9911796707
TMI Blog2024 (1) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... loans from various international agencies. The assessee also borrows from National Housing Bank an Life Insurance Corporation of India. The assessee filed the return of income for the assessment year 1998-99 on 30/11/1998 declaring a total income of Rs.146,93,24,570/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer completed the assessment by assessing the income at Rs.232,01,37,101/-. Aggrieved, the assessee filed the appeal before the CIT(A), who partially allowed the appeal. Aggrieved, the assessee is in appeal before the Tribunal. 3. The effective issues arising for our consideration in the present appeal are as under - : (a) Whether the Appellant would be entitled to deduction in respect of provision for exchange loss on foreign currency borrowings arising on account of revaluation of the said borrowings at the year-end (refer Ground Nos. 1.1 to 1.3 of the Concise Grounds of Appeal); (b) Whether in arriving at the quantum of deduction available to the Appellant under section 36(1)(viii) of the Income-tax Act ('the Act') the Appellant is justified in taking into consideration: (i) income by way of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rent Deposits 65,01,534 COD Banks / Financial Institutions 4,25,21,587 IDBI Deposits 66,839 Interest on Bank Deposits 20,61,07,824 4 Interest on investments Debentures 78,31,16,718 Government Securities 17,45,27,134 5 Other Interest Income Investment Application Money 85,57,474 Discount on Treasury Bills 3,28,98,812 Commercial Paper 7,71,564 6 LEASE RENTALS - 7 DIVIDEND INCOME - 8 PROFIT ON SALE OF INVESTMENTS Profit on redemption of Debentures / Govt. Securities 1,09,49,675 Profit on sale of debentures / Govt Securities 4,46,32,239 9 OTHER INCOME Incidental Charges 34,76,077 GROSS TOTAL INCOME 1104,16,01,352 OVERALL RATIO of Housing Finance (%) 76.43 Income from Housing Finance (Excluding Dividend & Capital Gains) (%) 81.59 Other Income (%) 18.41 Total - (%) 100 APPORTIONMENT OF PROIT BEFORE TAX Gross Income 1104,16,01,352 Less : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees profit and redemption / sale of debentures, etc. of Rs.40,19,09,989/- as income for the purpose of claiming deduction under section 36(1)(viii) of the Act). The Assessing Officer held that these categories of income would not fulfill the test of minimum effective source of direct and proximate source and hence, they cannot be said to be derived from the business of providing loan from finance for residential purposes. The Assessing Officer further held that mere commercial connection of such income with the business of providing finance or residential purposes is not sufficient and this would result in defeating the legislative intent and object. The income from treasury operations are arising out of the assessee's regular activities and such income cannot be considered as derived from the business of providing long term finance for residential purposes as the source of such income are different from the activities of providing long term finance for residential purposes. 10. The assessee, while computing the deduction under section 36(1)(viii) had segregated the income and the expenses under 3 categories, i.e. income from housing finance, income from capital gains / divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81,37,21,643 (81,37,21,643) Add: Housing Loan given for non residential purpose 42,18,07,237 (42,18,07,237) Revised Gross Total Income as per Notes 12,27,71,30,232 2,16,97,11,258 14,44,68,41,490 - Treasury Income (2,10,39,23,070) - Other income (interest on loans against deposit, processing fees, profit on redemption / sale of debentures / G0Sec) (14,19,09,989) Assessed Gross Total Income 8,79,57,68,293 5,65,10,73,197 14,44,68,41,490 Less : Expenses (8,56,79,82,956) (2,36,52,75,773) (10,93,32,58,729) (9,52,67,48,545) (7,66,86,27,150) (3,26,46,31,579) 10,93,32,58,729) Profit Before Tax 2,47,36,18,396 (2,36,52,75,773) (10,93,32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y deployment of funds pending deployment in the business, disbursal of loans and collecting the principal amount along with interest from the borrowers which is a continuous activity. (iii) The raising of funds and the infrastructure necessary for the purposes of providing finance and collection of principal and interest is the same for providing such finance for a period more than 5 years, or a period less than 5 years, or for non residential purposes and that these transactions cannot be regarded as a separate business or activity pursued by the Assessee. All the three categories of transactions are part of Assessee's business of providing long term finance for residential purposes which is its predominant business. (iv) Income from housing loans for residential purposes for period more than 5 years is 86.31% of its gross revenue from interest on loans/operations and the interest on loan granted for a period less than 5 years is 8.33% and for non-residential loans is 4.32% of the gross revenue from interest on loans/operations. 