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Facts
The Assessee, a trust providing credit guarantees, claimed a deduction for provision for claim payouts based on an actuarial report. The Assessing Officer disallowed this, alleging a hybrid accounting system. The CIT(A) partly allowed the appeal, allowing deduction for actual payouts but not the provision.
Held
The Tribunal held that the provision for claim payouts, calculated based on an independent actuarial report, represented an ascertained liability. The contention that it was contingent or based on an ad-hoc basis was rejected.
Key Issues
Whether the provision for claim payouts, created based on an actuarial report, is an allowable deduction as an ascertained liability for the Assessee.
Sections Cited
10(46B), 143(3), 144B, 250
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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
order : 21.03.2025 O R D E R [Per Rahul Chaudhary, Judicial Member: 1. These are cross-appeals for Assessment Year 2019-2020 preferred against the order, dated 18/05/2009, passed by the National 1 & ITA No.4713/Mum/2024 Assessment Year 2019-2020 Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had partly allowed the appeals against the Assessment Order, dated 28/09/2021, passed under Section 143(3) read with Section 144B of the Act.
The Assessee has raised following grounds of appeal in :
“1. The Ld. CIT(A) has erred in law and in facts in not appreciating that the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.09.2021 is invalid and bad in the eyes of law.
2. The Ld. CIT(A) has erred in law and in facts in passing the appellate order u/s 250 of the Act in violation of principles of natural justice.
3. The Ld. CIT(A) has erred in law and in facts in passing the order u/s. 250 of the Act dated 15.07.2024 partly confirming the additions made in the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.09.2021 which is bad and invalid in the eyes of law.
The Ld. CIT(A) has erred in law and in facts in partly confirming the action of Ld. AO in making disallowance of provision for claim payout amounting to Rs. 682,09,65,697/- [Rs. 903,60,99,374/- (-) Rs. 221,51,33,677/-].”
The Assessee has also raised the following additional ground on 21/10/2024:
“1. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and in facts in not deleting entire addition of Rs.978,76,84,517/- made by the Ld. Assessing Officer being the closing balance of provision for claim payout as on 31.03.2019.
2. On the facts and circumstances of the case, the Ld. CIT(A) erred in law and in facts in holding that the expenses to the extent of actual payout during the year shall be allowed and the amount if provided in earlier years shall be reversed back and added to income.”
ITA No.4674/Mum/2024 & Assessment Year 2019-2020 4. Having considered the rival submissions and on perusal of record, we admit the Additional Ground No. 1 & 2 raised by the Assessee in view of the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. Vs. CIT: 229 ITR 383 since the additional ground can be adjudicated on the basis of material already on record.
The Revenue has raised following grounds of appeal in : “i. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in allowing deduction of Rs.221,51,33,677/- from the assessed income which is not a part of assessed income as no disallowance has been made of this amount?. ii. Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in allowing the deletion of unutilized provision of Rs.75,15,85,143/- without giving any proper reason.”
6. Since all the grounds raised in the cross-appeals are connected and arise from same factual matrix, all the grounds are taken up together hereinafter.
7. The Assessee is a trust set up under the Prime Minister Mudra Yojna (PMMY) vide Trust Deed, dated 30/03/2016, with National Credit Guarantee Trustee Company Limited as its trustee. The purpose of the Assessee-trust is to provide credit guarantee to various banks in the country in respect of loans given by such banks to customers in informal sectors of the society who find it difficult to access formal system of credit. The Assessee charges Guarantee Fees from banks against the aforesaid guarantee cover. The scheme is designed to cover guarantees of micro loans upto Rs. 10 lakhs and other benefits.
