Gruh Finance Ltd., Ahmedabad V. The ACIT., Circle-4, Ahmedabad

ITA 2238/AHD/2007

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1156 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 28-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: M G PATEL AR WITH SMT A N SHAH
• Keywords: Bad and doubtful debts; Capital expenditure

Judgement Text

, A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ./ ITA.NO.2238/AHD/2007 / ASSTT. YEAR: 2004-2005 AND ./ ITA.NO.2601/AHD/2008 / ASSTT. YEAR: 2000-2001 GRUH FINANCE LD. GRUH MITHAKHALI SIX ROADS ELLISBRIDGE AHMEDABAD. VS ACIT, CIR.4 AHMEDABAD. ./ ITA.NO.2807/AHD/2008 / ASSTT. YEAR: 2000-2001 ACIT, CIR.4 AHMEDABAD. VS GRUH FINANCE LD. GRUH MITHAKHALI SIX ROADS ELLISBRIDGE AHMEDABAD. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI M.G. PATEL, AR WITH SMT. A.N. SHAH REVENUE BY : SHRI R.I. PATEL, CIT - DR WITH SHRI JAMESH KURIAN, SR.DR / DATE OF HEARING : 05/05/2016 / DATE OF PRONOUNCEMENT: 11/07/2016 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: ITA NO.2238/AHD/2007 AND 2 OTHERS 2 IN ASSTT.YEAR 2000-01, THE ASSESSEE AND REVENUE ARE IN CROSS- APPEALS AGAINST THE ORDER OF LD.CIT(A) DATED 22.5.2 008, WHEREAS IN THE ASSTT.YEAR 2004-05, THE ASSESSEE ALONE IS IN APPEAL AGAINST THE ORDER OF THE LD.CIT(A) DATED 4.4.2007. SINCE COMMON ISSUES ARE INVOLVED, THEREFORE, WE HEARD THE APPEALS TOGETHER AND DEEM I T APPROPRIATE TO DISPOSE OF THEM BY THIS COMMON ORDER. 2. FIRST WE TAKE UP THE APPEAL OF THE REVENUE IN TH E ASSTT.YEAR 2000- 01. THE GROUND NOS.1 AND 2 ARE THE ONLY SUBSTANTIA L GROUND OF APPEAL, WHICH PROJECT GRIEVANCE OF THE REVENUE AS UNDER: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING TO ALLOW 1/5 TH OF THE DEBENTURE ISSUE EXPENSES, AND DELETING THE DISALLOWANCE OF RS.11,63,048/- MADE BY THE AO, BEING 1/10 TH OF THE DEBENTURE ISSUE EXPENSES CLAIMED BY THE ASS ESSEE IN HIS RETURN OF INCOME. 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE ADDITION OF RS.6,70,36,967/- BEING EMI RESIDUAL INCOME. 3. AS FAR AS GROUND NO.1 IS CONCERNED, THE LD.CIT-D R, AT THE OUTSET CONTENDED THAT THE ISSUE IN DISPUTE IS SQUARELY COV ERED IN FAVOUR OF THE REVENUE BY THE DECISION OF THE HONBLE JURISDICTION AL HIGH COURT. 4. IT IS PERTINENT TO MENTION THAT SECTION 35D OF T HE INCOME TAX ACT, PROVIDES THAT CERTAIN EXPENDITURE MENTIONED THEREIN INCURRED BEFORE THE COMMENCEMENT OF BUSINESS AND WHICH HAVE BEEN AMORTI ZED IS ALLOWED AS DEDUCTION. HOWEVER, AFTER THE BUSINESS HAS BEEN COMMENCED THE EXPENDITURE MENTIONED THEREIN CAN BE AMORTIZED AND ALLOWED DEDUCTION U/S.35D OF THE ACT ONLY IF THE SAID EXPENDITURE IS INCURRED IN CONNECTION ITA NO.2238/AHD/2007 AND 2 OTHERS 3 WITH THE EXTENSION OF INDUSTRIAL UNDERTAKING. IT EM ERGES OUT FROM THE RECORD THAT THE ASSESSEE HAD INCURRED EXPENDITURE F OR ISSUANCE OF FULLY CONVERTIBLE DEBENTURE. IT HAS CLAIMED 1/10 TH OF THE EXPENDITURE. IN THIS YEAR, SUCH EXPENDITURE WAS CLAIMED AT RS.11,63,048/ -. THE LD.CIT(A) HAS ALLOWED THIS CLAIM OF THE ASSESSEE. HOWEVER, I N THE CASE OF GUJARAT AMBUJA COTSPIN VS. CIT, HONBLE JURISDICTIONAL HIGH COURT HAS HELD THAT EXPENDITURE INCURRED ON ISSUE OF CONVERTIBLE D EBENTURE IS A CAPITAL EXPENDITURE. IT CANNOT BE ALLOWED AS DEDUCTION. S IMILAR VIEW HAS BEEN TAKEN IN THE CASE OF TORRENT PHARMACEUTICALS LTD. V S. ACIT, 55 TAXMANN.COM 170 (GUJ). SINCE ASSESSEE HAS INCURRED THE EXPENDITURE ON ISSUE OF CONVERTIBLE DEBENTURE, WHICH IS DIRECTLY R ELATED TO THE EXPANSION OF CAPITAL BASE OF THE COMPANY, THE HONBLE HIGH CO URT HELD THAT SUCH EXPENDITURE IS TO BE TREATED AS CAPITAL EXPENDITURE . THE LD.COUNSEL FOR THE ASSESSEE WAS UNABLE TO CONTROVERT THIS CONTENTI ON OF THE LD.DR. WE, THEREFORE, ALLOW THIS GROUND OF APPEAL OF THE REVEN UE AND SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ORDER OF THE AO ON THIS ISSUE. 