RABO INDIA FINANCE LTD, MUMBAI v. ACIT 1(3), MUMBAI

CO 243/MUM/2009 | 2004-2005
Pronouncement Date: 18-03-2010 | Result: Allowed

Appeal Details

RSA Number 24319923 RSA 2009
Assessee PAN AARCR6065R
Bench Mumbai
Appeal Number CO 243/MUM/2009
Duration Of Justice 2 month(s) 28 day(s)
Appellant RABO INDIA FINANCE LTD, MUMBAI
Respondent ACIT 1(3), MUMBAI
Appeal Type Cross Objection
Pronouncement Date 18-03-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 18-03-2010
Assessment Year 2004-2005
Appeal Filed On 21-12-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH MUMBAI BEFORE SHRI R.K. GUPTA JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 3325/MUM/2009 (ASSESSMENT YEAR: 2004-05) ACIT 1(3) M/S. RABO INDIA FINANCE PVT. LTD. ROOM NO. 540/564 5TH FLOOR FORBES BUILDING 2ND FL OOR AAYAKAR BHAVAN M.K. ROAD VS. CHARANJIT RAI MARG MUMBAI 400020 FORT MUMBAI 400001 PAN - AARCR 6065 R APPELLANT RESPONDENT CO NO. 243/MUM/2009 (ASSESSMENT YEAR: 2004-05) M/S. RABO INDIA FINANCE PVT. LTD. ACIT 1(3) FORBES BUILDING 2ND FLOOR ROOM NO. 540/564 5TH FL OOR CHARANJIT RAI MARG VS. AAYAKAR BHAVAN M.K. ROAD FORT MUMBAI 400001 MUMBAI 400020 PAN - AARCR 6065 R CROSS OBJECTOR APPELLANT IN APPEAL REVENUE BY: SHRI R.N. JHA ASSESSEE BY: SHRI KANCHAN KAUSHAL/ SHRI ALIASGER RAMPURAWALLA O R D E R PER B. RAMAKOTAIAH A.M. THE APPEAL BY THE REVENUE IS AGAINST THE ORDER OF T HE CIT(A) XXI MUMBAI DATED 24.02.2009 IN WHICH THE REVENUE HAS RA ISED THE FOLLOWING GROUNDS: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW BAD DEBTS AGGREGATING TO RS.33 58 678/- AS CLAIMED BY T HE ASSESSEE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW THE EXEMPTION OF INTEREST OF RS.3 55 14 746/- RECEIVED FROM BHARTI MOBINET LTD. AND ENERGY DEVELOPMENT CORPN U/S. 10(2 3G). 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE THE ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 2 ADDITION ON ACCOUNT OF WRITE OFF OF INTEREST OF RS. 9 35 58 831/- IN RESPECT OF NON-PERFORMING ASSETS. 2. REGARDING GROUND NO. 1 WHILE COMPLETING THE ASSESS MENT THE A.O. EXAMINED THE BAD DEBTS TO THE EXTENT OF RS.33 58 67 8/- RECEIVABLE FROM BEAN COFFEE TRADING COMPANY LTD. WHICH WAS WRITTEN OFF DURING THE YEAR. IT WAS SUBMITTED THAT THE TOTAL AMOUNT DUE WAS RS.2 01 52 067/- ON THE INVOICES RAISED IN NOVEMBER 2002 AND THE CLIENT PAI D ONLY AN AMOUNT OF RS.1 67 93 389/- IN NOVEMBER 2003. THE BALANCE AMOU NT OF RS.33 58 678/- WAS NOT RECEIVED TILL MARCH 2004. THE SAME WAS WRIT TEN OFF DURING THE YEAR. THE A.O. DID NOT ALLOW THE CLAIM HOLDING THAT THIS IS NOT A BAD DEBT AS THE ASSESSEE HAS NOT PROVED THAT THE AMOUNT HAS BECOME BAD. THE CIT(A) HAVE EXAMINED THE ISSUE AND ALLOWED THE CLAIM ON THE BAS IS OF THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS . STAR CHEMICALS (BOMBAY) P. LTD. 313 ITR 126 IN WHICH THE HON'BLE BOMBAY HIG H COURT HAS HELD THAT THE CLAIM FOR BAD DEBT WILL BE ALLOWED IN THE YEAR IN WHICH SUCH BAD DEBTS HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF THE ASSESSEE. NOW THE ISSUE IS FURTHER CONFIRMED BY THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT RANCHI IN CIVIL APPEA L NO. 4293 OF 2003 WHEREIN THE HON'BLE SUPREME COURT HAS HELD THAT THE POSITION OF LAW PRIOR TO 01.04.1989 AND POST 01.04.1989 IS WELL SETTLED. AFT ER 1 ST APRIL 1989 IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH WHETHER THE DEBT IN FACT HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRIT TEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. SINCE THE ASSESSEE HA S WRITTEN OFF THE AMOUNT AND THE ONLY REASON FOR DISALLOWANCE IS THAT THE AS SESSEE HAS NOT PROVED THE BAD DEBT WE ARE OF THE OPINION THAT THE ORDER OF T HE CIT(A) DOES NOT REQUIRE ANY MODIFICATION OR INTERFERENCE. ACCORDINGLY GROUN D NO. 1 IS REJECTED. 