TaxTMI 
TaxTMI 
2026 (4) TMI 766
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....Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order. 3. Frist we take up ITA No.319/Del/2025 and ITA No. 577/Del/2025 for AY 2018-19 wherein both the assessee and revenue has taken following grounds of appeal, the assessee has taken the following grounds :- "1. That the action taken w/s 143(3) of the Income Tax Act and consequent assessment framed, as upheld by Ld. CIT(A) is vitiated, without jurisdiction and contrary to law. 2. That the Ld. CIT(A) has erred in law and on facts in upholding the action of the Ld. AO in making the additions/ disallowances on the issues which were beyond the scope of limited scrutiny, as such the assessment order passed is illegal, without jurisdiction and liable to be set aside. 3. That having regard to the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts in upholding the action of Ld. AO in not taking into account, for deduction u/s 36(1)(vii) of the Act and subsequently u/s 36(1)(viia) of the Act. the amount of Rs. 15,11,41,174/- towards certain fees related to processing of loans (which includes proces....
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....e circumstances of the case, the Ld. CTT(A) has erred in granting relief to the assessee on disallowance of deduction of Rs. 179,74,78,529/- u/s 36(1)(vi) of the Act in relation to deduction claimed on interest income earned on long term loans which were prepaid before 5 years ? 1.2 Whether, the Ld. CIT(A) has ignored the facts of the case however it is clear form statement of profit and loss account that the assessee has received prepayment premium of Rs. 106.41 Cr. during the year under consideration ? 2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in granting relief to the assessee on the issue of the disallowance of Rs. 5584,57,541/- under section 36(1)(vii) and section 36(1)(viia)(c) of the Act i.e., deductions under both section is independent on each other ?" 4.1 Since the issue raised by the revenue and assessee relating to the issue of deduction claimed u/s 36(1)(viii) are common, the same are adjudicated together below. 5. Ground Nos.1 & 2 raised by the assessee are general in nature, hence not adjudicated. With regard to ground Nos. 5, 6 and 7 are not pressed, the same are dismissed as not pressed. 6. Wit....
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....d after 5 years and Rs. 58.61 crores out of loans prepaid in 5 years or less. Further he noticed that as per the policy documents, it charges 0.75% of the loans outstanding on the date of prepayment. Based on the above information, he worked the repayment of loan amount by factoring the premium earned with the fixed rate of premium of 0.75%, the total loan repaid was determined at Rs. 7815.12 crores, by adopting 11.5% as the estimated average interest rate, determined the estimated income earned by the assessee out of the above- mentioned loans at Rs. 898.74 crores. From the above, he disallowed the deduction u/s 36(1)(viii) of the Act, at 20% of the above estimated income at Rs. 179.75 crores. He added the above estimated deduction claimed by the assessee during the year. 6.2 Further he observed that the deduction u/s 36(1)(viii) is available in respect of special reserve created by the financial corporation for providing long term finance, an amount not exceeding 20% of the profits derived from such business of providing long term finance before making any deduction (under this clause) carried to such reserve account. It is available only when the special reserve is created, t....
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....ulation and the same are reproduced at pages 53 to 57 of the assessment order, as per which the assessee had claimed excess to the extent of Rs. 64,83,31,467/-. 7. Aggrieved with the above order, the assessee preferred an appeal before NFAC, Delhi and filed detailed submissions and grounds. After considering the same, Ld CIT(A) allowed the claim of the assessee on the aspect of eligibility criteria for terms of loans of 5 years or more at the time of providing loans instead of determining the period of loan on the basis of preclosure 5 year or less. 8. With regard to other issues raised on deduction u/s 36(1)(viii) of the Act, he has sustained the additions on the basis that the jurisdictional ITAT at Delhi in the order dated 25.06.2009 and 31.08.2009 in ITA Nos.5347, 5348 & 5349/Del/2004 for A.Ys.2001-02 to 2003-04 in the case of M/s. Power Finance Corporation Ltd and held that the income from upfront fees, management fees and agency fees are not income derived from business of long-term finance and the same cannot be treated as profits eligible for deduction u/s 36(1)(viii). Therefore, the action on part of the Assessing Officer to exclude this sum of Rs. 15,11,41,174/- fro....
