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TMI Blog2024 (1) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes other than for purchase or construction of residential house. The assessee, for the purpose of providing housing loan mobilizes bonds from public and also secures loans from various international agencies. The assessee also borrows from National Housing Bank an Life Insurance Corporation of India. The assessee filed the return of income for the assessment year 1998-99 on 30/11/1998 declaring a total income of Rs.146,93,24,570/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer completed the assessment by assessing the income at Rs.232,01,37,101/-. Aggrieved, the assessee filed the appeal before the CIT(A), who partially allowed the appeal. Aggrieved, the assessee is in appeal before the Tribunal. 3. The effective issues arising for our consideration in the present appeal are as under : (a) Whether the Appellant would be entitled to deduction in respect of provision for exchange loss on foreign currency borrowings arising on account of revaluation of the said borrowings at the year-end (refer Ground Nos. 1.1 to 1.3 of the Concise Grounds of Appeal); (b) Whether in arriving at the quantum of deduction availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53,584 Rent Deposits 65,01,534 COD Banks / Financial Institutions 4,25,21,587 IDBI Deposits 66,839 Interest on Bank Deposits 20,61,07,824 4 Interest on investments Debentures 78,31,16,718 Government Securities 17,45,27,134 5 Other Interest Income Investment Application Money 85,57,474 Discount on Treasury Bills 3,28,98,812 Commercial Paper 7,71,564 6 LEASE RENTALS - 7 DIVIDEND INCOME - 8 PROFIT ON SALE OF INVESTMENTS Profit on redemption of Debentures / Govt. Securities 1,09,49,675 Profit on sale of debentures / Govt Securities 4,46,32,239 9 OTHER INCOME Incidental Charges 34,76,077 GROSS TOTAL INCOME 1104,16,01,352 OVERALL RATIO of Housing Finance (%) 76.43 Income from Housing Finance (Excluding Dividend Capital Gains) (%) 81.59 Other Income (%) 18.41 Total (%) 100 APPORTIONMENT OF PROIT BEFORE TAX Gross Income 1104,16,01,352 Less : Lease Depreciation (Actuals) - Other Depreciation (Allocated in the ratio 81.59 : 18.41) 6,00,64,244 Other Expenses (Allocated in the ratio 81.59 : 18.41) 850,79,18,712 Total Expenses 856,79,82,956 Profit Before Tax 247,36,18,396 6. The assessee, in the notes to the computation of income contented that the profit derived from business of long term fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further held that mere commercial connection of such income with the business of providing finance or residential purposes is not sufficient and this would result in defeating the legislative intent and object. The income from treasury operations are arising out of the assessee's regular activities and such income cannot be considered as derived from the business of providing long term finance for residential purposes as the source of such income are different from the activities of providing long term finance for residential purposes. 10. The assessee, while computing the deduction under section 36(1)(viii) had segregated the income and the expenses under 3 categories, i.e. income from housing finance, income from capital gains / dividends and other income. The assessee had segregated certain expenses based on the ratio between the income from housing finance and other income which was worked out at 81.59:18.41. The Assessing Officer, during the course of assessment inserted one more vertical of business viz., Income from leasing finance. The Assessing officer based on the revised allocation income between the verticals of business arrived at the revised ratio (excluding capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,31,579) 10,93,32,58,729) Profit Before Tax 2,47,36,18,396 (2,36,52,75,773) (10,93,32,58,729) 2,75,03,81,687 76,32,01,074 3,51,35,82,761 1,12,71,41,143 2,38,64,41,618 3,51,35,82,761 Profit eligtible for deduction u/s 36(1)(viii) after tax adjustments 2,53,95,92,893 2,82,38,15,126 1,22,40,22,591 Deduction u/s 36(1)(viii) 1,01,58,37,157 1,12,95,26,050 48,96,09,036 Rs. 11,36,88,893 Rs.52,62,28,121 12. Aggrieved, the assessee preferred further appeal before the CIT(A). The CIT(A) affirmed the stand taken by the Assessing Officer by holding that the intent of the legislature is clear when it comes to the definition, the term long term finance for residential housing and any other interpretation would defeat the object of promoting residential house. The CIT(A) further relied on the decision of the Supreme Court in the case of Pandian Chemicals Ltd vs CIT 262 ITR 278 (SC) to hold that the word derived from has to be given a narrow meaning. The CIT(A) also relied on the findings given in the orders passed for the A.Ys 1996-97 and 1997-98 to uphold the stand taken by the Assessing Officer with regard to the various streams of income which the assessee had claimed to be part of income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed such loans, then, sell the residential unit in the project as approved by HDFC. If any purchaser of the residential unit in the project intends to take a loan, then, in such a scenario, proportionate part of loan given to the builder or developer is converted into a loan given to the purchaser of the residential unit which would be for a period of more than five years. In this regard the ld