For the relevant previous year, the Assessee filed its return of income declaring total income of INR.127,07,98,130/- which was & ITA No.4713/Mum/2024 Assessment Year 2019-2020 selected for regular scrutiny. During the course of assessment proceedings, the Ld. Assessing Officer observed that the Assessee has claimed deduction in respect of Provision for Claim Pay Out of INR.9,03,60,99,374/- and has shown Closing Balance of Provision for Claim Pay Out as INR.9,78,76,84,517/- in the financial statements for the relevant previous year. Therefore, a show cause notice was issued to the Assessee seeking explanation in this regard. In the aforesaid notice it was stated that the Assessee had claimed deduction for Provision for Claim Pay Out on accrual basis whereas the Guarantee Fees was accounted for and offered to tax on receipt basis. It was alleged that the Assessee was following a hybrid system of accounting which was not permitted. Thus, the Assessee was asked to justify the deduction for Provision for Claim Pay Out of INR.9,03,60,99,374/- claimed by the Assessee. In response to the aforesaid show cause notice, the Assessee filed reply explaining that Assessee was following accrual system of accounting (and not hybrid system of accounting). The Guarantee Fees accrued to the Assessee and was paid to the Assessee on execution of contract for providing guarantee cover. Thus, in the case of the Assessee the guarantee cover started on payment of guarantee fee only and therefore, the accrual as well as the receipt was on the same date. However, the Assessing Officer was not convinced. The Assessing Officer concluded that the Assessee was following hybrid system of accounting and made addition of INR.978,76,84,517/-, being closing balance of Provision for Claim Pay Out, in the hands of the Assessee.
Being aggrieved, the Assessee preferred appeal before the CIT(A) and explained that the Provision for Claim Pay Out was an allowable expense as the Assessee was following accrual system of accounting and that the deduction was claimed on the basis of independent actuarial report. The CIT(A) partly allowed the appeal preferred by the Assessee vide order dated 15/07/2024. The CIT(A) observed 4 & ITA No.4713/Mum/2024 Assessment Year 2019-2020 that in the actuarial report furnished by the Assessee, the Provision for Claim Pay Out was computed on ad-hoc basis. Further, Claim Pay Out amount would materialised only upon the loan and upon guarantee cover being invoked. Therefore, the Provision for Claim Pay Out was in the nature of a contingent liability in respect of which deduction could not have been allowed to the Assessee. However, the CIT(A) allowed deduction in respect of actual Pay Out of INR.221,51,33,677/- made during the relevant previous year subject to the condition that deduction in respect of the same was not allowed in earlier years on creation of Provision for Claim Pay Out. The CIT(A) granted relief to the Assessee by holding that addition of the opening balance of Provision for Claim Pay Out amount to INR.75,15,85,143/- was not warranted. Thus, in terms of the aforesaid, the CIT(A) granted relief to the extent of INR.296,67,18,820/-(INR.221,51,33,677/- + INR.75,15,85,143/-).
Being aggrieved, both, the Assessee as well as the Revenue had come in appeal before the Tribunal.
We have heard both the sides, perused the material on record and examined the position in law in view of the submissions advanced.
The issue that arises for consideration before the Tribunal is whether the Provision for Claim Pay Out created during the relevant previous year was allowable deduction in the hands of the Assessee. All the grounds/additional ground raised by the both the sides pertain to the aforesaid issue and in order to address the same, it would be pertinent to ascertain the nature of Claim Pay Out/Provision for Claim Pay Out.
We find that the finding retuned by the CIT(A) that a copy of Trust Deed was not filed before the Assessing Officer is factually incorrect. A copy of the Trust Deed was filed by the Assessee before the Assessing Officer along with submission, dated 23/09/2021 [placed at 5 & ITA No.4713/Mum/2024 Assessment Year 2019-2020 Page No.173 and 15-40 of the Paper Book]. On perusal of the Trust Deed along with Notification [S.O.1443(E)], dated 18/04/2016, whereby the Scheme known as Credit Guarantee Funds for Micro Units (hereinafter referred to as ‘Scheme’) was notified, it becomes clear that the Assessee-trust was established to increase access to and availability of micro-loans to the eligible micro units and by providing guarantee cover to lenders (Banks/NBFCs/Financial Intermediaries) giving loans and advances without collaterals and/or third party guarantees to the eligible Micro Units. As per paragraph 4.1 of the Trust Deed the Scheme was to be operationalised and implemented by the Trustees (National Credit Guarantee Trustee Company Limited). The Scheme guaranteed payment to Banks/NBFCs/MFIs/Other financial intermediaries in the event of default in repayment of micro loans extended to the eligible borrowers. The relevant extract of the Scheme reads as under: “CHAPTER II : SCOPE AND EXTENT OF THE SCHEME 3. Guarantees by the Fund i. Subject to the other provisions of the Scheme, the Fund undertakes in relation to loans extended to an eligible micro unit by a lending institution which has entered into the necessary agreement for this purpose with the Fund, to provide guarantee against default in repayment of micro loans extended by the lending institutions. ii. The Fund reserves the discretion to accept or reject any proposal referred by a leading institution which otherwise satisfies the norms of the Scheme. 4. Micro loans eligible under the Scheme: The Fund shall cover micro loans up to the specified limit (currently Rs.10 lakh) extended by Member Lending Institution(s) to an eligible borrower, provided that the lending institution applies for guarantee cover in respect of such loans so sanctioned within such time period and as per procedures prescribed by the Pond for the purpose. Further, Overdraft loan amount of Rs.5,000/- sanctioned under PMJDY accounts shall also be eligible to be covered under Credit guarantee Fund.
