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Before: Shri Amit Shukla & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order of CIT(A)-IX, New Delhi dated 25.03.2014 for the assessment year 2010-11 on the following grounds :
“1 Whether in the fact and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 95,80,354/- made by the A.O. on account of loss on foreclosure of loan accounts?
2 Whether in the fact and circumstances of the case & in law, the Ld. CIT (Appeal) erred in deleting the disallowance of Rs. 62,47,393/- being claim of TDS recoverable written off by completely ignoring the reasons given by the assessing officer?
3 Whether in the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 1,66,88,812/- on account of bed debts written off without appreciating the detailed reasons given by the assessing officer?
4 That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law.
5 That the grounds of appeal are without prejudice to each other.
The brief facts of the case are that M/s. Maruti Country Wide Auto Financial Services Pvt. Ltd. is a non-banking Financial Co. (NBFC), inter alia, engaged in business of providing financial assistance to the customers in acquiring wide range of consumers and auto products. The assessee filed return of income declaring income of Rs.8,43,23,046/- on 21.09.2010. Subsequently, the return was revised on 29.03.2010 by the assessee company declaring same income, but excess amount claimed as refund of Rs.38,76,621/- which was more than the refund claimed in the original return. In the assessment proceedings, the Assessing Officer observed that the assessee has claimed loss on foreclosure of loans of Rs.95,80,354/-. In this regard, the assessee submitted his reply as under : "The assessee is a Non-Banking Financial Company (NBFC) engaged inter alia in the business of auto finance, lease and hire purchase. The assessee is providing financial assistance to customers in acquiring wide range of customer and auto products, during the regular course of business, it has to provide from time to time certain auto/consumer loans and assets on hire purchase/lease. In the case of consumer loan, the loan is hypothecated against the auto/two wheeler or the consumer durable as a security which, in the event of default of the customer may be repossessed or a foreclosure settlement reached with the borrower. Similarly, in the case of hire purchase, in the event of default on the part of the hirer in the payment of installments the assessee may repossesses the assets etc. As and when the hypothecated asset is repossessed under loan/hire purchase transaction, the same is included in the repossessed stock of the company under the current assets thereafter; the assessee takes a commercially prudent decision for selling those repossessed assets to the interested buyers. On sale, the excess/shortfall of the sale proceeds vis-a-vis the amount recovered from the hirer is booked as business profit/loss in the profit and loss account under the head 'loss on sale of repossessed assets'. The unsold repossessed stock lying in the possession of the assessee as at the end of the year continue to form part of the current assets. The loss which has arisen consequent to the sale of repossessed assets represent's realizable value/sale proceeds vis-a-vis the amount recoverable from the hirer constitute the loss incurred by the assessee as business loss. Similarly, where the loan is foreclosed the loss is quantified and charged, to the books.
In the event of default by the customer, the assessee takes a commercially prudent decision and negotiates with the customers and the loans are foreclosed at the mutually agreeable value which is most of the cases is less than the principal amount of loans remaining unpaid. The settlement is reached with a view to minimize the losses on account of non-recovery from defaulting customers.
Accordingly, loss on repossessed assets and foreclosure are on account of defaults due to non payments by the customers/borrowers and losses in the normal course of business."
From the above submissions, the Assessing Officer observed that the assessee company is an NBFC which is authorized to lend for earning interest on advances as per Government Rules, RBI and statutory regulations. The foreclosure of loans is nothing but it is a discount offered to lonee on negotiation of pre-payment of principal amount when the loss of principal is expected if the loan is recovered over the contracted tenure. The loan is an asset on which the yield is by way of interest. The foreclosure loss is a loss equated to erosion of the loan asset. The claim of loss on foreclosure is, therefore, equivalent to write off of an asset which is capital in nature and not allowable u/s. 37(1) since it is not a Revenue write off. He also observed that it is not a business loss which happens automatically and in regular course of business beyond the assessee’s control. It is a situation brought by the assessee itself to save future capital loss. He also observed that it is not a bad debt because it has not been accounted for as per the mandatory provisions of section 36(1)(vii) and 36(2). It was further observed that the loss on sale of repossessed assets occurs when there is difference between the unrecovered principle and the sale price of vehicles pertaining to those loans that have gone bad and these vehicles are sold after their repossession. Thus, these two heads cannot on any score be equated or mean to be at part. It was also observed that the case laws relied by the assessee are not applicable in the present case because the facts are different. Keeping in view the above, the Assessing Officer disallowed the amount of Rs.95,80,354/- and added into the income of the assessee.
