SUNDARAM FINANCE LIMITED,CHENNAI vs. ADDL. CIT, CHENNAI

3. The Commissioner of Income tax (Appeals) erred in holding that provision for non-performing assets (NPAs) which has been duly provided in the books is not an allowable deduction. 3.1 Notwithstanding the above, the Commissioner of Income tax (Appeals) erred in not reducing the provision for non-performing assets amounting to Rs.6,59,11,617/- from the taxable income which was reversed during the year consistent with the stand taken in the assessments.

4. The Commissioner of Income Tax (Appeals) erred in not allowing the claim of the appellant that the amount recovered in respect of bad debts written off in the books of the amalgamating companies of Rs.5,71,47,000/- is not taxable in their hands as successor u/s.41(4) which is the charging section. 4.1 The Commissioner of Income Tax (Appeals) erred in distinguishing the decision of the Madras High Court in PK Kaimal's case (123 ITR 755) whereas the decision is squarely applicable to the facts of the case. 4.2 The Commissioner of Income Tax (Appeals) erred in observing that the bad debts recovery would either be taxable as other income under section 56 of the Income Tax Act or taxable under section 176(3A) as income of discontinued business. Additional Grounds of Appeal:

1. The Order of the Commissioner of Income Tax (Appeals) is contrary to law, weight of evidence and probabilities of the case.

2. The Commissioner of Income Tax (Appeals) erred in coming to the conclusion of dismissing the Appellant's appeal against the order of the Assessing officer in disallowing business origination costs of Rs.6,10,17,489/- actually incurred by the appellant during the year on the ground that the appellant, itself, deferred the said amount to the subsequent years in the books. 2.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that under mercantile system of accounting, revenue expenditure should be allowed in the year in which it was incurred irrespective of the treatment given in the books of the Appellant. 2.2 The commissioner of Income Tax (Appeals) has given relief in the AY 2008-09 hence the Appellant has not added the issue in its original grounds of appeal however being advised by its counsel the appellant prays to add it as an additional ground of appeal.

2. The assessee being a resident corporate assessee is stated to be engaged in the business of hire purchasing and leasing. It was assessed u/s 143(3) on 26.12.2018 wherein the returned income of Rs.134.63 Crores was determined at Rs.155.93 Crores after certain additions / disallowances. Upon further appeal, the Ld. CIT(A) granted partial relief to the assessee which has resulted into cross-appeals before us. The issues which form subject matter of assessee’s appeal are adjudicated as under: -

3. Ground Nos. 2 to 2.2: Method of recognizing income on hire purchase contracts: 3.1 It transpired that to recognize income on hire purchase contracts, the assessee switched over to Internal Rate of Return (IRR) method from Even-Spread Method (ESM) for apportionment of finance charges on hire purchase transactions. The switch over was stated to be as per the requirements of the Accounting Standard (AS-19) on leases issued by the Institute of Chartered Accountants of India (ICAI). However, for income tax purpose, the assessee continued to follow ESM method as done in earlier years. Such change resulted in hire purchase finance charges on ESM basis being higher than the income recognized on IRR method in the books to the tune of Rs.483.52 Lacs. Accordingly, the same was added back by the assessee while computing the taxable income. It was submitted that the finance charges on hire purchase transactions were taxed on IRR method in earlier assessment years and assessee’s appeal against the same was pending before Hon’ble High Court. However, for the sake of consistency in the assessments, the excess hire purchase income offered on ESM basis was to be deducted from the taxable income. However, rejecting the same, Ld. AO noted that the issue had not reached finality and further similar treatment was give in assessment order for AY 2005-06. Therefore, the plea to reduce the taxable income by Rs.483.52 Lacs was not accepted. The Ld. CIT(A), following the decision of Tribunal for AY 2001-02 in & 829/Mds/2005 dated 31.07.2007 confirmed the stand of Ld. AO against which the assessee is in further appeal before us. 3.2 We find that this issue is covered by the latest order of Tribunal vide ITA Nos.72 & 73/Mds/2015 order dated 04.09.2019 for AYs 2004-05 & 2005-06. The bench, considering the decision of Hon’ble High Court of Madras in assessee’s own case (dated 05.03.2019), directed Ld. AO to tax the interest income on EMI method or ESM method which has been consistently being followed by the assessee and allow consequential relief in accordance with law. Since facts as well as issue is pari-materia the same in this year, we issue similar directions to Ld. AO in this year. In other words, the reduction claimed by the assessee for Rs.483.52 Lacs would not be allowed and continue to be added to the income in the computation of income. The grounds thus raised stand allowed for statistical purpose. 3.3 As per chart placed before us, this issue arises in assessee’s appeals for AYs 2007-08 to 2010-11 also and the facts are similar. Therefore, assessee’s ground for all these years, stands disposed-off on similar lines.