5. AS FAR AS SECOND GROUND IS CONCERNED, AN IDENTIC AL ISSUE WAS CONSIDERED BY THE ITAT IN THE ASSTT.YEAR 2001-02. THE FINDING OF THE TRIBUNAL ON THIS ISSUE READS AS UNDER: 18. IN THE APPEAL FILED BY THE ASSESSING OFFICER, T HE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: THE LD. CIT(A) ERRED IN LAW AND ON FACTS OF THE CAS E IN DELETING THE DISALLOWANCE OF EMI RESIDUAL ACCOUNT AMOUNTING TO RS.803.40 LACS, WITHOUT APPRECIATING T HE DEFINITION OF INCOME AS EXPLAINED BY THE HONBLE SU PREME COURT IN THE CASE OF SHIV PRAKASH JANAK RAJ & CO. R EPORTED AT 222 ITR 583. ITA NO.2238/AHD/2007 AND 2 OTHERS 4 19. SO FAR AS THIS ISSUE IS CONCERNED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS SOLD IS PORTFOLIO OF INDIVIDUAL HOME LOANS AGGREGATING TO RS 8,109.09 LAKHS BUT THE ASSESSEE IS OBLIGED TO ACT AS RECEIVING AND PAYING AGENT FOR EFFECTING RECOVERIES FROM THE INDIVIDUAL BORROWERS UNTIL THE POINT OF TIME WHEN ALL THESE LOANS ARE FULLY RECOVERED. U NDER THIS ARRANGEMENT, THE ASSESSEE IS ENTITLED TO RETAIN INT EREST IN EXCESS OF THE AGREED RATE OF INTEREST RECOVERED FROM THE BORR OWERS. IT WAS IN THIS BACKDROP THAT THE ASSESSEE COMPUTED THE SURPLU S OF RS 932.42 LAKHS BEING THE DIFFERENCE BETWEEN EMI RECOVERABLE FORM THE BORROWERS DURING THE REMAIN LOAN TENURE, AND THE AM OUNT PAYABLE BY THE ASSESSEE TO THE BUYER OF ASSESSEES HOME LOA N PORTFOLIO. THIS REPRESENTED, WHAT WAS TERMED AS, EMI RESIDUAL. OUT OF THIS AMOUNT, THE ASSESSEE FURTHER SET ASIDE A SUM OF RS 428.31 LAKHS ON ACCOUNT OF CONTINGENCIES OF PRE-PAYMENTS. THE BALAN CE AMOUNT OF RS 507.29 LAKHS WAS TRANSFERRED TO THE PROFIT AND L OSS ACCOUNT. IN THE COMPUTATION OF INCOME, IT APPEARS, THAT THE ASS ESSEE REDUCED THIS AMOUNT FROM NET PROFIT AND THEN OFFERED ONLY R S 132.02 LAKHS AS INCOME OF THE RELEVANT YEAR. THIS COMPUTATION WA S ON THE BASIS OF INCOME ACTUALLY EARNED SO FAR AS INTEREST DIFFER ENTIAL WAS CONCERNED. THE ASSESSING OFFICER, HOWEVER, WAS NOT SATISFIED WITH THE SAME. HE WAS OF THE VIEW THAT ENTIRE DIFFERENCE BETWEEN RECOVERY VALUE OF HOUSING LOANS AND AMOUNT PAYABLE TO THE BUYER OF LOAN PORTFOLIO SHOULD BE BROUGHT TO TAX IN THIS YEAR ITSELF. HE ALSO HELD THAT EVEN THE AMOUNT OF CONTINGENCY SET A SIDE BY THE ASSESSEE AT RS 428.31 LAKHS COULD NOT BE ALLOWED AS IT IS ONLY A CONTINGENT, AND NOT REAL, LIABILITY. HE THUS PROCEE DED TO BRING TO TAX THE BALANCE AMOUNT OF RS.803.40 LAKHS ( I.E. EM I RESIDUAL OF RS 935.42 LAKHS MINUS THE AMOUNT ALREADY OFFERED TO TA X AMOUNTING TO RS 132.02 LAKHS) IN THIS ASSESSMENT YEAR. AGGRIE VED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO DELETED THE ADDITION O N THE GROUND THAT THE INCOME IS TO BE BROUGHT TO TAX ONLY WHEN I T ACCRUES AND THE ACCRUAL TAKES PLACE ONLY IN THE YEAR IN WHICH T HE AMOUNTS RECOVERED FROM THE BORROWERS ARE MORE THAN PAYABLE TO THE BUYER OF LOAN PORTFOLIO. IT WAS ALSO NOTED THAT THE EMI R ESIDUAL INCOME HAS BEEN SUBSEQUENTLY BROUGHT TO TAX IN THE YEAR IN WHICH RELATED ITA NO.2238/AHD/2007 AND 2 OTHERS 5 RECOVERIES HAVE TAKEN PLACE. THE ASSESSING OFFICER IS AGGRIEVED OF THE RELIEF SO GIVEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 20. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 21. IN THE LANDMARK JUDGMENT OF CHAINRUP SAMPATRAM VS CIT [(1953) 24 ITR 481 (SC)], HONBLE SUPREME COURT HAS OBSERVED THAT WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACC OUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLO SING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOUL D CARE TO SHOW INCREASED PROFIT BEFORE ITS ACTUAL REALISATION. THI S IS THE THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS THE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACT ICE AND ACCOUNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS OF COURSE, SUCH PRINC IPLES HAVE BEEN SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMEN TS, UNREALISED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF AN ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOUNT IN A BUSINESS THAT IS CONT INUING ARE NOT BROUGHT INTO THE CHARGE AS A MATTER OF PRACTICE, TH OUGH, AS ALREADY STATED, LOSS DUE TO A FALL IN PRICE BELOW COST IS A LLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALISED. THE PRINCIPLE IS THUS UNAMBIGUOUS. THE PRINCIPLES OF CONSERVATISM, AND CO NSIDERATIONS OF PRUDENCE, IN THE ACCOUNTING TREATMENT REQUIRE TH AT NO ANTICIPATED PROFITS BE TREATED AS INCOME UNTIL THE PROFITS ARE REALIZED, AND, AT THE SAME TIME, AN ANTICIPATED LOS S TO BE DEDUCTED FROM COMMERCIAL PROFITS, AT THE FIRST SIGN OF ITS R EASONABLE POSSIBILITY. THERE MAY SEEM TO BE, AT FIRST SIGHT, AN ELEMENT OF DICHOTOMY IN THIS APPROACH INASMUCH AS ANTICIPATED LOSSES ARE TAKEN INTO ACCOUNT AND ANTICIPATORY PROFITS ARE IGN ORED, BUT THAT IS THE IMPACT OF ACCOUNTING PRINCIPLES SANCTIONED BY T HE STATUTE AND THE LAW LAID DOWN BY HONBLE SUPREME COURT. NO MATT ER HOW REASONABLE IS IT TO ASSUME THAT THE ASSESSEE WILL M AKE THESE PROFITS, THESE PROFITS CANNOT BE BROUGHT TO TAX AT THIS STAG E. THAT IS WHAT THE LEGAL POSITION, FOR THE DETAILED REASONS SET OU T ABOVE, IS. ITA NO.2238/AHD/2007 AND 2 OTHERS 6 22. IN THE CASE BEFORE US, WHATEVER BE CERTAINTY OF THE ASSESSEE REALIZING THE PROFITS IN FUTURE AS A RESULT OF THIS ARRANGEMENT, THESE PROFITS CAN ONLY BE BROUGHT TO TAX WHEN THESE ACTUA LLY ACCRUE AND ARISE AND THAT STAGE COMES ONLY WHEN THE RECOVERIES ARE MADE FROM THE INDIVIDUAL BORROWERS. IT IS ALSO NOT IN DI SPUTE, IN THE LIGHT OF THE CATEGORICAL FINDING GIVEN BY THE CIT(A), THA T THE RELATED INCOMES ARE BROUGHT TO TAX IN SUBSEQUENT PERIOD WHE N THESE INCOME ACCRUE AND ARISE. AS FOR THE REFERENCE TO HO NBLE SUPREME COURTS JUDGMENT IN THE CASE OF CIT VS SHIV PRAKASH JANAK RAJ & CO PVT LTD [(1996) 222 ITR 583 (SC)], THAT WAS A CA SE IN WHICH ACCRUAL HAD ADMITTEDLY TAKEN PLACE. THAT IS NOT THE SITUATION BEFORE US. IN THESE CIRCUMSTANCES, WE SEE NO INFIRM ITY IN THE WELL REASONED CONCLUSION ARRIVED AT BY THE CIT(A) AND DE CLINE TO INTERFERE IN THE MATTER. 23. THE APPEAL FILED BY THE ASSESSING OFFICER IS TH US DISMISSED. 24. TO SUM UP, FOR THE ASSESSMENT YEAR 2001-02 IN Q UANTUM ASSESSMENT PROCEEDINGS, WHILE THE APPEAL FILED BY T HE ASSESSEE IS PARTLY ALLOWED, THE APPEAL FILED BY THE ASSESSING O FFICER IS DISMISSED. 6. THERE IS NO DISPARITY OF FACTS. THE GROUND RAIS ED BY THE AO IS IDENTICAL, AS WAS RAISED IN THE ASSTT.YEAR 2001-02. FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH, WE DO NOT FIND A NY MERIT IN THIS GROUND OF APPEAL, WHICH IS ACCORDINGLY REJECTED. 7. IN VIEW OF THE ABOVE DISCUSSION, THE APPEAL OF T HE REVENUE IS PARTLY ALLOWED. 8. NOW, WE TAKE UP THE APPEAL OF THE ASSESSEE I.E. ITA NO.2601/AHD/2008. ITA NO.2238/AHD/2007 AND 2 OTHERS 7 9. SOLITARY GRIEVANCE OF THE ASSESSEE IS THAT THE L D.CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION OF RS.27,3 4,000/- CLAIMED BY THE ASSESSEE UNDER SECTION 36(1)(VIII) OF THE INCOM E TAX ACT, 1961. 10. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-C OMPANY IS A NON- BANKING FINANCE COMPANY IN WHICH PUBLIC ARE SUBSTAN TIALLY INTERESTED. THE MAIN OBJECT OF THE ASSESSEE IS TO PROVIDE LONG TERM FINANCE FOR HOUSING BESIDES PROVIDING FINANCE AND LEASING OF AS SETS, DISCOUNTING, INVESTMENT ETC. IT HAS FILED ITS RETURN OF INCOME ON 29.11.2000 DISCLOSING TOTAL INCOME AT RS.1,26,62,678/- UNDER SECTION 115J A OF THE INCOME TAX ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SC RUTINY ASSESSMENT AND NOTICE UNDER SECTION 143(2) WAS ISSUED AND SERVED U PON THE ASSESSEE. ON VERIFICATION OF THE ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 36(1)(VIII) OF THE INCOME TAX ACT, 1961 AMOUNTING TO RS.1,59,69,000/-. THE