2017 (7) TMI 820 - HC - Income Tax

Income deductible u/s 36(1)(viii) - Held that - Section 36(1)(viii) of the Act provides for the deduction in respect of any reserve created and maintained by a specified entity of an amount not exceeding twenty per cent of the profit derived from eligible business computed in the heads of profit and losses of the business or profession which is carried to its reserve account. Term longterm finance has been explained in clause( e) of the explanation as to mean any loan or advance where the term for which the moneys are loaned or advanced provided for repayment along with interest thereof during a period of not less than five years. The fact that the assessee company is a financial corporation which is engaged in providing longterm finance including for residential purposes is not in dispute. However, with respect to the loan portfolio which the assessee company held for less than five years for transferring, in our opinion, after such transfer, the assessee would cease to be engaged in the business of longterm finance with respect to such loan accounts. The income arising out of such activity would therefore not be the assessee s income from the business of providing longterm finance. As noted, counsel for the assessee had sought to press in service the principle of consistency by producing certain returns and assessment orders for the earlier years. However, no such documents were produced before the lower authorities, no attempt was made to advance and develop these arguments. For the first time before the High Court, we would not permit raising of such a ground which would essentially require examination of basic facts. Whether in earlier assessment years such a precise question had come up, whether the returns filed by the assessee were accepted after scrutiny or otherwise and whether in such scrutiny assessments, this issue was considered by the Revenue, are issues which cannot without proper examination of facts, be gone into. At this stage therefore, we do not enter into this arena.

Summary

Issues:
1. Whether the appellant is entitled to a deduction of 40% of profits derived from the business of providing long-term finance in respect of income received on account of EMI residual?
2. Whether the interpretation of clause (viii) of section 36(1) by the Tribunal is correct?

Analysis:
Issue 1:
The appellant, a company engaged in long-term housing finance, claimed a deduction under section 36(1)(viii) of the Income Tax Act for the assessment year 2004-05. The dispute arose when the Assessing Officer disallowed a portion of the claimed deduction related to income from loan portfolios transferred to another entity. The Tribunal and Commissioner of Income Tax upheld the disallowance, stating that post-transfer, the appellant was no longer engaged in the business of long-term finance with respect to those loans. The appellant argued that it continued to collect EMIs post-transfer and retained a portion of the interest income, making it eligible for the deduction. However, the court held that the income from the transferred portfolios did not qualify as income derived from long-term finance, as the risk and profit were transferred to the entity receiving the portfolios. The court examined the agreement between the appellant and the entity to which the portfolios were transferred, confirming that the appellant acted as a receiving and paying agent, retaining only a small portion of the interest component. The court concluded that the appellant ceased to be engaged in long-term finance concerning the transferred portfolios, hence not eligible for the deduction.

Issue 2:
The Tribunal's interpretation of clause (viii) of section 36(1) was challenged by the appellant, arguing that the Tribunal erred in rejecting the claim for deduction based on the language of the provision. The appellant contended that consistency in interpreting similar claims in previous years should be maintained. However, the court noted that the appellant failed to present relevant documents and arguments on this ground before lower authorities. The court declined to entertain new grounds at the High Court level without proper examination of facts. Consequently, the court dismissed the Tax Appeals, upholding the Tribunal's decision on the interpretation of the provision and disallowance of the deduction for income from transferred loan portfolios.