TaxTMI 
TaxTMI 
2005 (11) TMI 371
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the SLR requirements invested amounts to the extent required in units of US-64 issued by the Unit Trust of India as well as various Government and other notified bonds. The appellant claimed the statutory deduction allowable under section 36(1)(viii) to a housing finance company upon the income earned on the house finance business, on dividend and interest earned on the above investments. This was on account of the fact that these investments were made exclusively on account of the requirements of law, governing the business of housing finance. 2.2 The Assessing Officer taking cue from the order passed by the CIT(A) in respect of appeals of the appellant relating to assessment years 1996-97 and 1997-98 against the prima facie adjustments made by the Assessing Officer while completing the assessment under the provisions of section 143(1)(a) of the Income-tax Act, 1961, assessed the income relating to SLR investments of the appellant under the head 'Income from other sources' and disallowed the statutory claim of the appellant under section 36(1)(viii), the details of which is given below :- Asst. year Gross income from Interest on Bonds & Dividends Statutory deduction u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....art and parcel of the very core housing finance activity of the appellant. 3.2 The investments in S.L.R. securities were made on account of the statutory provisions without which the appellant had to close his business. The "DIVIDENDS" received by the appellant were not the same as referred to in the provisions of section 56 and section 57 of the Income-tax Act, 1961. The provisions of section 2(28B), which refer/relate to interest on securities are applicable to the case of the appellant. The income earned by the appellant on the SLR securities are nothing but income earned from his housing finance business, as they are part and parcel of the business of the housing finance. The income earned from SLR investments are required to be assessed under the head 'Income from Housing Finance' business only. The appellant is legally entitled to the claim of statutory deduction under section 36(1)(viii) allowable to him against his income from housing finance business which includes income from his SLR investments. 3.3 Shri Balakrishna also relied upon the following decisions :- 1.Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). 2.CIT v. Paramount Premis....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... NATIONAL HOUSING BANK may by notification specify. (6)The NATIONAL HOUSING BANK may cancel a certificate of registration granted to a finance institution under this section if such institution :- (i)ceases to carry on the business of a housing finance institution in India; or (ii)has failed to comply with any condition subject to which the certificate of registration had been issued to it; or (iii)at any time fails to fulfil any of the conditions referred to in clauses (a) to (g ) of sub-section (4); or (iv)fails :- (a)to comply with any direction issued by the NATIONAL HOUSING BANK under the provisions of this chapter; or (b)to maintain accounts in accordance with the requirement of any law or any direction or order issued by the NATIONAL HOUSING BANK under the provisions of this chapter; or (c)to submit or offer for inspection its books of account and other relevant documents when so demanded by any inspecting authority of NATIONAL HOUSING BANK; or (v)has been prohibited from accepting deposit by an order made by the NATIONAL HOUSING BANK under the provisions of this chapter and such order has been in force for a period of not less than three months.......
X X X X Extracts X X X X
X X X X Extracts X X X X
.... What one has to look is whether the appellant can carry on the business of housing finance without making these investments in notified securities. The answer would be NO. In other words it is the act of investment and the resultant income namely dividends and interest from these securities are nothing but part and parcel of housing finance business, and hence entitled to the benefit of statutory deduction under section 36(1)(viii). It is also necessary for us to consider and understand the relevant provision of section 36(1)(viii). The provisions of section 36(1)(viii) gives relief to a housing finance company only when he fulfills the following conditions : (a)He must have been recognized by NATIONAL HOUSING BANK. (b)He also must be recognized by CBDT for the purposes of section 36(1)(viii). (c)The assessee should create a reserve out of his profits from his housing finance business. (d)The statutory deduction is limited to 40 per cent of the income from housing finance business (Long Term) or the reserve created, whichever is less. 5.2 Learned CIT(A) failed to appreciate that the nature of activity of the appellant and as well as the position of law and simply....
X X X X Extracts X X X X
X X X X Extracts X X X X
....undertaking of Government of India and assessee is merely holding certain units of the mutual fund scheme called US 64 floated by Government. It is a different proposition that under the UTI Act itself, the income distributed is characterized as dividend and is also eligible for deduction under section 80L etc. However, the income declared by UTI cannot be considered as equivalent to dividend distributed by a company on the shares issued by it. Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) held that the expression "attributable to" is having a wider import than the expression "derived from". Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579 held that to claim deduction under section 80HH, the industrial undertaking itself has to be the source of the profit. The business of the industrial undertaking should directly yield the profit. The industrial undertaking should be a direct source of that profit and not a means to earn the profit. There must be a direct nexus between the profits and gains and the industrial undertaking. In the present case, it is seen that the income by way of income distribution by mut....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng finance company and not on the basis of mere accrual. 6.2 The Assessing Officer, while concluding the assessment, held that the income on non-performing assets are required to be accounted and to be assessed on mercantile basis. As per the amended provisions of section 145, the assessee cannot have a mixed system of accounting. Since the assessee is following mercantile system of accounting, the income on such non-performing assets is deemed to have accrued and accordingly chargeable to tax. For this purpose, the Assessing Officer relied upon the decision of Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 . Learned CIT(A) relied on the amended section 43D, which extend the benefit of recognizing the income on non-performing assets to National Housing Finance with effect from 1-4-2000. Accordingly, he came to conclusion that the appellant was not entitled to application of cash system of accounting in respect of NPA for assessment year 1997-98. As per the accounting standards I and II as issued under section 145 of the Income-tax Act, they merely stated that accounting policy adopted by assessee should be such so as to represent true and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ash system of accounting in respect of part of business is not permissible. The issue is covered in favour of revenue by the decision of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). 7. We have carefully considered the relevant facts and the arguments advanced. As per section 145 amended with effect from 1-4-1997, income chargeable under the head 'Profit and gains of business or profession' is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. As per sub-section (2) of section 145, the Central Government may notify in the Official Gazette accounting standards to be followed by any class of assessees or in respect of any class of income. The relevant portions of Accounting Standards I & II are reproduced below : Accounting Standard I : Relating to disclosure of accounting policies : (4) "Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. "For this purpose, the major consideration gove....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, if any, should also be treated as NPA. 1.2 Lease, rentals/hire purchase instalments Where lease rentals/hire purchase instalments are 'past due' for six months, the entire dues from the lease/hire should be treated as NPA. 1.3 Bills purchased/discounted A bill is to be treated as NPA if it remains overdue and unpaid for six months. Overdue interest is not to be taken to income account. 1.4 Other credit facilities All other credit facilities in the nature of short-term loans/advances should be treated as NPA if any amount to be received in respect of such a facility remains apse due for a period of six months. 1.5 Accounting standards All accounting standards and guidance notes issued by the Institute of Chartered Accountants of India (ICAI) dealing with lease accounting/depreciation/income recognition etc. may be followed. It is not in dispute that the assessee has not provided interest income only on such account, which are classified as non-performing assets, within the meaning of aforesaid criteria. 7.1 Addition has been made relying on the decision of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). Later on Hon'ble Supreme....