AO FURTHER FOUND THAT ON 29.3.2000, THE ASSESSEE HAS ASSIGNED THE LOAN PORTF OLIO IN RESPECT OF 3328 FINANCE ACCOUNTS TO M/S.HDFC. OUT OF THIS TOTAL F INANCE ACCOUNT, THE LOAN TENURE OF 325 ACCOUNTS WAS FOUND TO BE MORE TH AN FIVE YEARS, AND THE TENURE OF REMAINING ACCOUNTS WAS LESS THAN FIVE YEARS. IN OTHER WORDS, EXCEPT 325 ACCOUNTS, LOAN TAKEN BY THE CUSTO MER WAS NOT OLDER THAN FIVE YEARS. THE AO WAS OF THE OPINION THAT EX PRESSION LONG TERM FINANCE HAS BEEN DEFINED IN CLAUSE (E) APPENDED TO EXPLANATION TO SECTION 36(1)(VIII) OF THE ACT. ACCORDING TO THIS DEFINITION LONG TERM FINANCE MEANS ANY LOANS OR ADVANCES WHERE THE TERM S UNDER WHICH MONEYS ARE LOANED OR ADVANCED PROVIDE FOR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERIOD OF NOT LESS THAN F IVE YEARS. THE AO HARBOURED A BELIEF THAT SINCE THE ASSESSEE HAS TRAN SFERRED ITS FINANCE ITA NO.2238/AHD/2007 AND 2 OTHERS 8 ACCOUNT BEFORE COMPLETION OF FIVE YEARS WITH IT, TH EREFORE, IT SHOULD BE CONSTRUED THAT IN THESE ACCOUNTS, THE FINANCE WAS N OT MADE FOR LONG TERM. THE AO ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE A ND INVITED ITS EXPLANATION. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FILED A DETAILED LETTER DATED 21.8.2007. THIS SUBMISSION O F THE ASSESSEE HAS BEEN REPRODUCED BY THE AO, BUT DID NOT CONCUR WITH THE S UBMISSIONS OF THE ASSESSEE. THE REPLY OF THE ASSESSEE ALONG WITH FIN DING OF THE AO IS WORTH TO NOTE. IT READS AS UNDER: '2.1 IN THE STATEMENT OF INCOME FILED ALONG WITH TH E RETURN OF INCOME, WE HAVE CLAIMED DEDUCTION OF RS. 1,59,69,00 0/-U/S. 36(1) (VIII) OF THE INCOME TAX ACT,1961. THE OBJECT OF TH E COMPANY IS TO PROVIDE LONG TERM FINANCE FOR CONSTRUCTION OR PURCH ASE OF RESIDENTIAL HOUSE AND IT SATISFIES THE-, NECESSARY CONDITIONS PRESCRIBED U/S. 36(1) (VIII) OF THE INCOME TAX ACT AND ACCORDINGLYTHE DEDUCTION HAS BEEN CLAIMED AT 40% O F PROFIT DERIVED FROM THE LONG TERM HOUSING FINANCE ACTIVITY . FOR WORKING OUT THE CLAIM, THE TOTAL INCOME HAS BEEN SEGREGATED IN LONG TERM HOUSING FINANCE ACTIVITY AND OTHER ACTIVITIES AS PE R THE STATEMENT ENCLOSED HEREWITH. AS PER THE SAID WORKING, WE ARE ENTITLED TO DEDUCTION OF RS.159.69 LAC WHICH IS 40 % OF RS.399. 23 LAC BEING INCOME FROM LONG TERM HOUSING FINANCE ACTIVITY. DUR ING THE YEAR UNDER CONSIDERATION, SPECIAL RESERVE OF RS. 210.00 LAC HAS BEEN CREATED BY DEBITING THE PROFIT & LOSS ACCOUNT. 2.2 AS ASKED BY YOU, WE ENCLOSE HEREWITH DETAILS OF LOAN PORTFOLIO ASSIGNED ON 29TH MARCH 2000, FROM THE SAID DETAILS, IT CAN BE SEEN THAT PORTFOLIO ASSIGNED IS IN RESPECT OF 3328 FINAN CE ACCOUNTS. OUT OF THEM, AS ON 29TH MARCH 2000, LOAN TENURE OF 325 ACCOUNTS IS FOR MORE THAN 5 YEARS AND TENURE OF REMAINING ACCOUNTS IS LESS THAN 5 YEARS. DURING THE COURSE OF HEARING, VIEW EXPRESSED BY YOU THAT DEDUCTION U/S. 36(1) (VIII) CANNOT BE ALLOWED IN RE SPECT OF LOANS ASSIGNED WHOSE PERIOD IS LESS THAN 5 YEARS. IN THIS REGARD, WE WOULD LIKE TO SUBMIT AND DRAW YOUR ATTENTION TO THE PROVISIONS OF SECTION 36(1) (VIII), WHICH IS REPRODUCED AS UNDER: ITA NO.2238/AHD/2007 AND 2 OTHERS 9 'IN RESPECT OF ANY SPECIAL RESERVE CREATED AND MAIN TAINED BY A FINANCIAL CORPORATION WHICH IS ENGAGED IN PROVIDING LONG-TERM FINANCE FOR INDUSTRIAL OR AGRICULTURAL DEVELOPMENT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA OR BY A PUBLIC COMPANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CAR RYING ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRU CTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSE S, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUSINESS OF PROVIDING LONG-TERM FINANCE COMPUTED UN DER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' BEFOR E MAKING ANY DEDUCTION UNDER THIS CLAUSE CARRIED TO SUCH RESERVE ACCOUNT.' FURTHER LONG-TERM FINANCE HAS BEEN DEFINED IN THE S ECTION AS UNDER: 'LONG TERM FINANCE' MEANS ANY LOAN OR ADVANCE WHERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PROVIDE F OR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERI OD OF NOT LESS THAN FIVE YEARS.' 