REC Limited Vs ACIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT), Delhi, adjudicated cross appeals filed by the assessee and the Revenue for Assessment Years (AYs) 2018–19 and 2019–20, along with Revenue appeals for AYs 2020–21 and 2021–22. Since the issues were common across years, the Tribunal disposed of all appeals through a consolidated order.
Core Issue: Deduction under Section 36(1)(viii)
The principal dispute revolved around the allowability and computation of deduction under Section 36(1)(viii), which permits specified entities to claim deduction up to 20% of profits derived from long-term finance business, subject to transfer to a special reserve.
(A) Treatment of Prepayment Premium and Loan Tenure
The Assessing Officer (AO) denied deduction under Section 36(1)(viii) on income arising from loans that were prepaid before completion of five years. According to the AO, such loans did not qualify as “long-term finance” as defined under the Act, which requires repayment over a period of not less than five years.
The AO computed estimated income from such prepaid loans and disallowed deduction to the extent of Rs.179.75 crores. The Revenue argued that deduction should not be available where loans were actually repaid within five years.
The CIT(A), however, held that the nature of a loan as “long-term finance” should be determined at the time of sanction based on the terms of the agreement, and not on subsequent prepayment. This view relied on a High Court decision.