4. Ground Nos. 3 & 3.1: Provision for reversal of NPA: 4.1 The assessee made provision for non-performing assets (NPA) as per directions of RBI. In the assessment of earlier years, such provision was added to the taxable income and not allowed to the assessee. During this year, the assessee reversed NPA provisions for Rs.659.11 Lacs and submitted that the same should be reduced from income. It was submitted that since the provisions were taxed in earlier years, the reversals should not be taxed in this year. However, Ld. AO rejected the plea in the light of the fact that the issued had not attained finality in earlier years. 4.2 The Ld. CIT(A), following the decision of Tribunal for AY 2001-02 in & 829/Mds/2005 dated 31.07.2007 confirmed the stand of Ld. AO against which the assessee is in further appeal before us. 4.3 We find that what the assessee is claiming is that the reversal should not be included in total income on the ground that provisions were not allowed in earlier years. We also find that this issue has been set-aside by Tribunal in ITA Nos.72 & 73/Mds/2015 dated 04.09.2019. The bench, vide para 5.3 of the order, observed that the assessee’s claim would require verification and therefore, the matter has been remitted back to the file of Ld. AO for fresh consideration after affording opportunity of hearing to the assessee. The Ld. AR has sought similar directions for AYs 2006-07 & 2007-08. Concurring with the same, the matter, for both these years, stands remitted back to the file of Ld. AO on similar lines. The grounds thus raised stand allowed for statistical purposes.

5. Ground Nos. 4 to 4.2: Recovery of Bad debts written-off in the books of amalgamating companies 5.1 The assessee reduced taxable income by Rs.571.47 Lacs, being amount recovered out of bad-debts written-off in the books of amalgamating companies on the ground that it was exempt / non- taxable. It transpired that the assessee recovered this sum out of bad- debts which were written-off in the books of amalgamating companies. The same was claimed on the ground that recovery of bad-debts should be taxed under the specific provision of Sec.41(4) and not u/s. 41(1) of the Act. For taxing recovery of bad debts u/s. 41(4) of the Act, the identity of the assessee should be the same who originally claimed deduction of bad-debts written off. This was as per the decision of Hon’ble Madras High Court in the case of CIT vs. PK Kaimal 123 ITR 755 (Mad). Since the amalgamating companies was no more in existence, the amount of recovery of such bad debts of amalgamating companies are rightly claimed as not taxable in the return of income. However, distinguishing the cited case-law, Ld. AO held that Sec.41(1)(b) of the Act shall apply to the successor of business also. The bad-debts having been allowed as expenditure in the predecessor’s hand, the successor would be liable to be taxed when the same are recovered. As per Ld. AO, the successor is specifically defined as the amalgamated company. The provisions of Sec.176(3A) could also be invoked which provide that in case of discontinued business, any sum received thereafter would be deemed to be the income of the assessee. Accordingly, the taxable income was increased to that extent. 5.2 The Ld. CIT(A), following the appellate order for AY 2004-05 confirmed the stand of Ld. AO against which the assessee is in further appeal before us. 5.3 We find that this issue stood against the assessee vide para 6.2 of order of Tribunal in & 73/Mds/2015 dated 04.09.2019. The bench held that after amalgamation, the assessee has all the rights as well as liabilities of amalgamating company which were transferred to it. Such recoveries of bad-debts were nothing but business receipts for assessee and therefore, assessable in its hands. Respectfully, following the same, we dismiss the grounds urged by assessee, in this regard. This issue arises in assessee’s appeals for AYs 2007-08 to 2010-11 also. Facts being remaining the same, the assessee’s ground for all these years stands dismissed.

