9911796707
TMI Blog2016 (7) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of Rs. 11,63,048/- made by the AO, being 1/10th of the debenture issue expenses claimed by the assessee in his return of income." 2. The ld.CIT(A) has erred in law and on the facts of the case in deleting the addition of Rs. 6,70,36,967/- being EMI residual income." 3. As far as ground no.1 is concerned, the ld.CIT-DR, at the outset contended that the issue in dispute is squarely covered in favour of the Revenue by the decision of the Hon'ble jurisdictional High Court. 4. It is pertinent to mention that section 35D of the Income Tax Act, provides that certain expenditure mentioned therein incurred before the commencement of business and which have been amortized is allowed as deduction. However, after the business has been commenced the expenditure mentioned therein can be amortized and allowed deduction u/s.35D of the Act only if the said expenditure is incurred in connection with the extension of industrial undertaking. It emerges out from the record that the assessee had incurred expenditure for issuance of fully convertible debenture. It has claimed 1/10th of the expenditure. In this year, such expenditure was claimed at Rs. 11,63,048/-. The ld.CIT(A) has allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontingencies of pre-payments. The balance amount of Rs. 507.29 lakhs was transferred to the profit and loss account. In the computation of income, it appears, that the assessee reduced this amount from net profit and then offered only Rs. 132.02 lakhs as income of the relevant year. This computation was on the basis of income actually earned so far as interest differential was concerned. The Assessing Officer, however, was not satisfied with the same. He was of the view that entire difference between recovery value of housing loans and amount payable to the buyer of loan portfolio should be brought to tax in this year itself. He also held that even the amount of contingency set aside by the assessee at Rs. 428.31 lakhs could not be allowed as it is only a contingent, and not real, liability. He thus proceeded to bring to tax the balance amount of Rs. 803.40 lakhs ( i.e. EMI residual of Rs. 935.42 lakhs minus the amount already offered to tax amounting to Rs. 132.02 lakhs) in this assessment year. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A) who deleted the addition on the ground that the income is to be brought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court. No matter how reasonable is it to assume that the assessee will make these profits, these profits cannot be brought to tax at this stage. That is what the legal position, for the detailed reasons set out above, is. 22. In the case before us, whatever be certainty of the assessee realizing the 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) 222 ITR 583 (SC)], 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) and decline to interfere in the matter. 23. The appeal filed by the Assessing Officer is thus dismissed. 24. To sum up, for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completion of five years with it, therefore, it should be construed that in these accounts, the finance was not made for long term. The AO issued a show cause notice to the assessee and invited its explanation. In response to the show cause notice, the assessee filed a detailed letter dated 21.8.2007. This submission of the assessee has been reproduced by the AO, but did not concur with the submissions of the assessee. The reply of the assessee along with finding of the AO is worth to note. It reads as under: "2.1 In the statement of income filed along with the return of income, we have claimed deduction of Rs. 1,59,69,000/-U/S. 36(1) (viii) of the Income Tax Act,1961. The object of the company is to provide long term finance for construction or purchase of residential house and it satisfies the-, necessary conditions prescribed u/s. 36(1) (viii) of the Income Tax Act and accordingly-the deduction has been claimed at 40% of profit derived from the long term housing finance activity. For working out the claim, the total Income has been segregated in long term housing finance activity and other activities as per the statement enclosed herewith. As per the said working, we are entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat loan period is not reduced because loanee is paying EMI regularly till the tenure of the loan as per schedule. Though the loan Portfolio is assigned, our company is retaining part of the interest received from the loanee which is the interest income of the company on long term housing finance only. It is strongly submitted that after the assignment of loans, which are originally of more than five years duration, character of the same being long term housing loan is not changed at all. In view of the fact that on those loans the loanee are paying total interest to us and out of the same, contracted rate is paid to the assignees retaining the remaining amount of interest with us whose character as income from long term finance remains the same. Alternatively, it is submitted that the assignment of loan is for the purpose of availing of finance from the assignee only and therefore, the interest paid over to assignee in respect of these loans is only finance charge paid to assignee but basic character of loan does not change at any point of time. Thus in the present case, conditions laid down u/s 36(1) (viii) are duly fulfilled and we, therefore, request you to allow deduction u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to Rs. 28,19,63,692/- is less than 5 years. Thus only 9.76% of the portfolio assigned