ITA No.4674/Mum/2024 & Assessment Year 2019-2020 It may be noted that micro loans under PMMY inclusive of overdraft under PMUDY, sanctioned since April 2015 would qualify for guarantee cover under the scheme The Fund may, at its discretion, approve/frame a list of Member Lending Institutions and for their schemes, for which the guarantee cover will be available, or a negative list for which the guarantee cover shall not be available 5. xx xx 6. Agreement to be executed by the lending institution A landing institution shall not be entitled to a guarantee in respect of eligible Micro Loan granted by it unless it has submitted an undertaking with the Fund in such form as may be required by the Fund for covering by way of guarantee, under the Scheme all the eligible Micro Loans granted by the lending institution, for which provision has been made in the Scheme.
Responsibilities of lending institution under the Scheme i. The lending institution shall evaluate Micro Loans in accordance with the guidelines issued by Reserve Bank of India/the Fund and conduct the account(s) of the borrowers with normal lending prudence. ii. The lending institution shall pool all its outstanding micro loans extended against sanctioned effected on or after April 08, 2015 as the end of the quarter (quarter ended March, June, September and December) as part of the portfolio during the base year and ensure to submit the information required by NCGTC for giving guarantee cover with regard to the micro borrowal account during the currency of the portfolio. iii. The MLI would need to furnish a Statutory Auditor Certificate/ Management Certificate as prescribed by the Fund from time to time, certifying the following: (a) All accounts in the portfolio conform to eligible micro loans sanctioned after the date of April 08, 2015. (b) All accounts covered in the initial portfolio as well as new accounts added in the portfolio subsequently, are standard accounts. (c) All accounts which have turned NPA within the portfolio and for which claim has not been lodged have to be included in the portfolio on which the guarantee fee is payable.
ITA No.4674/Mum/2024 & Assessment Year 2019-2020 iv. The statutory auditor/management shall certify the amount of non-performing asset of the crystallized portfolio as on the date of March 31 every year, by the second quarter of every financial year from the date of crystallization of the portfolio, during the currency of the portfolio. v. The lending institution shall closely monitor the borrower account and follow up for repayment. vi. The payment of guarantee claim by the Fund to the lending institution does not in any way take away the responsibility of the lending institution to recover the entire outstanding amount of the credit from the borrower with applicable interest. The lending institution shall exercise all the necessary precautions and maintain its recourse to the borrower for entire amount of micro loan owed to it and initiate such necessary actions for recovery of the outstanding amount, including such action as may be advised by the Fund. vii. The lending institution shall comply with such directions as may be issued by the Fund, from time to time, for facilitating recoveries in the guaranteed account, or safeguarding its interest as a credit guarantor, as the Fund may deem fit and the lending institution shall be bound to comply with such directions. viii. The lending institution shall, in respect of any guaranteed account, exercise the same diligence in recovering the dues, and safeguarding the interest of the Fund in all the ways open to it as it might have exercised in the normal course if no guarantee had been furnished by the Fund. The lending institution shall, in particular, refrain from any act of omission or commission, either before or subsequent to invocation of guarantee, which may adversely affect the interest of the Fund as the guarantor. In particular, the lending institution should intimate the Fund while entering into any compromise or arrangement, which may have effect of discharge or waiver of personal guarantee(s) or primary security. Further, the lending institution shall secure for the Fund or its appointed agency, through a stipulation in an agreement with the borrower or otherwise, the right to publish the defaulted borrowers' names and particulars by the Fund. ix. The lending institution shall provide the performance review of the portfolio at the transaction level as at the end of