3. GROUND NO. 2 PERTAINS TO THE ISSUE OF CLAIM OF EXEM PTION UNDER SECTION 10(23G). THE ASSESSEE CLAIMED EXEMPTION OF INTEREST OF RS.3 55 14 746/- RECEIVED FROM BHARTI MOBINET LTD. AND ENERGY DEVELOPMENT CORPORATION UNDER SECTION 10(23G). THE A.O. DENIED THE EXEMPTION ON THE GROUND THAT ADVANCES MADE TO THE A BOVE ENTITIES ARE NOT IN THE NATURE OF INVESTMENTS SINCE THE ASSESSEE HA S NOT CLASSIFIED THE ABOVE LOANS AS INVESTMENT AND THE SAME HAS BEEN CLASSIFIE D UNDER THE HEAD ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 3 LOANS AND ADVANCES ALONG WITH OTHER PARTIES TO WH OM THE LOANS HAVE BEEN ADVANCED. FURTHER IT WAS ALSO A GROUND FOR DISALLOW ANCE THAT THE ABOVE NAMED COMPANIES HAVE NOT INVITED AN OPEN OFFER FROM THE PUBLIC FOR LONG TERM INVESTMENTS WHICH IS A REQUIREMENT TO QUALIFY AS AN ELIGIBLE FUND UNDER THE PROVISIONS OF SECTION 10(23G). AFTER EXAM INING THE FACTS OF THE CASE THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESS EE BY CONSIDERING AS UNDER: - 7.3 I HAVE CAREFULLY CONSIDERED THE ISSUE. ORDINAR ILY WHETHER THE COMP ANY IS CLASSIFIED AS INFRASTRUCTURE COMPANY OR NOT AND WHETHER THE LOAN IS CLASSIFIED AS LONG-TERM FINANCE OR NOT ARE THE ISSUES TO BE CONSIDERED IN THE VERY FIRST YEAR OF SUCH LOANS. AF TER DUE CONSIDERATION THEREOF EXEMPTION U/S. 10(23G) WAS GRANTED FOR A.Y . 2002-03 AND CONTINUED THEREAFTER. THE DEFINITION OF LONG-TERM F INANCE DOES INCLUDE THE LOAN OR DEPOSIT THAT HAVE A HOLDING PERIOD OF MORE THAN 5 YEARS. THERE IS ABSOLUTELY NO REASON FOR DEPARTING FROM THE ESTA BLISHED DECISION OF GRANTING EXEMPTION U/S. 10(23G). THE A. O. IS ACCORDINGLY DIRECTED TO ALLOW THE EXEMPTION FOR TH E YEAR IN QUESTION AS WELL. THIS GROUND OF APPEAL THUS ALLOW ED . 4. BEFORE US THE LEARNED D.R. SUBMITTED THAT THE ASSE SSEE IS NOT ELIGIBLE FOR DEDUCTION WHEREAS THE LEARNED COUNSEL REITERATE D THE SAME SUBMISSIONS MADE BEFORE THE CIT(A). IT WAS FURTHER SUBMITTED TH AT THE ASSESSEE COMPANY IS ELIGIBLE FOR DEDUCTION AS IT HAS GIVEN LONG TERM LEASE FINANCE AND THUS QUALIFIED UNDER THE SECTION AS INFRASTRUCTURE COMPA NY AND FURTHER THESE TWO COMPANIES ARE ALSO APPROVED FOR THE PURPOSE OF SECT ION 10(23G) VIDE DIRECT TAX NOTIFICATION NO. 319 DATED 4 TH OCTOBER 2001 AND NOTIFICATION 82/2004 RESPECTIVELY GIVEN BY THE CBDT. THE LEARNED COUNSEL ALSO RELIED ON THE DECISION OF THE AMRITSAR BENCH IN THE CASE OF JAMMU & KASHMIR BANK LTD. VS. ACIT 118 ITD 146 FOR THE PROPOSITION THAT IT IS NOT NECESSARY THAT THE INFRASTRUCTURAL CAPITAL COMPANY SHOULD BE FORMED SO LELY FOR THE PURPOSE OF MOBILISING RESOURCES FOR FINANCING INFRASTRUCTURE F ACILITIES AND IF IT INCLUDES ONE OF THE OBJECTS OF THE BANKING BUSINESS THE SAM E SHOULD BE SUFFICIENT TO ENTITLE THE ASSESSEE TO CLAIM DEDUCTION UNDER SECTI ON 10(23G). IT WAS THE SUBMISSION THAT THE ASSESSEE AS AN INFRASTRUCTURE C APITAL COMPANY GIVING LONG TERM FINANCE TO VARIOUS OTHER PERSONS AND THIS FACT WAS ALSO CONFIRMED IN EARLIER YEARS AND THE CLAIMWAIS ALLOWED IN EARLI ER YEARS AS WELL. ACCORDINGLY THE CIT(A) WAS CORRECT IN ALLOWING THE CLAIM. ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 4 5. WE HAVE CONSIDERED THE ISSUE. AS THE ASSESSEE SATIS FIES THE CONDITIONS FOR CLAIMING THE EXEMPTION UNDER SECTION 10(23G) AS MUCH AS IT INVOLVED IN LONG TERM FINANCING AND THESE ENTITIES WERE ALSO NO TIFIED UNDER PROVISIONS OF SECTION 10(23G) THE CIT(A)S ORDER REQUIRE NO MODI FICATION. THE ASSESSING OFFICERS REASONS FOR DENYING THE CLAIM THAT THE AS SESSEE HAS NOT CLASSIFIED THE LOANS AS INVESTMENTS AND FURTHER THOSE COMPANIE S HAVE NOT INVITED FUNDS BY OPEN OFFER FROM THE PUBLIC ARE NOT MATERIA L AS CLASSIFICATION OF AMOUNTS IN THE BOOKS OF ACCOUNT ARE NOT A CRITERIA FOR CONSIDERING THE LONG TERM