14. The ld AR explained that the residential loans for period less than 5 years are mainly granted to individuals for construction or purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e gap between the raising of the funds and their utilisation in the activity of lending to the borrowers. Further the entire amount of approved loan is not disbursed immediately and the disbursement is based on progress of the project and demand raised by the builder or developer. In such cases also, there is always a gap between the approved loan and the disbursed loan. During the year under consideration, the approved loans stood at Rs. 3,251.27 crores while the disbursed loans were only Rs. 2,753.61 crores. It would be practically impossible for the Assessee to raise funds only when the requirement to lend has arisen. Therefore, as stated above, funds that are raised are temporarily deployed in treasury operations during this period, with a view to recoup the interest cost in part. The Assessee also raises funds by way of public deposits as a part of its fund raising activity. As per the Guidelines issued by National Housing Bank, the Assessee is mandatorily required to invest a certain percentage of deposits raised in the approved Government securities [now commonly known as Statutory Liquidity Ratio (SLR)] which yields interest income. Therefore, the interest income in such ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the Jurisdictional High Court in CIT vs. Jayanand Khira & Co. (P.) Ltd. 170 ITR 31 (refer pages 15 to 18 of the case law compilation) where the Hon'ble Court while concerned with the issue of whether an assessee, that was engaged in the manufacture or production of bus bodies could be regarded as engaged in the business of manufacture or production of motor trucks or buses held that "The crucial expression calling for interpretation in this reference is the `the business of construction, manufacture or production of any one or more of the articles or things specified in the Fifth/Sixth Schedule'. This is exactly the expression used in section 33(1)(b)(B) and section 80E as also in section 80B(7) except with the difference that this clause refers to Sixth Schedule in place of Fifth Schedule. It is pertinent to mention that all the three provisions hereinabove are the provisions granting relief to the assessees with a view to give incentive to certain types of industries. The Legislature has in its wisdom used the expression 'for the purposes of business of construction, manufacture or production of' (motor buses in this case) which is of wider connotat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereunder: * India Value Fund v/s. ACIT (2010) 129 TTJ 611 (Mum.) (refer paragraph 26 at page No. - copy annexed as Exhibit-4 hereto); * HDFC Property Fund v/s. ITO (ITA No. 7472/Mum/2017) (Mumbai Tribunal) (refer paragraph 12 at page No. 11 - copy annexed as Exhibit-5 hereto); * DHFL Venture Capital Fund v/s. ITO (2016) 157 ITD 60 (Mumbai) (refer paragraph 12 at page No. 8 - copy annexed as Exhibit-6 hereto); * ITO v/s. Kshitij Venture Capital Fund (2011) 140 TTJ 6 (Mumbai) (refer paragraph 13 and 14 at page No. 13 - copy annexed as Exhibit-7 hereto); and * JM Financial India Fund Scheme v/s. ITO (ITA No. 277/Mum/2019) (Mumbai Tribunal) (refer paragraph 13 to 18 at page Nos. 18 to 25 - copy annexed as Exhibit-8 hereto) 21. The ld AR therefore submits that, the above-referred three categories of receipts should qualify for deduction under section 36(1)(viii) of the Act. 22. With respect to allocation of provision for contingencies and interest on foreign currency borrowings, the ld AR submitted that, if the aforesaid three categories of transactions are held to be eligible for claim of deduction under section 36(1)(viii) of the Act, then, this issue will not arise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt footing and not applicable to the assessee. (3)The assessee has taken a plea of common management, common business organization, common administration, etc. to state that these businesses will also be considered for the purpose of deduction under section 36(1)(viii) where the assessee itself has offered the income under different business divisions and, therefore, this plea of the assessee cannot be entertained. (4)With regard to the contention that the main object of the assessee's business is to provide long term finance and that the entire profits of the said business should be allowed, is not correct since the Act does not specify any percentage to justify that if the housing loan advance for more than 5 years beyond certain