Housing Development Finance Corporation Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that income by way of interest on loans given for residential purposes for period less than 5 years is eligible for deduction under section 36(1)(vii) of the Income Tax Act.
Facts- During the year under consideration, the assessee has claimed an amount of 101,58,37,175/- as deduction under section 36(1)(viii) of the Act. The assessee has shown the income arising from housing finance business at Rs.247,36,18,306/- and had claimed 40% of the same as deduction under section 36(1)(viii) of the Act.
AO did not accept the contentions of the assessee for the reason that the definition of the term “long term finance” given in clause (e) of Explanation to section 36(1)(viii) provides that any income derived from providing loans other than from long term finance or loans given other than for residential purposes are debarred from the ambit of eligibility criteria. AO held that such income from loans for less than 5 years of maturity and loans for non residential purposes are clearly beyond the scope of consideration and quantification of deduction u/s. 36(1)(viii).
CIT(A) affirmed the stand taken by AO by holding that the intent of the legislature is clear when it comes to the definition, the term “long term finance for residential housing” and any other interpretation would defeat the object of promoting residential house.
Conclusion- Held that the interest income earned from loans extended for construction or purchase of house for a period of less than 5 years should also be included in the profits for the purpose of deduction under section 36(1)(viii).
Held that the income earned by the assessee from deployment of surplus funds on a short term basis is to considered as derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes since there is a direct nexus between the income earned and the business of the assessee. Accordingly the same shall be included for the purpose of claiming deduction u/s. 36(1)(viii).
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is against the order of Commissioner of Income-tax (Appeals)-1, Mumbai dated 31/10/2003 for A.Y. 1998-99.
2. The Assessee is a Housing Finance Institution set up in 1977 with the main object of providing loans for purchase or construction of residential houses in India. It is regulated by National Housing Bank, which is an wholly owned subsidiary of Reserve Bank of India and satisfies all conditions stipulated by the National Housing Bank. The assessee’s business activity include, leasing and providing loans for the purposes other than for purchase or construction of residential house. The assessee, for the purpose of providing 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 Appellant is justified in taking into consideration:
(i) income by way of interest on loans given for residential purposes for period less than 5 years;
(ii) income by way of interest on loans for non-residential purposes; and
(iii) income by way of interest / discount etc. from temporary deployment of funds in treasury operations (refer Ground Nos. 2.1 to 2.3 of the Concise Grounds of Appeal)
(c) Whether the deduction allowable for interest paid on foreign currency borrowings and provision for contingencies should also be allocated as deductible against income which is alleged to be ineligible for deduction under section 36(1) (viii) of the Act, and further, whether other common expenses should be allocated in the final ratio of eligible to the ineligible income. (refer Ground No. 2.4 of the Concise Grounds of Appeal)
(d) Whether the Revenue was justified in making a disallowance of interest and other administrative expenses in the present case by invoking the provisions of section 14A of the Act (refer Ground Nos. 3.1 to 3.3 of the Concise Grounds of Appeal).
(e) Whether the CIT(A) was justified in enhancing the disallowance under section 14A of the Act by making such disallowance also in respect of income from tax free bonds (refer Ground Nos. 4.1 and 4.2 of the Concise Grounds of Appeal).
4. During the course of hearing the ld AR did not press Ground 1 (Ground 1.1 to Ground 1.3) relating to provision for forex loss arising out of reinstatement of loan balances and the same is dismissed as not pressed.
DEDUCTION UNDER SECTION 36(1)(viii) – Ground 2 (Ground 2.1 to 2.4)
5. During the year under consideration, the assessee has claimed an amount of 101,58,37,175/- as deduction under section 36(1)(viii) of the Act. The assessee has shown the income arising from housing finance business at Rs.247,36,18,306/- and had claimed 40% of the same as deduction under section 36(1)(viii) of the Act. The income from housing finance has been arrived at as under:-
