Reversal of Previously Disallowed Securitisation Provisions Cannot Be Taxed Upon Being Written Back

ORDER

Bijayananda Pruseth, Accountant Member. – These two appeals filed by assessee and revenue emanates from the orders passed under section 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the learned Commissioner of Income-Tax, National Faceless Appeal Centre [in short, ‘CIT(A)’], Delhi, dated 12.07.2025 and 15.07.2025 for the assessment years (AY) 2013-14 and 2014-15 respectively. Since the issues in all appeals are similar, with consent of both parties, the appeals were clubbed, heard together and are disposed of by a common order for the sake of convenience and brevity. ITA No.6003/Mum/2025 (AY:2014-15) is taken as the lead case.

2. The grounds of appeal raised by the assessee in ITA No.5545/Mum/2025 (AY: 2013-14) are as under:

1. On the facts and in the circumstances of the case and in law, the notice dated March 27, 2021 issued under section 148 of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) is without jurisdiction, as there was no reason to believe that any income had escaped assessment and the proceedings under section 147 of the Act are void-ab-initio.

2. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as the (‘Ld. CIT(A)’) erred in upholding the reopening of the assessment made by the Ld. Assessing officer (hereinafter referred to as the ‘Ld. AO’), on the basis of revenue audit objection, which is impermissible in law The Ld. CIT(A) also erred in holding that the Ld. AO reasons record independent analysis and conclusion.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the Appellant was granted an opportunity of submitting response to the show cause notice (providing draft assessment order, proposing for unwarranted additions) and the principal of natural justice has not been violated, thereby the relevant order is not bad in law.

4. Without prejudice to the above grounds, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) and the Ld. AO erred in bringing to tax the reversal of Provision for Estimated loss on securitization of Rs. 28,32,96,732, without appreciating that the provision of equivalent amount was made on such item in AY 200910, which was disallowed while computing the total income in AY 2009-10 and it has led to double taxation of same amount.

5. On the facts and circumstances of the case in law, the Ld. CIT(A) and the Ld. AO erred in bringing to tax the reversal of Provision for Estimated expenses on securitization of Rs. 3,54,03,094, without appreciating that the provision of equivalent amount was made on such item in AY 2009-10, which was disallowed while computing the total income in AY 2009-10 and it has led to double taxation of same amount.

3. The grounds of appeal raised by the revenue in ITA No.6003/Mum/2025 (AY:2013-14) are as under:

4. Fact of the case in brief are that the assessee is a registered NBFC and is engaged in providing financial services. It filed the return of income for AY 201415 on 28.11.2014 declaring total income at Rs.1591,93,11,090/-. Assessment order u/s 143(3) was passed on 29.12.2017 assessing the total income at Rs.1592,62,80,540/-. Subsequently, the AO noticed that the assessee had made certain provisions on account of estimated loss on securitisation and estimated expenses on securitisation. Accordingly, the case was reopened u/s 147 and notice u/s 148 of the Act. In response, assessee filed return with income of Rs.1592,62,80,540/- on 28.04.2021. The assessee had claimed deduction on account of estimated expenses on securitisation (provision) of Rs.4,88,91,020/-and estimated loss on securitisation (provision) of Rs.37,00,73,197/- in the computation of taxable income, which had been allowed in the assessment order. The above amounts were mere provisions and could not be allowed as business expenditure u/s 37 of the Act. Therefore, the case was reopened and notice u/s 148 of the Act was issued after obtaining approval from the PCIT u/s 151 of the Act. The assessee replied that it had reversed the above amounts and the provisions made earlier were disallowed in the computation of income. It submitted that reopening is based on audit objection, which is not permissible. The reply of the assessee has been reproduced by the AO at pages 3 to 10 of the assessment order. The assessee also filed reply in response to the show cause notice enclosing the draft assessment order, wherein the impugned additions were proposed to be made. The reply is at page 11 to 13 of the assessment order. The assessee contended that the impugned provisions had been disallowed while computing the total income in the year when the provisions were made. Consequently, the reversal of the provisions has been reduced in the computation of income. The provisions for loss of securitisation was created in AYs 2009-10 and 2010-11, which was reversed in the subject AY 2014-15. A historical rate of 2.96% and 4.46% were arrived at based on the past experience, which rates were applied on the monthly cash flows that is expected from the tenure of the deal. The estimated expenses that would be incurred while recovering the loan amount was also computed based on historical rate per contract per month and, accordingly, the provision was made. The AO did not accept the contention of the assessee on the ground that no vouchers etc. of the earlier year expenses have been brought on record to indicate the nature of the expenditure, the persons to whom the expenses were paid, etc. The AO also stated that the appellant had provided for much more than the income actually offered from the provisions made in AYs 2013-14, 2014-15 and 2015-16. Accordingly, he added Rs.4,88,91,020/- and Rs.37,00,73,197/- to the total income of the assessee.

