M/S POONAWALLA FINCOUP LIMITED,KOLKATA vs. PCIT-1, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, KOLKATA BEFORE SHRI SANJAY GARG, HON’BLE JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, HON’BLE ACCOUNTANT MEMBER I.T.A. No. 218/Kol/2022 Assessment Year: 2017-18 M/s. Poonawalla Fincorp Limited PCIT-1, Kolkata Development House Vs 4th Floor 24, Park Street Kolkata - 700016 PAN : AABCM9445K अपीलाथ"/ (Appellant) "त् यथ"/ (Respondent) Assessee by : Shri S.K. Tulsiyan, Advocate & Ms. Puja Somani, CA Revenue by : Shri Amitava Bhattacharya, CIT (D/R) सुनवाई क" तारीख/Date of Hearing : 30/08/2022 घोषणा क" तारीख /Date of Pronouncement: 26/09/2022 आदेश/O R D E R PER SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is arising out of the order of ld. Pr. CIT – Kolkata-1 vide order ITBA/REV/F/REV5/2021-22/1042104843(1), dt. 30/03/2022, passed u/s 263 of the Income-tax Act, 1961, hereinafter referred to as the Act.

(i) Capital work in progress amounting to Rs.690.18 Lakhs which have been written off in the profit and loss account under the head ‘other expenses’ ought to have been disallowed being expenditure of capital nature. Assessment Year: 2017-18 Poonawalla Fincorp Limited 2

(ii) Claim of depreciation of Rs.4754.29 lakhs on the assets which are in finance lease and for which lessee is entitled to claim depreciation and not the lessor. Thus, resulting into an excess claim of depreciation by the assessee.

(iii) Assessee has not recognised gross income on securitization and assignment of loan aggregating to Rs.1290.58 lakhs.

2.1. In respect of the first issue, ld. Pr. CIT noted that submission made by the assessee dt. 26/03/2022, is tenable and, therefore, no interference is drawn on the view taken by ld. AO regarding the allowability of expenses of Rs.690.13 lakhs treated as revenue expenses. Accordingly, the assessment order was not set aside on this ground by the ld. Pr.CIT. Considering the finding given by the ld. Pr. CIT on the first issue, assessee requested to withdraw Ground No. 3 is this respect. Thus, Ground No. 3 is disposed off as withdrawn by the assessee.

4.1 In respect of vehicles financed under ‘finance lease transactions’, the amount for vehicles leased is shown as ‘loans advanced’ in the balance sheet instead of capitalizing the same as fixed assets. Lease rentals received by the assessee from the lessees under the finance lease are bifurcated into two components, viz., principal and interest. Principal component of the lease rental is adjusted with the said ‘loans advanced’ amounts in the balance sheet and the interest component is credited to the profit and loss account. He thus submitted that, method of accounting for these transactions both, under the operating lease and finance lease has been consistently followed by the assessee which is in consonance with the accounting standards generally accepted in India. He further submitted that, for the purpose of computing total income under the Act, it has to be computed in accordance with the provisions of the Act, more particularly by applying Section 4, Section 5 and Chapter IV, [dealing with computation of total income] r.w.s. 14 of the Act. It was stated that income of every assessee has to be assessed according to the statutory framework laid out in Chapter IV, Part D of the Act which deals with heads of income. He thus pointed out that certain adjustments have to be made Assessment Year: 2017-18 Poonawalla Fincorp Limited 4 to the profit reported in the profit and loss account prepared from the books of accounts regularly maintained by the assessee to arrive at the total income taxable under the Act.

4.2 The entire issue hovers on the treatment of income from finance lease transactions only, owing to difference in its treatment in accounting which is governed by Accounting Standards and in computing the total income which is governed by the provisions of the Act. Summary of treatment of finance lease transactions in the books of accounts and in computing the total income under the Act, as submitted by the ld. Counsel is tabulated below:-

Nature of Finance Lease Amount In the Audited Accounts In the Computation of per Companies Act, 2013 Income under the Act and generally accepted accounting standards Cost of Asset Shown as ‘Asset on Finance’ Capital under Fixed Assets - Leased out under the head ‘Loans and Block Plant and Machinery - Advances’ on the Assets side of 30% the Balance Sheet.

Depreciation Not Charged Charged as per Income Tax Rate – 30% Principal It is adjusted with Loan Not included in Profit Component of and Advances in the Before Tax (PBT) Lease Rental Balance Sheet and not reported, hence separately credited to Profit & Loss offered for taxation in account computation of income Interest Credited to Profit & Loss No separate adjustment made component of account forming part of PBT since already credited to Lease Rental Profit and Loss A/c. Offered for taxation as forming part of PBT.