was having tenure of more then 5 years and 90.2% were having tenure of less then 5 years which cannot be termed as long term finance. The cumulative finance at the end of Financial Year is Rs. 650.13 crores and during the year it is Rs. 166.63 Crores (V) As per revised working of the claim u/s 36(1)(viii)given by the assessee company as against the claim of Rs. 1,59,69,000/- after considering the assignment of portfolio it comes to Rs. 1,32,35,000/-. The difference between both the figures of Rs. 27,34,000/- is disallowed. Penalty proceedings for furnishing inaccurate particulars of income are initiated. (Disallowance U/s 36(1)(viii) Rs. 27,34,000) 11. Appeal to the CIT(A) did not bring any relief to the assessee. Section 36(1)(viii) has a direct bearing on the controversy. Therefore, it is imperative upon to us to take note of this section. It reads as under: "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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income to the assessee would change. The emphasis of the AO is on the interpretation of clause (e) appended to Explanation to the Section. According to the ld.AO, this clause suggests that loan account should be older than five year, only thereafter, the interest from such loan account would qualify for deduction. The case of the issue is that by assignment of loan portfolio the character of loan account does not change. It still remains a long term finance. The right to receive interest has changed the hands. Accordingly the new company if fulfills other conditions contemplated in the Act, then, assessee will be entitled to claim deduction, otherwise, automatically it will not be available to any assessee after the assignment. 13. A 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 deduction for the purpose of this section from the first year itself. The meaning construed by us can be further fortified by considering sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction under section 36(1)(viii) of the Act of Rs. 8,47,63,564/-. The AO has observed that the assessee has shown operative income from long-term housing finance claim at Rs. 81,90,33,995/-. It has shown operating income from non-housing finance business at Rs. 2,52,71,906/-. Thus, the ratio of income from housing finance business and non-housing finance is 97.01and 2.99. Assessee had assigned 5112 finance accounts from long term loan portfolio to HDFC. This portfolio was assigned on 30.3.2004. Out of this, loan tenure of 87 accounts was more than 5 years and tenure of remaining account was less than 5 years. The AO confronted the assessee as to why its claim should not be rejected in respect of accounts who have not completed tenure of 5 years. Apart from this one fold of controversy, other aspect is that the assessee had recovered bad debt of Rs. 1,00,74,694/-. The assessee has included this amount in the total claim made under section 36(1)(iii) of the Act. The third limb of dispute is that the assessee has income of Rs. 3,34,87,796/- under the head EMI residual. This has been offered for tax and it has also been included in the working of deduction under section 36(1)(iii). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing deduction u/s.36(1) (viii) on the same loan portfolio which has never been the intention of the legislature and the same is not admissible u/s 36(1 )(viii) of the IT Act, 1961. In view of the above mentioned facts the assessee was asked to explain how the income received on account of "EMI residual" can be considered as income derived by the assessee from long term housing finance business, more particularly in view of the fact that the loan portfolios on which the assessee has received the "service charges" and has been categorized as "EMI residual income" have already been sold/transferred to M/s HDFC. In response to same the assessee company vide letter dated 26.12.2006 has submitted the revised working (Annexure-4) of eligible deduction u/s 36(1)(viii) of the Act after excluding the "EMI Residual income" at Rs. 3,34,87,796/- from the income derived from long term housing finance business. As per the said revised working the assessee has computed the eligible deduction u/s.36(1)(viii) of the I.T.Act of Rs. 6,05,75,243/-. 1.7 In view of the above mentioned discussion the assessee's original claim of deduction u/s.36(l)(viii) of the Act at Rs. 8,47,63,564/- cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be enhanced by that much amount. Thus, the AO has erred in rejecting the claim of the assessee. The AO has made reference to the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Sterling Foods, 237 ITR 579 (SC). In that case while construing expression "derived", the Hon'ble Court has observed that there should be a nexus between the income "derived" from industrial undertaking. The assessee has sold import entitlement, and in that context, it was construed that such income was not "derived" from industrial undertaking. In the present case, income derived by the assessee is from long term finance i.e. interest income. It was reduced by virtue of written off of certain debts which has direct nexus with the income derived by the assessee. This year, these entries have been reversed by recovery of this bad debt. Thus, nexus is available. The AO is not justified to exclude the amount of bad debts recovered by the assessee for calculating the claim under section 36(1)(viii) of the Act. 20. As far as the third limb is concerned, while considering the issue, with regard to EMI residual in the Asstt.Year 2000-01, we have reproduced the finding of the ITAT in the Asstt.Year ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
