Maharashtra State Financial ... vs Assessee

This appeal has been preferred by the Assessee, against order dated 09.01.2013, passed by Ld. CIT(A)-7, Mumbai for the quantum of assessment passed u/s 143(3) for the A.Y. 2008-09.

2. The sole ground raised by the assessee is that, Ld. CIT(A) has erred in law and on facts in confirming the addition on the amount received from the borrowers in One Time Settlement (OTS) amounting to Rs.5,61,41,000/-. On the last date of hearing i.e. on 14.08.2014, at the request of assessee, the case was adjourned on 18.02.2015 and both the parties were duly informed in the open court. However, on this date non appeared on behalf of the assessee nor any adjournment ITA No. 3629/Mum/2013 2 Assessment Year: 2008-09

application has been filed. Accordingly, we are proceeding to decide the appeal after hearing the Ld. DR.

3. Brief facts of the case are that the assessee is a State Government Corporation of Maharashtra, whose principal business is financing activities on short term and long term basis. During the course of the assessment proceedings, on the perusal of Clause 13 D to the Tax Audit Report, AO noted that assessee has received sum of Rs.5,67,41,000/- from borrowers towards OTS and the same was not credited to the P&L account. In response to the show cause notice, the assessee submitted as under:-

"In so far as your specific query regarding the amounts received from the borrowers towards One Time Settlement (OTS) we submit as under:-

a. The Corporation had introduced the OTS scheme for settlement of non-performing assets (NPA) accounts. b. Under the said scheme the borrower has to deposit a certain amount upfront with the application for OTS in terms of the scheme.

c. On receipt of upfront amount and the relevant documents, such application are placed for approval before the competent authority.

d. Further, some of the borrowers paid the amount on piecemeal basis on approval of the OTS.

e. The upfront amount receives as well as the amounts received on piecemeal basis are credited to as 'Suspense account' created for this purpose and shown under schedule 6-'Other Liabilities' of the statement of accounts. f. Majority of the OTS applications are for settlement of accounts which comprises mainly of principal outstanding amount. Hence despite following cash system of accounts, the amounts received do not partake the nature of income."

ITA No. 3629/Mum/2013 3 Assessment Year: 2008-09

However, the AO rejected the assessee's contention on the ground that receipt of money from borrowers towards OTS partakes the character of income. Further, the assessee is following cash system of accounting therefore, the assessee should have included the said money received from the customers as its income. Accordingly, he added the said sum to the total income of the assessee.

4. Before the Ld. CIT(A), the assessee after reiterating the same submission categorically brought on records that the majority of the OTS applications for the settlement of accounts mainly comprised of principal outstanding amount. The assessee has apportioned the interest portion and added it to the income of the corporation, however, the principal amount has been apportioned towards loan and advances of the assessee. Out of the said amount only the interest component is taxable and not the principal amount. The assessee's detailed submission has been incorporated by the Ld. CIT(A) at pages 3 and 4 of the appellate order. However, the Ld. CIT(A) without assigning any reason has confirmed the action of the AO in the following manner:-

"4.3 I have considered the AO's order as well as the appellant's submission. Having considered both, I find that there is no force in appellant's request. I am completely convinced with the AO's reasons given by the AO, in the order as categorically deliberated by the AO in para-4 of the assessment order, wherein the AO assigned his reasons for such disallowance. I am completely in agreement with the AO's findings and hence the additions so made is confirmed. Thus, this ground of appeal is dismissed."

5. After hearing the Ld. DR and also on the perusal of the impugned order, it is seen that assessee's main business is to provide short term and long term financing to various parties. The assessee had introduced OTS scheme for settlement of non-performing assets (NPA). Under the said scheme the borrower has to deposit certain amount of up front with ITA No. 3629/Mum/2013 4 Assessment Year: 2008-09

the application of OTS in the terms of the scheme which is to be approved by the competent authority of the corporation. The entire money received is credited to "suspense account" created for this purpose. The assessee has categorically apportioned the OTS amount into two parts, interest portion and principal payment, which has been appropriated towards loans and advances. The appropriation of interest component has been offered as income and the principal amount has been appropriated to loans and advances, because the same is not taxable. On these facts, we are unable to understand as to how the principal amount appropriated constitutes income of the assessee. In the case of financing, only the interest element partakes the character of the income and not the principal amount which is paid back by the borrower. Since this vital aspect has not been properly dealt or considered by the Ld. CIT(A), therefore, we are of the opinion that this matter should be restored back to the file of the Ld. CIT(A) to deal and decide the issue after considering the assessee's submission material placed on record and also in accordance with the provisions of law. While doing so the Ld. CIT(A) will provide due and effective opportunity of hearing to the assessee. Accordingly, the ground raised by the assessee is allowed for statistical purpose.

6. In the result, the appeal of the Assessee is allowed for statistical purposes.

Order pronounced in the open court on this 18th day of February, 2015.

Sd/- Sd/- (SANJAY ARORA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 18.02.2015 ITA No. 3629/Mum/2013 5 Assessment Year: 2008-09

*Srivastava Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "B" Bench

//True Copy// By Order

Dy/Asstt. Registrar, ITAT, Mumbai.