2025 (1) TMI 1667 - AT - Income Tax

Income from application fees, service charges and premature closure premiums qualify as finance income under section 36(1)(viii)

ITAT HYDERABAD - AT allowed the appeal, holding that income from sale of application forms, service charges, upfront fees and premiums on premature ... Disallowance of deduction u/s 36(1)(viii) - assessee has reported income from sale of application forms, service charges, upfront fee / commitment charges and premium on pre-mature closure of accounts under the head ‘other income’ - HELD THAT:- Income from sale of forms is received by the assessee from eligible undertakings, who apply for loans from the assessee company. Similarly, the assessee receives service charges from all borrowers. Likewise, the assessee has received upfront fee and also received premium on pre-mature closure of accounts, wherever, the borrowers have closed their accounts before the tenure of loan accounts. Once, the borrowers accounts are eligible accounts for the purpose of provisions u/s 36(1)(viii) then, in our considered view any income received from the said borrowers account, including income from sale of application forms, service charges, upfront fee and income on account of premium on pre-mature closure of accounts also partakes the nature of income derived from providing long term finance to eligible business. Therefore, we are of the considered view that the AO/CIT(A) erred in excluding other income for the purpose of computing eligible profit in terms of section 36(1)(viii) of the Act. Assessee claims that it is following similar method for computing eligible profits for the purpose of section 36(1)(viii) of the Act for earlier assessment years. The assessee further claimed that the Assessing Officer has disallowed other income for earlier financial years also and the same has been challenged by the assessee before the CIT(A) and CIT(A) allowed the claim of the assessee for the A.Y.2009-10. Revenue has challenged the order of the Ld.CIT(A) before the Tribunal and the ITAT Hyderabad Benches in ITA No.2069/Hyd/2017 has affirmed the reasons given by the CIT(A) in allowing relief to the assessee for computing eligible profit u/s 36(1)(viii) of the Act. We find that the CIT(A) has allowed relief to the assessee in respect of disallowance of deduction claimed u/s 36(1)(vii) by including other income like service charges, sale of forms, upfront fee and premium on premature closure of accounts and the ITAT has confirmed the order passed by the Ld.CIT(A). From the above, it is very clear that the matter attained finality at the level of Tribunal for the earlier assessment years. Once the issue has been decided by the Tribunal in favour of the assessee, then, unless there is change in facts for the impugned assessment years, the CIT(A) ought to have followed the decision of ITAT and allowed relief to the assessee. Since the Ld.CIT(A) has taken a different view on the issue even though there is no change in the facts for the present assessment year, in our considered view, the reasons given by the Ld.CIT(A) to sustain the additions made by the Assessing Officer towards disallowance of deduction claimed u/s 36(1)(viii) of the Act cannot be upheld. CIT(A) erred in upholding the reasons given by the Assessing Officer to recompute the deduction claimed u/s 36(1)(viii) of the Act towards profit derived from eligible business of providing long term finance - Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts categorized as 'other income' (including recovery of bad debts written off, service charges, upfront/commitment fees, sale of application forms and premium on premature closure of accounts) form part of 'profits derived from eligible business of providing long-term finance' for computation of the 20% deduction under section 36(1)(viii) of the Income-tax Act. 2. Whether the assessing authority and the appellate authority were justified in excluding portions of other income from the eligible profit where the assessee treated such receipts as arising from its main business activity. 3. Whether an earlier Tribunal decision and consistent past treatment by the assessee bind or are persuasive on the present year where facts remain unchanged (issue of finality/consistency in assessment treatment). ISSUE-WISE DETAILED ANALYSIS - Inclusion of 'other income' in eligible profits under section 36(1)(viii) Legal framework: Section 36(1)(viii) allows a deduction not exceeding 20% of 'profits derived from eligible business computed under the head 'Profits and gains of business or profession' (before making any deduction under this clause)' where a specified entity creates/maintains a special reserve. The statutory phrase requires identification of profit 'derived from eligible business' for computing the allowable reserve deduction. Precedent treatment: Authorities below accepted the assessee's entitlement to the deduction but disputed computation. The appellate record shows prior acceptance in earlier assessment years by the Tribunal that similar receipts (service charges, sale of forms, upfront fees, premiums) are part of business income for section 36(1)(viii) computation. Interpretation and reasoning: The Tribunal applied a substance-over-form approach: although the receipts were shown in the profit and loss as 'other income', their nature and source - receipts from borrowers and applicants arising in the ordinary course of lending operations - demonstrate they are