TMI Blog2016 (7) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... profits in future as a result of this arrangement, these profits can only be brought to tax when these actually accrue and arise and that stage comes only when the recoveries are made from the individual borrowers. It is also not in dispute, in the light of the categorical finding given by the CIT(A), that the related incomes are brought to tax in subsequent period when these income accrue and arise. As for the reference to Hon’ble Supreme Court’s judgment in the case of CIT Vs Shiv Prakash Janak Raj & Co Pvt Ltd [1996 (9) TMI 5 - SUPREME Court ], that was a case in which accrual had admittedly taken place. That is not the situation before us. In these circumstances, we see no infirmity in the well reasoned conclusion arrived at by the CIT(A) in deleting the addition - Decided in favour of assessee. Disallowance of deduction under section 36(1)(viii) - Held that:- Perusal of section along with clause (e) no where reveals that the assessee is bound to maintain the account for five years, otherwise the Legislature would provide the deduction after completion of 5 years of such loan account. It only puts a condition about the nature of account. An assessee is entitled for deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this income will not form part of the eligible profit derived from long term finance for the purpose of calculating 40% of the amount to claim deduction under section 36(1)(viii) of the Act. - ITA. No. 2238/Ahd/2007, ITA. No. 2601/Ahd/2008 - - - Dated:- 11-7-2016 - Shri Rajpal Yadav, Judicial Member And Shri Manish Borad, Accountant Member For the Assessee : Shri M.G. Patel, AR with Smt. A.N. Shah For the Revenue : Shri R.I. Patel, CIT-DR with Shri Jamesh Kurian, Sr.DR ORDER Per Rajpal Yadav, Judicial Member In Asstt.Year 2000-01, the assessee and Revenue are in crossappeals against the order of ld.CIT(A) dated 22.5.2008, whereas in the Asstt.Year 2004-05, the assessee alone is in appeal against the order of the ld.CIT(A) dated 4.4.2007. Since common issues are involved, therefore, we heard the appeals together and deem it appropriate to dispose of them by this common order. 2. First we take up the appeal of the Revenue in the Asstt.Year 2000- 01. The ground nos.1 and 2 are the only substantial ground of appeal, which project grievance of the Revenue as under: 1. The ld.CIT(A) has erred in law and on the facts of the case in directing to allow 1/5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) erred in law and on facts of the case in deleting the disallowance of EMI residual account amounting to ₹ 803.40 lacs, without appreciating the definition of income as explained by the Hon ble Supreme Court in the case of Shiv Prakash Janak Raj Co. reported at 222 ITR 583. 19. So far as this issue is concerned, the relevant material facts are as follows. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has sold is portfolio of individual home loans aggregating to ₹ 8,109.09 lakhs but the assessee is obliged to act as receiving and paying agent for effecting recoveries from the individual borrowers until the point of time when all these loans are fully recovered. Under this arrangement, the assessee is entitled to retain interest in excess of the agreed rate of interest recovered from the borrowers. It was in this backdrop that the assessee computed the surplus of ₹ 932.42 lakhs being the difference between EMI recoverable form the borrowers during the remain loan tenure, and the amount payable by the assessee to the buyer of assessee s home loan portfolio. This represented, what was termed as, EMI re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised. The principle is thus unambiguous. The principles of conservatism, and considerations of prudence, in the accounting treatment require that no anticipated profits be treated as income until the profits are realized, and, at the same time, an anticipated loss to be deducted from commercial profits, at the first sign of its reasonable possibility. There may seem to be, at first sight, an element of dichotomy in this approach inasmuch as anticipated losses are taken into account and anticipa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, discounting, investment etc. It has filed its return of income on 29.11.2000 disclosing total income at ₹ 1,26,62,678/- under section 115JA of the Income Tax Act. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On verification of the accounts, it revealed to the AO that the assessee has claimed deduction under section 36(1)(viii) of the Income Tax Act, 1961 amounting to ₹ 1,59,69,000/-. The AO further found that on 29.3.2000, the assessee has assigned the loan portfolio in respect of 3328 finance accounts to M/s.HDFC. Out of this total finance account, the loan tenure of 325 accounts was found to be more than five years, and the tenure of remaining accounts was less than five years. In other words, except 325 accounts, loan taken by the customer was not older than five years. The AO was of the opinion that expression long term finance has been defined in clause (e) appended to Explanation to Section 36(1)(viii) of the Act. According to this definition long term finance means any loans or advances where the terms under which moneys are loaned or advanced provide for repayment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance computed under the head Profits and gains of business or profession before making any deduction under this clause carried to such reserve account. Further long-term finance has been defined in the section as under: Long term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years. 