4.3 From the tabulation above and the submission made, it is noted that for the purpose of accounting, leases are classified into two categories as per the Accounting Standard (AS-19) issued by the Institute of Chartered Accountants of India (ICAI), viz., finance lease and operating lease. From an accounting Assessment Year: 2017-18 Poonawalla Fincorp Limited 5 perspective, in the finance lease, the lessee selects the equipment who acquires the title to the equipment from the funds provided by the lessor and the lessee is allowed to use it for its expected useful economic life. There is fixed obligation on the lessee for payment of lease money and in case of premature termination, the lessor is entitled to recover his investment with expected interest. As against this, in an operating lease, the lessor bears the risk of loss, the period is cancellable and lease rentals are not synchronized with the expected useful economic life of the asset. Based on this accounting requirement under AS-19 in respect of finance lease, ld. Pr. CIT observed that depreciation cannot be allowed to the lessor on the assets which are financed under the finance lease transactions, since all the risks and rewards incidental to the ownership are borne by the lessee and the lessor’s ownership is nominal and symbolic. It was also pointed out by the ld. Counsel that AS – 19 is silent as to how to calculate the depreciation under the Act, on these assets as it only deals with the treatment for the purpose of maintaining of the books of account as per the Companies Act, 2013. 5. At this juncture, attention was drawn towards the judgment of the Hon’ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT [2015] 55 taxmann.con 361 (SC) for the proposition that it is trite law that accounting entries in the books of account are not determinative of taxability of income or deductibility of any expenditure. From the audited financial statement forming part of the paper book, ld. Counsel referred to the profit and loss account statement to point out that, assessee has offered to tax, the interest component in respect of finance lease transactions, which has been duly credited in the profit and loss account. He further submitted that, for the purpose of computing total income under the Act, assessee adopted similar treatment for both operating lease and the finance lease. Thus, cost of leased vehicles under the finance lease was also capitalized under the block of assets carrying depreciation @ 30% under the Act. Hence, on a matching concept, the principal component of the finance lease was also offered for taxation in the return of income which otherwise was not credited to the profit and loss account. It was Assessment Year: 2017-18 Poonawalla Fincorp Limited 6 thus submitted that, a sum of Rs.4759.68 lakhs, has been offered in the computation of total income towards recovery of principal component of finance lease rentals against which depreciation of Rs.3705.88 lakhs has been claimed as per the Act. Accordingly, on a net basis, an additional amount of Rs.1,053.80 lakhs [Rs.4759.68 Lakhs (minus) Rs.3705.88 lakhs] was offered in the computation of total income. For the purpose of calculating depreciation on the assets under finance lease, assessee computed the depreciation @ 30% on the assets added to the gross block and put to use for more than 180 days and @ 15% on the additions made and put to use for 180 days or less. It was thus emphatically submitted that, by offering an additional sum of Rs.1053.80 lakhs (net), towards finance lease transactions in the computation of total income, assessment order cannot be said to be prejudicial to the interest of the revenue.

6.1 To understand the “ownership” aspect of the asset, we refer to the sample copy of finance lease agreement entered into by the assessee with the lessee. The relevant extract of the same is reproduced as under:-

“5. USE AND MAINTENANCE OF VEHICLE 5.2 Lessee acknowledges that the Vehicle is and will remain the property of Lessor, and that Lessee only has the right to use the Vehicle during Term. Lessee further acknowledges and agrees that the Vehicle will not accede or become permanently attached to any premises or any other property or asset, and that on termination of this Agreement for whatever cause, Lessee will be required to surrender the Vehicle in the manner provided herein. Assessment Year: 2017-18 Poonawalla Fincorp Limited 7 5.6 With regard to the registration of the Vehicles; Lessee undertakes the following: (a) For the purposes of the Motor Vehicles Act, 1988 (59 of 1988), as may be amended from time to time (“the Act"), and the provisions thereof, or under any law or regulation pertaining to the ownership or use thereof if the Vehicle provided on Lease hereunder requires registration, the Lessee shall at all times, ensure and provide necessary document required for effective registration of Vehicle, indicating, wherever such law or regulation so permits, the ownership of the Vehicle by the Lessor. Where the relevant law or regulation does not permit registration of Vehicle in the name of any person other than the effective user thereof, the Parties understand that notwithstanding registration of Vehicle in the name of Lessee, Lessor is and shall always remain the absolute legal owner of Vehicle. The Lessee shall ensure that suitable endorsement is duly made in the registration certificate book ( Form 23 A of the Act) , in favour and in the name of the Lessor.” 6.2 From the perusal of the above extract, it is noted that assessee as lessor, is the absolute owner of the assets/vehicles leased under finance lease and the lessee has only the right to use the vehicles. Further, lessee shall not create any charge or encumbrance on the vehicle at any time and shall not have any objection to inspection of the vehicles by the lessor. Also, at the conclusion of the lease period, lessee is obliged to return the vehicle to the lessor and if lessor terminates the leasing of any vehicle due to the default of the lessee, the lessee must immediately surrender the vehicle to the lessor. Accordingly, from the above, it can be safely stated that, assessee is the owner of the assets leased out and the lessee only possesses the right to use those assets as per the terms and conditions laid down in the finance lease agreement. Thus, the first condition contained in Section 32 of the Act in respect of ownership of the asset by the assessee to claim the depreciation is met.

