2024 (1) TMI 1300 - AT - Income Tax

Deduction u/s 36(1)(viii) - loans given for a period of less than 5 years and nonresidential loans being eligible for deduction u/s.36(1)(viii) - AR explained that the residential loans for period less than 5 years are mainly granted to individuals for construction or purchase of house where the borrower is of an advanced age and his age of retirement from employment does not justify a loan for a period beyond five years - HELD THAT - The assessee through a note to the return of income had included the following incomes eligible for deduction u/s.36(1)(viii) i. income from housing finance for residential purposes for a period of less than 5 years; ii. income from housing finance for non-residential purposes; and iii. income from temporary deployment of funds treasury operations AO and the CIT(A) has denied the benefit of section 36(1)(viii) to the income from (i) and (ii) above on the ground that these two incomes do not fall within the definition of long term finance as defined in clause (e) of the Explanation to section 36(1)(viii). The income from (iii) is denied the benefit of 36(1)(viii) for the reason that the same is not derived from the business of long term finance and that it would not fulfill the test of immediate and effective source of direct and proximate source and hence they cannot be said to be derived from the business of providing long term finance for residential purposes. So for the purpose of adjudication we will consider the income derived from (i) (ii) above and income from (iii) separately. Income from housing finance for residential purposes for a period of less than 5 years - The profits from business of long term finance for construction or purchase of houses for residential purposes is what should be considered for deduction under section 36(1)(viii) and not the profit from lending long term finance. In assessee's case it was submitted that the total interest income earned by the assessee from lending loans with terms less than 5 years is around 8.33% of the total interest income and therefore the same cannot be excluded from the profits of the business of the long term finance for the purpose of deduction under section 36(1)(viii). We in this regard notice that in the case of Goodricke Group Ltd 2011 (4) TMI 863 - CALCUTTA HIGH COURT while holding that the entire profits should be considered for allowing deduction under section 33AB had held so also for the reason that the tea purchased from outside is very insignificant amount of tea as compared what is grown by the assessee in its garden. The income, on which deduction is claimed by the assessee, is not from other business activities but from the core business of long term finance and the source of income is the said business. The purpose for which the loans on which the impugned interest is earned are granted for construction or purchase of house and this fact is not disputed by the lower authorities - 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). Income from housing finance for non-residential purposes - assessee has added a sum as part of income for the purpose of claiming deduction under section 36(1)(viii) which was denied by the assessing officer for the reason that the interest is earned from loans that are given for non-residential purposes - HELD THAT - The main purpose of allowing deduction under section 36(1)(viii) is to encourage financial corporations/approved public companies to lend for construction or purchase of residential houses. The income derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes is eligible for deduction under section 36(1)(viii). In the given case the claim of the assessee is towards interest on loans given for nonresidential purposes. Therefore the same cannot be said to be from the business activity of long-term finance for construction or purchase of houses. The assessee has made the claim separately through notes to the return of income from which it is clear that the assessee is able to identify the income as from separate business activity. Therefore we are unable to agree with the contention that lending loans for non-residential is an integral part of the loans lent for residential purposes. The interest income earned by the assessee from loans given for non-residential purposes are not eligible for deduction under section 36(1)(viii) . To this extent we uphold the order of the CIT(A). Income from temporary deployment of funds - main contention of the assessee with regard to this income is that there is first degree nexus between the business of the assessee and the source of income, thus the income is part of the income derived from the business of providing long finance - revenue denied the benefit on the ground that the investment activity should be considered separately and accordingly the income arising is not eligible for deduction u/s.36(1)(viii) - HELD THAT - We applying the ratio of case of Meghalaya Steels Ltd 2016 (3) TMI 375 - SUPREME COURT hold 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). Exemption u/s.10(33) against the dividend income earned - HELD THAT - As admitted fact that the cost of shares yielding dividend income is lower than that of the own funds of the assessee. Further the Assessing Officer himself while arriving at the profit eligible for deduction u/s.36(1)(viii) had not allocated any interest expense to the vertical income from capital gains / dividend . It is a settled position that when sufficient own funds are available then, the presumption should be that such investments have been made out of the same and not out of borrowed funds - no interest cost need to be adjusted against the dividend income for the purpose of exemption u/s.10(33). With regard to other expenses, we notice that the AO has applied an adhoc percentage of 80% to housing finance and balance 20% is allocated among other verticals of business in their income ratio. In this regard we issue a direction to the AO re-allocate administrative expenditure based on the actual ratio of the investments yielding exempt income to the total average assets for the relevant financial year and consider the same for the purpose of exemption u/s.10(33). Disallowance u/s 14A - expenses incurred earning exempt income - HELD THAT - It is an admitted position that the assessee is having own funds more than the amount invested in the tax free bonds. Further the impugned investments as per the submissions of the assessee are resulting in both exempt as well as taxable income. We place reliance on the decision of the coordinate bench in the case of Prakash K. Shah Shares Securities Pvt. Ltd 2016 (12) TMI 47 - ITAT MUMBAI to hold that no disallowance is warranted u/s.14A. The disallowance made in this regard is deleted.