every financial year, including base year, in the manner as prescribed by the Fund. CHAPTER III: FEE STRUCTURE ITA No.4674/Mum/2024 & Assessment Year 2019-2020 8. Guarantee Fee i. For availing the guarantee coverage, the Member Lending Institution shall pay guarantee fee as under: a) During the base year (year of portfolio built-up) - Guarantee fee will be paid on the sanctioned amount corresponding to the outstanding balance of the quarterly built up balance of the portfolio of micro loans for the full year or the broken period i.e. till March 31 of subsequent year, as the case may be, and the Guarantee will be valid upto the end of that financial year. It may be noted that for such sanctioned cases which have been cancelled/repaid/pre-paid/taken over during the currency of the portfolio, no guarantee fee shall be charged for such sanctioned cases in the portfolio and no guarantee cover would be applicable. b) During subsequent years. The guarantee fee will be paid on the sanctioned amount corresponding to the outstanding balance (including on accounts which have turned NPA) of the crystallized portfolio during the currency of the portfolio and Guarantee will be valid unto the end of that financial year Guarantee fee with respect to NPA accounts in the portfolio would continue to be paid till lodgment of claim for such accounts, at a rate specified by the Fund on the amount or fee based on risk based pricing/such other amount on such reference dates or specified rate act by the Fund from time to time (risk based guarantee for components given at Attachments in respect of 5 Models). The portfolio as at the end of third year from the date of crystallization will be finally settled and terminated. The outstanding balance of the terminated portfolio at the end of the third year will be deemed to be a new portfolio and could be merged with the current portfolio of that year at the discretion of the lending institution. ii. Guarantee fee shall be paid within 16 days from the end of the quarter. (The MLI would need to furnish a Management Certificate within 7 days from the of the the quarter, after which, a Credit Guarantee Demand Advice Note [CGDAN] would be issued by NCGTC within 3 day of receipt of Management Certificate and subsequently, the guarantee fee shall be payable within 3 days from the issue of CGDAN) iii. All cases within the portfolio for which the guarantee fee has been paid by MLI, would be covered under the 9 ITA No.4674/Mum/2024 & Assessment Year 2019-2020 credit guarantee scheme subject to the loan accounts within the portfolio being eligible micro loans. iv. The Fund may at its discretion, charge risk based pricing i.e., different guarantee fees for different Member Lending Institutions depending on their credit rating, NPA levels, claim payout ratio, geographical spread, etc; or such other parameters as per the experience of the Fund based on the performance of the portfolios of the respective MLIs. v. Provided further that in the event of non-payment of guarantee fee within the stipulated time or such extended time that may be agreed to by the Fund on such terms, liability of the Fund to guarantee such credit facility would lapse in respect of those credit facility against which the fee is due and not paid. vi. The amount equivalent to the guarantee fee payable by the eligible lending institution may be recovered by it, at its discretion from the eligible borrower vii. The guarantee fee once paid by the lending institution to the Fund shall be non-refundable, except under certain circumstances like. Excess remittance, Remittance made more than once against the same portfolio, Fee paid in advance but application not approved for guarantee cover under the scheme, etc CHAPTER IV: GUARANTEES 9. Extent of the guarantee i. In the nature of 'First Loss Portfolio Guarantee, wherein first loss to the extent of 5% of the crystallized portfolio of the MLI, will be borne by the MLI and therefore, will be excluded for the claim. Out of the balance portion, the "extent of guarantee' will be to a maximum extent of 50% of "Amount in Default' in the portfolio or such other percentage as may be specified by the Fund from time to time on a pro-rata basis. ii. The guarantee cover will commence from the date of payment of guarantee fee and shall run through the agreed tenure of the repayment of Micro loan or the termination date of the portfolio, whichever is earlier, subject to yearly renewal of the guaranteed portfolio.
