IIFL Finance sinks 15% after tax audit order; founder calls it 'procedural'

Shares of IIFL Finance slid as much as 15% on Thursday, January 22, after the company disclosed that it had received a communication from the Income Tax Department along with its quarterly earnings announcement.

The company said the tax authorities have directed it to conduct a special audit of its accounts for a specified block period under Section 142(2A) of the Income Tax Act, 1961, and have appointed a special auditor for the exercise.

Addressing concerns over the development, IIFL Group Founder Nirmal Jain said the issue stemmed from a “complete misunderstanding” and was largely procedural in nature. He explained that Section 142(2A) is typically invoked for complex accounts, adding that IIFL’s gold loan business, which services over 6.5 million customers, naturally warrants closer scrutiny.

Jain said a block assessment following a search is standard practice, that reassessments for the period have already been completed, and that around ₹1.2-1.3 crore in tax has been paid. “There is nothing unusual about it,” he said, noting that a chartered accountant firm has been appointed and given 60 days to submit its report.

Operationally, the company reported a sharp expansion in its gold loan business during the December quarter, with gold loans surging 189% year-on-year and rising 26% sequentially.

Net profit for the quarter jumped to ₹484 crore from ₹41 crore a year earlier, while revenue rose 40% year-on-year to ₹3,427.5 crore.

Below is the excerpt of the interview.

Q: The quarterly numbers look good, but there is this IT department issue. Could you explain?

Jain: I think there is a complete misunderstanding. Section 142(A) is for complex accounts. In our case, when the gold loan business has more than 6.5 million customers, obviously that requires scrutiny, and this is very procedural. Whenever there is a search, they do a block assessment for six years. So, there is nothing unusual about it. In terms of the block assessment period, we have done the reassessment, and about ₹1.2–1.3 crore of tax has been paid. Other than that, anything else is speculation. If you read Section 142(A), it talks about accounts for inventory valuation which are complex. When the department is not able to do it with its own resources, they can appoint a chartered accountant as a special auditor. A CA firm has been appointed and has been given a mandate of 60 days to submit the report.