2025 (9) TMI 1009 - AT - Income Tax

Appeal allowed: Deductions under s.36(1)(viia) and s.36(1)(vii) upheld; public financial institution status affirmed and interest on long-term loans taxable

ITAT KOLKATA allowed the appeal, holding the AO erred in disallowing deductions under s.36(1)(viia) and s.36(1)(vii) and in assessing grant receipts. The ... Deduction claimed u/s 36(1)(viia) and 36(1)(vii) - main object of the company is to advance loans and participate in the share capital of the companies to be established for industrial development and generation of employment in the State - AO has assessed the total income of the assessee by adding income received by the assessee between grant from the State Government and also after disallowing claimed deduction u/s 36(1)(viia) and 36(1)(vii) CIT(A) has allowed the appeal of the assessee on the issue of grant received but dismissed the claim of deduction u/s 36(1)(viia) and 36(1)(vii) HELD THAT:- The object clause of the memorandum of Article of Association has also been brought before us that goes to show that WBIDC is engaged in advancing loans and participating in the share capital of the companies, firm and association involved in Industries to be established within the State in order to secure and assist in the expeditious and orderly establishment the growth and development of industries in the State of West Bengal. We further find that WBIDC is regarded a public financial institution as it satisfies the guidelines framed by the Ministry of Company Affairs for declaring financing institution u/s 4A of the Act,1956. WBIDC has advanced long term loans of expenditure till 31.03.2015 for AY 2015-16 and interest earned on long term finance (loans) during the year ended 31.03.2015 has been duly offered to tax. It is further pertinent to mention herein that specified entity as defined in Explanation (a)(i) & (ii) to Section 36(1)(viii) meaning a financial corporation specified in Section 4A of the Companies Act, 1956 and WBIDC satisfies this criterion as we have already discussed in the preceding paragraph that the object clause of memorandum of article of association established that WBIDC is engaged in advancing loans and participating in the share capital of the companies, firms and association involved in the industries to be established within the state in order to secure and assist in the expeditious and orderly establishment, growth and development of industries in the State of West Bengal. The said section has been accepted by the Department consistently. Keeping in view, the above discussion, we find substance in the argument of assessee that disallowance of claim of deduction u/s 36(1)(viia) and 36(1)(vii) is erroneous and hence liable to be deleted. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee is entitled to deductions under section 36(1)(viia) and section 36(1)(vii) of the Income-tax Act for interest on long-term loans advanced, having regard to its status as a public/financial institution and the definitions/Explanation applicable to 'specified entity'. 2. Whether administrative or policy material (including Ministry of Corporate Affairs circulars and consistency of departmental acceptance in prior assessment years) supports the assessee's claim to be treated as a public financial institution / specified financial corporation for the purposes of sections 36(1)(viia)/(vii). 3. Whether directions should be given in the appeal regarding tax credit claimed by the assessee where neither the Assessing Officer nor the Commissioner (Appeals) adjudicated the issue. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement to deductions under sections 36(1)(viia) and 36(1)(vii) - Legal framework Legal framework: Sections 36(1)(viia) and 36(1)(vii) allow deduction in respect of interest or other charges in specified circumstances where the recipient of interest is a financial corporation / specified entity as defined by the Act and its explanatory provisions. The Explanation to section 36(1)(viii) (as applied) defines 'specified entity' by reference to entities recognised under section 4A of the Companies Act, 1956 (i.e., financial corporations as per guidelines). Precedent treatment: The Tribunal noted that the department had consistently accepted the assessee's claim to these deductions in assessment years 2010-11 through 2014-15, indicating an established treatment by revenue authorities in earlier years. Interpretation and reasoning: The Tribunal examined the memorandum and articles of association, the objects clause and the actual activities of the entity (advancing loans, participating in share capital, providing long-term finance to industry). It found that the entity's functions and object clause squarely fit within the guidelines framed by the Ministry of Corporate Affairs for declaration as a financial institution under section 4A of the Companies Act, 1956. The Tribunal further noted the quantum of