TaxTMI 
TaxTMI 
2024 (1) TMI 1300
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....ng housing loan mobilizes bonds from public and also secures 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 App....
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....nbsp; Dishonoured Cheque charges 3,28,859 Draft Agreement Charges 1,300 3 Interest on Deposits Corporate Deposits 84,88,53,584 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 ....
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....ential purposes are clearly beyond the scope of consideration and quantification of deduction under section 36(1)(viii) of the Act. 9. In the course of assessment, the Assessing Officer also noticed that the assessee has included certain other incomes such as income from treasury activities of Rs.210,39,23,070/- and interest on loans against deposits, process 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 lon....
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.... Housing Finance Other than Housing Finance Total Housing Finance Other than Housing Finance Total Housing Finance Other than Housing Finance Total Gross Total Income 11,04,16,01,352 3,40,52,40,138 14,44,68,41,490 11,04,16,01,352 3,40,52,40,138 14,44,68,41,490 11,04,16,01,352 3,40,52,40,138 14,44,68,41,490 Add: Housing Loans given for less than 5 years 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 aga....
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.... be part of income from long term finance for housing which is eligible for deduction under section 36(1)(viii). The CIT(A) also upheld the basis on which the Assessing Officer had re-distributed the allocation of expenses while computing the income eligible for deduction under section 36(1)( viii) of the Act. Aggrieved, the assessee is in appeal before the Tribunal. 13. With regard to the loans given for a period of less than 5 years and nonresidential loans being eligible for deduction u/s.36(1)(viii), the ld AR submitted that (i) it is an undisputed fact that assessee is 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. (ii) The said business comprises of raising of funds, inviting applications from persons seeking finance, processing the said applications, temporary 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 neces....
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....ans to the builder or developer for a period more than 5 years. Loans for non-residential purposes are also given to builders and developers engaged in the construction industry where the residential project includes commercial space like convenience shopping etc. The ld AR, therefore, submitted that income from housing finance for residential purposes for period less than 5 years and such income from housing finance for non-residential purposes should also qualify for deduction under section 36(1)(viii) of the Act as the same is part of the business of providing long term finance. 15. With regard to treasury income and other income being eligible for deduction u/s.36(1)(viii), the ld AR submitted that major portion of funds of the Assessee comprises of deposits from the public and it also raises funds from international organisations and financial institutions in India i.e. the Assessee borrows in wholesale and lends in retail. There is always a time 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 projec....
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....providing long term finance. It is an undisputed position that the Assessee is carrying on the eligible business, and therefore the test is to be applied is whether the immediate source of the aforesaid three categories of receipts under consideration is the said eligible business or the said receipts could be regarded as a separate business or activity. Accordingly it was submitted that, the said three categories of receipt cannot be regarded as a separate business or activity and have their immediate source in the business of long term finance for construction and purchase of houses in India for residential purposes. In view thereof, the ld AR prayed that deduction under section 36(1)(viii) of the Act may be granted in respect of all the aforesaid three categories of receipts. In this regard reliance is placed on the decision of the Apex Court in the case of Standard Refinery & Distillery Ltd. vs. CIT (1971) 79 ITR 589 (SC). 18. The ld AR further relied 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 a....
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....International Container Terminal Pvt. Ltd. in Order dated 28.09.2018 in ITA No. 2935/Mum/2012 20. The ld AR drew attention to the cases where exemption under section 10(23FB) of the Act has been extended to interest and other income arising from temporary deployment of funds by venture capital funds and venture capital companies. In these cases, pending the investment in venture capital undertakings, the venture capital fund or the venture capital company had invested the funds in interest earning securities or units of liquid mutual funds. The Revenue had denied the assessee's claim of exemption on the ground that the said investment was not in a venture capital company and was also in violation of the SEBI guidelines. Upholding the assessee's claim for exemption in respect of such receipts, the Tribunal has held that the short-term investment formed a part of the business of investing in venture capital undertakings and did not violate the SEBI guidelines. An illustrative list of these decision are given 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 Propert....
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....erm finance for the activities specified in section 36(1)(viii). Now, income arising from other business activities or from sources other than business shall not be taken into account for computing deduction under section 36(1)(viii). 'Long term finance' was defined by the Finance Act 1996 and the "5 year" period is fixed by legislature. The deductions claimed by the assessee do not fall within the definition of long term finance for construction or purchase of houses in India for residential purposes. (2)The word "such business" is also very important. The scope of application is very limited and narrow. It clearly means that only profits which arise from such long term housing finance will be eligible for deduction and not any other income. Even in respect of cases relied upon by the assessee on section 80IA/80IB or other sections for interpreting the phrase 'derived from business of industrial undertaking', the words used in those sections are 'any business', while here the words used are 'such business'. The case laws cited by the assessee are therefore, on different footing and not applicable to the assessee. (3)The assessee has taken a plea of common managem....