FINANCE GIVEN BY THE ASSESSEE AND FURTHER THER E IS NO STIPULATION THAT THERE SHOULD BE AN OPEN OFFER IN INVITING LONG TERM FINANCE UNDER THE RULES. THE CONDITIONS CONSIDERED BY THE A.O. ARE NOT SUPPO RTED BY THE PROVISIONS OF THE ACT AND THEREFORE THE ASSESSING OFFICERS ACTIO N IN DENYING THE CLAIM ON INFRUCTUOUS REASONS CANNOT BE UPHELD. AS RIGHTLY HE LD BY THE CIT(A) BOTH THE ASSESSEE AND THOSE ENTITIES DO CLASSIFY UNDER THE P ROVISIONS OF THE ACT AND ACCORDINGLY THE CLAIM OF 10(23G) IS ALLOWABLE. IT I S ALSO ON RECORD THAT THE CLAIMS WERE BEING CONSISTENTLY ALLOWED FROM A.Y. 20 02-03 AND THERE IS NO NEED FOR DEVIATING FROM THE SAME STAND IN THE YEAR UNDER CONSIDERATION. ACCORDINGLY THE GROUND RAISED BY THE REVENUE IS DIS MISSED. 6. GROUND NO. 3 PERTAINS TO THE ISSUE OF WRITE OFF OF INTEREST OF RS.9 35 58 831/- IN RESPECT OF NON-PERFORMING ASSET S. THE BRIEF FACTS LEADING TO THE PRESENT GROUND IS THAT THE A.O. NOTICED THAT DURING THE YEAR ASSESSEE COMPANY HAS EARNED INTEREST INCOME OF RS.9 35 58 83 1/- FROM 8 COMPANIES WHOM THE ASSESSEE HAS CLASSIFIED AS NPA LOANS. BY CLASSIFYING THESE LOANS AS NPA ASSESSEE COMPANY HAS IN THE CREDIT SIDE OF THE P & L ACCOUNT CREDITED THE ABOVE INTEREST AND ALSO DEBITED THE SA ME AMOUNT IN THE P & L ACCOUNT THUS NULLIFYING THE EFFECT OF INTEREST INC OME. AFTER VERIFYING THE DETAILS AND ANALYSING THE SYSTEM OF ACCOUNT THE A.O . DISALLOWED THE CLAIM OF REVERSAL INTEREST ON NPA LOANS BY GIVING THE FOLLOW ING OBSERVATIONS IN PAGE 15 & 16 OF THE ORDER: - IT IS CRYSTAL CLEAR THAT IN THE BACK GROUND OF THE IR SOUND FINANCIAL STATUS THE ASSESSEE COMPANY HAS ADVANCED LOAN WITHOUT ANY SECURITY IN THE CASE OF ASIMA LIMITED BPL LIMITED INDIA CEMENT S . KUMARS AND ESCORT LIMITED WHILE ADVANCING THE LOAN OF RS.7.83 CRORE RS.25 90 CRORE RS.20.00 CRORE RS.17 52 CRORE AND RS.23.38 CRORE RESPECTIVELY. ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 5 WHEREAS IT HAS OBTAINED SECURITY ONLY IN RESPECT OF THE REMAINING THREE COMPANIES I.E. SHREE MAHADESHWARA SUGAR MILLS LTD. NAGARJUNA FERTILIZERS & CHEMICALS LTD. AND TRANSFLEET LTD. IT IS PERTINENT TO MENTION HERE THAT OUT OF THE ABOVE EIGHT PARTIES WHICH HAV E BEEN CLASSIFIED AS NPA BY THE ASSESSEE COMPANY THE ENTIRE LOAN ALONGW ITH INTEREST AS ON DATE HAVE BEEN RECOVERED IN RESPECT OF THESE COMP ANIES EXCEPT BPL LIMITED AND ESCORTS LIMITED WHICH ARE ALSO PAYING THE INTEREST/LOAN INSTALMENT IN TIME. THE ASSESSEE COMPANY HAS SIMPLY CLASSIFIED THE ABOVE LOANS AS NPA LOANS WITH THE PLEA THAT THE I NTEREST HAS REMAINED OVER-DUE FOR A PERIOD OF SIX MONTHS OR MORE FOR WH ICH THE ASSESSEE COMPANY HAS NOT FURNISHED ANY SUPPORTING DOCUMENTAR Y EVIDENCES ALONGWITH CONFIRMATION FROM THE CONCERNED PARTIES TO JUSTIFY ITS CLAIM OF OVERDUE INTEREST FOR 6 MONTHS. IN FACT SUBSEQUENTL Y THESE COMPANIES HAVE PAID THE ENTIRE AMOUNT ALONGWITH INTEREST WE LL IN TIME. KEEPING IN MIND THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE COMPANY NA TURE OF LOANS ADVANCED FINANCIAL CAPACITY OF THE ABOVE MENTIONED COMPANIES NON- FURNISHING OF REQUIRED DETAILS ALONGWITH SUPPORTING DOCUMENTARY EVIDENCES ASSESSEES CLAIM OF NPA IS NOT TENABLE H ENCE LIABLE FOR REJECTION. WHETHER THE DEFAULT OF OVER DUE INTERES T FOR MORE THAN 6 MONTHS WAS DUE TO THEIR POOR FINANCIAL CONDITION OR DUE TO NON TIMELY ISSUE OF CHEQUES OR THEIR DEPOSIT WITH THE BANK OR NON-CREDITING OF THE SAME IN THE LEDGER ACCOUNT COULD NOT BE ESTABLISHE D BY THE ASSESSEE COMPANY ALONG WITH SUPPORTINGS AS ALL ABOVE PARTIE S ARE FINANCIALLY VERY SOUND. HENCE THE CONTENTION OF THE ASSESSEE CO MPANY FOR CLASSIFYING THE ABOVE PARTIES UNDER THE HEAD NPA L OAN IS TOTALLY BASELESS AND DO NOT MATCH WITH THE GUIDELINES ISSUE D BY THE RBI AS HAS BEEN CLAIMED. SECONDLY THE ASSESSEE COMPANY IS NOT A BANKING COMPANY AS PER THE PROVISIONS OF SECTION 36(1)(VII A) OF THE I.T. ACT 1961 HENCE THE CLAIM OF THE ASSESSEE FOR NPA IS NOT TEN ABLE HENCE REJECTED. KEEPING IN MIND THE FOREGOING DISCUSSION AND FACTS OF THE CASE I HEREBY DISALLOW THE CLAIM OF REVERSAL OF ALLEGED NPA LOAN S INTEREST INCOME OF RS.9.36 CRORE AND ADDED BACK TO THE INCOME OF THE ASSESSEE COMPA NY. THE PENALTY PROCEEDINGS U/S. 271(1)(C) ARE INITIATE D SEPARATELY. 