5. Aggrieved by the order of AO, assessee preferred appeal before the CIT(A). The appellant challenged the validity of the reopening as well as merits of the addition on account of reversal of provisions. The CIT(A) dismissed the ground on validity of the reopening by observing that the reasons recorded indicate that the AO noted a prima facie escapement of income based on book entries and comparison with prior years’ treatment. He held that the reopening satisfies the threshold of section 147 of the Act. Hence, the ground was dismissed.

6. Regarding reversal of provisions brought to tax u/s 37 of the Act, the CIT(A) has discussed the submission of the assessee under different heads i.e. “Assessee’s Explanation and Position, Documentary Evidence Submitted, Position in Earlier Computations, Legal Analysis and Judicial Support and Conclusion and Decision.” The CIT(A) finally allowed the ground of appeal by observing that the amounts reversed during the year under appeal correspond to provisions that were previously disallowed and subjected to tax in earlier years. Bringing these amounts to tax again would result in double taxation, which is contrary to the scheme and intent of the Act. The AO’s reasoning does not find support either in facts or in law.

7. Aggrieved by the order of CIT(A), the revenue has filed appeal before the Tribunal. Both grounds are related and hence taken up together. The Ld. CIT(A) has relied on the order of the AO. He submitted that the CIT(A) himself has confirmed the additions made in AYs 2013-14 and 2015-16 on similar issue. Hence, there was no need to take different view in AY 2014-15.

8. On the other hand, the Ld. AR of the assessee has supported the order of the CIT(A). He has filed a paper book of 133 pages including audited financial statements, computation of income for AYs 2009-10 and 2010-11, ledger extract of estimated loss on securitisation in AYs 2009-10 and 2010-11, ledger extract of reversal of estimated loss on securitisation in AY 2014-15, ledger extracts for the estimated expenses of securitisation of AY 2009-10 and reversal of the same in AY 2014-15. He submitted that in securitisation, the assessee sells a package of loan receivables to the Investors or banks for immediate cash consideration and the loans are de-recognised in the books of account. Tenure of securitisation matches with cash flows pertaining to underlying loan contracts, which ranges between 48 months to 54 months. At the time of entering a securitisation deal, the appellant estimates the loss that could occur if there is default from the customers and the expenses (like, postage & Courier, Printing, Telephone, etc.) that could be incurred for recovery of such loans. Such estimations made are reduced from the head “income from assignment/securitization transactions” credited to the profit and loss account. Thereafter, in the year of maturity, the said estimations made are written back and credited to the profit & loss account, since the provisions are no more required.

9. The Ld. AR further submitted that for income tax purposes, the provisions made for loss and expenses are disallowed in the initial year i.e., in this case, AYs 2009-10 and 2010-11. Consequentially, the reversal of such provisions is reduced while computing the total income in the year of maturity, i.e. AY 2014-15. During the AY 2009-10, the assessee had entered securitisation transactions with ICICI Bank Ltd. In this year, the assessee had made following provisions: (i) Provision for estimated loss on securitisation of Rs.16,20,03,359. This provision was made by considering the historical rate of 2.96%, which was arrived at based on the data of bad debts or loss that would occur on the loan assets for the last 3 years; and (ii) Provision for estimated expenses on securitisation of Rs.2,52,58,213. This provision was made by considering the historical rate of Rs.45.54 per contract per month. Similarly, during the AY 2010-11, the assessee had entered securitisation transactions with HDFC Bank Ltd. and J&K Bank Ltd. In this year, the assessee had made following (i) provision for estimated loss on securitisation of Rs.20,80,69,838/- and provision for estimated expenses on securitisation of Rs.2,36,32,807/-. These provisions were made by considering the historical rate of 4.46% and Rs.51.94 per contract per month respectively.

10. Thereafter, in the impugned AY 2014-15, when the said deals got matured, the provisions made were reversed in the books of account. Accordingly, since the same were credited to the profit & loss account, the said amount were reduced while computing total income. The Ld. AR submitted that the deal wise details for loss and expenses on securitisation were submitted before the CIT(A), copies which are enclosed at pages 127 to 130 of the paper book. Regarding the AO’s observation that the assessee has provided for much more than the income actually offered for the provisions made in AY 2013-14, AY 2014-15 and AY 2015-16, the Ld. AR submitted that the reversal is specific to a securitization deal and only the corresponding provisions, is to be considered. In this case, securitization transactions were in relation to three deals namely ST 27, 29 and 30 and hence, there is no mismatch in the claim of the assessee. He further submitted that the amounts pertaining to AY 2013-14 and AY 2015-16 relate to altogether different deals and are not relevant for deciding the issue in AY 2014-15.