6.3 Further on the second condition relating to use of asset for the purpose of business or profession, it is a fact on record that assessee is into the business of asset financing which is mainly against the purchase of vehicles by way of undertaking leasing transactions, both by way of operating lease and finance lease. Assessee has leased out vehicles under the finance lease which is part and parcel of its business and the income therefrom has been offered to tax under the head “profits and gains from business or profession”. Evidently, both the conditions enumerated in Section 32 of the Act, has been complied Assessment Year: 2017-18 Poonawalla Fincorp Limited 8 with, entitling the assessee to claim depreciation on the assets financed under the finance lease agreement while computing the total income under the Act.

6.4 For this claim of depreciation, force is drawn from the judgment of the Hon’ble Supreme Court in the case of R.S.V.S. Ltd. vs. CIT [2013] 29 taxmann.com 129 (SC), wherein it was held that, where assessee engaged in business of hire/purchase, leasing etc., having purchased vehicles from manufacturers, leased out those vehicle to customers, it was entitled to claim depreciation in respect of vehicles so leased out. The substantial question of law framed by the Hon’ble High Court on the appeal preferred by the revenue, is reproduced as under:- “Whether the appellant (assessee) is the owner of the vehicles which are leased out by it through its customers and; Whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles on the ground that they were hired out to the appellant’s customers”

6.4.1 While answering the above questions in favour of the revenue, the Hon’ble High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled to claim depreciation in respect of these vehicles. Hence, these appeals by the assessee. Hon’ble Supreme Court noted in para 13 that “the provision of depreciation in the Act reads that the asset must be “owned, fully or partly by the assessee and used for the purposes of business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a claim u/s 32 of the Act.”

6.4.2 Before giving its finding, Hon’ble Supreme Court at para 18 held that “Hence, the assessee meets the second requirement discussed above. The assessee did use the vehicles in the course of its leasing business. In our opinion, the fact that the trucks themselves were not used by the assessee is irrelevant for the purpose of the section.” Assessment Year: 2017-18 Poonawalla Fincorp Limited 9

6.4.3 Further, on the issue of ownership, Hon’ble Supreme Court noted in para 23 that “A scrutiny of the sale agreement cannot be the basis of raising question against the ownership of the vehicle. The clues qua ownership lies in the ownership agreement itself which clearly point in favour of the assessee.”

6.4.4 Thus, by observing these, the Hon’ble Supreme Court in para 32 held that “For the foregoing reasons, in our opinion, the High Court erred in law in reversing the order of the Tribunal. Consequently, the appeals are allowed; the impugned judgments are set aside and the substantial question of law framed by the High Court extracted in para 6 (supra) are answered in favour of the assessee and against the revenue.”

9.2 Ld. Counsel explained the concept of securitization that it is a process of raising funds as a treasury tool under which pool of performing assets are sold to a special purpose vehicle (SPV). The assets are transferred from the balance sheet of the originator/seller (assessee in the present case) to the SPV, in return for an immediate cash payment. The SPV in turn, would sell the security interest to third party investors for which securitization agreements are entered into. He thus submitted that, in case of securitization transactions, the Assessment Year: 2017-18 Poonawalla Fincorp Limited 11 assessee is the seller of loan receivables standing in its audited balance sheets. On transfer/sale of its loan portfolio to SPV, by the assessee, the SPV becomes the legal owner of such loan portfolio. The SPV would hold the assets in trust and for the benefits of the beneficiaries and shall be deemed to be the full, true and absolute owner of all such assigned assets. Thus, the relationship between the assessee/lender and the customer/borrower ceases as on the date on which pool of assets/loan receivables is sold by the assessee to the SPV. Assessee receives the installment amount from the customers on behalf of the SPV in terms of the securitization agreement. Assessee thus, plays a dual role i.e., seller as well as the servicer. The assessee receives what is called as purchase consideration that covers only the principal amounts of the borrowings. Subsequently, on the due date of instalment from the borrower, assessee remits the same to the SPV. The entire instalment collected from the borrower is kept in designated ‘collection and payout account’ operated by the SPV. The payment from ‘collection and payout account’ is made by the SPV as per the waterfall mechanism which is utilized in order of priority and the last priority in the waterfall mechanism is payment of EIS to the seller (assessee in the present case). Thus, the EIS becomes due to the assessee only when the actual amount is received by the assessee after payment to the investors and meeting the expenses as listed in the waterfall mechanism contained in the securitization agreement.