percentage of total loan, then the same should be considered within the definition of long term housing finance. There is no ambiguity in the language of the provision and, therefore, any other interpretation imported artificially, is not correct. (5)The reason given by the assessee for lending loans for less than 5 years or for non-residential purpose is not relevant since the period and the purpose of loan are what is relevant for deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come is eligible for deduction. The assessee in this regard has it relied on the decisions in the cases of CIT vs Jagdishprasad M Joshi and Tema Exchangers Manufacturers Pvt Ltd. vs ACIT (Para 23 of assessee's submission dtd 20.03.2023 - pg 19). In the said decisions, Hon'ble Bombay High Court relied on the decision of Delhi High Court in CIT vs Eltek SGS P Ltd. (300 ITR 06), and held that interest income would qualify for deduction u/s 80IA/80IB being profits and gains derived from any business of an industrial undertaking, differentiating between sec 80HH and 80IB. However it is to be noted that the decision of Delhi High Court in CIT vs Eltek SGS P Ltd. (300 ITR 06) has been reversed by Hon'ble Supreme Court in CA 2817 of 2010 vide order dated 26.03.2010 and therefore the case laws relied on by the assessee are not reliable. (11) The assessee while relying on the decision of Hon'ble Apex Court in CIT vs Meghalaya Steels Ltd. 383 ITR 217 contented that the temporary deployment funds are for earning interest income to reduce the cost of borrowing and therefore the ratio laid down by the Hon'ble Apex Court in the above case is applicable whereby the interest income should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit of section 36(1)(viii) to the income from (i) and (ii) above on the ground that these two incomes do not fall within the definition of long term finance as defined in clause (e) of the Explanation to section 36(1)(viii). The income from (iii) is denied the benefit of 36(1)(viii) for the reason that the same is not "derived" from the business of long term finance and that it would not fulfill the test of immediate and effective source of direct and proximate source and hence they cannot be said to be derived from the business of providing long term finance for residential purposes. So for the purpose of adjudication we will consider the income derived from (i) & (ii) above and income from (iii) separately. Income from housing finance for residential purposes for a period of less than 5 years 27. We will first look at the provisions of section as applicable for AY 1998-99 before proceeding further - ( viii) 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 regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness which are in the nature of short term and those held for long term investment purposes. The income from the investments is also offered based on the said segregation i.e. under the Housing Finance Business or Capital Gains/Dividend. Within the business of Housing Finance, the assessee derives income from loans which do not fall within the definition of "Long Term Finance" i.e. loans with repayment period of less than 5 years and also income from loans extended for non-residential purposes. The contention of the assessee is that the words "business of providing long-term finance" is wide encompassing and therefore would include housing loans for less than 5 years and loans given for non-residential purposes. The argument of the revenue is that the profits are derived from providing other than long term finance are not eligible for deduction under section 36(1)(viii). 30. The basic conditions for availing the deduction under section 36(1)(viii) are that the assessee should be engaged in the business of providing long term finance and the long term finance should be extended for construction or purchase of houses in India for residential purposes. In the given case there is no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such business" in clause (b) as aforesaid relates to the expression "business of growing and manufacturing tea" as appearing in the beginning of subsection (1) of section 33AB of the Act. A combined reading of the ratio laid down by the Hon'ble High Court in both the above case leads us to see the merit in the contention of the ld AR that the profits from business of long term finance for construction or purchase of houses for residential purposes is what should be considered for deduction under section 36(1)(viii) and not the profit from lending long term finance. In assessee's case it was submitted that the total interest income earned by the assessee from lending loans with terms less than 5 years is around 8.33% of the total interest income and therefore the same cannot be excluded from the profits of the business of the long term finance for the purpose of