Summary

Issues Involved:
1. Deduction in respect of provision for exchange loss on foreign currency borrowings.
2. Quantum of deduction under section 36(1)(viii) of the Income-tax Act.
3. Allocation of interest and other administrative expenses as deductible against income.
4. Disallowance of interest and other administrative expenses under section 14A of the Act.
5. Enhancement of disallowance under section 14A by the CIT(A).

Detailed Analysis:

1. Deduction for Exchange Loss on Foreign Currency Borrowings:
The Assessee did not press Ground 1 (Ground 1.1 to 1.3) relating to the provision for forex loss arising out of reinstatement of loan balances, and the same was dismissed as not pressed.

2. Quantum of Deduction under Section 36(1)(viii):
- Income from Loans for Residential Purposes for Less than 5 Years:
The assessee argued that all loans, including those for less than 5 years, should be considered as part of the business of providing long-term finance. The Tribunal noted that the legislative intent was to promote residential housing finance, and therefore, income from loans given for less than 5 years should be included in the profits for the purpose of deduction under section 36(1)(viii).

- Income from Loans for Non-Residential Purposes:
The Tribunal held that loans for non-residential purposes do not fall within the scope of long-term finance for residential purposes. Thus, the interest income earned from such loans is not eligible for deduction under section 36(1)(viii).

- Income from Temporary Deployment of Funds (Treasury Operations):
The Tribunal considered the direct nexus between the business of housing finance and the income from temporary deployment of funds. It concluded that the income from such investments, which are part of the business activity to offset interest costs, should be included for deduction under section 36(1)(viii).

3. Allocation of Interest and Other Administrative Expenses:
- Interest on Foreign Currency Borrowings and Provision for Contingencies:
The Tribunal directed that if any category of transactions is held ineligible for deduction, the related costs should be allocated proportionately. The AO's allocation of expenses was revised based on the Tribunal's findings on re-characterization of income into eligible and ineligible business activities.

4. Disallowance under Section 14A:
- Interest and Administrative Expenses:
The Tribunal held that no interest cost should be adjusted against the dividend income for the purpose of exemption under section 10(33), as the investments were made from the assessee's own funds. For other expenses, the AO was directed to re-allocate administrative expenditure based on the actual ratio of investments yielding exempt income to the total average assets.

5. Enhancement of Disallowance under Section 14A by CIT(A):
- Tax-Free Bonds:
The Tribunal noted that the assessee had sufficient own funds to cover the investments in tax-free bonds, and these investments also yielded taxable income. Therefore, no disallowance was warranted under section 14A.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-compute the income eligible for deduction under section 36(1)(viii) and to re-allocate expenses in accordance with the Tribunal's findings. The disallowance under section 14A was deleted.