9.3 Fact in the present case is that, EIS of Rs. 1290.58 Lakhs was not accounted as income in the books of accounts of the assessee during AY 2017- 18 as the same was not received for which due disclosure was made in notes to accounts vide note no. 35(d) referred above. In this respect, ld. Counsel also submitted that this income of EIS has been accounted in the books of account for AY 2018-19 and 2019-20 and offered for taxation in those respective years. It was also pointed out that, treatment of EIS on cash basis is in compliance with the prudential norms, prescribed by the RBI. Assessment Year: 2017-18 Poonawalla Fincorp Limited 12 10. Ld. Pr. CIT on this issue has also made a reference to the income computation and disclosure statement - IV (ICDS-IV) for the purpose of understatement of income of Rs.1290.58 Lakhs. ICDS-IV deals with revenue recognition according to which interest shall accrue on the time basis determined by the amount outstanding and the rate applicable. On this, consideration of the ld. Pr. CIT, reference is made to the definition of interest defined u/s 2(28A) of the Act, which reads as under:- “(28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;]” 10.1 From the perusal of above definition, it is noted that interest is in respect of any moneys borrowed or debt incurred. However, in the present case, the loan portfolio was sold by the assessee to the SPV and therefore is no longer a lender for the customers. Loan ceases to exist in the audited accounts of the assessee on the date when securitization agreement is entered into by the assessee. The EIS receivable by the assessee is thus, a contractual receipt and not an interest receipt, since the relationship of the assessee with the borrowers ceases to exist once the loan is sold to the SPV whereby “moneys borrowed or debt incurred” no longer remain its books. Accordingly, once the EIS is not in the nature of “interest” as defined u/s 2(28) of the Act, ICDS-IV has no application. Tax treatment of such income in the form of EIS is governed by the general principles under the head business income as and when received by the assessee which is accounted in accordance with the RBI Circulars for which a proper disclosure has been made in the notes to audited financial statements.

10.2 Reference is also made by the ld. Counsel with respect to recognition of EIS in the books of account which has been followed consistently from year on year basis and accepted by the ld. AO both in the preceding as well as in the succeeding years relevant to the year under consideration. Assessment order for AY 2016-17 dt. 21/12/2018 and for AYs 2018-19 and 2019-20 dt. Assessment Year: 2017-18 Poonawalla Fincorp Limited 13 19/04/2021 & 30/09/2021 respectively, have been placed on record to substantiate the contentions made by the ld. Counsel for demonstrating that, no adjustment has been made with respect to EIS not recognised as income in these respective years. For this submission, to apply the Rule of consistency, reliance was placed on the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang v. Commissioner of Income-tax [1992] 193 ITR 321 (SC).

11.1 From this above observation of the ld. Pr. CIT, it is evident that it was in his know-how that EIS income is to be recognised only when it is redeemed in cash which is in accordance with the RBI guidelines and are binding on the assessee. Thus, considering the above facts of the present case and the judicial precedents, following the rule of consistency and more particularly, when the EIS income of Rs.1290.58 Lakhs having been offered in the subsequent years as and when it was received, there is no prejudice to the interest of the revenue and the impugned order cannot be held to be erroneous, as claimed by the ld. Counsel. 12. Be that as it may, we observe that in the course of proceedings u/s 263 of the Act, before the Ld. PCIT, assessee had furnished the relevant details and explained the issue raised through the show cause notice by the Ld. PCIT, supporting its contentions by various decisions as narrated above. It is well settled law that for invoking the provisions of section 263 of the Act, both the conditions, that the order must be erroneous and prejudicial to the interest of revenue needs to be satisfied. This ratio stands laid down by various Hon'ble Courts. Assessment Year: 2017-18 Poonawalla Fincorp Limited 14 13. Before we advert to the facts and law involved in this appeal before us, it is worth apprising ourselves on the law governing the issue involved. In the first place, the assessee company has challenged the very invocation of jurisdiction by Ld. Pr. CIT of his revisional powers u/s 263 of the Act. Therefore, firstly we have to look at the rightful exercise of revisional powers by the Ld. Pr. CIT for which we have to examine whether in the first place the order of the Assessing Officer found fault by the Ld. Pr. CIT is erroneous in so far as it is prejudicial to the interest of the Revenue.

आदेशानुसार/ BY ORDER,