7. WHEN THE SAME WAS CONTESTED BEFORE THE CIT(A) THE CIT(A) ALLOWED THE ASSESSEES CONTENTIONS VIDE PARA 8.3 AND 8.3.1 WHIC H ARE AS UNDER: - 8.3 I HAVE CAREFULLY CONSIDERED THE ISSUE. IT IS O BSERVED THAT THE COURTS HAVE CONSISTENTLY HELD THAT IN THE CASE OF N ON-PERFORMING ASSETS IN THE LIGHT OF NOTIFICATION ISSUED BY THE RESERVE BANK OF INDIA REGARDING CLASSIFICATION OF ASSETS AND IN VIEW OF A CCOUNTING STANDARD-9 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN THE MATTER OF RECOGNIZING INCOME THE QUESTION OF ACCRUAL CAN BE CONSIDERED ONLY AFTER THE RECOGNITION OF INCOME FROM SUCH ASSETS. T HE QUESTION OF APPLYING PRINCIPLE OF ACCRUAL COMES INTO BEING ONLY AFTER THE INCOME IS RECOGNIZED. IN THE PRESENT CASE THE APPELLANT CLAS SIFIED SOME OF ITS ASSETS AS NON-PERFORMING ASSETS ON THE BASIS OF NOT IFICATION ISSUED BY ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 6 THE RESERVE BANK OF INDIA. FROM SUCH NON-PERFORMING ASSETS THE APPELLANT HAS NOT RECOGNIZED ANY INCOME IN CONSONAN CE WITH THE NOTIFICATION ISSUED BY THE RESERVE BANK OF INDIA AN D AS-9 ISSUED BY THE ICAI. THEREFORE THE APPELLANT IS JUSTIFIED IN NOT RECOGN IZING THE INCOME AS SUCH . 8.3.1 IT IS FURTHER OBSERVED THAT THE SAID METHOD O F ACCOUNTING HAS BEEN CONSISTENTLY FOLLOWED BY THE APPELLANT AND ACC EPTED BY THE DEPARTMENT FROM ASST. YEAR 2002-03 ONWARDS AND THIS IS THE FIRST YEAR DURING WHICH THE A.O. HAS TAXED THE INCOME ON ACCRU AL BASIS. IN ANY CASE SUCH ASSUMPTION OF ACCRUAL WILL HAVE TO BE RE VERTED IN THE YEAR OF WRITE OFF AND IF ANY PART OF IT IS RECEIVED IN FUTU RE THE SAME WOULD NOT BE TAXABLE. THAT IS TO SAY THAT THE DEBATE OVER WH ETHER INTEREST RECEIVABLE ON NON-PERFORMING ASSETS IN THE CASE OF AN NBFC CAN BE SAID TO ACCRUE ON AN YEAR TO YEAR BASIS OR NOT WHIL E FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING HAS THE IMPACT OF O NLY CHANGING THE YEAR OF TAXABILITY. THEREFORE IT IS NOT CONSIDERED APPROPRIATE TO CHANGE THE CONSISTENT STAND TAKEN BY THE DEPARTMENT SO FAR. THE A.O. IS ACCORDINGLY DIRECTED TO DELETE THE AD DITION OF RS.9 35 58 831/- MADE ON THIS ACCOUNT. THE APPELLAN T SUCCEEDS ON GROUND NO.6 OF APPEAL. 8. IT WAS THE SUBMISSION OF THE LEARNED D.R. THAT THE CIT(A)S FINDINGS ARE FACTUALLY NOT CORRECT AND THE ASSESSEE HAS CREDITED THE AMOUNTS AS WELL AS DEBITED THE AMOUNTS AND SO THE QUESTION OF RECOGNIZ ING THE INCOME DOES NOT ARISE AS CONSIDERED BY THE CIT(A). MOREOVER THE HO N'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT 320 ITR 577 HELD THAT THE RBI GUIDELINES ARE NOT APPLICABLE TO THE NBFCS. IN VIEW OF THIS IT IS SUBMITTED THAT THE ORDERS OF THE CIT(A) ARE NOT COR RECT AND THE ASSESSING OFFICERS ORDER SHOULD BE RESTORED. 9. THE LEARNED COUNSEL IN REPLY SUBMITTED THAT THE ASS ESSEE IS FOLLOWING CONSISTENT METHOD OF RECOGNIZING NPAS FOR THE DEFA ULT OF INTEREST OR PRINCIPAL LOAN REPAYMENT FOR A PERIOD OF 6 MONTHS ACCORDING T O THE RBI GUIDELINES AND SINCE THE ABOVE 8 COMPANIES HAVE NOT PAID THE AMOUN T THEY HAVE BEEN CLASSIFIED AS NPAS AND THE INTEREST INCOME WAS REVE RSED DURING THE YEAR. HE FILED DETAILED CHART INDICATING COMPANY NAME START ING DATE FIRST DATE OF DEFAULT LOAN AMOUNT INTEREST ACCRUED ETC. AND AL SO THE BASIS FOR CLASSIFICATION OF NPA AND STEPS TAKEN TO RECOVER. W ITH REFERENCE