assessment years. The order of the AO was challenged by the assessee in appeals preferred before 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 debenture holders, which occurred in the respective assessment years in which deduction of this expenditure was claimed.
7.Section 36 of the Income - Tax Act, 1961 …………………………………
8. Ignoring the proviso and the explanation in clause (iii) above, with which we are admittedly not concerned in this case, it is clear that as per the aforesaid provision any amount on account of interest paid becomes an admissible deduction under Section 36 if the interest was paid on the capital borrowed by the assessee and this borrowing was for the purpose of business or profession. There is no quarrel, in the present case, that the money raised on account of issuance of the debentures would be capital borrowed and the debentures were issued for the purpose of the business of the assessee. In such a scenario when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, on the application of this statutory provision, on incurring of such interest, the assessee would be entitled to deduction of full amount in the assessment year in which it is paid. While examining the allowability of deduction of this nature, the AO is to consider the genuineness of business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. Once the genuineness is proved and the interest is paid on the borrowing, it is not within the powers of the AO to disallow the deduction either on the ground that rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent. In the instant case, the AO did not dispute that the non-convertible debentures were issued and money raised for business purposes. The AO did not even dispute the genuineness of clause relating to upfront payment of interest in the first year itself as per the option to be exercised by the debenture holder. In nutshell, the AO did not dispute that the expenditure on account of interest was genuinely incurred. Therefore, there is no dispute that interest has, in fact, been 'paid' during the year of accounting. The definition of 'paid' is contained in Section 43(2) of the Act to mean actually paid or incurred according to the method of accounting. To be precise, this definition is couched in the following language:
“S.43 In sections 28 to 41 and 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 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.
9. The only reason which persuaded the AO to stagger and spread the interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of accounts, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited 1/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion.
10. Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as one time payment. By allowing only 1 /5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount.
11. The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid 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, thus, it was exercising the statutory right which could not be denied.
12. We find that the High Court has taken into consideration the provisions of Section 36(1)(iii) of the Act and the conditions which are to be fulfilled for allowing the deduction on this account in the following words:
“...The term “interest” has been defined under Section 2(28A) of the Act. Briefly, interest payment is an expense under Section 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see 35 ITR 339 - Madras]. For claiming deduction under Section 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word “Paid” is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word “Paid” in Section 36(1 )(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting...”
Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercantile system of accounting, book profits are liable to be taxed and in order to determine the net income of an Accounting Year, the revenue and other incomes are to be matched with the cost of resources consumed (expenses). For this reason, in the opinion of the High Court, this matching concept is required to be done on accrual basis. As per the High Court, in this case, payment of Rs. 55 per debenture towards interest was made, which pertained to five years, and, thus, this interest of five years was paid in the first year. We are of the opinion that it is here the High Court has gone wrong and this approach resulted in wrong application of Matching Concept. It is emphasized once again that as per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute 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 Section 35-D of the Act.
14. What is to be borne in mind is that the moment second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax (2000) 6 SCC 645, this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability quantified and discharged at a future date. Following pamsasay geh afvreo mto tbhee aforesaid judgment is worth a quote:
“The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”
The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year.
15. Judgment in Madras Industrial Investment Corporation Limited v. cCooumnmseils sfoiorn tehre oRfe vIenncuoem teo jTuasxti,f y( t1h9e9 d7e) c4is ioSnC Cta k6e6n6 b yw tahse ccoituerdt sb bye ltohwe. lWeaer fninedd that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to 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 Rs. 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 its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.
Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.”
16. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.
17. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.
18. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in 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 showing this expenditure in a spread over manner in the books of accounts, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.
20. In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs. 2,72,25,000 and Rs. 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs.
5.10.1. From the aforesaid judgement, what we are able to decipher is the assessee is given a choice to claim the expenditure as revenue in nature in one go i.e in the year of incurrence or alternatively, claim the same as amortization duly giving credence to the matching principle. Both the choices have been permitted by the Hon’ble Apex Court in the aforesaid judgement. The assessee in the instant case had chosen to claim the entire revenue expenditure in one go in the year of incurrence. We also find that the Hon’ble Supreme Court in its findings that the amortization method cannot be forced on the assessee unless otherwise specifically provided such as section 35D, etc. and it is only permitted if the assessee chooses to do so in the return. We find that the ratio laid down in the aforesaid judgement squarely covers the case of the instant assessee in its favour.
5.11. We find that the ld AO had placed reliance on the following decisions in support of amortization principle:-
a) Rakesh Shantilal Mardia vs DCIT reported in (2012) 26 taxmann.com 253 (SC)
b) CIT vs Winner Business Link (P) Ltd reported in (2015) 55 taxmann.com 468 (Gujarat)
c) CIT vs Unique Mercantile Service (P) Ltd reported in (2015) 56 taxmann.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 matching principle. We hold that once the accrual of upfront expenditure is not in dispute, the same has to be allowed as revenue expenditure in full in the year of incurrence. Moreover, the ld AO has been allowing the upfront claim of expenditure upto Asst Year 2011-12 in section 143(3) proceedings in the year of incurrence itself on accrual basis and hence there is no basis for taking a contrary view in the year under appeal. We find that the assessee was forced to comply with RBI guidelines dated 21.8.2012 which is binding on it, wherein it was forced to recognize income and expenses based on matching principle in its books of accounts, but this action does not in any way disturb the computation of income under the provisions of the Income Tax Act. Hence the change in method of accounting in the books was warranted only due to compliance of mandatory RBI guidelines and accordingly the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs Hindusthan Zinc Ltd reported in (2007) 161 Taxman 162 (SC) is not applicable to the facts of the instant case as it is factually distinguishable. We find that in the case of Hindusthan Zinc Ltd, the claim made previously had no similarity with the claim made later. Also the claim made later following a different method of accounting was found to be for the purpose of suppressing profits, which would not be possible had the previous method of accounting been followed. However, in the assessee’s case, no such anomalies have resulted in the claim made by it in the return of income earlier or later.
5.13. In view of our aforesaid findings and respectfully following the judicial precedents relied upon hereinabove; we hold that the upfront expenditure should be allowed in the year of incurrence on accrual basis. Accordingly, we direct the ld AO to delete the disallowance made in the sum of Rs. 81,22,83,000/-. Accordingly, the Grounds 2 to 6 raised by the assessee are allowed.
6. The Ground Nos. 7 & 8 raised by the assessee are general in nature and does not require any specific adjudication.
7. In the result, the appeal of the assessee is allowed.