deduction under section 36(1)(viii). We in this regard notice that the Hon'ble Calcutta High Court in the case of Goodricke Group Ltd (supra) while holding that the entire profits should be considered for allowing deduction under section 33AB had held so also for the reason that the tea purchased from outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes. Therefore the same cannot be said to be from the business activity of long-term finance for construction or purchase of houses. The assessee has made the claim separately through notes to the return of income from which it is clear that the assessee is able to identify the income as from separate business activity. Therefore we are unable to agree with the contention that lending loans for non-residential is an integral part of the loans lent for residential purposes. Accordingly we hold that the interest income earned by the assessee from loans given for non-residential purposes are not eligible for deduction under section 36(1)(viii). To this extent we uphold the order of the CIT(A). Income from temporary deployment of funds 37. The main contention of the assessee with regard to this income is that there is first degree nexus between the business of the assessee and the source of income. Therefore the income is part of the income "derived from" the business of providing long finance. However the revenue denied the benefit on the ground that the investment activity should be considered separately and accordingly the income arising is not eligible for deduction u/s.36(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vs CIT [2009] 183 Taxman 349 (SC) (v) By using the expression "derived from", Parliament intended to cover sources not beyond the first degree from where the profit/income is generated. - Liberty India Ltd. Vs CIT [2009] 183 Taxman 349 (SC) (vi) There should be direct and proximate connection between carrying on business and the income earned - Vellore Electric Corpn. Ltd. v. CIT [1997] 93 Taxman 401/227 ITR 557 (SC) 38. The Hon'ble Supreme Court in the case of CIT(A) vs Meghalaya Steels Ltd [2016] 67 taxmann.com 158 (SC) has discussed all these principles while deciding whether the subsidy received by the assessee is eligible for deduction u/s.80IB/80IC. Before proceeding further to consider the merits of assessee's case it is relevant to reproduce the extracts from the decision of this case where it is held that - "17. An analysis of all the aforesaid decisions cited on behalf of the Revenue becomes necessary at this stage. In the first decision, that is in Cambay Electric Supply Industrial Co. Ltd.'s case (supra) this Court held that since an expression of wider import had been used, namely "attributable to" instead of "derived from", the legislature intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned. 19. Similarly, the judgment in Pandian Chemicals Ltd.'s case (supra) is also distinguishable, as interest on a deposit made for supply of electricity is not an element of cost at all, and this being so, is therefore a step removed from the business of the industrial undertaking. The derivation of profits on such a deposit made with the Electricity Board could not therefore be said to flow directly from the industrial undertaking itself, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, in CIT v. Andaman Timber Industries Ltd., [2000] 242 ITR 204/109 Taxman 135 (Cal.), the same High Court arrived at an opposite conclusion in considering whether a deduction was allowable under Section 80HH of the Act in respect of transport subsidy without noticing the aforesaid earlier judgment of a Division Bench of that very court. A Division Bench of the Calcutta High Court in Cement Mfg Co. Ltd.'s case (supra) by a judgment dated 15.1.2015, distinguished the judgment in Andaman Timber Industries Ltd.'s case (supra) and followed the impugned judgment of the Gauhati High Court in the present case. In a pithy discussion of the law on the subject, the Calcutta High Court held: 'Mr. Bandhyopadhyay, learned Advocate appearing for the appellant, submitted that the impugned judgment is contrary to a judgment of this Court in the case of CIT v. Andaman Timber Industries Ltd. reported in [2000] 242 ITR 204/109 Taxman 135 wherein this Court held that transport subsidy is not an immediate source and does not have direct nexus with the activity of an industrial undertaking. Therefore, the amount representing such subsidy cannot be treated as profit derived from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: "The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (nonremote) areas. The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other northeastern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the segregation was explained during the course of hearing. The ld AR submitted that on the income from short term investment of