Foreign Currency Borrowing Costs Must Be Reallocated for Housing Finance Deduction: ITAT Mumbai

HDFC Bank Ltd. Vs DCIT (ITAT Mumbai)

Summary: The Mumbai Bench of the Income Tax Appellate Tribunal allowed the miscellaneous application filed by HDFC Bank Ltd., successor to Housing Development Finance Corporation Ltd., under Section 254(2) of the Income-tax Act, 1961, seeking rectification of the Tribunal’s earlier order dated 12 January 2024 for Assessment Year 1998-99. The assessee contended that although the Tribunal had adjudicated the eligibility of different categories of housing finance income for deduction under Section 36(1)(viii), it had omitted a specific finding on Ground No. 2.4 concerning allocation of interest on foreign currency borrowings, provisions for contingencies and common expenses.

The assessee submitted that the Assessing Officer had incorrectly allocated the entire interest expenditure on foreign currency borrowings to eligible long-term housing finance income, while distributing domestic borrowing costs according to gross revenue and other common expenses on an ad hoc 80:20 basis. It argued that once the Tribunal determined which income categories qualified for deduction under Section 36(1)(viii), the corresponding expenses should also be reallocated between eligible and ineligible activities. Failure to adjudicate this specific ground constituted a mistake apparent from the record warranting rectification.

The Tribunal observed that its earlier order had held income from residential housing finance loans with repayment periods below five years and income from temporary deployment of funds eligible for deduction, while excluding income from non-residential housing finance. However, the earlier order contained no specific finding concerning the allocation of expenses. Accepting the assessee’s contention, the Tribunal replaced paragraph 43 of its earlier order and directed the Assessing Officer to rework the allocation of foreign currency borrowing costs, provisions for contingencies and other expenses in accordance with the final classification of eligible and ineligible business income.

Cases Discussed

• HDFC Bank Ltd. (successor to Housing Development Finance Corporation Ltd.) Vs. DCIT — ITA No. 552/Mum/2004, order dated 12.01.2024 (earlier order rectified).

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This Miscellaneous Application (MA) filed under section 254(2) of the Income Tax Act, 1961 (the Act) by the assessee seeking rectification of the order of the Tribunal in ITA No. 552/Mum/2024 dated 12.01.2024 for AY 1998-99. 2 MA No. 115/Mum/2024

2. The Tribunal in the above order adjudicated various grounds raised by the assessee and the Revenue pertaining to the additions / disallowances made by the Assessing Officer (AO) / CIT(A). The assessee has now raised the MA submitted that the Tribunal while adjudicating Ground No.2 i.e. Ground No.2.1 to 2.4, did not give any specific finding with regard to Ground No.2.4., which pertains to allocation of interest on foreign currency borrowings and provision for contingencies. The relevant ground reads as under –

“2.4 The Id. CIT(A) erred in allocating expenses erroneously, arbitrarily and on incorrect assumptions, for the purpose of computing the profits eligible for deduction under section 3611(viii) of the Act.

He erred in not allocating expenses in the proportion of gross receipts from the activity of housing finance and non-housing finance, and instead in allocating expenditure on the following basis:-

(i) interest paid on foreign currency barrowings, allocated wholly to income from long-term finance.

(ii) interest paid on domestic borrowings, allocated in the ratio of gross revenues, without adjusting the allocation made by the AO, referred to in (i) above, and

(iii) other common expenses allocated on an adhoc basis in the ratio of 80:20, without assigning reasons for the same.”

3. The ld. AR submitted that the assessee has through Ground No.2.1 to 2.3 contended the eligibility of various categories of income for deduction under section 36(1)(viii) and the Tribunal while adjudicating had given partial relief to the assessee. The ld AR further submitted that the assessee vide ground no. 2.4 had pleaded that in case one of the categories are held to be not eligible for deduction under section 36(1)(viii) then the AO should be directed to allocate the expenses incurred towards interest on foreign currency borrowing and provisions for contingencies taking into consideration the decision of the Tribunal. The ld. AR also submitted that the Tribunal has not given any specific finding with regard to 3 MA No. 115/Mum/2024 the allocation of these expenses and therefore there is a mistake apparent as per section 254(2) of the Income Tax Act.

4. We heard the parties and perused the material on record. We notice that while adjudicating ground no. 2 which includes ground no. 2.1 to 2.4 specific findings have been given with regard to various categories of income such as Income from Housing Finance for residential purposes for a period less than five years, Income from Housing Finance for non-residential purposes and Income from Temporary requirement of funds. We further notice that we have held that Income from Housing Finance for a period of less than five years and Income from temporary deployment of funds are eligible for deduction under section 36(1)(viii) and that Income from Housing Finance for non-residential purpose would not be eligible for such deduction thereby giving partial relief to the assessee. Vide ground no. 2.4 the assessee has contended incorrect allocation of certain expenses by the AO and we notice that no specific findings have been given with regard to this contention of the assessee in the above referred order of the Tribunal. Therefore we allow the miscellaneous application filed by the assessee for the limited purpose of adjudicating Ground No.2.4 of the assessee. We accordingly replace the following in the place of paragraph no. 43 of above dated 12.01.2024 –

“43. The assessee vide ground no.2.4 is contending the allocation of expenses incurred towards interest on foreign currency borrowing and allocation of provision for contingencies. The assessee is also contending the allocation of other expenses on adhoc basis applying a ratio of 80:20. In our considered view, the allocation of these expenses as done by the AO is not correct and needs to be re-worked. We have while adjudicating the issue of eligibility of (i) Income from Housing Finance for residential purposes for a period less than five years, (ii) Income from Housing Finance for non-residential purposes and (iii) Income from Temporary requirement of funds have held (i) and (iii) to be eligible and (ii) to be not eligible (Refer findings 4 MA No. 115/Mum/2024 in the earlier part of this order). As a result we are of the view that the expenses incurred towards interest on foreign currency borrowing, allocation of provision for contingencies and other expenses also needs to be allocated between the income which has been held to be eligible for deduction under section 36(1)(viii) i.e. Income from Housing Finance and the income which ineligible for such deduction i.e. Income from Non-housing Finance. During the course of hearing the bench directed the ld.AR to submit detailed working with regard to the allocation of expenses between Income from Housing Finance and Income from Non-housing Finance and the said working is Annexed as part of this order. Accordingly we direct the AO to reallocate the expenses / costs in the ratio as would be finally determined while giving effect to the directions given in this order with regard the re-characterization of income between eligible and non-eligible business. The AO is further directed to examine the correctness of the workings submitted by the ld. AR in this regard and give relief to the assessee accordingly. Ground No. 2.4 is partly allowed.”

5. The rest of the findings given in order dated 12.01.2024 remain unaltered.

6. In the result, the MA of the assessee is allowed.

HDFC Bank Limited
(as successor to Housing Development Finance Corporation Limited)

ASSESSMENT YEAR 1998 – 1999

(PREVIOUS YEAR 01.04.97 – 31.03.98)

Apportionment of Gross Income

—

Order pronounced in the open court on 24-07-2024.