6. Addl. Ground Nos. 1 to 2.2 : Business Origin Cost 6.1 The assessee paid commission to direct market agents for procurement of business. This amount represents upfront expenditure incurred in the course of business and termed as ‘business origin cost’. In the books of accounts, the assessee has apportioned the cost over the terms of the contract and accordingly, debited a sum of Rs.1175.17 Lacs in this year. The balance of Rs.610.17 Lacs was carried over in Balance Sheet for amortization in subsequent years. However, in the computation of income, the assessee has claimed the balance amount of Rs.610.17 Lacs also on the ground that it is a revenue expenditure and allowable in full. Reliance was placed on the decision of Hon’ble Supreme Court in the case of Madras Industrial Investment Corp. Ltd.

(225 ITR 802) for the same. However, following assessment order for AY 2005-06, Ld. AO denied the deduction so claimed by the assessee. The Ld. CIT(A) chose to follow appellate order for AY 2005-06 and confirmed the stand of Ld. AO. Aggrieved the assessee is in further appeal before us. 6.2 We find that this issue has been dealt with by Tribunal in & 73/Mds/2015 dated 04.09.2019 for AYs 2004-05 & 2005-06. The bench, vide paras 7.2 & 7.3 of the order, chose to follow the decision of Hon’ble Apex Court in Taparia Tools Pvt. Ltd. V/s JCIT (372 ITR 605) wherein it was held that normally revenue expenditure incurred in a particular year has to be allowed in that year and if the assessee claims the full expenditure, department could not deny the same. Finally, the claim was allowed. Therefore, this issue is covered in assessee’s favor. We direct Ld. AO to allow the claim. This ground stand allowed. 6.3 This issue arises in assessee’s appeals for AYs 2007-08 which also stands allowed on similar lines. 6.4 In AY 2008-09, the amortization of expenditure as claimed by the assessee in the books of accounts was added back by assessee in the computation of income on the ground that these amounts were already claimed in full in earlier years. The assessee submitted that the business organization cost which was not allowed in earlier AYs was to be allowed as deduction in this year since it was charged to profit & loss account in this year. However, Ld. AO denied the deduction. The Ld. CIT(A) held that since the claim was rejected in earlier years, the reversal of the same during this year was to be given credit. Accordingly, Ld. AO was directed to entertain the claim. Aggrieved, the revenue is in further appeal before us. Since we have allowed the assessee’s claim in full in the year of incurrence as per assessee’s computation of income, the credit of reversal would not be available to the assessee in this year. Therefore, this ground raised by the revenue in stand allowed.

7. The assessee’s appeal for AYs 2006-07, 2007-08 stands partly allowed in terms of our above order.

8. Additional Issues in Assessee’s Appeals for AYs 2009-10 & 2010- 11 8.1 In AYs 2009-10 and 2010-11, the assessee has raised an additional ground of appeal qua disallowance u/s 40(a)(i) which is adjudicated as under. 8.2 In AY 2009-10, the assessee paid professional charges of Rs.74.62 Lacs to its UK Branch for carrying out marketing of BPO operations relating to IT / ITES sectors. Out of this, an amount of Rs.66.05 Lacs was paid to Singapore branch whereas the balance Rs.8.57 Lacs was paid to Krishna Kalambur of Australia. The assessee did not deduct tax at source on the ground that the expenses were incurred by overseas branch and the payments were not taxable in India. Therefore, there was no obligation of withholding tax liability. 8.3 However, Ld. AO rejected the same on the ground that payment was for the purpose of getting marketing information which was utilized by the assessee for its business purposes. The assessee utilized the data collected by the Singapore Branch for its business purposes in India. Accordingly, Explanation-2 to Sec.9(1)(vii) would apply since the non-resident provided technical support to assessee for its business activities. Relying upon various judicial pronouncements, Ld. AO disallowed the expenditure u/s 40(a)(i).