On scrutiny of accounts, he further noticed that the assessee has debited a sum of Rs.62,47,393/- in the profit and loss account under the head ‘recoverable written off’ this year as against nil amount last year. The assessee was asked for details party-wise of this amount and to explain as to whether the transaction with the said parties are still undertaken or not. In this regard, the assessee submitted the reply which is as under :
"The assessee has claimed deduction in respect of recoverable written off amounting to Rs. 62,47,393/-, these amounts have been written off as the customers have neither paid the amount nor issued the TDS certificates. , The assessee believes that the said claim is admissible under section 28 and/or allied laws of the Act, as thing trading loss has arisen during the course of business carried on by the assessee. "
"It is respectfully submitted that the electronic tracking of TDS via NSDL website generally started from AY 2009-10. Earlier, the entire entries were based on the normal book keeping and there is none one to one correlation with respect to the same. It is commonly known that when there was no electronic tracking of TDS, TDS certificates were issued in physical form to the tax payer and many such certificates used to get lost or mutilated in transit. Also there would have been instances where certificates may have been delivered to the local offices/addresses of the assessee and may not have ultimately reached final destination. The company would have made efforts from time to tome to obtain duplicate copies from the issuer but such resolution is not possible in all circumstances due to business as well as logistics and timing differences. Accordingly, it is submitted that the such loss which has been incurred by the assessee is a resultant accumulation over a period of time."
The Assessing Officer observed that the assessee has not furnished the details party-wise and reply regarding the transaction with said party. Further, he noticed that this amount also not in the nature of bad debts as per mandatory provisions of section 36(1)(vii) and 36(2). Accordingly, the Assessing Officer disallowed the claim of assessee for the amount of Rs.62,47,393/- and added to the total income of the assessee.
Further, on scrutiny of accounts, the Assessing Officer observed that the assessee has debited as a bad debt to the tune of Rs.1,66,88,812/-. In this regard, the Assessing Officer issued detailed questionnaire and asked the assessee to submit information, i.e., name and address of the debtors and total amount written off during the financial Year 2009-10, copy of ledger accounts of the debtors from the date when relevant transaction was undertaken to the date of ultimate write off and the brief note as to how the amount is irrecoverable became bad debt during the year and efforts made for making recovery thereof. In response, the assessee submitted reply vide his letter dated 09.08.2012 which is as under :
“The assessee submits that during the subject year, the assessee has not written off any debt as bad.”
Further the assessee by letter dated 11.12.2012 while furnishing reply of the other queries has filed a note justifying the bad debts amounting to Rs.1,66,88,812/-. However, the assessee did not furnish copy of ledger amount of the debtors and other details as specifically required in the questionnaire. Rather, as mentioned above, it stated that no bad debts have been written off during the year. Therefore, the Assessing Officer disallowed the entire amount and added back to the total income of the assessee, as the assessee did not write off any amount as bad debt in its books as stated by it unambiguously.
Aggrieved by the above order, the assessee appealed before the ld. CIT(A), who after considering the submissions of the assessee and order of the Assessing Officer, allowed the appeal of the assessee. Aggrieved, the Revenue is in appeal before the ITAT.
The ld. DR relied on the order of the Assessing Officer and submitted in respect of ground No. 1 that the assessee did not fulfill the conditions of section 36(1)(vii) and 36(2) of the IT Act. The amount has been written off which is capital in nature and not allowable u/s. 37(1) of the Act. It cannot be treated as a business loss because it has not arisen in the ordinary course of business which relates to the assessee.
