TMI Blog2005 (11) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... quired in units of US-64 issued by the Unit Trust of India as well as various Government and other notified bonds. The appellant claimed the statutory deduction allowable under section 36(1)( viii ) to a housing finance company upon the income earned on the house finance business, on dividend and interest earned on the above investments. This was on account of the fact that these investments were made exclusively on account of the requirements of law, governing the business of housing finance. 2.2 The Assessing Officer taking cue from the order passed by the CIT(A) in respect of appeals of the appellant relating to assessment years 1996-97 and 1997-98 against the prima facie adjustments made by the Assessing Officer while completing the assessment under the provisions of section 143(1)( a ) of the Income-tax Act, 1961, assessed the income relating to SLR investments of the appellant under the head Income from other sources and disallowed the statutory claim of the appellant under section 36(1)( viii ), the details of which is given below : Asst. year Gross income from Interest on Bonds Dividends Statutory deduction u/s. 36(1)( viii ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in S.L.R. securities form part and parcel of the very core housing finance activity of the appellant. 3.2 The investments in S.L.R. securities were made on account of the statutory provisions without which the appellant had to close his business. The "DIVIDENDS" received by the appellant were not the same as referred to in the provisions of section 56 and section 57 of the Income-tax Act, 1961. The provisions of section 2(28B), which refer/relate to interest on securities are applicable to the case of the appellant. The income earned by the appellant on the SLR securities are nothing but income earned from his housing finance business, as they are part and parcel of the business of the housing finance. The income earned from SLR investments are required to be assessed under the head Income from Housing Finance business only. The appellant is legally entitled to the claim of statutory deduction under section 36(1)( viii ) allowable to him against his income from housing finance business which includes income from his SLR investments. 3.3 Shri Balakrishna also relied upon the following decisions : 1. Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned funds of twenty-five lakh rupees or such higher amount, as the NATIONAL HOUSING BANK may by notification specify. (6)The NATIONAL HOUSING BANK may cancel a certificate of registration granted to a finance institution under this section if such institution : ( i )ceases to carry on the business of a housing finance institution in India; or ( ii )has failed to comply with any condition subject to which the certificate of registration had been issued to it; or ( iii )at any time fails to fulfil any of the conditions referred to in clauses ( a ) to ( g ) of sub-section (4); or ( iv )fails : ( a )to comply with any direction issued by the NATIONAL HOUSING BANK under the provisions of this chapter; or ( b )to maintain accounts in accordance with the requirement of any law or any direction or order issued by the NATIONAL HOUSING BANK under the provisions of this chapter; or ( c )to submit or offer for inspection its books of account and other relevant documents when so demanded by any inspecting authority of NATIONAL HOUSING BANK; or ( v )has been prohibited from accepting deposit by an order made by the NATIONAL HOUSING BANK under the provisions of this chapte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al companies. The business of finance is governed and controlled by the nodal agency RESERVE BANK OF INDIA and the business of housing finance company are governed by NHB, which is a wholly owned subsidiary of RESERVE BANK OF INDIA. What one has to look is whether the appellant can carry on the business of housing finance without making these investments in notified securities. The answer would be NO. In other words it is the act of investment and the resultant income namely dividends and interest from these securities are nothing but part and parcel of housing finance business, and hence entitled to the benefit of statutory deduction under section 36(1)( viii ). It is also necessary for us to consider and understand the relevant provision of section 36(1)( viii ). The provisions of section 36(1)( viii ) gives relief to a housing finance company only when he fulfills the following conditions : ( a )He must have been recognized by NATIONAL HOUSING BANK. ( b )He also must be recognized by CBDT for the purposes of section 36(1)( viii ). ( c )The assessee should create a reserve out of his profits from his housing finance business. ( d )The statutory deduction is limited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S 64) Statutory Deduction : Statutory Deduction : S. 80L : Refers to Statutory Deduction out of Gross Income. S. 80L : Refers to Statutory deduction out of gross income. For Dividends : S. 80L( iv ) For income from US 64 S. 80L( v ). By purchasing the units of UTI, the assessee is not becoming a shareholder of the Unit Trust of India. Unit Trust of India is a 100 per cent undertaking of Government of India and assessee is merely holding certain units of the mutual fund scheme called US 64 floated by Government. It is a different proposition that under the