ITA No.4674/Mum/2024 & Assessment Year 2019-2020 iii. The overall guarantee payout for an MLI would be linked to exposure norms/payout caps as may be specified by the Fund from time to time CHAPTER V: CLAIMS 10. Invocation of guarantee i. The lending institution may invoke the guarantee in respect of the 'amount in default' out of the crystallized portfolio of micro loans, subject to the condition of first loss guarantee, after 1 year from the date of crystallization of the portfolio and thereafter, at the end of every financial year. ii. The MLI shall furnish a statutory auditor/management certificate confirming that the amount due and payable to the lending institution in respect of the micro loan has not been paid and the dues have been classified by the lending institution as Non Performing Asset. Provided that the lending institution shall not make or be entitled to make any claim on the Fund in respect of the said micro loan if the loss in respect of the said credit facility had occurred owing to actions/decisions taken contrary to or in contravention of the guidelines issued by the Fund. The certificate shall also mention the percentage of the amount in default borne by the MLI towards first loss. iii. The claim should be preferred by the lending institution in such manner and within such time as may be specified by the Fund in this behalf. iv. The Fund shall pay eligible claim amount on preferring of claims by the lending institution, within 60 days, subject to the claim being otherwise found in order and complete in all respects. The Fund shall pay to the lending institution interest on the eligible claim amount at the prevailing Bank Rate for the period of delay beyond 60 days. On a claim being paid, the Fund shall be deemed to have been discharged from all its liabilities on account of the guarantee in force in respect of the borrower concerned. v. The lending institution shall be liable to refund the claim released by the Fund together with penal interest at the rate stipulated by the Fund, if such a recall is made by the Fund in the event of deficiencies having existed in the matter of appraisal/renewal/follow-up/conduct of the micro loan or where lodgment of the claim was more than once or where there existed suppression of any material information on part of the lending institutions 11 ITA No.4674/Mum/2024 & Assessment Year 2019-2020 for the settlement of claims. The lending institution shall pay such penal interest, when demanded by the Fund, from the date of the initial release of the claim by the Fund to the date of refund of the claim.
11. Subrogation of rights and recoveries on account of claims paid i. The lending institution shall furnish to the Fund, the details of its efforts for recovery, realizations and such other information as may be demanded or required from time to time. ii. Every amount recovered and due to be paid to the Fund shall be paid without delay, and if any amount due to the Fund remains unpaid beyond a period of 30 days from the date on which it was first recovered, interest shall be payable to the Fund by the lending institution at the rate stipulated by the Management Committee for the period for which payment remains outstanding after the expiry of the said period of 30 days.”
On perusal of the above we find that the Guarantee Fee is paid for a contract between the Assessee and Member Lending Institution (MLI) for providing guarantee cover to the MLI. The accounting policy on ‘Revenue Recognition’ states – ‘Guarantee fees is accrued on receipts of contacted amount from the member lending institutions’. The Assessing Officer has interpreted the same to mean that the Guarantee Fee is recognized by the Assessee on receipt basis. In our view, the aforesaid interpretation adopted by the Assessing Officer is not correct given the facts and circumstances of the present case. Paragraph 9. ii. of the Scheme [reproduced hereinabove] specifically states – ‘The guarantee cover will commence from the date of payment of guarantee fee….’. Thus, the guarantee cover generally commences on payment of Guarantee Fee only. Therefore, it cannot be said that the Assessee is following receipt basis of accounting for recognition of Guarantee Fee since in the present case there is (a) either no difference in the accrual and receipt of Guarantee Fee, or (b) the receipt of Guarantee Fee precedes the accrual of corresponding risk to providing guarantee cover. We also find merit in the contention of the Assessee that 12 ITA No.4674/Mum/2024 & Assessment Year 2019-2020 Guarantee Fee is akin to insurance premium which is payable at the start of the period covered. The moment Guarantee Fee is received the corresponding liability to pay the guarantee amount in case of a Claim Pay Out as per the terms of the Scheme and the applicable agreement gets triggered. Thus, while the liability to pay Claim Pay Out is a ‘liability in presenti’, the actual quantum of the aforesaid liability as well as the time of the actual Claim Pay Out would depend upon the facts and circumstances of each case of event of default committed by the eligible borrower and corresponding claim made by the MLI in terms of Chapter IV of the Scheme dealing with the extent of Guarantee. Therefore, we reject the contention of the Revenue that the liability to make payment towards Claim Pay Out is a contingent liability.