8. In respect to ground No. 2, the ld. DR submitted that TDS has been written off in the profit and loss account is no allowable expenditure. It is in the nature of payment of Income-tax liability and after adjustment of the TDS from the tax liability, the excess amount is shown as TDS in the balance sheet which cannot be written off. The assessee is also unable to demonstrate as to which year this TDS related to and no detailed ledger of TDS was given pary- wise. It was also not demonstrated as to when it was credited as income into the profit and loss account. Therefore, the Assessing Officer is justified to make addition.
In respect of ground No. 3, the ld. DR submitted that the details of the copy of ledger account were not furnished and other requirements of the Assessing Officer were not fulfilled by the assessee. The CIT(A) has deleted all the above additions only on the basis of submissions made by the assessee before him. Therefore, the order of the Assessing Officer should be restored.
On the other hand, the ld. AR relied on the order of the CIT(A) and reiterated the submissions made before him. He also furnished a paper book containing 84 pages. The assessee has also submitted in respect of ground No. 1 that this issue is squarely covered in favour of the assessee in his own case for the assessment year 2009-10 in ITA No. 5894/Del/2013. In respect of ground No. 2, it was submitted that the issue is covered in favour of the assessee in for the assessment year 2008-09. Therefore, the ld. CIT(A) has done a good reasoned order and therefore, the order of the ld. CIT(A) should be upheld.
After hearing both the sides and perusing the entire materials available on record and the case laws cited by both the parties, we observe that in for the A.Y. 2009-10 in the case of assessee itself, the co- ordinate Bench of Tribunal has decided the issue in favour of the assessee as under :
We have carefully considered the rival contentions and also the various decisions relied up on by the assessee. Factum of the claim of the assessee is that assessee advances to loan to various customers against hypothecation of primary assets. Late or on imminent default in repayment of loan or on account of inadequate security available with the assessee, assessee negotiates the outstanding amount with the borrower for repayment. On negotiation it may happen the negotiated amount is most of the times less than the amount of outstanding due
from the borrower. Such excess of outstanding over the negotiated amount is written off in the books of accounts of the assessee titled as “loss on foreclosure of loan assets.” Such amount is claimed as deduction u/s 36(1) (vii) of the Income tax Act. Provision of section 36 (1) (vii) are as under :- 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (vii) subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year] : Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause : Explanation — For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee 2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money- lending which is carried on by the assessee ; 09. Admittedly the assessee is a non banking fiancé company and engaged in the business of money lending and therefore the amount of debt represents the money lent in the ordinary course of business of money lending. Further according to section 36(1) (vii) of the act any bad debt or part of the bad debt if written off in the books of accounts as irrecoverable, same shall be allowed to the assessee as deduction. It is admittedly written off in the book of accounts of the assessee as “ loss on foreclosure of loan assets” . In view of this the assessee satisfies all the conditions of allowabaility of this sum as deduction u/s 36(1) (vii) rws 36(2) of the Income Tax Act. As the sum is written off in the books of accounts by writing of the loan amount of the borrower on negotiation cannot be called a future or probable loss but ascertained and accrued loss in the business of financing. Though the cases relied up on by the assessee relates to the issues of loss on sale of repossessed vehicle, Honourable Delhi High court in case of CIT V CITI CORP Maruti Finance Limited in & 1714 /20109/11/2010 has held that even loss on repossessed vehicle sold is also allowable to the assessee u/s 36(1) rws 36 (2) of the act. Honourable Delhi High court also held that such deduction was also covered in favour of the assessee by the decision of Honourable Calcutta High court in case of A W Figgies & Co Pvt Limited 254 ITR 63. Above decision of Honourable Delhi high court has been upheld by Hon Supreme court in CC 22330/2011 dated 13/1/2012. Further the claim of the assessee in writing off of the bad debt is on stronger footing on the cases relied up on by the assessee. In view of above facts, we confirm the order of CIT (A)in deleting the disallowance of Rs. 77,36,166/- made by the AO on account of loss of foreclosure of loan assets. Respectfully following the above judgment, ground No. 1 of the Revenue deserves to be dismissed, as no contrary material is brought on record from the side of Revenue to take a different view.
