DCIT, CHENNAI vs. MADURAI MICRO FINANCE LTD., CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No. 2858/Mds/2014. :- 2 -:

No.414/2013-14, dated 21.08.2014 for the assessment year 2007-2008 passed u/s.271(1)(c) of the Income Tax Act, 1961.

The department has raised the following grounds challenging 2. the order of ld.Commissioner of Income Tax (Appeals):-

‘’’2.2 The learned Commissioner of Income Tax (Appeals) ought to have appreciated the findings of the Assessing Officer, that the assessee’s claim on the amount kept in cash collateral is not permissible as it is mere diversion of income by overriding title. 2.3 The learned Commissioner of Income Tax (Appeals) failed to note that this is a case where questionable details and particulars, relating to revenue recognition were furnished by the assessee and such details were so fundamental to the genuineness and bonafide of the claim that mere furnishing of those particulars made the claim vulnerable, entailing levy of penalty u/s.271 (1)(a) of the I.T. Act, 1961. 2.4 The learned Commissioner of Income Tax (Appeals) ought to have appreciated that making a claim contrary to a statutory provision is a clear case of furnishing inaccurate particulars of income, leading to concealment of income. 2.5 Having regard to the Hon’ble Delhi High Court’s decision in the case of CIT vs. Zoom Communication (P) LTD 327 ITR 510, the learned Commissioner of Income Tax (Appeals) ought to have upheld the levy of penalty u/s.271(1)(c) of the Income Tax Act, 1961’’.

ITA No. 2858/Mds/2014. :- 3 -:

Department and in the scrutiny proceedings the ld.AO has made addition on account of cash collateral offered to ICICI Bank �2,10,99,000/- as income of the previous year and assessed total income at �7,87,40,505/-. Aggrieved by the order of the Assessing Officer the company has filed an appeal before ld. Commissioner of Income Tax (Appeals)-IV and reiterated its submissions with the judicial decisions on the ground of retention of money were the contractor could not treat the retention amount as income till the contract period is lapsed or completed but the ld. Commissioner of Income Tax (Appeals) has confirmed the order of the lower authorities. The ld. Assessing Officer issued notice for levy of penalty u/s.271(1)(c) of the Act. In the penalty proceedings, the assessee has submitted detailed explanations and furnished details of contract and complied with directions.

The ld. Assessing Officer alleged to levy penalty based on 4. the system of accounting followed by the company in respect of loans provided for self help groups. The ld. Authorised Representative has explained that company has sold a portion of loans granted by its various self help groups to ICICI Bank on the basis of Bilateral Buy Out Basis. A per the terms and conditions of the buyout deal the assessee shall provide cash collateral for the amount equal to 2% of purchase

ITA No. 2858/Mds/2014. :- 4 -: consideration for receivables assigned to ICICI Bank and such collateral is made by way of bank deposits and company shall make a lien in favour of ICICI Bank. The terms being the cash collateral provided shall be utilized by ICICI Bank to cover any shortfall in the repayment of loans by self help groups to ICICI Bank. It was argued and submitted before the ld.Assessing Officer that the assessee being a company registered under Companies Act, 1956 and also comply with Statutory Audit Accounting Standards referred to sec 211 of the Companies Act and it has been following such system as per guidelines issued by the ICAI. But ld. Assessing Officer alleged that assessee has submitted inaccurate particulars and levied the penalty of �71,01,923/-. Aggrieved by the order of penalty u/s.271(1)(c) the assessee preferred an appeal before Commissioner of Income Tax (Appeals).

In appellate proceedings the assessee company has 5. reiterated its earlier submissions and relied on the legal decisions were the amount of retention money was not considered as income until the contract period expires. But the ld. Commissioner of Income Tax (Appeals) in quantum appeal has confirmed the addition of Assessing Officer. Meanwhile time period of loans which were sold to ICICI Bank has expired and the actual amount of loans not repaid by Self

ITA No. 2858/Mds/2014. :- 5 -:

Help Groups was determined and ICICI Bank has appropriated the amount of cash collateral fixed deposits to the extent of recovery deficit. Since the recovery is less than the actual loans granted, the assessee company has incurred bad debts in the year of appropriation of deposits by ICICI Bank and debited to Profit and Loss account and claimed deduction. The assessee has not filed second appeal against the order of the Commissioner of Income Tax (Appeals) passed u/Secs. 143(3) and 250 of the Act due to claim of Bad debts. The NBFC company has filed submissions duly supported by the Jurisdictional High Court decision.