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....he amount given for non residential purposes cannot be part of deduction claimed under section 36(1)(viii) of the Act. (8) The assessee claims that the purpose of other investments is to park temporary surplus. However this facts is not clearly coming out if the statement of accounts where are large investments held for more than 2 years. In the garb of temporary deployment, assessee is claiming benefit for a wide variety of other income, which is not allowable (9)The assessee has claims that income from treasury operations are a stop gap arrangement for deployment of funds before utilizing them in the business of housing finance and to partly recoup the interest cost in this manner. The Revenue strongly places reliance on the decision of the Hon'ble Supreme Court in the case of Liberty India vs CIT 317 ITR 218 (SC) in which it was held that incentive profits are not eligible profits derived from eligible business under section 80IB and that they belong to category of ancillary profits of such undertakings. (10)The assessee has argued that the section uses the phrase 'business of' even the other income is eligible for deduction. The assessee in this regar....
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....rom treasury operations in assessee's case has immediate source in deposits / debentures etc. where the funds have been deployed, and not from the housing loans for period more than 5 years. Similarly the income earned from housing loan < 5 years and non-residential loans cannot be said to be from housing loans > 5 years. Therefore as per the ratio laid down in the decisions discussed above including the decision of Meghalaya Steels, the assessee's reliance is misplaced and the income other than from housing loan of > 5 years, cannot be said to be derived from the eligible business. 24. The ld DR also relied on plethora of other decisions to reiterate the submissions made above. 25. We heard the parties and perused the material on record. The assessee through a note to the return of income had included the following incomes eligible for deduction u/s.36(1)(viii) i. income from housing finance for residential purposes for a period of less than 5 years; ii. income from housing finance for non-residential purposes; and iii. income from temporary deployment of funds ["treasury operations"] 26. The AO and the CIT(A) has denied the benefit of section 3....
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....6); ( 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 the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; 28. From the perusal of the above provisions it is clear that - (a) The deduction is allowable in respect of any Special Reserve that is created and maintained (b)In the case of 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 (c) Deduction is allowed for an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance 29. The assessee has segregated the total income into income from Housing Finance Business, Income from Capital Gains / Dividends and Other Income. The assessee has also segreg....
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....r the head "Profits and gains of business or profession" before making any deduction under this section), whichever is less : 32. The Hon'ble Calcutta High Court in the context of deduction allowable under the said section in the case of Goodricke Group Ltd. vs CIT ([2011] 11 taxmann.com 130 (Calcutta)) held that the a purposive interpretation of the aforesaid provision should be made instead of literal construction of the same otherwise, the legislative purpose will be frustrated. The Hon'ble High Court concluded by holding that - 28. ...................... the second point in the negative against the revenue by setting aside the part of the finding of the authorities below on the second question and hold that the assessee is entitled to the benefit of the entire profit arising out of the business of growing and manufacturing the tea and the amount of tea purchased from outside for blending should not be deducted as the said amount is insignificant in comparison to the amount of tea grown and manufactured by the assessee. ................... 33. The Hon'ble High Court expressed a similar view in the case Singlo (India) Tea Ltd. vs CIT [201....
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....in the profits for the purpose of deduction under section 36(1)(viii). Income from housing finance for non-residential purposes 35. The assessee has added a sum of Rs. 42,18,07,237 as part of income for the purpose of claiming deduction under section 36(1)(viii) which was denied by the assessing officer for the reason that the interest is earned from loans that are given for non-residential purposes. The contention of the ld AR is that the housing projects which are constructed by corporate or developer may have an element of non-residential amenities and these cannot be isolated from housing projects. Therefore the ld AR argued that the interest income earned should be considered as part of the profits derived from the business of long term finance for construction or purchase of residential housing. 36. The main purpose of allowing deduction under section 36(1)(viii) is to encourage financial corporations/approved public companies to lend for construction or purchase of residential houses. The income derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes is eligible for deduction under section 36(....