11. We have heard both parties and perused the materials on record. The assessee is a registered NBFC and is engaged in providing financial services. We have also carefully perused the audited financial statements and computation of income of AYs 2009-10, 2010-11 and 2014-15. The assessee gives loan to various customers and the loan receivables are sold to various banks for cash consideration and the loans are derecognized in the books of the assessee. The tenure of securitisation matches with cash flow of the relevant loan contract. The appellant estimates the loss which may occur if there is default from the customer and the expenses that could be incurred for recovery of such loans. The assessee has made the provisions for the estimated loss on securitisation and expenses based on historical rates. The said provisions were disallowed in the year of making the provisions, i.e. AYs 2009-10 and 2010-11. In the instant case, upon maturity of the loans, the estimations were written back and credited to profit and loss accounts. Since the provisions for loss and expenses had been disallowed in the initial AYs 2009-10 and 2010-11, the reversal of such provisions were reduced while computing the total income in AY 2014-15. Hence, the same was not liable to be disallowed. The CIT(A) has rightly allowed the ground in this regard. The relevant part of the order of CIT(A) is reproduced below for ready reference and clarity:

The assessee submitted that both these provisions had been created in earlier years and were fully disallowed while computing the total income for those years. Specifically, the provision for estimated loss was created and disallowed in assessment years 2009-10 and 2010- 11. Likewise, the provision for estimated expenses was also disallowed in the year of creation. Accordingly, the reversal of these very provisions in assessment year 2014-15 cannot be treated as income, since the amounts had already been subjected to tax in earlier years and no deduction had been allowed.

TAX DEP The assessee furnished documentary evidence to support its contention that the reversals recorded in the books during the year under appeal directly correspond to provisions created and disallowed in earlier years. The reversal of provision for estimated loss on securitisation, amounting to Rs. 37 crores, was supported by detailed ledger entries and voucher records which matched the original provisions created in assessment years 2009-10 and 2010-11 These records included the transaction dates, reference numbers, and exact amounts, allowing for a clear one to one correlation between the original disallowance and subsequent reversal. Likewise, the reversal of estimated expenses on securitisation, amounting to Rs. 4.88 crores, was similarly documented and matched to prior disallowances. The assessee also submitted computation statements for the earlier years in which these provisions were voluntarily added back to the taxable income, thereby establishing that the reversals in the current year do not result in any fresh claim of deduction or tax advantage.

The computation of income for assessment years 2009-10 and 2010-11 clearly shows that the assessee had added back the amounts of estimated loss and estimated expenses on securitisation while arriving at the taxable income. These disallowances were made voluntarily by the assessee and accepted in the assessments for those years. The amounts were never allowed as deductions, and therefore their reversal in assessment year 2014-15 has no bearing on the computation of income. The treatment adopted in the current year is consistent with the tax position taken in earlier years and reflects the proper accounting and tax principle that only real income should be taxed.

It is a settled legal position that income must be taxed on the basis of real accrual and not merely due to book entries. Where a provision has already been disallowed in earlier years and has not resulted in a tax deduction, its reversal does not create any income. The Honorable Supreme Court in the case of FAX DEPAR Apollo Tyres Limited versus Commissioner of Income Tax 2002 255 ITR 273 held that book entries cannot override the provisions of the Act and that real income must be determined based on actual tax treatment. The Court emphasized that accounting policies followed in financial statements do not by themselves determine taxability unless they result in a deduction or benefit under the Act.

Further, the Honourable Bombay High Court in Principal Commissioner of Income Tax versus Mahindra and Mahindra Limited 2018 404 ITR 1 held that an item which was never allowed as a deduction earlier cannot be brought to tax in the year of reversal simply because it appears as income in the books. The Court observed that taxation must follow legal substance over accounting form, and that mere book reversals without earlier tax benefit do not give rise to income.

These legal principles are directly applicable to the present case. The Assessing Officer has not established that the provisions now reversed were ever allowed in earlier years. On the contrary, the computation records confirm that they were disallowed and taxed when made. The assessee’s treatment is in accordance with both the law and consistent accounting practice.

In view of the facts, supporting documentation, and settled legal position, the addition of Rs. 41,89,64,217 made by the Assessing Officer under section 37 is found to be unjustified. The amounts reversed during the year under appeal correspond to provisions that were previously disallowed and subjected to tax in earlier years. Bringing these amounts to tax again would result in double taxation, which is contrary to the scheme and intent of the Act. The Assessing Officer’s reasoning does not find support either in facts or in law. Accordingly, the addition is deleted. This ground of appeal is allowed.

12. Since, the provisions for estimated loss on securitisation and estimated expenses were disallowed in the initial year i.e. AYs 2009-10 and 2010-11, the reversal of such provisions was rightly reduced while computing the total income of the assessee. We do not find any infirmity in the order of CIT(A), which we confirm. Accordingly, the grounds are dismissed.

13. In the result, the appeal of the assessee is dismissed.

14. Facts of the above appeal are similar to the facts of assessment year 201415 in ITA No.6003/Mum/2025. In both these years, the cases were reopened u/s 147 of the Act by issue of notice u/s 148 of the Act. After considering the submission of the assessee, the AO disallowed the provisions for estimated loss on securitisation and estimated expenses on securitisation which were credited to the profit and loss account but reduced while computing the total income. The CIT(A) has confirmed the addition though it was deleted in AY 2014-15. The issue has been discussed in detail in ITA No.6003/Mum/2025 (supra) and the appeal of the revenue has been dismissed. Following the reasons given therein, the ground Nos.4 and 5 raised by the assessee are allowed.

15. Since we have allowed the appeal on merit, the other grounds become academic in nature and do not require adjudication.

16. In the result, the appeal of the assessee is allowed.