TO ITEM NO. 1 IN THE SAID CHART IT WAS SUBMITTED THAT M/S. ASHIMA LIMITED WAS GIVEN A LOAN ON 25 TH JANUARY 2000 AND THE DATE OF DEFAULT WAS 18 TH FEBRUARY 2003. THE LOAN AMOUNT OUTSTANDING AS ON 31.03.2004 AS RS. 7 83 12 363/- AND ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 7 THE YEAR-WISE INTEREST ACCURED IN THE A.Y. WAS RS.8 4 99 573/- INCLUDING THE INTEREST CREDITED IN THE PREVIOUS YEAR. THE AMOUNT REVERSED DURING THE YEAR WAS RS.99 20 919/-. IT WAS THE SUBMISSION THAT INTE REST HAS REMAINED OVERDUE FOR A PERIOD OF 6 MONTHS OR MORE AND ACCORD INGLY THE SAME WAS CLASSIFIED AS NPA. FOR THE STEPS TAKEN TO RECOVER I T WAS SUBMITTED THAT INTEREST RATES WERE REDUCED AND AT LAST THE ENTIRE LOAN AMOUNT WAS SOLD OFF TO M/S. CLEARWATER CAPITAL PARTNERS AT 10% OF THE E NTIRE PRINCIPAL AMOUNT ON 31.03.2005. THUS THE ASSESSEE COULD RECOVER ONLY AN AMOUNT OF RS.78 31 286/- AND DISCLOSED A LOSS OF RS.7 04 81 1 27/-DURING THE A.Y. 2005-06 WHICH WAS ALLOWED BY THE A.O. LIKEWISE THE ASSESSEE EXPLAINED ALL THE OTHER 7 COMPANIES DETAILS AND ALSO THE FACT TH AT THESE AMOUNTS WERE SUBSEQUENTLY WRITTEN OFF IN RESPECTIVE YEARS WHICH INCLUDED THE PRINCIPAL AMOUNT ALSO. REGARDING THE INTEREST THAT WAS CREDI TED AND DEBITED IT WAS SUBMITTED THAT THE ASSESSEE COMPANY A BIG NBFC HAS SYSTEMISED AND COMPUTERISED ITS ACCOUNTS AND THE SYSTEM ITSELF GEN ERATES INTEREST ACCRUAL ON A DAY-TO-DAY BASIS ON ALL ACCOUNTS AND ONCE THE LOAN IS CLASSIFIED AS NPA IT AUTOMATICALLY DEBITS THE SAME AMOUNT BUT THESE AMOUNTS ARE NOT CHARGED TO THE RESPECTIVE LOAN ACCOUNTS BUT HAS SEP ARATELY KEPT AND DIRECTLY CREDITED AND DEBITED INTO THE P & L ACCOUNT. THUS T HE ASSESSEES METHOD OF ACCOUNTING IS SUCH THAT THE PARTY WAS NOT DIRECTLY CREDITED TO THE AMOUNT AND THE QUESTION OF ACCRUAL OF THE INTEREST DOES NO T ARISE. HE RELIED ON THE DECISION OF THE DELHI F BENCH IN THE CASE OF BRAH AMPUTRA CAPITAL & FINANCIAL SERVICES LTD. VS. ITO 9 DTR (DEL) (TRIB) 511 FOR THE PROPOSITION THAT THE ASSESSEE NON-BANKING FINANCIAL COMPANY EVEN TH OUGH FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING CANNOT BE CHARGED TO TAX IN RESPECT OF NOTIONAL INTEREST ON STICKY LOANS WHICH WAS NOT EVE N ACCOUNTED FOR AS INCOME BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. 10. ON A QUERY ABOUT THE DIFFERENCE IN THE FINDINGS OF THE A.O. THAT THE ASSESSEE HAS RECEIVED THE FULL AMOUNT IN LATER YEAR S AS MENTIONED IN THE ASSESSMENT ORDER IN PAGE 15 EXTRACTED ABOVE AND THE STATEMENT OF ASSESSEE WHERE IT WAS MENTIONED THAT ALL THE PRINCIPAL AMOUN TS WERE WRITTEN OFF AND CLAIMED IN LATER YEARS AS BAD DEBTS THE COUNSEL HA S NO OBJECTION IF THE MATTER REQUIRE EXAMINATION BY THE A.O. ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 8 11. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE FIND INGS AND FACTS GIVEN BY THE ITO IT WAS ON RECORD THAT THE ASSESSEE HAS R ECOVERED PRINCIPAL AMOUNT AND INTEREST IN A LATER YEAR. THE BASIS FOR THIS FI NDING IS NOT AVAILABLE WHEREAS IT WAS ASSESSEES SUBMISSION THAT WITH REFERENCE TO TH E 8 NPAS CLASSIFIED THE ASSESSEE NOT ONLY NOT RECOVERED THE INTEREST BUT AL SO SUBSEQUENTLY WRITTEN OFF THE PRINCIPAL AMOUNT ALSO AND THE SAME WERE ALLOWED AS DEDUCTION IN THE RESPECTIVE ASSESSMENT YEARS AS PER THE CHART FURNI SHED. IT WAS ALSO SUBMITTED THAT THESE DETAILS WERE PLACED BEFORE THE A.O. AS W ELL THE CIT(A) BUT A.O. HAS NOT CONSIDERED THE DETAILS IN ITS CORRECT PERSPECTI VE. AS SEEN FROM THE ORDER OF THE A.O. THE ASSESSEE HAS INDEED CREDITED THE INTER EST AMOUNT AND AT THE SAME TIME DEBITED THE INTEREST AMOUNT AS WRITE OFF EXPL AINED AS SYSTEM GENERATED INTEREST ON EVERY DAY BASIS. THE METHOD OF ACCOUNTI NG INTEREST IS NEITHER EXAMINED BY THE A.O. NOR BY THE CIT(A) AND WHETHER THE