8.4 The Ld. CIT(A), following appellate order for AY 2007-08, confirmed the disallowance. Aggrieved, the assessee is in further appeal before us. 8.5 It is the submissions of Ld. AR that the issue in appellate order for AY 2007-08, in fact, has been allowed in assessee’s favor and Ld. CIT(A) has erred in noticing the proper factual matrix. The submissions of Ld. DR were that the services in that year was utilized outside India which is not the case in this year. Considering the rival submissions, we remit this issue back to the file of Ld. AO to bring on record correct factual matrix and re-adjudicate the same after affording opportunity of hearing to the assessee. Similar additional ground has been raised by the assessee in AY 2010-11 also. The issue, in AY 2010-11, stand remitted back to the file of Ld. AO on similar lines. The additional grounds, in both the years, stands allowed for statistical purposes.

. Revenue’s Appeals

10. AY 2006-07 The subject matter of revenue’s appeal is-(i) Broken Period interest on securities; (ii) Bad-debts & (iii) Depreciation on UPS. The same is adjudicated as under: -

11. Broken period interest on sale of securities 11.1 It transpired that the assessee was in regular sale and purchase of Government securities. The transactions were classified as investment.

It was noted that in almost every sale or purchase of securities, capital- loss was booked after taking the benefit of indexation. The assessee claimed capital-loss of Rs.33.97 Lacs during this year despite the fact that these instruments were having fixed tenure bearing fixed rate of return. It was explained by the assessee that broken period interest on purchase and sale of securities was recognized as revenue item in the books as per Accounting Standard-13 issued by ICAI. However, for tax purpose, the broken period interest was treated as part of cost / consideration as per the decision of Hon’ble Supreme Court in Vijaya Bank (187 ITR 547). Accordingly, the resultant gains / losses were offered to tax under the head capital gains. However, Ld. AO opined that the transactions would be assessable as ‘business income’ as held in assessment order for AY 2005-06. Accordingly, the loss was added back to the income of the assessee. The Ld. CIT(A), following appellate order for AY 2004-05, allowed the assessee’s ground. Aggrieved, the revenue is in further appeal before us. 11.2 We find that this issue is subject matter of Tribunal order & 286/Chny/2015 dated 04.09.2019. The coordinate bench, at para 9.5 of the order, observed that Ld. CIT(A) did not appreciate the facts of the issue properly. The courts have held that if the securities are regularly purchased and sold, they could be stock-in-trade. Therefore, the matter was remitted back to the file of Ld. AO for fresh examination with a direction to the assessee to place all the material before Ld. AO. Since facts are similar in this year and with a view to enable revenue to take consistent stand in the matter, we remit this issue back to the file of Ld. AO on similar lines. As per chart placed before us, this issue also arises in revenue’s appeal ITA No.289/Chny/2015 for AY 2007-08, ITA No.291/Chny/15 for AY 2008-09 and for AY 2010-11. Therefore, this issue, in all these years, stands restored back to the file of Ld. AO on similar lines. The grounds thus raised stands partly allowed for statistical purposes.

in those years stands dismissed.

