Loan securitization income can be considered as interest income and hence eligible for deduction under section 36(1)(viii)

DCIT v. AIG Home Finance India Ltd. (ITA No. 2167/Mds/2010) Chennai Tribunal dated 5 May 2011

Facts: - The taxpayer was a housing finance company. The taxpayer had claimed deduction under section 36(1)(viii) of the Income-tax Act (ITA) in respect of securitization income earned from the business of long term housing finance. The Assessing Officer (AO) denied the deduction to the taxpayer on the basis that the taxpayer had received the proceeds on loan securitization and not the interest income. The Commissioner of Income-tax (Appeals) allowed the claim of the taxpayer. Aggrieved by the decision of the Commissioner of Income-tax (Appeals), the AO preferred an appeal before the Tribunal.

Issue before the Chennai Tribunal: – Whether the taxpayer was entitled to deduction under section 36(1)(vii) of the Income Tax Act, 1961  in respect of loan securitization income from the business of long term housing finance?

Observations and Ruling of the Chennai Tribunal :- In the process of securitization, the future receivables for a period of ten years are discounted with banks and the banks pay the Net Present Value of future receivables to the taxpayer as part of securitization arrangement. Thus, the long term housing loan granted by the taxpayer to the borrowers is discounted with third party banks.  The risk continues to remain with the taxpayer as in the event of default by the borrowers, the taxpayer is responsible to make good the default to banks. The Net Present Value at which the long term housing loans are discounted could be considered as future interest income discounted to the present value. Accordingly, the securitization income is an income from business of long term housing finance and hence eligible for deduction under section 36(1)(viii) of the ITA.

Conclusion: – Loan securitization income from the business of long term housing finance is eligible for deduction under section 36(1)(viii) of the ITA.

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