SAID INTERESTS WERE CREDITED TO THE PARTIES ACCOUNTS OR NOT. THE CONTEN TION THAT THESE AMOUNTS ARE KEPT SEPARATELY AND THE REASONS FOR CREDITING AND D EBITING TO P & L ACCOUNT SEPARATELY WERE NOT EXAMINED BY THE A.O. OR THE CIT (A). WHILE ADMITTING THAT THE GUIDELINES OF RBI ARE NOT STRICTLY APPLICABLE T O NBFC ASSESSMENT AS HELD BY THE HON'BLE SUPREME COURT (SUPRA) IT IS NOT ON RECO RD WHETHER THE ASSESSEE HAS REALLY CREDITED THE INTEREST IN THE BOOKS OF AC COUNT. IF THE ASSESSEES CONTENTIONS ILLUSTRATED BY THE CHART ARE TO BE CONS IDERED THE ASSESSEES CLAIMS ARE CORRECT AS EVEN THE PRINCIPAL AMOUNTS WERE WRI TTEN OFF IN THE LATER YEAR. THERE SEEMS TO BE NO PROPER EXAMINATION OF THE FACT S BY THE A.O. OR CIT(A). EVEN THE CIT(A) OBSERVATIONS ARE AT VARIANCE TO THE AOS OBSERVATIONS. IN VIEW OF THIS WE ARE OF THE OPINION THAT THE ISSUE REQUI RES RE-EXAMINATION BY THE A.O. IN CASE THE ASSESSEE HAS NOT RECEIVED ANY INTEREST AMOUNT OR PRINCIPAL AMOUNT OUT OF THE 8 COMPANIES AND WERE ALLOWED AS DEDUCTIO N IN LATER YEAR THE ASSESSEES CLAIMS ARE PRIMA FACIE CORRECT. HOWEVER SINCE THIS REQUIRES VERIFICATION AT THE END OF THE A.O. HE IS DIRECTED TO EXAMINE THE ISSUE AFRESH AND GIVE CLEAR FINDINGS AND CONSIDER THE CLAIM OF T HE ASSESSEE ACCORDING TO THE FACTS AND PROVISIONS OF LAW. NEEDLESS TO STATE THAT HE SHOULD GIVE PROPER OPPORTUNITY TO THE ASSESSEE. FOR THIS THE ISSUE IN GROUND NO. 3 IS RESTORED BACK TO THE A.O. TO DO ACCORDINGLY. GROUND CONSIDER ED ALLOWED. 12. IN THE RESULT APPEAL IS CONSIDERED PARTLY ALLOWED. ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 9 C.O. NO. 243/MUM/2009 13. THE ASSESSEE FILED CROSS OBJECTION WITH A DELAY OF 12 DAYS. THE REASONS FOR FILING THE CROSS OBJECTION LITTLE BELATEDLY IS THAT THE ASSESSEE WAS UNDER THE IMPRESSION THAT CROSS OBJECTION WAS TO BE FILED WITHIN 60 DAYS FROM THE DATE OF RECEIPT AND NOT 30 DAYS AVAILABLE FOR CROSS OBJECTION. SINCE THIS IS A BONAFIDE MISTAKE THE ASSESSEES PRAYER FOR CONDONAT ION IS CONSIDERED AND THE DELAY IS CONDONED. 14. IN THE CROSS OBJECTION THE ASSESSEE HAS RAISED THRE E GROUNDS ON THE ISSUE WHICH WAS PARTLY CONFIRMED BY THE CIT(A). GRO UND NO. 1 IS WITH REFERENCE TO TREATMENT OF THE LEASEHOLD IMPROVEMENT S OF RS.45 30 383/- ON THE GROUND THAT THE SAID EXPENSES ARE ENDURING IN N ATURE AND THEREFORE SHOULD BE TREATED AS CAPITAL IN NATURE. GROUND NO. 2 IS WITHOUT PREJUDICE TO GROUND NO. 1 THAT IN THE EVENT OF THE SAID EXPENSES ARE TREATED TO BE CAPITAL THE ASSESSEES PRAY FOR DEPRECIATION BE GRANTED. GR OUND NO. 3 PERTAINS TO NOT GRANTING DEPRECIATION ON CAPITAL EXPENDITURE OF RS.4 58 400/- WHICH WAS ACCEPTED BY THE ASSESSEE BEFORE THE CIT(A). ALL THE ABOVE GROUNDS ARE INTERLINKED AND PERTAINING TO THE SAME ISSUE OF TRE ATMENT OF LEASEHOLD IMPROVEMENT EXPENSES. THE ASSESSEE CLAIMED A TOTAL OF RS.49 88 784/- AS REVENUE EXPENDITURE. THE A.O. AFTER EXAMINATION OF THE AMOUNT HELD THAT THE EXPENDITURE WAS INCURRED FOR CREATING SPECIAL I NFRASTRUCTURE CONSISTING OF REPLACING OF FLOOR WALL PLASTERS FALSE CEILING PATTERN BY WOOD/GLASS WOOD FURNITURE ETC. IN ORDER TO CREATE NEW OFFICE PREMI SES AS PER THEIR BUSINESS/ BANKING NEEDS. LEASE IMPROVEMENT HAS BEEN DONE WITH THE GUIDANCE OF INTERIOR DESIGNER AND ACCORDINGLY HUGE EXPENDITURE HAS BEEN INCURRED WHICH WAS CAPITAL EXPENDITURE. HE TREATED THE ENTIRE AMOU NT AS CAPITAL IN NATURE AND DISALLOWED THE SAME. THE CIT(A) AFTER PERUSAL OF THE LEDGER ACCOUNTS AND SUBMISSIONS OF THE ASSESSEE CONFIRMED AN AMOUN T OF RS.4 58 400/- ACCEPTED BY THE ASSESSEE AS INCURRED FOR PURCHASE O F CAPITAL ASSETS. WITH REFERENCE TO THE BALANCE AMOUNT OF RS.45 30 383/- THE CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSIONS HAVE CONFIR MED THE DISALLOWANCE HOLDING AS UNDER: - 