2.3 As you are aware that we are engaged in the business of providing long term housing finance and housing loans are given has been made for a period less than 5 years. Once long term housing finance is made and necessary reserves have been created and maintained as provided in the section, deduction u/s 36(1) (viii) is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigned is in respect of 3328 finance accounts, as on 29th March 2000, loan tenure of 325 accounts is for more than 5 years and tenure of remaining accounts is less than 5 years. (iv) Deduction u/s 36(1) (VIII) is allowable in In respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance computed under the head Profits and gains of business or profession before making any deduction under this clause carried to such reserve account. (v) Long-term finance has been defined in the section as under: Long term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); (c) Government company shall have the meaning assigned to it in section 617 of the Companies Act, 1956 (1 of 1956);] (d) Infrastructure facility shall have the meaning assigned to it in clause (23G) of section 10; (e) long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years. 12. A bare perusal of the section would indicate that if an assessee is engaged in providing long term finance for industrial, agriculture or housing projects, then, out of profit derived from such business of providing long term finance, the assessee could claim a deduction of 40% and create a reserve of that amount. It is pertinent to observe that in this year, the assessee has created a special reserve of ₹ 210 lakhs. As far as the conditions enumerated in section 36(1)(viii) is concerned, there is no dispute between the parties that the assessee has fulfilled conditions viz. (a) it is a public company, (b) it is engaged in providing finance for hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is more than five years, which continues even after assignment, then, interest income from those accounts upto the date of assignment would qualify for deduction under section 36(1)(viii) of the Act in the hands of the assessee. These directions are subject to fulfillment of other conditions which are not disputed before us. The ld.AO shall also ensure that double deduction should not be made i.e. by assessee as well as by HDFC. 14. Now we take up ITA No.2238/Ahd/2007 for the Asstt.Year 2004- 05. The ground of appeal taken by the assessee reads as under: 1. The Learned CIT (A)-VIII., Ahmedabad has erred In law and facts of the case by confirming the findings given by the Assessing Officer that deduction u/s 36(1)(viii) cannot be allowed on interest income in respect of loan port-folios assigned or transferred during the financial year having tenure of less than 5 years., interest on loan portfolios subsequently assigned having tenure of less than 5 years. Bad debt recovered in respect of long term housing finance and EMI Residuals offered for taxation on accrual basis during the assessment year and accordingly has upheld the reduction of claim u/s 36(l)(viii) by ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as under: 1.6 From the perusal of the revised working of deduction u/s.36(1)(viii) of the Act submitted by the assessee vide their letter dated 21.12.2006 it was observed that the assessee has included a sum of ₹ 3,34,87,796/- being the EMI residual offered for taxation under income derived from Long term housing finance business. The nature of the said income on account of EMI residual has already been discussed in earlier part of this order. At the cost of repetition this is again explain that the said income on account of EMI residual is arising to the assessee on account of service charges received by M/s HDFC for acting as their agent to collect the EMI from various customers on the loan portfolios which already have been sold/transferred to M/s HDFC. For the sake of clarification, it is again explained that such loan portfolios which are already been sold or transferred to HDFC are not appearing in the books of accounts of the assessee as debtor but the same are appearing as debtor in the books of M/s HDFC. Further, it is an admitted fact that M/s HDFC is also claiming deduction u/s 36(1)(viii) on the income arising on such loan portfolios already sold/transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible deduction u/s.36(l)(viii) vide order sheet entry dated 26.12.2006 and from the same it can be seen that the eligible deduction u/s.36(l)(viii) has been worked out at ₹ 6,05,75,243/-. In the return of income the assessee company has claimed deduction u/s.36(l)(viii) at ₹ 8,47,63,564/-. However, in view of the above mentioned discussion the deduction u/s.36(l)(viii) is restricted to ₹ 6,05,75,243/- and the difference of ₹ 2,41,88,321/- (8,47,63,564 - 6,05,75,243) is added to the income of the assessee company. Penalty proceedings u/s.271 (l)(c) of the I.T.Act, 1961 is initiated separately for furnishing inaccurate particulars of income. 17. Appeal to the CIT(A) did not bring any relief to the assessee. 18. With the assistance of the ld.representative, we have gone through the record carefully. As far as first fold of submission is concerned, we are of the view that this aspect of the assessee is covered by our finding in the Asstt.Year 2000-01 discussed in the aforesaid part of this order. The AO shall carry out similar exercise and then grant deduction to the assessee. 19. As far as the bad debts recovered by the assessee are concerned, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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