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.... reproduced herein below the relevant extract of Section 36(1)(viii) for your easy reference :- "In respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty percent of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account" 2.4 That the Income Tax Department has drawn any adverse inference on the said issue in the preceding years but has drawn favourable inference in the subsequent years. The details are as under: AY Amount of upfront fees, processing etc (Rs. ) Amount of processing fee disallowed (Rs. ) Remarks 2015-16 519306068 519306068 Department has disallowed by stating that processing fee is not derived from LT financing. The matter is settled under VsV 1.0 scheme. 2016-17 247129474 247129474 Department has disallowed by stating that processing fee is not derived from LT financing. The matter is settled under VsV 1.0 scheme. 2017-18 484880660 484880660 Department has disallowed by stating that processing fee is not derived f....
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.... much less any short-term finance business. Therefore, all these categories of incomes which the assessee is receiving as a direct nexus with the long term finance and therefore Section 36(1)(viii) of the Act is attracted. Therefore, we do not see any merit in these appeals. Accordingly, the first substantial question of law is answered in favour of assessee." 2.5.1 It is relevant to mention that the Authority for Advance Rulings of New Delhi in the Appellant's own case reported in 308 ITR 321 (AAR- New Delhi )(See CLC Page 158-160) has held that the 'swapping premium' received by the appellant from the State Electricity Boards on account of re-scheduling of the interest rates, has direct and immediate nexus with the business of providing Long Term Finance. 2.5.2 It is submitted that the AO/CIT(A) have failed to look into this contention and segregation done by the assessee and have denied the deduction by stating that the entire incidental income such as processing fees, upfront charges etc should be considered as other income as the immediate and effective source of such income is "receipts" from lending business and not "business of long-term financ....
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.... in 231 Taxman 901 (High Court of Allahabad) * CIT vs. Pratham Developers reported in 355 ITR 507 (High Court of Gujarat) * CIT vs. Jackson Engineers Ltd. reported in 341 ITR 518 (High Court of Delhi) * Nirma Industries Ltd. vs. DCIT reported in 283 ITR 402 (High Court of Gujarat) * CIT vs. Bramhaputra Carbon Ltd. reported in 152 taxmann.com 290 (High Court of Calcutta) * M/s Canadian Speciality Vinyls vs. ITO in ITA No. 7612/Del/2019 dated 02.06.2023 (ITAT, Delhi) 2.7 It is relevant to mention that the provisions related to deductions have to be liberally construed. Reliance is based is based upon following judgment: * National Organic Industries Limited Vs CCE (AIR 1997 SC 690) (See CLC Page 134, Para 10-13) "The dictionaries state that the word "derive" is usually followed by the word 'from' and it means : get or trace from a source; arise from, originate in; show the origin or formation of ......... .. The use of the words "derive" from in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is deri....
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.... 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 available in the regular course of business of housing finance and as part of the business activity the assessee keeps these funds in short term investments which earn income." * Pandian Chemicals Vs CIT (129 Taxman 539) [2003] (See CLC Page 136, 138 Para 6 & 8) "5. The High Court rejected the submission of the appellant by relying upon the decision of this court in Cambay Electric Supply Industrial Co. Ltd. v. CIT, where this court had clearly stated that the expression "derived from" had a narrower connotation than the expression "attributable to" (page 93) : "In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in Section 80J. In our view, since the expression of wi....
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....e necessarily required to be paid for the loan to be disbursed. The effective source of such income is the long-term lending activity itself. Hence, it squarely falls within the expression "profits derived from the business of providing long-term finance" under Section 36(1)(viii). A restrictive reading that limits the deduction only to interest income would be in ignorance of this proximate nexus and result in defeat of the legislative intent of incentivizing long-term financing for infrastructural development. 2.8.2 It is also a settled law that if two views are possible then view in favour of the appellant has to be adopted, as has been held by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. in 88 ITR 192 (SC). There is no estoppel against law. 2.8.3 Even if, Appellant agrees or consents for something contrary to law, A.O. has to discharge his duty of making fair assessment of income and to compute amount of tax payable as per law: *Article 265 of the Constitution of India: "No tax can be collected except by authority of law" *Ramlal vs Rewa Coalfield Ltd AIR 1962 SC 361 (See CLC Page 145, Para 15): " The ....
