By TIOL News Service

AHMEDABAD, SEPT 01, 2016: THE issue is - Whether if an assessee is obliged to act as receiving and paying agent for effecting recoveries from the individual borrowers, income can be brought to tax only when it accrues and the accrual takes place only in the year in which the amounts recovered from the borrowers are in excess of the amount payable to the buyers of loan portfolio. YES is the verdict.

Facts of the case

The assessee is engaged in advancing various loans to its customers on which various amounts of EMIs comprising of principal amount and interest amount were recovered from the clients and the interest amount was shown as income. AO noticed that the assessee had sold its portfolio of individual home loans but the assessee was obliged to act as receiving and paying agent for effecting recoveries from the individual borrowers until the point of time when all these loans were fully recovered. Under this agreement, the assessee was entitled to retain interest in excess of the agreed rate of interest recovered from the borrowers. Thus, assessee computed the surplus of Rs.935.42 lakhs being the difference between EMI recoverable from the borrowers during the remaining loan tenure and the amount payable by the assessee to the buyers of the assessee's home loan portfolio. This represented what was termed as EMI residual. Out of the above amount, the assessee set aside a sum of Rs.428.13 lakhs on account of contingency of pre-payments and the balance amount of Rs.507.29 lakhs was transferred to the profit and loss account. In the computation of income, the assessee reduced this amount from the net profit. This computation was on the basis of income actually earned so far as interest differential was concerned. AO held that the entire difference between the recovery value of housing loans and the amount payable to the buyer of loan portfolio should be brought to tax in the year itself. He also held that even the amount of contingency set aside by the assessee of Rs.428.13 lakhs could not be allowed as it was only a contingent and not a real liability. He, therefore, proceeded to bring to tax the balance amount of Rs.803.40 lakhs (i.e. EMI residual of Rs.935.42 lakhs minus the amount already offered to tax amounting to Rs.132.02 lakhs) in the AY. On appeal, CIT(A) deleted the addition on the ground that the income was to be brought to tax only when it accrues and the accrual takes place only in the year in which the amounts recovered from the borrowers are in excess of the amount payable to the buyers of loan portfolio. It was also noticed that the EMI residual income had been subsequently brought to tax in the year in which related recoveries had taken place. On further appeal, Tribunal also confirmed the order of CIT(A).

Held that,

++ the Tribunal has found that whatever be the certainty of the assessee realizing the profits in future as a result of the said arrangement, these profits can only be brought to tax when they actually accrue or arise and that stage comes only when the recoveries are made from the individual borrowers. The Tribunal noted that it was not in dispute in the light of the categorical finding recorded by the CIT (A) that the related incomes were brought to tax in the subsequent period when such income accrued and arose. The Tribunal, accordingly, did not find any reason to interfere with the order passed by the CIT(A). The assessee had sold during the year a portfolio of individual home loans aggregating Rs.8109.09 lakhs by way of stock-in-trade on the date of transfer, which represented the principal value only of the loan portfolios of various persons for which the assessee was entitled to earn income by way of services with reference to the differential rate of interest as per the specific agreements with the beneficiaries. The above amount of Rs.8109.09 lakhs did not have any profit element during the corresponding financial year 2000-01. However, in the light of the agreement with the beneficiaries, the assessee was entitled to retain the differential amount of interest recovered from the borrowers in excess of the agreed rate of interest. Evidently, therefore, the differential amount (residual EMI) would accrue to the assessee only as and when such interest amount in excess of the agreed amount was recovered by it. Such amount would, therefore, be taxable in the year in which the same had accrued to the assessee. It is an admitted position that the EMI residual income had subsequently been brought to tax in the year in which the related recoveries were made. In these circumstances, the view taken by the Tribunal does not suffer from any legal infirmity, warranting interference. The appeals, therefore, fail and are accordingly summarily dismissed.

(See 2016-TIOL-1932-HC-AHM-IT )