surplus funds which are mobilised for housing finance purposes have been taken under the income stream from housing finance. The ld AR further submitted that the income arising out of other regular investment / treasury activity and long term investments have been considered separately as other income and no deduction u/s.36(1)(viii) is claimed on the same. Accordingly the ld AR countered the submission of the ld DR that the investments are held by the assessee as long term investments and the income there from is claimed as deduction u/s.36(1)(viii). We notice that the AO/CIT(A) have not looked into this contention and segregation done by the assessee and have denied the deduction by stating that the entire interest income should be considered as other income as the immediate and effective source of such income is "investments" and not "business of housing finance" and accordingly the said income is not "derived from" the business of providing long-term finance for construction or purchase of houses in India for residential purposes. In this regard i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration where it is held that - 13. Question No.5 is directed against the finding of the Tribunal that interest earned on short-term deposits made during the interregnum period between disbursement of funds was not profit derived from the business of providing long-term finance. As held by the Tribunal, this is also an investment of the funds of the assessee for making use of the idle funds remaining with it during the interregnum period. The interest cannot be considered as profit derived from the business of providing longterm finance within the meaning of the Section. No question of law arises out of the factual finding of the Tribunal, which is not challenged as perverse. The question cannot be admitted. 42. The ld AR as a counter submitted that the Hon'ble High Court has not analysed the issue and has not given any detailed finding on the legality of whether the interest earned is "derived from" the business of long term housing finance. On perusal of the above observations of the Hon'ble High Court, we are inclined to agree with the submission of the ld AR that the court has not given any specific finding with regard to the correctness of the claim of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r expenses to be adjusted against the dividend income for the purpose of exemption u/s.10(33) at Rs.53,01,00,000/- and Rs.71,87,574/- respectively. Since the total of these expenses are more than the dividend income earned by the assessee, the Assessing Officer held that no amount should be allowed to be claimed as exempt under section 10(33) of the Act. 45. Aggrieved, the assessee filed appeal before the CIT(A). The assessee submitted before the CIT(A) that the investment in shares which is earning dividend income is a separate, distinct and divisible activity from the business of housing finance and, therefore, the Assessing Officer is not correct in allocating the interest expenses in proportion to the investment made in dividend earning shares. The CIT(A) recomputed the interest amount by attributing weighted cost method as per below working to arrive at the interest amount of Rs.30,81,41,271/- as against the amount of Rs.53,01,00,00/- arrived at by the Assessing Officer. 46. With regard to the other expenditure, the CIT(A) confirmed the stand taken by the Assessing Officer. Accordingly, the CIT(A) gave partial relief to the assessee with regard to the exemption under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made out of the same and not out of borrowed funds. We are therefore of the considered view that no interest cost need to be adjusted against the dividend income for the purpose of exemption u/s.10(33). With regard to other expenses, we notice that the Assessing Officer has applied an adhoc percentage of 80% to housing finance and balance 20% is allocated among other verticals of business in their income ratio. In this regard we issue a direction to the AO re-allocate administrative expenditure' based on the actual ratio of the investments yielding exempt income to the total average assets for the relevant financial year and consider the same for the purpose of exemption u/s.10(33). DISALLOWANCE UNDER SECTION 14A - Ground No.4 (4.1 to 4.2) 50. The CIT(A), while adjudicating the issue of exemption under section 10(33) has directed the AO to consider the tax exempt interest arising out investments made by the assessee in tax free bonds and to apply the provisions of section 14A accordingly. In this regard the ld AR submitted that though the tax free bonds would result in interest which would be exempted from tax, the capital gains would be chargeable to tax. It is further sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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