Asirvad Micro Finance Limited Vs DCIT (ITAT Chennai)
Conclusion: Disallowance of ₹28,99,56,987/- towards finance costs on securitization transactions had no basis, as the interest income rightly belonged to the SPVs and not the assessee. Likewise, the addition of ₹1,61,82,000/- under section 69A read with section 115BBE was unjustified since the cash deposits in Specified Bank Notes represented genuine loan repayments from microfinance borrowers and could not be treated as unexplained.
Held: Assessee-NBFC was engaged in providing microfinance in rural areas under Reserve Bank of India regulations, filed its return of income for the Assessment Year 2017-18. 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 CIT (A) leading to the present appeal. Assessee-company 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, assessee 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 and in TASMAC it was concluded that: “once the receipt of specified bank notes by assessee was not illegal or barred by any legal provisions, the receipt of specified bank notes could not 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 were same as the source of other currency.” Revenue supported the orders of the lower authorities, and argued that 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 assessee’s declaration under the Pradhan Mantri Garib Kalyan Yojana scheme (PMGKY) indicated acceptance of violations. It was held that AO and CIT(A) appeared to have mischaracterized the securitization adjustment. Assessee had transferred receivables; ownership vested with SPVs; assessee merely serviced the loans for a fee. 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, 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.
