Taxing Corresponding Interest Income on Asset Transfer to SPVs on Assessee amounts to Double Taxation: ITAT [Read Order]
It also held that unexplained cash deposits in specified bank notes during demonetization were legitimate repayments by borrowers, not liable to addition under the Income Tax Act.
Double - taxation - taxscan
Double - taxation - taxscan
The Income Tax Appellate Tribunal ( ITAT ), Chennai Bench has deleted additions made under Section 69A of the Income Tax Act, 1961 on demonetization cash deposits, relying on Reserve Bank of India (RBI) guidelines and the precedent set in the TASMAC ruling. The Tribunal also allowed relief on disallowed securitization finance costs.
The appellant, Ashirvad Micro Finance Limited, a Non-Banking Finance Company engaged in providing microfinance in rural areas under Reserve Bank of India regulations, filed its return of income for the Assessment Year 2017-18.
The Assessing Officer (AO) made additions of ₹28.99 crore towards inadmissible finance costs on securitization transactions and ₹1.61 crore on account of cash deposits in specified bank notes during the demonetization period. These additions were confirmed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CITA(A)], leading to the present appeal.
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The appellant, represented by P.R. Prasanna Varma, F.C.A. and Mr. Arjun Rajagopalan, C.A., argued that the disallowance of finance costs was based on a misinterpretation of securitization agreements. It was submitted that under Reserve Bank of India regulations, the company had transferred illiquid assets to five Special Purpose Vehicles (SPVs). Interest collected on behalf of SPVs was shown in financials for monitoring purposes but reduced as finance costs in line with regulatory compliance.
Regarding cash deposits, the appellant maintained that collections were from rural microfinance borrowers during demonetization and cited that specified bank notes lost their legal tender status only on 31 December 2016.
The ITAT Chennai ruling in TASMAC was relied upon: “once the receipt of specified bank notes by assessee is not illegal or barred by any legal provisions, the receipt of specified bank notes cannot be put on a different footing for the purpose of Section 68 or Section 69 of the Act from other currency as the source of specified bank notes are same as the source of other currency.”
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The Revenue, represented by Mr. Bipin C.N., CIT, supported the orders of the lower authorities, and argued that the assessee had attempted to suppress income by claiming inadmissible finance costs and that deposits in specified bank notes were unauthorized after 08 November 2016. It was further contended that the assessee’s declaration under the Pradhan Mantri Garib Kalyan Yojana scheme (PMGKY) indicated acceptance of violations.
The Bench comprising of Vice President, George George K. and Accountant Member, Amitabh Shukla, found merit in the appellant’s submissions. The Tribunal held that interest income rightfully belonged to SPVs, and taxing it in the assessee’s hands would result in double taxation. The addition of ₹28.99 crore was therefore deleted.
On the issue of cash deposits, the Tribunal, relying on the TASMAC precedent, held that specified bank notes could not be treated as unexplained merely because of demonetization, as their receipt was not illegal prior to 31 December 2016. Accordingly, the addition of ₹1.61 crore under Section 69A was also deleted.
The appeal of Ashirvad Micro Finance Limited was thus allowed.
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