AR drew our attention to the ledger of the flat purchaser/ borrowers on a sample basis to evidence this fact and to explain that there is no flow of funds but entries are passed shifting the loan from the builder/ developer to the flat purchaser. The ld AR also submitted the (i) a copy of the Master Facility Agreement between Builder and Assessee ( Exhibit 1.1 - Refer Para 13.3 of the Agreement), (ii) copy of the Loan Agreement between Assessee and the Borrower ( Exhibit 1.2 ) (iii) copy of the Sale Agreement between Builder and the Borrower ( Exhibit 1.3 ) and (iv) copy of ledger showing internal adjustment ( Exhibit 1.4 ). The ld AR also submitted that it would not be commercially feasible for the Assessee to grant loans to the builder or developer for a period more than 5 years. Loans for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stand is upheld in the present case, then, it would result in deduction being granted under the said section based on classification of each transaction rather than on profits of the eligible business. This would be contrary to the express provisions of the Act which require that such deduction should be allowed based on profits derived from the business of providing long term finance computed under the head Profits and gains of business or profession . Also, as per the scheme of the Act income under the head Profits and gains of business is to be computed for each source of income. In the present case, housing finance for residential purposes for loan period more than 5 years, or less than 5 years or for non-residential purposes or interest income earned on temporary deployment of funds cannot be regarded as separate sources of income justifying separate computations. 17. The ld AR argued that considering the language of section 36(1)(viii) of the Act, a distinction has to be made between the concept of profits derived from providing long term finance and profits derived from the business of providing long term finance. It is an undisputed position that the Assessee is carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that section 36(1)(viii) which is a beneficial provision also and which too uses the phrase business of should similarly receive a wide interpretation and consequently, income from loans for a period less than five years, or for non-residential purposes or from treasury operations should also be regarded as fulfilling the requirements of profits derived from the business of providing long term finance. The ld AR also placed reliance on the following decisions where subsidies, interest income etc., have been considered as profits derived from business of the undertaking, and submitted that the same analogy should hold good for the impugned incomes in assessee's case (i) CIT vs. Meghalaya Steels Ltd. 383 ITR 217 (ii) CIT vs. Jagdishprasad M. Joshi 318 ITR 420 (iii) Tema Exchangers Manufacturers Pvt. Ltd. vs. ACIT being Order dated 18.07.2018 in ITA No. 415 of 2004 (iv) CIT vs. Shree Balaji Alloys 287 CTR 459 (v) Continental Construction Ltd. vs. CIT 195 ITR 81 (vi) ACIT vs. Nahavasheva International Container Terminal Pvt. Ltd. in Order dated 28.09.2018 in ITA No. 2935/Mum/2012 20. The ld AR drew attention to the cases where exemption under section 10(23FB) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e non-eligible business. Further, other expenses have been allocated by the AO on an adhoc basis in the ratio of 80:20 towards income from housing finance and income other than from housing finance. After re-characterizing the income between eligible business and ineligible business activities, the AO has determined the ratio of such revenue as 64.99 : 35.01. The ld AR in this regard submitted that allocation of such cost should also be made in the ratio as finally determined consequent to findings given by the Tribunal on re-characterisation of income into eligible and ineligible business. 23. The Ld.DR submitted a detailed written submission and the same is taken on record for adjudication. The brief of the key arguments of the ld DR are as given below - (1)The Finance Act, 1995 has amended Section 36(1)(viii) to limit the deduction to 40% only in respect of income derived from providing longterm finance for the activities specified in section 36(1)(viii). Now, income arising from other business activities or from sources other than business shall not be taken into account for computing deduction under section 36(1)(viii). Long term finance was defined by the Finance Act 1996 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction for the entire loan given to the developers since it is the individual loan transaction that needs to be looked into as to whether it is a long term loan given for more than 5 years or not. Therefore, the deduction claimed by the assessee with respect to loans given to developers for a period of less than 5 years cannot be in its entirety being claimed to be eligible for deduction under section 36(1)(viii). (7)The assessee's plea that the loans for non residential purposes are integral part of the loans given to developers engaged in the construction of residential projects which include commercial space like convenient shopping, cannot be considered for eligibility of deduction since the statute has clearly stated that the deduction is given for construction or purchase of houses of residential purposes and, therefore, the amount given for non residential