Further, the assessee is following Auditing and accounting standards of the ICAI which is not disputed. The fact that income recognition of retention money shall be crystallized only after completion of events or expiry of period. The ld. Commissioner of Income Tax (Appeals) has observed at pare 7 at page 3 as under:-

‘’The provisions of AS-9 mandated that in case there is any uncertainty relating the ultimate realization of the income, then the recognition of revenue had to be postponed until the uncertainty is resolved. Therefore, to comply with the said Standard, the appellant had adopted an accounting policy with respect to recognition of revenue in respect of income from ITA No. 2858/Mds/2014. :- 6 -: buyout of portfolio of loans. The said Accounting policy, which has been mentioned as part of the notes forming part of the Audited accounts filed alongwith the return of income reads as under:- ‘’ç) Revenue Recognition i) ............ ii) In respect of loans sold on bilateral basis with banks and Financial Institutions, the difference between the book value of the loans sold and the sale consideration received net of amounts kept in deposits under lien to banks and Financial Institutions towards possible default is credited to the profit and loss account’’. Considering the facts and system of accounting, ld. Commissioner of Income Tax (Appeals) observed that there is no concealment of income or submission of any inaccurate particulars of income by the assessee and directed Assessing Officer to delete the penalty.

Aggrieved by the order of the ld.CIT(A), the Revenue has filed an appeal before the Tribunal.

ITA No. 2858/Mds/2014. :- 7 -:

On the other hand, the ld. Authorised Representative of the 8. assessee submitted that there is no concealment of income or furnishing of inaccurate particulars by assessee in the assessment proceedings or before appellate proceedings and there is no fresh evidence filed before the Commissioner of Income Tax (Appeals). The assessee has explained the system of accounting before the lower authorities and retained the money, to be adjusted by the ICICI Bank for the deficiency in realization of loans which is considered and difference of loan recovery is claimed as Bad Debts. The ld. Commissioner of Income Tax (Appeals) has considered the accounting standards, accounting system and judicial decisions and directed to delete the penalty imposed on assessee in accordance with law and prayed for dismissal of the appeal of the Revenue.

We heard the rival submissions of both the parties, material 9. on record, lower authorities order and judicial decisions cited. The assessee being a Micro Finance Company is in the business of providing financial loans to various self help groups. The loans granted to self help groups have been sold to ICICI Bank on Bilateral Buy Out Basis and as per the agreement 2% of the loans receivable will be deposited by way of Fixed Deposits and the lien is charged in ITA No. 2858/Mds/2014. :- 8 -: favour of ICICI Bank and such provisions are acceptable as per terms of agreement which is not disputed. The Assessing Officer has verified the Audited accounts produced in assessment proceedings and there is dispute about the accounting policies which the Assessing Officer alleged. The assessee company claims that its case falls in capacity of contractor and the money is retained for a certain period and retention money shall not be taxable until the retention period is over and the assessee relied on the decisions but amount kept in cash collected is not a prudent practice and it should be subjected to tax.

In this case the money has been appropriated by ICICI Bank after collection and the assessee has claimed the deficiency in realization as Bad debts. The income of 2% was not considered in profit and loss account by assessee. We are of the opinion that these are incorrect treatment given by the assessee company and have no sanction of law and also not supported by any Accounting standard. The assessee claim is nothing but false claim and furnishing inaccurate particulars of income. The explanations given by the assessee cannot be considered as bonafide and assessee tried to conceal the income by misrepresenting the case by not bringing true income to the books of accounts. We rely on the decision of DCIT vs. Rattha Cidadines Boulevard Chennai (P) Ltd (2015) 155 ITD 977 where it observed that ITA No. 2858/Mds/2014. :- 9 -:

Auditor’s report cannot override provisions of act and, thus, merely because assessee’s false claim for deduction is supported by Chartered Accountant’s opinion, this fact per se cannot absolve assessee from penalty under section 271(1)(c) of the Act. Accordingly, we set aside the order of the Commissioner of Income Tax (Appeals) and restore the order of Assessing Officer and allow the appeal of the Revenue.

In the result, the appeal of the Revenue in ITA 10. No.2858/Mds/2014 is allowed.

Order pronounced on 28th January, 2016 at Chennai.