4.3 I HAVE CAREFULLY CONSIDERED THE ISSUE. THE ISS UE OF REVENUE VS. CAPITAL EXPENDITURE HAS BEEN ONE OF THE MAJOR AREA OF DISPUTE UNDER THE ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 10 INCOME TAX ACT. THE BASIC QUESTION ANSWERED IN ALL THE JUDICIAL PRONOUNCEMENTS HAS BEEN WHETHER THE EXPENSES INCURR ED HAVE RESULTED IN ADVANTAGES ACCRUING IN THE CAPITAL FIELD OR NOT. THE CONCEPT OF BENEFIT OF ENDURING NATURE IS ALSO SUBSUMED IN THIS TEST. I T WILL BE INCORRECT TO HOLD THAT EVERY EXPENDITURE MADE IN A LEASED PREMIS E WILL BE REVENUE IN NATURE MERELY BECAUSE THE LEASE PERIOD WILL EXPIRE SOON AND THE BENEFIT WILL NOT ACCRUE TO THE LESSEE IN THE LONG RUN. IF T HE EXPENSES HAVE RESULTED IN SUBSTANTIALLY ALTERING THE STRUCTURE TH EREBY GETTING AN ADVANTAGE IN THE CAPITAL FIELD THE SAID EXPENSES W ILL DEFINITELY BE CAPITAL IN NATURE. THE APPELLANT COMPANY THEMSELVES HAVE AD MITTED THAT THE EXPENDITURE ARE IN THE NATURE OF CIVIL ELECTRICAL RENOVATION AND ALLIED WORK AIR-CONDITIONING AND FURNISHING WORK. THIS DE FINITELY HAS THE EFFECT OF GIVING THE APPELLANT A BENEFIT OF ENDURING NATUR E. WHILE VALUING THE CREATION OF AN ASSET ON THE TEST OF ENDURANCE THE CONCEPT OF ENDURANCE IS NOT MEANT FOR ETERNITY. WHEN THE APPELLANT HAS TAKE N A PREMISE ON LEASE AND MADE EXTENSIVE RENOVATION THERETO AND HAS BROUG HT OUT THE STRUCTURAL CHANGES IT HAS DEFINITELY BROUGHT ENDUR ING BENEFIT TO THE APPELLANT. AIR-CONDITIONING AND FURNISHING FALL IN THE REALM OF CAPITAL EXPENDITURE. JUDICIAL PRONOUNCEMENTS CITED BY THE A PPELLANT DO NOT EXACTLY APPLY TO THE FACTS OF THE CASE. WHAT HAS BE EN PERMITTED TO BE CLASSIFIED AS REVENUE EXPENDITURE IS REPAIRS OF THE BUILDING BELONGING TO THE OWNERS AND NOT THE RENOVATION. PREMISES CAN BE REDESIGNED AND BETTER FITTINGS CAN BE PROVIDED. BUT IN THE CASE OF THE APPELLANT STRUCTURAL RENOVATION AIR-CONDITIONING AND FURNISH INGS HAVE BEEN DONE MUCH OF WHICH CAN BE REMOVED AND RELOCATED. EVEN TH E PARTS WHICH HAVE BEEN FITTED TO THE STRUCTURE CANNOT BE SAID TO HAVE NOT GIVEN THE APPELLANT AN ADVANTAGE OF ENDURING NATURE. WHAT IS PERMITTED TO BE CLAIMED AS REVENUE EXPENDITURE U/S. 30(A)(1) IS THE AMOUNT SPE NT ON REPAIRS TO THE RENTED PREMISES. THE EXPLANATION TO THE SAID SECTIO N ITSELF SAYS THAT THE COST OF REPAIRS ALLOWABLE WILL NOT INCLUDE ANY EXPE NDITURE IN THE NATURE OF CAPITAL EXPENDITURE. THE CLAIM OF THE APPELLANT THEREFORE THAT THE EXPENSES ARE REVENUE IN NATURE IS INCORRECT. THE A. O.S ACTION IN HOLDING THE EXPENSES AS CAPITAL IN NATURE IS THERE FORE UPHELD. THIS GROUND OF APPEAL IS ACCORDINGLY DISMISSED. 15. IT WAS THE SUBMISSION OF THE LEARNED COUNSEL THAT T HE ASSESSEE HAS INCURRED VARIOUS WORKS OF RENOVATION OF THE OFFICE PREMISES PLUMBING FALSE CEILING INTERIOR DESIGNING INCLUDING SUPERVI SION AND LAYING OF CARPETS NETWORKING OF SYSTEM COUNTER STORAGE AND PAINTING ON THE PREMISES LEASED AT DELHI OFFICE. IT WAS SUBMITTED T HAT THE EXPENSES ARE ALLOWABLE UNDER SECTION 30(A)(I) AND RELIED ON THE JUDGEMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF INSTALLMENT SUPPLY (P.) LTD. VS. CIT 149 ITR 52 WHEREIN IT WAS HELD THAT THE EXPENDITURE ON REPAIRS OF THE BUILDING WHICH ULTIMATELY BELONGING TO THE OWNER AND NOT TO THE ASSESSEE SHOULD NOT BE SAID TO BE IN CAPITAL NATURE. FURTHER RELIAN CE WAS ALSO PLACED ON ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 11 CIT VS. REX TALKIES 158 ITR 560 (KAR) WHEREIN IT WA S HELD THAT AMOUNT SPENT ON REPAIR OF CEILING AND REPAIRS TO FURNITURE THEATRE AS TENANT WAS REVENUE IN NATURE. RELIANCE IS ALSO PLACED OH THE D ECISION OF B&A PLANTATION AND INDS. LTD. VS. CIT 242 ITR 22 (GAU) AND THE PRINCIPLES ESTABLISHED BY THE HON'BLE SUPREME COURT IN THE CAS E OF EMPIRE JUTE COMPANY LIMITED LTD. CIT 124 ITR 1. HE ALSO RELIED ON THE FOLLOWING DECISIONS FOR VARIOUS NATURE OF EXPENDITURE INVOLVE D: - I) CIT VS. HARIDAS BHAGATH & CO. 240 ITR 169 (MAD) II) CIT VS. HARI VIGNESH MOTORS P. LTD. 282 ITR 338 (MA D) III) CIT VS. HEDE CONSULTANCY PVT. LTD. 258 ITR 380 (BOM ) IV) CIT VS. SANCO TRANS LTD. 284 ITR 51 (MAD) V) DIGITAL EQUIPMENT INDIA LTD. VS. CIT 103 TTJ 329 (B ANG) VI) CIT VS. ESCORTS FINANCE LTD. 205 CTR 574 (DEL) VII) REGAL THEATRE VS. CIT 59 ITR 449 (P&H) 16. THE LEARNED D.R. HOWEVER RELIED ON THE ORDER OF T HE CIT(A). 