purposes cannot be part of deduction claimed under section 36(1)(viii) of the Act. (8) The assessee claims that the purpose of other investments is to park temporary surplus. However this facts is not clearly coming out if the statement of accounts where are large investments held for more than 2 years. In the garb of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost but were not in the nature of reimbursement of cost. Just as the incentives have independent source of income and are far removed from reimbursement of an element of cost, the income from treasury operations as in the case of assessee also have independent source and are not in the nature of reimbursement. (12) As per assessee's submission, it is mentioned that there is always a time gap between the reasons of the funds and the utilization in the activity of lending to the borrowers which shows that the source of such income (from interest on deposits and investments, profit on sale of investments, etc.) in no way can be said to be the income from long term finance business. The nexus is not direct but at the best, can only be said to be incidental. (13) The income from treasury operations in assessee s case has immediate source in deposits / debentures etc. where the funds have been deployed, and not from the housing loans for period more than 5 years. Similarly the income earned from housing loan 5 years and non-residential loans cannot be said to be from housing loans 5 years. Therefore as per the ratio laid down in the decisions discussed above including the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company is for the time being approved by the Central Government for the purposes of this clause: Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital and of the general reserves] of the corporation or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess. Explanation. In this clause, ( a) financial corporation shall include a public company and a Government company; ( b) public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); ( c) Government company shall have the meaning assigned to it in section 617 of the Companies Act, 1956 (1 of 1956);] (d) infrastructure facility shall have the meaning assigned to it in clause (23G) of section 10; (e) long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; 28. From the perusal of the above provisions it is clear that (a) The deduction is allowable in respect of any Special Reserve that is create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits derived from such business of providing long- term finance and whether this would mean the entire profits of the business of providing long-term finance is the issue here. 31. We notice that section 33AB of the Act which allows deduction to assessee carrying on business of growing and manufacturing tea in India uses similar wordings as under ( a) a sum equal to the amount or the aggregate of the amounts so deposited ; or ( b) a sum equal to twenty per cent of the profits of such business (computed under the head Profits and gains of business or profession before making any deduction under this section), whichever is less : 32. The Hon'ble Calcutta High Court in the context of deduction allowable under the said section in the case of Goodricke Group Ltd. vs CIT ([2011] 11 taxmann.com 130 (Calcutta)) held that the a purposive interpretation of the aforesaid provision should be made instead of literal construction of the same otherwise, the legislative purpose will be frustrated. The Hon'ble High Court concluded by holding that 28. . the second point in the negative against the revenue by setting aside the part of the finding of the authorities below on the second qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance 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. In view of these discussions in our considered view, 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 35. The assessee has added a sum of Rs. 42,18,07,237 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. The contention of the ld AR is that the housing projects which are constructed by corporate or developer may have an element of non-residential amenities and these cannot be isolated from housing projects. Therefore the ld AR argued that the interest income earned should be considered as part of the profits derived from the business of long term finance for construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to off set the interest income earned against the interest cost incurred. The assessee also raises funds from public deposits and as per the Guidelines issued by National Housing Bank, the Assessee is mandatorily required to invest a certain percentage of deposits raised in the approved Government securities which yields interest income. Therefore it was argued by the ld AR that there is a first degree nexus between the interest income earned and the business of long term finance for residential purposes. The concept of income derived from in contrast to other related concept like income attributable to has been a subject matter of discussion in various decision of the Apex Court. Highlights of some of the principles laid down by these judicial pronouncements are (i) Receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may not fall within the expression of derived from - Cambay Electrical Supply Co. Ltd. 113 ITR 84 (ii) The nexus between the income and the industrial