In the present case the Assessee follows accrual basis of accounting and makes a provision for making payment towards Claim Pay Out corresponding to the Guarantee Fee recognized as income during the relevant previous year on the basis of actuarial report obtained from independent actuarial valuer. While the Assessing Officer had made disallowance in respect of Provision for Claim Pay Out on the ground that the Assessee follows hybrid system of accounting, we note that the CIT(A) has observed that the Provision for Claim Pay Out made by the Assessee is based upon actuarial valuation report wherein ad-hoc rate has been used for creating the provision. On perusal of the material on record, we find that the fact the actuarial valuation report had used the expression ‘ad-hoc rate’ has lead to the formation of opinion by the CIT(A) that the Provision for Claim Payout has been prepared on ad-hoc basis. However, in our view, that it not the case in the matter before us. We find that in the ‘Actuarial Valuation Report’ (as at 31/03/2018), the independent actuary had noted that out of expected defaults, the Assessee is liable to make payments after excluding 1st 5% of the gross loan amount which will be borne by the MLI, thereafter, out of balance 13 & ITA No.4713/Mum/2024 Assessment Year 2019-2020 portion, the extent of guarantee is maximum to the extent of 50% of the amount of default. Further, there is an upper cap on the total Claim Pay Out at 15% of the total loan sanctioned amount. The independent actuary had further observed that the relevant previous year was the second year of valuation and there was a lock-in-period of 18 months for lodging the claims with the Assessee. It was opined that the using proxy default rates sourced from similar loans given was considered but rejected in view of the difference between the terms of the Scheme and the target borrower. Thereafter, default rates, which were reasonable in the opinion of the actuary, were adopted to arrive at the total expected Claim Pay Out (as on 31/03/2018) of INR.296,67,18,820/-. The Revenue has not doubted the bonafides of the actuarial valuation. The contention of the Revenue is that the rate of default has been determined on an ad-hoc basis. We note that the CIT(A) has allowed deduction for actual amount of Claim Pay Out. In our view, the CIT(A) has, in effect, allowed the Assessee to claim deduction for Pay Out on payment basis even though the Assessee was following accrual basis of accounting and therefore, the approach adopted by the CIT(A) cannot be countenanced.
During the course of hearing the Learned Authorised Representative for the Assessee had also submitted that Trustee of the Assessee- Trust (i.e., National Credit Guarantee Company) is also a trustee of other similar schemes of the Government wherein identical accounting, provisioning etc was carried out. In all other entities where assessment proceedings are carried out, the Ld. Assessing Officer had, after making inquiries relating to provision for claim payouts, has allowed the deduction claimed in the assessment order. Copies of the following assessment orders were placed on record during the course of hearing [at Page 92-144 of the paper- book]:
ITA No.4674/Mum/2024 & Assessment Year 2019-2020 Sr. Name of the Assessment Date of Page No. of No. assessee Year Order paperbook 1. Emergency Credit 2023-24 19.11.2024 93-99 Line Guarantee Scheme Trust 2. Emergency Credit 2022-23 23.02.2024 100-105 Line Guarantee Scheme Trust 3. Loan Guarantee 2022-23 22.01.2024 106-111 Trust Fund for Covid Affected Sectors 4. Credit Guarantee 2022-23 28.02.2024 112-117 Trust Fund For MFIS 5. Credit Guarantee 2022-23 22.03.2024 118-131 Fund For Education Loans 6. Credit Guarantee 2022-23 22.03.2024 132-140 Fund For skill Development 7. Credit Guarantee 2022-23 05.03.2024 141-144 Fund For Stand UP India It was submitted that considering the uniform stand adopted by Revenue, in the present case also the deduction for Provision for Claim