17. WE HAVE CONSIDERED THE ISSUE. THE DETAILS OF THE EX PENDITURE INCURRED BY THE ASSESSEE ARE AS UNDER: - I) DECORATOR RS. 3 24 000/- II) PURCHASE OF UPS AND RECEPTION CHAIR RS. 2 85 000/- III) PURCHASE OF SOFA SET RS. 9 000/- IV) RENOVATION OF THE FIRST FLOOR RS. 3 10 000/- V) FIXED ASSETS RS. 6 72 649/- VI) STRUCTURAL CHANGE/OTHER WORK RS. 6 72 000/- VII) PAID TO ARCHITECT FOR SHIFTING OF TOILET WALL S ETC. RS. 44 032/- VIII) RENOVATION OF FIRST FLOOR RS. 1 50 706/- IX) ELECTRIC FITTINGS RS.11 14 993/- X) ANOTHER RENOVATION OF FIRST FLOOR RS. 6 11 40 2/- 18. THE ENTIRE EXPENDITURE WAS SPENT ON THE LEASED PREM ISES FOR ESTABLISHING A NEW OFFICE AS PER THE BUSINESS NEEDS . THE ASSESSEE IS ALREADY IN THE BUSINESS AND TAKEN A NEW PREMISES AND RENOVA TED IT FOR MAKING IT FIT FOR OCCUPATION. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ESCORTS FINANCE LTD. 155 TAXMAN 559 HAS HELD THAT THE AMOUN T SPENT ON PROVIDING WOODEN PARTITION ON LEASED PREMISES FOR CARRYING OU T REPAIRS SO AS TO MAKE ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 12 THE PREMISES WORKABLE CANNOT BE CONSIDERED AS CAPIT AL EXPENDITURE. AS SEEN FROM THE NATURE OF WORKS UNDERTAKEN THEY ARE ONLY RENOVATION/REPAIR WORKS AND NO NEW ASSET HAS COME INTO EXISTENCE. THE NEW ASSETS WHICH ARE PURCHASED LIKE SOFA SETS UPS THE EXPENDITURE OF R S.4 58 400/- HAVE ALREADY BEEN CAPITALISED AND ACCEPTED BY THE ASSESS EE IN THE ASSESSMENT PROCEEDINGS. OUT OF THE ABOVE AMOUNTS NOW CONSIDERE D AS CAPITAL BY THE CIT(A) THE MAJOR PART OF THE AMOUNT IS FOR FEES FOR SUPERVISING THE WORK OF ABOUT 16 00 000/-. HOWEVER THE OTHER EXPENDITURE I NCLUDES RENOVATION INCLUDING A.C. INSTALLATION WORK AT DELHI OFFICE. T HE NATURE OF THE RENOVATION INCLUDING INSTALLATION OF A.C. HAS NOT B EEN FURNISHED OR EXAMINED IN DETAIL. WHILE ACCEPTING THAT THE ENTIRE EXPENDITURE CANNOT BE CAPITAL EXPENDITURE THE A.O. IS DIRECTED TO EXAMIN E THE DETAILS ONCE AGAIN AND VERIFY WHETHER ANY NEW ASSET HAS COME INTO EXIS TENCE OR ONLY LEASED PREMISES WERE MADE FIT FOR OPERATION AS NEW OFFICE THEREOF. WHILE CONSIDERING THE EXPENDITURE THE A.O. IS ALSO DIRECT ED TO KEEP THE PRINCIPLES ESTABLISHED VARIOUS JUDICIAL AUTHORITIES RELIED UPO N BY THE ASSESSEE FOR DETERMINING THE NATURE OF EXPENDITURE. IF ANY OF TH E EXPENDITURE IS CONSIDERED CAPITAL AND A NEW ASSET HAS BEEN ACQUIRE D OR PURCHASED THE A.O. IS DIRECTED TO ALLOW DEPRECIATION AS APPLICABL E TO THAT EXTENT. ACCORDINGLY GROUNDS 1 & 2 ARE RESTORED TO THE A.O. FOR DETAILED EXAMINATION OF THE EXPENDITURE INVOLVED OF RS.45 30 383/- AND D ECIDING THE ISSUE AFRESH AND GROUND NO. 3 IS ALLOWED WITH THE DIRECTION TO T HE AO TO ALLOW DEPRECIATION AS PER RULES ON THE AMOUNT OF RS.4 58 400/- ACCEPTED AS CAPITAL EXPENDITURE BY THE ASSESSEE. 19. IN THE RESULT APPEAL IS PARTLY ALLOWED AND CO IS A LLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MARCH 2010. SD/- SD/- (R.K. GUPTA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 18 TH MARCH 2010 ITA NO. 3325 & CO NO. 243/MUM/2009 M/S. RABO INDIA FINANCE PVT. LTD. 13 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXI MUMBAI 4. THE CIT XXI MUMBAI CITY 5. THE DR D BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.