2.3 AS YOU ARE AWARE THAT WE ARE ENGAGED IN THE BUS INESS OF PROVIDING LONG TERM HOUSING FINANCE AND HOUSING LOA NS ARE GIVEN HAS BEEN MADE FOR A PERIOD LESS THAN 5 YEARS. ONCE LONG TERM HOUSING FINANCE IS MADE AND NECESSARY RESERVES HAVE BEEN CREATED AND MAINTAINED AS PROVIDED IN THE SECTION, DEDUCTIO N U/S 36(1) (VIII) IS ALLOWABLE. IN THE SECTION, NOWHERE, IT IS PROVIDED THAT DEDUCTION U/S 36(1) (VIII) WILL NOT BE ALLOWED IF T HE TENURE OF THE LOAN IS REDUCED TO LESS THAN 5 YEARS. IN RESPECT OF PORTFOLIO ASSIGNED, IT IS THAT LOAN PERIOD IS NOT REDUCED BEC AUSE LOANEE IS PAYING EMI REGULARLY TILL THE TENURE OF THE LOAN AS PER SCHEDULE. THOUGH THE LOAN PORTFOLIO IS ASSIGNED, OUR COMPANY IS RETAINING PART OF THE INTEREST RECEIVED FROM THE LOANEE WHICH IS THE INTEREST INCOME OF THE COMPANY ON LONG TERM HOUSING FINANCE ONLY. IT IS STRONGLY SUBMITTED THAT AFTER THE ASSIGNMENT OF LOA NS, WHICH ARE ORIGINALLY OF MORE THAN FIVE YEARS DURATION, CHARAC TER OF THE SAME BEING LONG TERM HOUSING LOAN IS NOT CHANGED AT ALL. IN VIEW OF THE FACT THAT ON THOSE LOANS THE LOANEE ARE PAYING TOTA L INTEREST TO US AND OUT OF THE SAME, CONTRACTED RATE IS PAID TO THE ASSIGNEES ITA NO.2238/AHD/2007 AND 2 OTHERS 10 RETAINING THE REMAINING AMOUNT OF INTEREST WITH US WHOSE CHARACTER AS INCOME FROM LONG TERM FINANCE REMAINS THE SAME. ALTERNATIVELY, IT IS SUBMITTED THAT THE ASSIGNMENT OF LOAN IS FOR THE PURPOSE OF AVAILING OF FINANCE FROM THE ASSIGNEE ON LY AND THEREFORE, THE INTEREST PAID OVER TO ASSIGNEE IN RE SPECT OF THESE LOANS IS ONLY FINANCE CHARGE PAID TO ASSIGNEE BUT B ASIC CHARACTER OF LOAN DOES NOT CHANGE AT ANY POINT OF TIME. THUS IN THE PRESENT CASE, CONDITIONS LAID DOWN U/S 36(1) (VIII) ARE DUL Y FULFILLED AND WE, THEREFORE, REQUEST YOU TO ALLOW DEDUCTION U/S 3 6(1) (VIII) AS CLAIMED BY US. 2.4 WITHOUT PREJUDICE TO OUR CONTENTION THAT DEDUCT ION U/S. 36(1) (VIII) IS ADMISSIBLE IN RESPECT OF INTEREST ON LONG TERM HOUSING LOAN WHICH ARE ASSIGNED / TRANSFER, WE ENCLOSE HEREWITH REVISED CALCULATION OF DEDUCTION U/S.36(1) (VIII) AFTER EXC LUDING INTEREST ON HOUSING LOAN FINANCE ASSIGNED / TRANSFER. 2.5 HDFC IS ALSO ENGAGED IN BUSINESS OF LONG TERM H OUSING FINANCE ACTIVITIES AND THEREFORE IS ELIGIBLE FOR DE DUCTION UNDER SECTION 36(1) (VIII). THEREFORE AS STATED HEREINABO VE THE LOAN PORTFOLIO HAS BEEN ASSIGNED ON MARCH 29, 2000, THE ENTIRE INTEREST HAS .BEEN ACCOUNTED IN OUR BOOKS & NO INTEREST IS A CCOUNTED IN THE BOOKS OF HDFC. IN VIEW OF THIS NO CLAIM UNDER SECTI ON 36(1) (VIII) HAS BEEN MADE BY THE HDFC AS NO INTEREST IS RECEIVE D OR ACCRUED BY HDFC.' (III) THE ASSESSEE HAS VIDE HIS LETTER DATED 21ST A UGUST 2000 HAS ENCLOSED THE DETAILS OF LOAN PORTFOLIO ASSIGNED ON 29TH MARCH 2000, FROM WHICH IT CAN BE ; SEEN THAT OUT OF PORTF OLIO ASSIGNED IS IN RESPECT OF 3328 FINANCE ACCOUNTS, AS ON 29TH MAR CH 2000, LOAN TENURE OF 325 ACCOUNTS IS FOR MORE THAN 5 YEARS AND TENURE OF REMAINING ACCOUNTS IS LESS THAN 5 YEARS. (IV) DEDUCTION U/S 36(1) (VIII) IS ALLOWABLE IN 'IN RESPECT OF ANY SPECIAL RESERVE CREATED AND MAINTAINED BY A FINANCI AL CORPORATION WHICH IS ENGAGED IN PROVIDING LONG-TERM FINANCE FOR INDUSTRIAL OR AGRICULTURAL DEVELOPMENT OR DEVELOPMENT OF INFRASTR UCTURE FACILITY IN INDIA OR BY A PUBLIC COMPANY FORMED AND REGISTER ED IN INDIA WITH THE MAIN OBJECT OF CARRYING ON THE BUSINESS OF PROVIDING LONG- ITA NO.2238/AHD/2007 AND 2 OTHERS 11 TERM FINANCE FOR CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSES, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUSINESS OF PROVIDING LON G-TERM FINANCE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSIN ESS OR PROFESSION' BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE CARRIED TO SUCH RESERVE ACCOUNT.' (V) LONG-TERM FINANCE HAS BEEN DEFINED IN THE SECTI ON AS UNDER: 'LONG TERM FINANCE' MEANS ANY LOAN OR ADVANCE WHERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PROVIDE F OR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERI OD OF NOT LESS THAN FIVE YEARS.' (VI) THE ASSESSEE ITSELF HAS IN STATED THAT OUT OF TOTAL 3328 PORTFOLIO ASSIGNED AMOUNTING TO RS. 30,68,97,000/- THE TENURE OF 325 ACCOUNTS IS FOR MORE THAN 5 YEARS AND TENURE OF REM AINING 3003 ACCOUNTS AMOUNTING TO RS. 28,19,63,692/- IS LESS TH AN 5 YEARS. THUS ONLY 9.76% OF THE PORTFOLIO ASSIGNED WAS HAVIN G TENURE OF MORE THEN 5 YEARS AND 90.2% WERE HAVING TENURE OF L ESS THEN 5 YEARS WHICH CANNOT BE TERMED AS LONG TERM FINANCE. THE CUMULATIVE FINANCE AT THE END OF FINANCIAL YEAR IS RS. 650.13 CRORES AND DURING THE YEAR IT IS RS. 166.63 CRORES (V) AS PER REVISED WORKING OF THE CLAIM U/S 36(1)(V III)GIVEN BY THE ASSESSEE COMPANY AS AGAINST THE CLAIM OF RS. 1,59,6 9,000/- AFTER CONSIDERING THE ASSIGNMENT OF PORTFOLIO IT COMES TO RS. 1,32,35,000/-. THE DIFFERENCE BETWEEN BOTH THE FIGU RES OF RS. 27,34,000/- IS DISALLOWED. PENALTY PROCEEDINGS FOR FURNISHING INACCURATE PARTICULARS OF INCOME ARE INITIATED. (DISALLOWANCE U/S 36(1)(VIII) RS. 27,34,000) 11. APPEAL TO THE CIT(A) DID NOT BRING ANY RELIEF T O THE ASSESSEE. SECTION 36(1)(VIII) HAS A DIRECT BEARING ON THE CON TROVERSY. THEREFORE, IT IS IMPERATIVE UPON TO US TO TAKE NOTE OF THIS SECTI ON. IT READS AS UNDER: IN RESPECT OF ANY SPECIAL RESERVE CREATED AND MAIN TAINED BY A FINANCIAL CORPORATION WHICH IS ENGAGED IN PROVIDING LONG-TERM ITA NO.2238/AHD/2007 AND 2 OTHERS 12 FINANCE FOR INDUSTRIAL OR AGRICULTURAL DEVELOPMENT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA OR BY A PUBLIC COMPANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CAR RYING ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRU CTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSE S, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUSINESS OF PROVIDING LONG-TERM FINANCE (COMPUTED U NDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RESERV E ACCOUNT: PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS CA RRIED TO SUCH RESERVE ACCOUNT FROM TIME TO TIME EXCEEDS TWICE THE AMOUNT OF THE PAID-UP SHARE CAPITAL AND OF THE GENERAL RESERVES O F 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 ASSIGNE D TO IT IN SECTION 3 OF THE COMPANIES ACT, 1956 (1 OF 1956); (C) GOVERNMENT COMPANY SHALL HAVE THE MEANING ASS IGNED TO IT IN SECTION 617 OF THE COMPANIES ACT, 1956 (1 OF 195 6);] (D) INFRASTRUCTURE FACILITY SHALL HAVE THE MEANIN G ASSIGNED TO IT IN CLAUSE (23G) OF SECTION 10; (E) LONG-TERM FINANCE MEANS ANY LOAN OR ADVANCE W HERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PRO VIDE FOR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERI OD OF NOT LESS THAN FIVE YEARS. 12. A BARE PERUSAL OF THE SECTION WOULD INDICATE TH AT IF AN ASSESSEE IS ENGAGED IN PROVIDING LONG TERM FINANCE FOR INDUSTRI AL, AGRICULTURE OR HOUSING PROJECTS, THEN, OUT OF PROFIT DERIVED FROM SUCH BUSINESS OF PROVIDING LONG TERM FINANCE, THE ASSESSEE COULD CLA IM A DEDUCTION OF 40% AND CREATE A RESERVE OF THAT AMOUNT. IT IS PER TINENT TO OBSERVE THAT IN THIS YEAR, THE ASSESSEE HAS CREATED A SPECIAL RE SERVE OF RS.210 LAKHS. ITA NO.2238/AHD/2007 AND 2 OTHERS 13 AS FAR AS THE CONDITIONS ENUMERATED IN SECTION 36(1 )(VIII) IS CONCERNED, THERE IS NO DISPUTE BETWEEN THE PARTIES THAT THE AS SESSEE HAS FULFILLED CONDITIONS VIZ. (A) IT IS A PUBLIC COMPANY, (B) IT IS ENGAGED IN PROVIDING FINANCE FOR HOUSING SECTOR, (C) IT HAS DERIVED PROF IT FROM SUCH BUSINESS OF PROVIDING LONG TERM FINANCE. IT HAS CREATED A SPEC IAL RESERVE. THE SHORT DISPUTE BETWEEN THE AO