long-term advances and interest income (advances of Rs. 3,09,47,61,000 up to 31.03.2015 and interest earned of Rs. 6,93,46,000 for the year) and that such interest was offered to tax, reinforcing the commercial character and financial-institution activity. Ratio vs. Obiter: Ratio - The Tribunal concluded that where an entity's objects, activities and conformity with Ministry guidelines demonstrate that it is a public financial institution / specified entity within the meaning of the relevant Explanation, deductions under sections 36(1)(viia) and 36(1)(vii) are allowable. The consistent prior acceptance by the department and the circularary guidance were treated as corroborative of this legal characterisation rather than determinative independent legal authority. Conclusion: The disallowance of deductions under sections 36(1)(viia) and 36(1)(vii) was erroneous and is liable to be deleted. The Tribunal allowed the claim for deduction on the ground that the entity qualifies as a specified public financial institution and meets the statutory criteria. Issue 2: Relevance of Ministry circular and departmental consistency - Legal framework Legal framework: Administrative circulars and government guidelines may be relevant to determine whether an entity satisfies statutory criteria established by corporate or tax law (here, the Companies Act guidelines for recognizing financial institutions) and to interpret whether an entity falls within statutory definitions used for tax benefits. Precedent treatment: The Tribunal relied on the fact that the department had repeatedly allowed the deductions in prior assessment years and on General Circular No. 10/2012 (Ministry of Corporate Affairs) which sets out guidelines for declaring a financing institution as a public financial institution under section 4A of the Companies Act, 1956. Interpretation and reasoning: The Tribunal treated the circular as specifying the criteria which the assessee satisfied. The combination of the object clause, actual lending activity, amounts of long-term advances and past departmental acceptance collectively demonstrated conformity with the circular's guidelines. The Tribunal regarded these factors as supporting the legal characterisation required for claiming the deductions under the Income-tax Act. Ratio vs. Obiter: Ratio - Administrative guidance and consistent departmental practice can be material evidence that an entity meets statutory criteria for tax deductions, insofar as the entity's substantive activities and charter correspond to the guidance. Obiter - The circular itself was not treated as a standalone substitute for statutory classification but as corroborative of the assessee's status. Conclusion: The Ministry circular and historical acceptance by the revenue reinforced the finding that the entity qualifies as a specified public financial institution; therefore the circular and prior practice supported allowance of the claimed deductions. Issue 3: Claim for tax credit where no adjudication was made below - Legal framework Legal framework: Appeals permit the Tribunal to adjudicate issues which are properly raised before it and which were decided, or should have been decided, by the authorities below. However, the Tribunal does not ordinarily decide issues that were not adjudicated by the Assessing Officer or the first appellate authority unless those issues are properly before the Tribunal and have been argued with record material. Precedent treatment: The record showed that neither the Assessing Officer nor the Commissioner (Appeals) dealt with the tax credit issue; the point was raised before the Tribunal by the assessee's representative. Interpretation and reasoning: The Tribunal declined to pass any order on tax credit because the issue lacked prior adjudication at lower levels; there was no material or finding in the assessment or appellate order upon which the Tribunal could base a direction. The Tribunal adhered to the principle that it should not issue directions on matters not decided below in the absence of suitable adjudicatory foundation. Ratio vs. Obiter: Ratio - Where an issue has not been adjudicated by lower authorities and there is no factual determination on record, the Tribunal will not give directions on that issue as part of deciding the appeal on other grounds. Obiter - The assessee remains free to seek adjudication of tax credit in the first instance before the Assessing Officer or in appropriate proceedings. Conclusion: No direction on tax credit was issued by the Tribunal because the issue was not adjudicated below; the Tribunal declined to decide it in these proceedings. Final Disposition (as arising from the above conclusions) The disallowance of deductions under sections 36(1)(viia) and 36(1)(vii) was deleted; the appeal was allowed on that issue. No adjudication or direction was given on the separate tax credit claim for want of prior determination by the authorities below.