16. ITA No.289/Chny/2015, AY 2007-08 The remaining issues in this appeal are – (i) Disallowance u/s 40(a)(i) & (ii) Disallowance u/s 14A. The adjudication of the same would be as under: - Disallowance u/s 40(a)(i) 16.1 The assessee has been saddled with disallowance u/s 40(a)(i) for Rs.228.67 Lacs for want of TDS on certain payments as detailed in para 13 of the assessment order. The assessee submitted that professional charges were paid for services rendered towards providing lead and market information for the business in Singapore and other countries. The payment would not be fees for technical services or royalty as the services were rendered outside India. However, rejecting the same, Ld. AO disallowed an amount of Rs.228.67 Lacs u/s 40(a)(i). The Ld. CIT(A), after considering assessee’s submissions, deleted all the additions except foreign travel expenditure wherein Ld. AO was directed to verify the same after obtaining details from the assessee. Aggrieved, the revenue is in further appeal before us. 16.2 We find that similar issue, in assessee’s appeal for AYs 2009-10 & 2010-11 has been remitted back by us to the file of Ld. AO for the reasons stated therein. We find that it is the contention of Ld. AO that the services were utilized in India whereas Ld. CIT(A) concluded that the services were utilized outside India. Therefore, to resolve the contradiction and with a view to enable the revenue to take consistent stand in the matter, we remit this issue to the file of Ld. AO on similar lines. The assessee is directed to furnish the requisite details and Ld. AO, after due verification, may re-adjudicate this issue. Needless to add that the assessee is free to rely on various judicial pronouncements as placed before us. This issue stand allowed for statistical purposes in this year as well as in for AY 2008-09.

Disallowance u/s 14A 17. This issue arises in assessee’s appeal for AY 2008-09 to 2010-11 as well as in revenue’s appeal for AY 2007-08. Facts in AY 2007-08 are that the assessee earned exempt dividend income of Rs.1881.19 Lacs as well as exempt long-term capital gains for Rs.263.20 Lacs. However, no disallowance was offered u/s 14A and during assessment proceedings, the assessee agreed for disallowance of 2% of exempt income. The Ld. AO, invoking Rule 8D, computed aggregate disallowance of Rs.152.11 Lacs. The Ld. CIT(A) noted that Rule 8D would not apply to this year and accordingly, directed Ld. AO to restrict the disallowance to the extent of 2% as held in various judicial pronouncements. Aggrieved, the revenue is in further appeal before us. We concur with the adjudication of Ld. CIT(A) that the provisions of Rule 8D were not applicable prior to AY 2008-09. Therefore, the disallowance of 2% considering the facts of the case, was quite fair which is supported by various judicial pronouncements as enumerated in the impugned order. Therefore, finding no infirmity in the impugned order, on this issue, we dismiss the grounds raised by the revenue.

18. Facts in AY 2008-09 are that the assessee earned exempt dividend income of Rs.8726.04 Lacs and exempt capital gain of Rs.462.91 Lacs. The Ld. AO, invoking Rule 8D, computed aggregate disallowance of Rs.240.89 Lacs which was interest disallowance u/r 8D(2)(ii) for Rs.14.39 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.226.49 Lacs. The disallowance, upon confirmation by Ld. CIT(A) is in further appeal before us. Similar are the facts in AY 2009-10 wherein Ld. AO has computed disallowance of Rs.198.84 Lacs which was confirmed in the first appellate order. Similar are the facts in AY 2010-11 wherein Ld. AO has computed disallowance of Rs.1196.87 Lacs which was confirmed in the first appellate order. Aggrieved, the assessee is in further appeal before us in all these years. The submissions of Ld. AR are two-fold i.e., own funds are more than the investment and therefore, no interest disallowance should be made. Secondly, the 0.5% as per Rule 8D(2)(iii) should be computed only on those investments which have yielded exempt income during the year. We concur with both the submissions. The Ld. AO is directed to verify whether assessee’s own funds are sufficient enough to cover the investment. If so, interest disallowance would not be justified. Further, the indirect disallowance of 0.5% should be computed only on those investments which have yielded exempt income during the year. The grounds, in all the three years, stand allowed for statistical purposes. The assessee’s appeal for AYs 2008-09 to 2010-11 stands partly allowed in terms of our above order. Conclusion 19. The assessee’s appeal for AYs 2006-07 to 2010-11 stands partly allowed. The revenue’s appeals & 290/Chny/2015 for AYs 2006-07 & 2007-08 stands dismissed. All the other appeals of the revenue stand partly allowed for statistical purposes. Order pronounced on 09th March, 2022.