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....matter was to be sent back to the Tribunal so that it could examine the question whether, in the light of what was disclosed in the proceedings or other particulars before the Income- tax officer, at the time of original assessment proceedings, the Income-tax officer concerned should have taken the initiative in guiding the assessee in claiming relief under section 2(5)(a)(iii) of the relevant Finance Act." 2.8.5 Further reliance is placed another landmark judgment in the case of S.R. Koshti 276 ITR 165 (Guj) in which relief was granted to assessee with following observations: "The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected." [Para 20] * CIT vs Lucknow Public Educational Society 318 ITR 223 (ALL) "The Assessing Officer had treated the revised return as 'non est' wrongly, for the reason that he himself had passed the order under section 14....
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....idend income in its return for the year in question, but there was no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it was incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it could not confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. Therefore the income from dividend was not assessable during the assessment year 1958-59, but it was assessable in the assessment year 1953-54. It could not, therefore, be taxed in the assessment year 1958-59." 2.9 That, in the alternative and without prejudice, if the amount of Rs. 15,11,41,174/- is not considered to be part of the Long Term finance Business of the Appellant, then the total income of the Appellant ought to have been proportionately increased by this ....
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.... financer fees, Security Trustee Fees, Underwriting Fees and letter of comfort fees during the year. He was of the view that these are additional income from other businesses and not connected to the long term finance business of the assessee. Similar view was taken by the department in the previous assessment years from 2015-16 to 2017-18. We noticed that the above disallowances were settled by the assessee under Vs V 1.0 Scheme. However, the assessee raised this issue before us and also brought to our notice that the revenue has accepted the stand of the assessee in the subsequent assessment years i.e., from AY 2020-21 and 2021-22 onwards. We further noticed that the Ld CIT(A) had rejected the above plea on the basis of the decision in the case of Power Finance Corporation Ltd (supra) by the coordinate bench. In our view, the above decision was rendered on 25.06.2009. However, we noticed that Hon'ble Karnataka High Court held in the case of Weizmann Homes Ltd (supra) that the processing fee and penal interest received, who are in the business of providing long term finance shall be included in the eligible income for deduction u/s 36(1(viii) of the Act, as the same has direct....
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....nd 34 of the assessment order and submitted that the loans are granted for more than 5 years but the same are closed for the period less than 5 years, the assessee also collected the premature premium. Therefore, she reiterated that the provisions of the section intended to give deduction to the assessee who provide the long term loans for the period beyond 5 years, the assessee controls the terms of providing loans and they are aware of the terms of period at the time of disbursal itself. Once it is established that the loans are actually provided to the beneficiaries for the period less than 5 years, the relevant deduction is not available to the assessee. She brought to our notice pages 10 and 11 of the appellate order and submitted that the decision given in para 6.11.3 is not proper. She objected to the relief granted by the Ld CIT(A). She submitted that the provision of the section must be interpreted literally and Ld CIT(A) had failed to interpret the same. Hence, she supported the findings of AO. 15. On the other hand, Ld AR submitted that the assessee, a notified public financial institution engaged in providing long-term infrastructure finance, is eligible to claim a 2....
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....it earned from the long term finance business. After considering the submissions of both the parties and detailed findings of Ld CIT(A), we observed that Ld CIT(A) had placed reliance on the decision of Hon'ble Gujarat High Court in the case of Gruh Finance Ltd (supra) wherein it was held that the nature of Long Term finance for the purposes of Section 36(1)(viii) of the Act was to be seen at the time of sanction of loans and in case of no change in the character of account i.e. tenure being more than 5 years even after assignment, the same was held eligible for deduction w/s 36(1)(viii) of the Act. Since, Ld CIT(A) had followed the decision of Hon'ble High Court, we are inclined to respectfully follow the same, hence the ground raised by the revenue is accordingly dismissed. 18. With regard to ground no.4 raised by the assessee relating to addition of interest income of Rs. 5,32,26,430/-, the relevant facts are, as per the business model of the assessee, it advances loans to various cooperative societies for rural electrification in their respective states. In order to protect the financial health of these societies, the assessee had provided an option of waiving of the interes....