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....e nexus between the interest income earned and the business of long term finance for residential purposes. The concept of "income derived from" in contrast to other related concept like "income attributable to" has been a subject matter of discussion in various decision of the Apex Court. Highlights of some of the principles laid down by these judicial pronouncements are - (i) Receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may not fall within the expression of 'derived from' - Cambay Electrical Supply Co. Ltd. 113 ITR 84 (ii) The nexus between the income and the industrial undertaking was should be direct and not incidental, otherwise it would not fall within the expression 'profits derived from industrial undertaking' - Sterling Foods 237 ITR 53 (SC) & Pandian Chemicals Ltd. 262 ITR 278(SC) (iii) When Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives but what attracts the incentives under Section 80-IA/80-IB is the generation of profits (operational profits). - Liberty India Ltd. Vs CIT [2009] 183 Taxman 3....
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....e was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Section....
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....of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself. 21. The Calcutta High Court in Merinoply & Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:- "We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee's business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manne....
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....th the manufacturing activity inasmuch as these subsidies go to reduce the cost of production. Therefore, the judgment in the case of Liberty India v. Commissioner of Income Tax has no manner of application. The Supreme Court in the case of Sahney Steel and Press Works Ltd. & Others versus Commissioner of Income Tax, reported in [1997] 228 ITR at page 257 expressed the following views:- ". . . . . Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable.' 23. We are of the view that the judgment in Merinoply & Chemicals Ltd.'s case (supra) and the recent judgment of the Calcutt....
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....e us being Dharam Pal Prem Chand Ltd.'s case (supra) from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80- IB of the Act. 28. *** 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India's cases (supra) to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove. 30. All the aforesaid appeals are, therefore, dismissed with no order as to costs." 39. From the plain reading of the above judicial pronouncement of Hon'ble Supreme Court, it can be said that so long as profits and gains emanate directly from the business itself and that there should be a direct nexus between such profits and gains and the industrial undertaking or business then th....
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.... the impugned income is derived is from the housing finance business of the assessee. Therefore the deployment of surplus funds by the assessee in short term investments with an intention to reduce the burden of cost of interest paid on loans in our view has a direct nexus with the business of housing finance. Therefore the income which has a direct nexus with the housing finance business of the assessee is to be considered as "derived from" the business of providing long-term finance for construction or purchase of houses in India for residential purposes and accordingly will be eligible for deduction u/s.36(1)(viii). The nomenclature of income is not so relevant as the nature of income since the same income which is a business income for somebody can be an income from other sources for someone else. A typical example would be the leasing of property which can either be a business income or income from property depending on whether the leasing is the doing of the business or the exploitation of the property by its owner. In the given case, the deployment of funds in short term investment is part and parcel of housing finance business of the assessee since the idle funds are availa....
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....d exemption under section 10(33) of Rs.40,89,24,273/- u/s.10(33) against the dividend income earned. The Assessing Officer called on the assessee to show cause as to why expenses to earn the dividend income should not be apportioned and the exemption under section 10(33) be restricted to the net dividend income. The assessee, in reply submitted that the dividend income earning investments are financed from internal accruals and not out of borrowed funds. The assessee further submitted that the loan funds borrowed by the assessee are institutional loans taken for specific purpose of business of housing finance and cannot be utilized for the purpose of any other investments and, therefore, the assessee submitted that the interest paid by the assessee on the institutional loans cannot be adjusted against the dividend income and that the assessee has not incurred any other expenditure wholly and exclusively for the purpose of earning the dividend income. The Assessing Officer did not accept the submissions of the assessee. The Assessing Officer placed reliance on circular No.780 dated 04/10/2009 which clarifies that exemption under section 10(33) is to be allowed on net basis and not o....
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....ed that the Hon`ble Jurisdictional High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bombay) (refer pages 68 to 72 of the case law compilation) and CIT vs. HDFC Bank Ltd. 366 ITR 505 (refer pages 64 to 67 of the case law compilation), have held that if investments have been made out of mixed funds and sufficient interest free funds are available with the assessee, then, the presumption should be that such investments have been made out of interest free funds and not borrowed funds. This view has also been approved by the Hon'ble Apex Court in the case of South Indian Bank vs. CIT (2021) 438 ITR 1 (SC). 48. The Ld.DR, on the other hand, relied on the order of the lower authorities. 49. We heard the parties and perused the materials available on record. We notice that the Assessing Officer while arriving at the proportionate interest to be adjusted against the dividend income has considered the own funds of the assessee to be at Rs.1777.24 crores and the borrowed funds to be at Rs.8148.45 crores. It is also admitted fact that the cost of shares yielding dividend income is lower than that of the own funds of the assessee. Further the Assessing Officer h....