As far as the second issue regarding write off of recoverable of Rs.62,47,393/- is concerned, it is clear from the submissions of the assessee that the assessee has offered it as income in earlier years and has claimed TDS which has not been allowed. Year wise details are placed at paper book page 38. The assessee has further submitted before the CIT(A) that party-wise ledger account had been submitted before the AO on 30.10.2012. The Assessing Officer, however, in the assessment order has categorically mentioned that no party-wise details were furnished by the assessee. The ld. CIT(A) has not controverted this finding of the Assessing Officer while allowing the claim of the assessee. Before us also, the assessee has not furnished the details as stated in its reply placed at paper book page 49. Before the authorities below, the assessee has claimed this amount as loss admissible u/s. 28 of the IT Act, but no evidence to claim the said loss u/s. 28 have been laid by the assessee. It is worthwhile to note that in order to claim the aforesaid amount either as loss u/s. 28, or as bad debt u/s. 36(1)(vii) read with section 36(2), the onus was on the assessee to produce the party-wise details alongwith their complete addresses, PANs, TANs so as to enable the Assessing Officer to make verification as to the correct nature of amount claimed by the assessee. It is also made clear that once the assessee proceeds to set off the receivables (TDS) from the total tax liability, the nature of such receivables no more remains in the nature of bad debts/receivables. On perusal of year-wise details of irrecoverable TDS placed at Paper book-38, we find that such irrecoverable receivables are shown to have been pending since assessment years 1997-98 to 2007-08, but the assessee has not been able to furnish Form 16A from the parties who deducted TDS nor could he prove that any efforts were made by the assessee to recover the impugned of TDS amount so as to claim its credit. The amount of TDS has to be deposited in the government treasury by the deductors on behalf of the deductee for which the Income-tax law provides procedure to furnish TDS certificate by the deductee for claiming its credit, which the assessee failed to do here. Once the TDS was deducted by the deductors and the assessee was not in possession of TDS certificates, he should have made a request to verify the same from the parties who deducted the TDS, but the assessee has also failed to do so as he did not furnish even the details of the deductors before the Assessing Officer. In these peculiar facts of the case on hand, the decision relied by the assessee are not found applicable due to disparity of facts. We accordingly, conclude that the ld. CIT(A) was not justified in giving relief to the assessee u/s. 37 of the IT Act. Accordingly, ground No. 2 of appeal deserves to be allowed.
Regarding last issue, we find that the ld. CIT(A) has rightly given relief to the assessee after considering various case laws as mentioned in the impugned order. The relevant findings of the ld. CIT(A) read as under:
7.3 The reasons given by AO and the submission of the appellant are considered. During the appellate proceeding, the Ld. AR further submitted the party wise details of bad debts written off. It is submitted that after the justification for bad debt written off is given to AO, he never asked for the party wise details which in any case not required in view of the amended provisions and the decision of the Hon’ble Supreme Court on this issue. In view of the aforesaid submission by the Ld. AR, the legal position that emerges is that in the case of a NBFC so long as the debt represents money lent in the ordinary course of money lending business; interest has been consistently assessed as income from money lending business; the debt has been written off as bad debts by the Appellant in its books of accounts, the claim of the appellant should be allowed as deduction under section 36(1)(vii) read with section 36(2( of the Act. Accordingly, the addition made is deleted and the grounds of appeal is allowed.” No contrary material is placed before us on behalf of the Revenue to discard the above findings reached by the ld. CIT(A). We, accordingly, do not find any justification to disturb the same. The ground of appeal of the Revenue is, thus dismissed on this issue.
In the result, the appeal of the Revenue is partly allowed.
Order pronounced in the open court on 14.01.2019.