2016 (12) TMI 1879 - AT - Income Tax

Disallowance u/s.36(1)(viii) in respect of the interest on mortgaged back security and interest from loans advanced to deposits holders - A.R submitted that only the net interest to be considered for disallowance u/s.36(1)(viii) of the Act and not the gross interest - HELD THAT - As rightly pointed out by the ld.D.R, provisions of Sec. 36(1)(viii) are applicable only in respect of loans granted for construction or purchase of house in India for residential purpose, as such Ld.CIT(A) rightly confirmed the disallowance. However, while computing the disallowance u/s.36(1)(viii) of the Act, only net interest income to be considered from the activities of mortgaged back security and interest from loans advanced to deposit holders. This ground of appeal is partly allowed. Disallowance u/s.36(1)(viii) in respect of the interest being the referral fee from insurance companies and other income - HELD THAT - Getting properties and persons insured is not a mandatory requirement for carrying on the business of providing long term housing finance. Therefore, the income received by way of commission has no direct nexus or its not incidental to the long term housing finance. Accordingly, this issue was decided against the assessee. CIT(A) had not admitted the additional grounds raised by the assessee - exclusion of income earned on the land loans which were extended by the assessee in the normal course of business, and exclusion of the entire interest income from the computation of eligible profits for the purpose of deduction u/s.36(1)(viii) - HELD THAT - We have gone through the assessment order for assessment year 2006-07 wherein the AO reworked the deduction u/s.36(1)(viii) of the Act by segregating the profit on the basis of various activities carried on by the company. On the same manner we direct the AO to compute u/s.36(1)(viii) of the Act for this assessment year also. Interest income on SLR investment is eligible for deduction u/s.36(1)(viii).

Summary

Issues involved:
1. Disallowance u/s.36(1)(viii) of the Act for interest on mortgaged back security and loans advanced to deposit holders.
2. Disallowance u/s.36(1)(viii) for referral fee from insurance companies.
3. Admission of additional grounds by Ld. CIT(A) regarding exclusion of income earned on land loans and interest income for deduction u/s.36(1)(viii).
4. Eligibility of interest income on SLR investment for deduction u/s.36(1)(viii).

Issue 1: Disallowance u/s.36(1)(viii) - Interest on mortgaged back security and loans advanced to deposit holders:
The assessee claimed deduction u/s.36(1)(viii) for interest on mortgaged back security and loans to deposit holders. The AO disallowed the claim stating it lacked statutory requirement for business activities. The Ld.CIT(A) upheld the AO's decision. The ITAT partially allowed the appeal, stating only net interest income from these activities should be considered for disallowance.

Issue 2: Disallowance u/s.36(1)(viii) - Referral fee from insurance companies:
The Tribunal referred to a previous case where it was held that income from referral fees lacked a direct nexus to long-term housing finance. Following this precedent, the Tribunal upheld the Ld. CIT(A)'s decision to disallow the income. The assessee's appeal on this issue was dismissed.

Issue 3: Admission of additional grounds by Ld. CIT(A) - Exclusion of income earned on land loans and interest income for deduction u/s.36(1)(viii):
The assessee contended that income from land loans should be eligible for deduction u/s.36(1)(viii). The AO disallowed this claim, stating loans for land purchase differ from house purchase loans. The ITAT directed the AO to compute the deduction similar to the assessment year 2006-07, segregating profits based on various activities.

Issue 4: Eligibility of interest income on SLR investment for deduction u/s.36(1)(viii):
The Revenue disputed the allowance of interest income on SLR investment for deduction u/s.36(1)(viii). The Tribunal referred to a previous case where it was held that such income, earned in compliance with statutory requirements, has a direct nexus to the business of long-term finance. Relying on this precedent, the Tribunal dismissed the Revenue's appeal.

In conclusion, the ITAT partially allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The judgments were based on the interpretation of statutory requirements and the direct nexus of income to business activities as per relevant provisions of the Income Tax Act.