undertaking was should be direct and not incidental, otherwise it would not fall within the expression profits derived from industrial undertaking - Sterling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself. 21. The Calcutta High Court in Merinoply Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held: We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Apex Court in the case of Liberty India could be availed after the manufacturing activity was over and exports were made. But, we are concerned in this case with the transport and interest subsidy which has a direct nexus with the manufacturing activity inasmuch as these subsidies go to reduce the cost of production. Therefore, the judgment in the case of Liberty India v. Commissioner of Income Tax has no manner of application. The Supreme Court in the case of Sahney Steel and Press Works Ltd. Others versus Commissioner of Income Tax, reported in [1997] 228 ITR at page 257 expressed the following views: . . . . . Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it unnecessary to further substantiate the reasoning in our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being Dharam Pal Prem Chand Ltd.'s case (supra) from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80- IB of the Act. 28. *** 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India's cases (supra) to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove. 30. All the aforesaid appeals are, therefore, dismissed with no order as to costs. 39. From the plain reading of the above judicial pronouncement of Hon ble Supreme Court, it can be said that so long as profits and gains emanate directly from the business itself an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance business in temporary investments and it is established that the source of investment from which the impugned income is derived is from the housing finance business of the assessee. Therefore the deployment of surplus funds by the assessee in short term investments with an intention to reduce the burden of cost of interest paid on loans in our view has a direct nexus with the business of housing finance. Therefore the income which has a direct nexus with the housing finance business of the assessee is to be considered as derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes and accordingly will be eligible for deduction u/s.36(1)(viii). The nomenclature of income is not so relevant as the nature of income since the same income which is a business income for somebody can be an income from other sources for someone else. A typical example would be the leasing of property which can either be a business income or income from property depending on whether the leasing is the doing of the business or the exploitation of the property by its owner. In the given case, the deployment of funds in short term inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DER SECTION 10(33) Ground No.3 (3.1 to 3.3) 44. The assessee had claimed exemption under section 10(33) of Rs.40,89,24,273/- u/s.10(33) against the dividend income earned. The Assessing Officer called on the assessee to show cause as to why expenses to earn the dividend income should not be apportioned and the exemption under section 10(33) be restricted to the net dividend income. The assessee, in reply submitted that the dividend income earning investments are financed from internal accruals and not out of borrowed funds. The assessee further submitted that the loan funds borrowed by the assessee are institutional loans taken for specific purpose of business of housing finance and cannot be utilized for the purpose of any other investments and, therefore, the assessee submitted that the interest paid by the assessee on the institutional loans cannot be adjusted against the dividend income and that the assessee has not incurred any other expenditure wholly and exclusively for the purpose of earning the dividend income. The Assessing Officer did not accept the submissions of the assessee. The Assessing Officer placed reliance on circular No.780 dated 04/10/2009 which clarifies that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from capital gains/dividend. The ld AR further submitted that the Hon`ble Jurisdictional High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bombay) (refer pages 68 to 72 of the case law compilation) and CIT vs. HDFC Bank Ltd. 366 ITR 505 (refer pages 64 to 67 of the case law compilation), have held that if investments have been made out of mixed funds and sufficient interest free funds are available with the assessee, then, the presumption should be that such investments have been made out of interest free funds and not borrowed funds. This view has also been approved by the Hon ble Apex Court in the case of South Indian Bank vs. CIT (2021) 438 ITR 1 (SC). 48. The Ld.DR, on the other hand, relied on the order of the lower authorities. 49. We heard the parties and perused the materials available on record. We notice that the Assessing Officer while arriving at the proportionate interest to be adjusted against the dividend income has considered the own funds of the assessee to be at Rs.1777.24 crores and the borrowed funds to be at Rs.8148.45 crores. It is also admitted fact that the cost of shares yielding dividend income is lower than that of the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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