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....ground that said funds belong to the Appellant and as such it should have been the income of the Appellant. The Ld. CIT(A) remanded the issue back to the Ld. AO in order to verify whether the cooperative societies had disclosed the interest income in their respective hands and if it has been disclosed then the additions is to be deleted. The Ld. CIT(A) has placed reliance on the order passed by this Hon'ble ITAT, Delhi in the Appellant's own case. 4.4 It is submitted that when all the evidence are on record to show that said interest income has been offered to taxation by the respective societies, then the Ld. CIT(A) ought to have deleted the addition instead of remanding the matter back to the Ld. AO. The following evidences have been placed on record: - Copy of letter and confirmation from CESS Ltd. Sircilla: PB Pg. 481 & Pg. 541 - Copy of Conformation from HRECS Ltd. Hukeri: PB Pg. 540 - Copy of Conformation from KRECS Ltd. Kuppam: PB Pg. 542" 22. On the other hand, ld. DR of the Revenue relied on the reasons given by Ld CIT(A) and there is no prejudice caused to the assessee. 23. Considered the rival submissions and material pla....
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....findings given in the AY 2018-19 are applicable mutandis mutatis in the AY 2019-20, Hence, the appeal preferred by the revenue are dismissed. 28. Now we take up Revenue's appeal being ITA Nos.609 & 579/Del/2025 for AYs 2020-21 and 2021-22 wherein the Revenue has taken the following grounds of appeal :- "AY 2020-21 1. Whether on the facts and in the circumstances of the case, the Ld. CIT[A) has erred in granting relief to the assessee on disallowance on account of variations of Rs. 94,11,968/- u/s 14A of the Act read with rule 8D of the of the Rule ? 2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in granting relief to the assessee on disallowance of deduction of Rs. 69,58,768/- u/s 36(1) (viii) of the Act in relation to deduction claimed on interest income earned on long term loans which were prepaid before 5 years? 3. Whether on the facts an in the circumstances of the case, the Ld. CIT(A) has erred in granting relief to the assessee of Rs. 78,34,00,000/- on account of variation in respect of disallowance u/s 80G of the Act?" "AY 2021-22 1. Whether on the facts and in the circumstan....
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....suo motu made a disallowance of Rs. 6,01,10,032/- (being 1 % of annual average of monthly average of opening and closing balances of investment, income from which does not form part of total income), in accordance with Section 14A of the Act r.w. Rule 8D of the Rules vide the return of income. That the Ld. AO disregarding the above, calculated average value of investments by including preference shares, units of venture capital funds and other equity instruments from which exempt income was derived by the Assessee to arrive at the impugned addition of Rs. 94,11,968/- being the additional sum above the suo motu disallowance already made by the Assessee in the return. That the ld. CIT(A) rightly deleted the aforesaid disallowance following the settled position of law established by the Hon'ble jurisdictional High Court, whereby only tax exempt investments are to be considered for computing average value of investments for the purposes of determining disallowance under Section 14A of the Act r.w. Rule 8D of the Rules. ACB India Ltd. vs. ACIT 374 ITR 08 (Delhi) Caraf Builders &Constructions (P) Limited 414 ITR 122 (Delhi) Cargo Motors (P.) Ltd. v. DCIT 45....
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....y, it qualifies for deduction u/s 80G of the Act, as upheld by the Coordinate bench in case of Interglobe Technology Quotient (P.) Ltd. v. ACIT [2024| 163 taxmann.com 542 (Del-Trib) and directed the Ld. AO to allow deduction u/s 80G of the Act to the assessee. 36. At the time of hearing, Ld. DR submitted relied on the findings of AO. 37. On the other hand, Ld AR submitted as under: "For the subject AY, the Assessee extended CSR donations amounting to Rs. 156.68 crore to REC Foundation in furtherance of its charitable objects, which is duly registered under Section 12A and Section G of the Act. The aforesaid sum being part of Assessee's CSR obligation was suo motu disallowed in the return as per Explanation 2 Section 37(1) of the Act. However, eligible deduction (at 50%) amounting to Rs. 78,34,00,000/- was claimed under Section 8G of the Act. That the aforesaid deduction was denied by the Ld. AO merely on the ground that the same formed part of CSR obligations under Section 135 of the Companies Act, 2013 and were not "voluntary" in nature. That the Ld. AO failed to appreciate that CSR expenditure though mandatory, is philanthropic in nature, without any q....