incidental to and flow from the main business of providing long-term finance. Income from sale of application forms arises from loans applicants; service charges and upfront/commitment fees are charged to borrowers; premium on premature closure is a contractually derived income from borrower accounts. Where borrowers' accounts qualify as eligible accounts under section 36(1)(viii), receipts flowing from those accounts partake the character of profit derived from the eligible business. Recovery of bad debts written off was accepted by the lower appellate authority and the Tribunal also included it; the same characterization principle applies to the other receipts contested. Ratio vs. Obiter: Ratio - Receipts that are economically and functionally linked to lending operations and derived from borrowers eligible under section 36(1)(viii) form part of 'profits derived from eligible business' for computing the 20% reserve deduction, notwithstanding their ledger classification as 'other income'. Obiter - Observations regarding precise accounting classification or the treatment of any immaterial categories not present on facts of the year (for example, unrelated investment income) are ancillary. Conclusion: The Tribunal held that the assessing officer and the CIT(A) erred in excluding the contested items from eligible profit; such items must be included in computing profits derived from the eligible business for the purposes of section 36(1)(viii). ISSUE-WISE DETAILED ANALYSIS - Evidentiary burden and sufficiency of proof Legal framework: The foil is whether the assessee produced sufficient evidence to demonstrate that contested receipts were derived from lending activities and thus part of eligible business profits. Tax authorities may disallow items not shown to be business-linked. Precedent treatment: The CIT(A) allowed inclusion of recovery of bad debts (finding sufficient evidence) but excluded service charges, upfront fees, sale of forms and premiums for want of evidence. The Tribunal reviewed the financial statements and schedules filed by the assessee. Interpretation and reasoning: The Tribunal found that the nature of the receipts, as reflected in the audited financial statements and schedule of other income, themselves demonstrate the nexus to lending operations - e.g., application form fees paid by loan applicants, service charges from borrowers, upfront/commitment fees and premature closure premiums. Given the direct economic nexus, separate documentary proof beyond the statements was unnecessary. By contrast, the authority's requirement for additional evidence where the nature of the receipt is self-evident was held to be an unreasonable hyper-technical insistence inconsistent with the economic substance principle. Ratio vs. Obiter: Ratio - When the factual nature of receipts is demonstrable from account schedules and their economic nexus to lending operations is clear, additional formal proof is not required to include them in eligible profit computation. Obiter - The Tribunal's comment that authorities may remit for verification where genuine dispute of factual linkage remains. Conclusion: The Tribunal concluded the assessee furnished adequate material to establish that the contested receipts derived from lending operations and must be included in eligible profits; the CIT(A)'s exclusion for want of evidence was unsustainable. ISSUE-WISE DETAILED ANALYSIS - Consistency, finality and precedential effect of earlier Tribunal decision Legal framework: Principles of consistency and finality in tax proceedings afford weight to earlier tribunal findings on identical questions of law and fact where facts are unchanged; tax authorities should not adopt inconsistent approaches across assessment years absent change in circumstances. Precedent treatment: An earlier Tribunal bench affirmed a CIT(A) order allowing identical items to be included in eligible profits for prior years. The present Tribunal recognized that decision as binding in the sense of finality on the facts, though not as a formal precedent in the appellate hierarchy beyond persuasive effect. Interpretation and reasoning: Where the facts of the present year mirror those previously adjudicated and the earlier Tribunal had decided in favour of including the same categories of receipts, the assessing authority and the CIT(A) ought to have followed that view unless material facts differed. The CIT(A)'s departure without change in facts was held to be unsound and inconsistent administrative action. Ratio vs. Obiter: Ratio - Earlier Tribunal findings on identical factual matrices create an expectation of like treatment; absent material change, taxing authorities should not take a contrary position. Obiter - Remarks on the binding nature of one Tribunal bench on another are contextual and do not purport to lay down hierarchical law. Conclusion: The Tribunal held that the issue had attained finality in favour of the assessee for earlier years and that the authorities below should have followed that consistent view; therefore, deviation in the present year could not be sustained. OVERALL CONCLUSION AND RELIEF The Tribunal concluded that the assessing officer and the CIT(A) erred in excluding the contested items from profits derived from the eligible business under section 36(1)(viii). The Tribunal set aside the appellate order insofar as it sustained the disallowance and directed deletion of additions made by the assessing officer, allowing the appeal.