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Gruh Finance Ltd. Versus ACIT, Cir. 4 Ahmedabad

Disallowance of debenture issue expenses - revenue or capital expenditure - Held that:- 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 ₹ 11,63,048/-. The ld.CIT(A) has allowed this claim of the assessee. Expenditure incurred on issue of convertible debenture is a capital expenditure. It cannot be allowed as deduction. Similar view h .....

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me - Held that:- 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 f .....

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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 section 155 of the Income Tax Act. Under this section AO has been empowered to wi .....

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we are of the view that the ld.Revenue authorities have erred in construing the meaning of clause (e) to section 36(1)(viii) of the Income Tax Act. We remit this issue to the file of the AO with a direction that he will verify the details of finance accounts, and if there is no change in the character of accounts i.e. their life span 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 u .....

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ar, 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. - With regard to EMI residual considering the finding of the AO, in the light of the discussion made by the ITAT in the Asstt.Year 2000-01 and 2001-02 extracted supra, we are of the view that the income from EMI residual offered for taxation is an income .....

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i 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 ap .....

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penses 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 ₹ 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 expen .....

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/10th of the expenditure. In this year, such expenditure was claimed at ₹ 11,63,048/-. The ld.CIT(A) has allowed this claim of the assessee. However, in the case of Gujarat Ambuja Cotspin Vs. CIT, Hon ble jurisdictional High Court has held that expenditure incurred on issue of convertible debenture is a capital expenditure. It cannot be allowed as deduction. Similar view has been taken in the case of Torrent Pharmaceuticals Ltd. Vs. ACIT, 55 taxmann.com 170 (Guj). Since assessee has incurr .....

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cal issue was considered by the ITAT in the Asstt.Year 2001-02. The finding of the Tribunal on this issue reads as under: 18. In the appeal filed by the Assessing Officer, the assessee has raised the following grievance: The ld. 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. rep .....

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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 residual. Out of this amount, the assessee further set aside a sum of ₹ .....

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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 ₹ 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 ₹ 803.40 lakhs ( i.e. EMI residual of ₹ 935.42 lakhs minus the amount already offered to .....

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ught to tax in the year in which related recoveries have taken place. The Assessing Officer is aggrieved of the relief so given by the CIT(A) and is in appeal before us. 20. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 21. In the landmark judgment of Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)], Hon ble Supreme Court has observed that While anticipated loss is thus taken into account .....

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nary 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 a .....

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nd anticipatory profits are ignored, but that is the impact of accounting principles sanctioned by the statute and the law laid down by Hon ble Supreme 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 arrangeme .....

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], 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 year 2001-02 in quantum assessment proceedings, while the appeal filed by the assessee is partly allowed, the appeal filed by the Assessing Officer is dismisse .....

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owance of deduction of ₹ 27,34,000/- claimed by the assessee under section 36(1)(viii) of the Income Tax Act, 1961. 10. Brief facts of the case are that the assessee-company is a non-banking finance company in which public are substantially interested. The main object of the assessee is to provide long term finance for housing besides providing finance and leasing of assets, discounting, investment etc. It has filed its return of income on 29.11.2000 disclosing total income at ₹ 1,26 .....

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.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 .....

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ee 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 ₹ 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 constructi .....

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of ₹ 399.23 Lac being Income from long term housing finance activity. During the year under consideration, special reserve of ₹ 210.00 Lac has been created by debiting the Profit & Loss Account. 2.2 As asked by you, we enclose herewith details of loan portfolio assigned on 29th March 2000, from the said details, it can be seen that portfolio assigned is in respect of 3328 finance accounts. Out of them, as on 29th March 2000, loan tenure of 325 accounts is for more than 5 years a .....

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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 mak .....

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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 allowable. In the section, nowhere, it is provided that deduction u/s 36(1) (viii) will not be allowed if the tenure of the loan is reduced to less than 5 years. In respect of Portfolio assigned, it is that loan period is not reduced because loanee is paying EMI regularly till the tenure of the loan as per schedule. T .....

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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 .....

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nd therefore is eligible for deduction under section 36(1) (viii). Therefore as stated hereinabove the loan portfolio has been assigned on March 29, 2000, the entire interest has .been accounted in our books & no interest is accounted in the books of HDFC. In view of this no claim under section 36(1) (viii) has been made by the HDFC as no interest is received or accrued by HDFC." (iii) The assessee has vide his letter dated 21st August 2000 has enclosed the details of loan portfolio ass .....

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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 re .....

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counts amounting to ₹ 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 ₹ 650.13 crores and during the year it is ₹ 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 ₹ 1,59,69,000/- aft .....

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er: 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 .....

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excess. Explanation. In this clause - (a) financial corporation shall include a public company and a Government company; (b) public company shall 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 t .....

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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 housing sector, (c) it has derived profit from such business of providing long term finance. It has created a special reserve. The short dispute between the AO and the assessee is whether by .....

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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 woul .....

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of ship and such ship was transferred before expiry of eight years in violation to the conditions, then u/s.155 it will be construed that such allowance was granted wrongly. Similarly, a provision has been made to withdraw number of such other benefits given under the Act. But, this section does not talk withdrawal of deduction granted u/s.36(1)(vii) of the Act. Therefore, we are of the view that the ld.Revenue authorities have erred in construing the meaning of clause (e) to section 36(1)(viii) .....

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ions 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 por .....

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nder section 36(1)(viii) of the Act. 16. Brief facts of the case are that the assessee has filed its return of income on 30.10.2004 declaring total income at ₹ 12,18,86,500/-. It has claimed deduction under section 36(1)(viii) of the Act of ₹ 8,47,63,564/-. The AO has observed that the assessee has shown operative income from long-term housing finance claim at ₹ 81,90,33,995/-. It has shown operating income from non-housing finance business at ₹ 2,52,71,906/-. Thus, the r .....

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roversy, other aspect is that the assessee had recovered bad debt of ₹ 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 ₹ 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 ld.AO has denied the deduction to the assessee on all three issues, namely, he .....

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ncerned, he AO has observed that this income was in respect of service charges received by the assessee by acting as an agent of HDFC to collect EMI from various customers on the loan portfolio which have already been sold/transferred to HDFC. The finding of the AO is worth to note. It reads 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 .....

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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/transferred .....

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ct, 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 a .....

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of deduction u/s.36(l)(viii) of the Act at ₹ 8,47,63,564/- cannot be allowed . The claim of the assessee in respect of income arising on the loan portfolios which has been sold/transferred before the expiry of 5 years from the date of sanctioning such loan has already been rejected as discussed above. Further, the income assessable u/s.41(1) of the Act being the recovery of bad debts at ₹ 1,00,74,694/- cannot be held to be profit derived from the long term housing finance business a .....

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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)( .....

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then grant deduction to the assessee. 19. As far as the bad debts recovered by the assessee are concerned, the AO haws observed that ratio of operating income from long term finance is 97.01%. In the year in which the loans have gone bad and the assessee has written off them, the eligible profit derived from long term housing finance was reduced by the amount written off by the assessee as bad debt. In this year, when the assessee recovered bad debts, its income from long term finance would be .....

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