Payout be allowed in the case of the Assessee. It was further submitted that for immediately preceding assessment year (Assessment Year 2018-2019) and for immediately succeeding assessment year (Assessment Year 2021-2022) no addition on account of Provision for Claim Pay Out was made has been made in the assessment order passed under Section 143(3) of the Act. We have perused copy of the assessment orders passed under Section 143(3) of the Act in case of the Assessee for Assessment Years 2017-18, 2018-19 and 2021-22 [placed at Pages 85 to 91 of the Paper- Book] to support the above facts. We find that similar language has been used in the actuarial valuation report of for the Assessment Year 2018-2019 issued by the same actuary. Therefore, we find merit in the contention advanced on behalf of the Assessee to the effect that even on the principle of consistency addition made on account of Provision for Claim Pay Out should be deleted. 15 ITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 Assessment Year 2019-2020
During the course of hearing, the Assessee was directed to submit the details regarding the actual Claim Pay Outs and in response to the same the Assessee furnished following details: Sr. Assessment Outstanding Provisions for Amount of No. Year guarantee claim payout NPAs of issued made during respective towards loans the year years settled as on year (claimed as and paid on end expense) approval (INR Crores) (INR Crores) (INR Crores) 1. 2016-17 6,705.55 - 489.80 2. 2017-18 16,902.08 37.13 506.18 3. 2018-19 39,966.46 425.44 1,077.26 4. 2019-20 50,848.61 903.61 926.55 5. 2020-21 54,990.46 1,431.66 529.65 6. 2021-22 71,067.94 2,667.30 1,817.50 7. 2022-23 74,262.57 6.78.77 687.41 Total 6,170.91 6,034.56 Difference between provision and claims settled 136.56 % Difference between provision and claims settled 2.21% 18. We note that the CIT(A) had allowed deduction for actual Claim Pay Out. On perusal of the above details, it can be seen that the Provision for Claim Payout created for Assessment Year 2019-2020 was less than the actual Claim Pay Out. Further, on an overall basis (i.e. from A.Y. 2016-2017 till A.Y. 2022-2023), the aggregate difference between the Provisions for Claims Pay Out and actual Claim Payout was only 2.21% only. Further, the Assessee has been granted exemption from income tax under Section 10(46B) of the Act by the Finance Act, 2023. 19. In view of the aforesaid, we overturn the finding returned by the CIT(A) that the Provision for Claim Pay Out has been created on ad- hoc basis. In our view, the Assessee has created provisions for the liability to make payment towards Claim Pay Out on the basis of actuarial report furnished by an independent actuary after application of mind to the attendant facts and circumstances. The Provision for Claims Pay Out so created is an ascertained liability keeping in view the provisions of the Trust Deed, the Scheme and 16 & ITA No.4713/Mum/2024 Assessment Year 2019-2020 the applicable agreement. Therefore the order passed by the Assessing Officer and the CIT(A) in relation to Provision for Claim for Pay Out is set aside and the Assessing Officer is directed to grant deduction for Provisions for Claim Pay Out created during the relevant previous year.
Our above view draws strength form the following decision of the Co-ordinate Bench of the Tribunal in the case of (a) Credit Guarantee Fund for Micro and Small Enterprises v. ITO (157 Taxmann.com 417(Mum), and (b) Credit Guarantee Fund for Micro and Small Enterprises v. DCIT [169 Taxmann.com 471(Mum)].
In view of above (a) Ground No.4 and Additional Ground No.1 and 2 raised by the Assessee are allowed. Consequently, Ground No.1, 2 and 3 raised by the Assessee are dismissed as having been rendered infructuous and not pressed and (b) Ground No.1 to 2 raised by the Revenue are dismissed.
In result appeal preferred by the Assessee [ITA No.4674/Mum/2024] is partly allowed & appeal preferred by the Revenue [ITA No.4713/Mum/2024] is dismissed.