UTI Act itself, the income distributed is characterized as dividend and is also eligible for deduction under section 80L etc. However, the income declared by UTI cannot be considered as equivalent to dividend distributed by a company on the shares issued by it. Hon ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. ( supra ) held that the expression "attributable to" is having a wider import than the expression "derived from". Hon ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 held that to claim de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued by NHB under section 30A known as prudential norms came into force from 1st April, 1995. As per the said guidelines, the assessee changed its method of accounting from mercantile system to cash system of accounting in respect of income on loans classified as "non-performing assets" (NPA). According to the prudential norms prescribed by NHB, the income on such non-performing assets can be recognized only after such income is recei-ved by the housing finance company and not on the basis of mere accrual. 6.2 The Assessing Officer, while concluding the assessment, held that the income on non-performing assets are required to be accounted and to be assessed on mercantile basis. As per the amended provisions of section 145, the assessee cannot have a mixed system of accounting. Since the assessee is following mercantile system of accounting, the income on such non-performing assets is deemed to have accrued and accordingly chargeable to tax. For this purpose, the Assessing Officer relied upon the decision of Hon ble Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 . Learned CIT(A) relied on the amended section 43D, which extend the benefit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order. He submitted that as per section 145, the assessee can have only one of the two methods of accounting i.e., either cash or mercantile. With effect from assessment year 1997-98, the assessee cannot choose a mixed system of accounting. Since the assessee is undisputedly following mercantile system of accounting, the interest, though on non-performing assets, accrues and is accordingly, to be brought to tax. Since the income is arising from the same business of housing finance, cash system of accounting in respect of part of business is not permissible. The issue is covered in favour of revenue by the decision of Hon ble Supreme Court in the case of State Bank of Travancore ( supra ). 7. We have carefully considered the relevant facts and the arguments advanced. As per section 145 amended with effect from 1-4-1997, income chargeable under the head Profit and gains of business or profession is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. As per sub-section (2) of section 145, the Central Government may notify in the Official Gazette accounting standards to be followed by any class of assessees or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unpaid for 30 days beyond the due date. Interest on NPAs should not be booked as income if such interest has remained outstanding for more than six months on and from March 31, 1995. The basis of treating a credit facility as NPA should be as under : 1.1 Term loan beyond one year If interest amount remains past due for six months, a term loan is to be treated as NPA. Where the instalment is overdue for more than six months, the entire outstanding loan, inclusive of unpaid interest, if any, should also be treated as NPA. 1.2 Lease, rentals/hire purchase instalments Where lease rentals/hire purchase instalments are past due for six months, the entire dues from the lease/hire should be treated as NPA. 1.3 Bills purchased/discounted A bill is to be treated as NPA if it remains overdue and unpaid for six months. Overdue interest is not to be taken to income account. 1.4 Other credit facilities All other credit facilities in the nature of short-term loans/advances should be treated as NPA if any amount to be received in respect of such a facility remains apse due for a period of six months. 1.5 Accounting standards All accounting standards and guidance notes issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Thus, the RBI Act is applicable only to a special class of the assessees. Accordingly, the tax authorities were also not correct in coming to the conclusion that the Income-tax Act is a special Act and the RBI Act is a general Act as the position for the purpose of the issue at hand is vice versa. The RBI Act was incorporated for a specific purpose and section 45Q categorically brings out the intention of the Legislature inasmuch as it states that Chapter IIIB shall override for all intents and purposes. Anything inconsistent with any other Act for the time being in force or any instrument having effect by virtue of any such law shall fade into oblivion on account of that fact. Therefore, the additions made by the Assessing Officer disregarding the prudential norms were to be deleted". In a similar issue by ITAT, Hyderabad Bench in the case of TCI Finance Ltd. ( supra ), the head note reads as under : "Accounts-Rejection-Norms laid down by RBI in respect of non-performing assets-Assessee, a non-banking financial company, consistently following prudential norms prescribed by RBI in respect of income from non-performing assets and not returning such income on accrual basi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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