AND THE ASSESSEE IS WHETHER BY ASSIGNING OF LOAN PORTFOLIO, THE CHARACTER OF FINANCE ACCOUNT WHICH H AS GENERATED PROFIT OR INTEREST INCOME TO THE ASSESSEE WOULD CHANGE. THE EMPHASIS OF THE AO IS ON THE INTERPRETATION OF CLAUSE (E) APPENDED TO EXPLANATION TO THE SECTION. ACCORDING TO THE LD.AO, THIS CLAUSE SUGG ESTS THAT LOAN ACCOUNT SHOULD BE OLDER THAN FIVE YEAR, ONLY THEREAFTER, TH E INTEREST FROM SUCH LOAN ACCOUNT WOULD QUALIFY FOR DEDUCTION. THE CASE OF THE ISSUE IS THAT BY ASSIGNMENT OF LOAN PORTFOLIO THE CHARACTER OF LO AN ACCOUNT DOES NOT CHANGE. IT STILL REMAINS A LONG TERM FINANCE. THE RIGHT TO RECEIVE INTEREST HAS CHANGED THE HANDS. ACCORDINGLY THE NEW COMPANY IF FULFILLS OTHER CONDITIONS CONTEMPLATED IN THE ACT, THEN, ASSESSEE WILL BE ENTITLED TO CLAIM DEDUCTION, OTHERWISE, AUTOMATICALLY IT WILL N OT BE AVAILABLE TO ANY ASSESSEE AFTER THE ASSIGNMENT. 13. A PERUSAL OF SECTION ALONG WITH CLAUSE (E) NO W HERE REVEALS THAT THE ASSESSEE IS BOUND TO MAINTAIN THE ACCOUNT FOR FIVE YEARS, OTHERWISE THE LEGISLATURE WOULD PROVIDE THE DEDUCTION AFTER COMPL ETION OF 5 YEARS OF SUCH LOAN ACCOUNT. IT ONLY PUTS A CONDITION ABOUT THE NATURE OF ACCOUNT. AN ASSESSEE IS ENTITLED FOR DEDUCTION FOR THE PURPO SE OF THIS SECTION FROM THE FIRST YEAR ITSELF. THE MEANING CONSTRUED BY US CAN BE FURTHER FORTIFIED BY CONSIDERING SECTION 155 OF THE INCOME TAX ACT. UNDER THIS SECTION AO HAS BEEN EMPOWERED TO WITHDRAW CERTAIN DEDUCTION TO AN ASSESSEE. ITA NO.2238/AHD/2007 AND 2 OTHERS 14 FOR EXAMPLE INVESTMENT ALLOWANCE IS BEING GRANTED T O AN ASSESSEE U/S.32A IN RESPECT OF SHIP AND SUCH SHIP WAS TRANSF ERRED BEFORE EXPIRY OF EIGHT YEARS IN VIOLATION TO THE CONDITIONS, THEN U/ S.155 IT WILL BE CONSTRUED THAT SUCH ALLOWANCE WAS GRANTED WRONGLY. SIMILARLY, A PROVISION HAS BEEN MADE TO WITHDRAW NUMBER OF SUCH OTHER BENEFITS GIVEN UNDER THE ACT. BUT, THIS SECTION DOES NOT TA LK WITHDRAWAL OF DEDUCTION GRANTED U/S.36(1)(VII) OF THE ACT. THER EFORE, WE ARE OF THE VIEW THAT THE LD.REVENUE AUTHORITIES HAVE ERRED IN CONSTRUING THE MEANING OF CLAUSE (E) TO SECTION 36(1)(VIII) OF THE INCOME TAX ACT. WE REMIT THIS ISSUE TO THE FILE OF THE AO WITH A DIREC TION THAT HE WILL VERIFY THE DETAILS OF FINANCE ACCOUNTS, AND IF THERE IS NO CHANGE IN THE CHARACTER OF ACCOUNTS I.E. THEIR LIFE SPAN IS MORE THAN FIVE YEARS, WHICH CONTINUES EVEN AFTER ASSIGNMENT, THEN, INTEREST INCOME FROM T HOSE ACCOUNTS UPTO THE DATE OF ASSIGNMENT WOULD QUALIFY FOR DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT IN THE HANDS OF THE ASSESSEE . THESE DIRECTIONS ARE SUBJECT TO FULFILLMENT OF OTHER CONDITIONS WHICH AR E NOT DISPUTED BEFORE US. THE LD.AO SHALL ALSO ENSURE THAT DOUBLE DEDUCT ION SHOULD NOT BE MADE I.E. BY ASSESSEE AS WELL AS BY HDFC. 14. NOW WE TAKE UP ITA NO.2238/AHD/2007 FOR THE ASS TT.YEAR 2004- 05. THE GROUND OF APPEAL TAKEN BY THE ASSESSEE REA DS AS UNDER: 1. THE LEARNED CIT (A)-VIII., AHMEDABAD HAS ERRED IN LAW AND FACTS OF THE CASE BY CONFIRMING THE FINDINGS GIVEN BY THE ASSESSING OFFICER THAT DEDUCTION U/S 36(1)(VIII) CANNOT BE AL LOWED ON INTEREST INCOME IN RESPECT OF LOAN PORT-FOLIOS ASSIGNED OR T RANSFERRED DURING THE FINANCIAL YEAR HAVING TENURE OF LESS THA N 5 YEARS., INTEREST ON LOAN PORTFOLIOS SUBSEQUENTLY ASSIGNED H AVING TENURE OF LESS THAN 5 YEARS. BAD DEBT RECOVERED IN RESPECT OF LONG TERM ITA NO.2238/AHD/2007 AND 2 OTHERS 15 HOUSING FINANCE AND EMI RESIDUALS OFFERED FOR TAXAT ION ON ACCRUAL BASIS DURING THE ASSESSMENT YEAR AND ACCORDINGLY HA S UPHELD THE REDUCTION OF CLAIM U/S 36(L)(VIII) BY RS.2,41,88,32 1/- 15. IN THIS YEAR ALSO SOLITARY GRIEVANCE OF THE ASS ESSEE RELATES TO DENIAL OF CLAIM UNDER SECTION 36(1)(VIII) OF THE ACT. 16. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE H AS FILED ITS RETURN OF INCOME ON 30.10.2004 DECLARING TOTAL INCOME AT RS.1 2,18,86,500/-. IT HAS CLAIMED DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT OF RS.8,47,63,564/-. THE AO HAS OBSERVED THAT THE ASS ESSEE HAS SHOWN OPERATIVE INCOME FROM LONG-TERM HOUSING FINANCE CLA IM AT RS.81,90,33,995/-. IT HAS SHOWN OPERATING INCOME F ROM NON-HOUSING FINANCE BUSINESS AT RS.2,52,71,906/-. THUS, THE RA TIO OF INCOME FROM HOUSING FINANCE BUSINESS AND NON-HOUSING FINANCE IS 97.01AND 2.99. ASSESSEE HAD ASSIGNED 5112 FINANCE ACCOUNTS FROM LO NG TERM LOAN PORTFOLIO TO HDFC. THIS PORTFOLIO WAS ASSIGNED ON 30.3.2004. OUT OF THIS, LOAN TENURE OF 87 ACCOUNTS WAS MORE THAN 5 YE ARS AND TENURE OF REMAINING ACCOUNT WAS LESS THAN 5 YEARS. THE AO CO NFRONTED THE ASSESSEE AS TO WHY ITS CLAIM SHOULD NOT BE REJECTED IN RESPECT OF ACCOUNTS WHO HAVE NOT COMPLETED TENURE OF 5 YEARS. APART FR OM THIS ONE FOLD OF CONTROVERSY, OTHER ASPECT IS THAT THE ASSESSEE HAD RECOVERED BAD DEBT OF RS.1,00,74,694/-. THE ASSESSEE HAS INCLUDED THIS A MOUNT IN THE TOTAL CLAIM MADE UNDER SECTION 36(1)(III) OF THE ACT. TH E THIRD LIMB OF DISPUTE IS THAT THE ASSESSEE HAS INCOME OF RS.3,34,87,796/- UNDER THE HEAD EMI RESIDUAL. THIS HAS BEEN OFFERED FOR TAX AND IT HAS ALSO BEEN INCLUDED IN THE WORKING OF DEDUCTION UNDER SECTION 36(1)(III). THE LD.AO HAS DENIED THE DEDUCTION TO THE ASSESSEE ON ALL THREE ISSUES, NAMELY, HE REJECTED THE ITA NO.2238/AHD/2007 AND 2 OTHERS 16 CLAIM OF THE ASSESSEE WITH RESPECT TO INTEREST INCO ME DERIVED BY IT FROM THE ACCOUNTS, WHICH HAVE NOT COMPLETED TENURE OF 5 YEARS AND ASSIGNED TO HDFC BANK. THE AO HAS OBSERVED THAT BAD DEBT RE COVERED BY THE ASSESSEE IS TAXABLE UNDER SECTION 41(1) OF THE ACT. THIS INCOME WOULD NOT BE CONSIDERED AS DERIVED FROM ACTIVITY OF LON G TERM FINANCE, HENCE, THIS WILL NOT QUALIFY FOR INCLUSION IN THE ELIGIBLE PROFIT FOR GRANT OF DEDUCTION UNDER SECTION 36(1)(VIII). AS FAR AS THE 3 RD ITEM IS CONCERNED, HE AO HAS OBSERVED THAT THIS INCOME WAS IN RESPECT OF SERVICE CHARGES RECEIVED BY THE ASSESSEE BY ACTING AS AN AGENT OF H DFC TO COLLECT EMI FROM VARIOUS CUSTOMERS ON THE LOAN PORTFOLIO WHICH HAVE ALREADY BEEN SOLD/TRANSFERRED TO HDFC. THE FINDING OF THE AO IS WORTH TO NOTE. IT READS AS UNDER: 1.6 FROM THE PERUSAL OF THE REVISED WORKING OF DED UCTION U/S.36(1)(VIII) OF THE ACT SUBMITTED BY THE ASSESSE E VIDE THEIR LETTER DATED 21.12.2006 IT WAS OBSERVED THAT THE ASSESSEE HAS INCLUDED A SUM OF RS.3,34,87,796/- BEING THE 'EMI RESIDUAL OFF ERED FOR TAXATION' UNDER INCOME DERIVED FROM LONG TERM HOUSI NG FINANCE BUSINESS. THE NATURE OF THE SAID INCOME ON ACCOUNT OF EMI RESIDUAL HAS ALREADY BEEN DISCUSSED IN EARLIER PART OF THIS ORDER. AT THE COST OF REPETITION THIS IS AGAIN EXPLAIN THA T THE SAID INCOME ON ACCOUNT OF EMI RESIDUAL IS ARISING TO THE ASSESS EE ON ACCOUNT OF SERVICE CHARGES RECEIVED BY M/S HDFC FOR ACTING AS THEIR AGENT TO COLLECT THE EMI FROM VARIOUS CUSTOMERS ON THE LOAN PORTFOLIOS WHICH ALREADY HAVE BEEN SOLD/TRANSFERRED TO M/S HDF C. FOR THE SAKE OF CLARIFICATION, IT IS AGAIN EXPLAINED THAT S UCH LOAN PORTFOLIOS WHICH ARE ALREADY BEEN SOLD OR TRANSFERRED TO HDFC ARE NOT APPEARING IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AS DEBTOR BUT THE SAME ARE APPEARING AS DEBTOR IN THE BOOKS OF M/ S HDFC. FURTHER, IT IS AN ADMITTED FACT THAT M/S HDFC IS AL SO CLAIMING DEDUCTION U/S 36(1)(VIII) ON THE INCOME ARISING ON SUCH LOAN PORTFOLIOS ALREADY SOLD/TRANSFERRED TO THEM BY THE ASSESSEE COMPANY. FOR SUCH LOAN PORTFOLIOS THE ASSESSEE IS M ERELY ACTING AS COLLECTION AGENT FOR WHICH THEY ARE RECEIVING SERVI CE CHARGES AND ITA NO.2238/AHD/2007 AND 2 OTHERS 17 THE SAME BY NO STRETCH OF IMAGINATION CAN BE HELD T O BE INCOME DERIVED FROM LONG TERM HOUSING FINANCE BUSINESS. IR ONICALLY, BOTH THE ASSESSEE COMPANY AND M/S HDFC ARE CLAIMING DEDU CTION U/S.36(1) (VIII) ON THE SAME LOAN PORTFOLIO WHICH H AS NEVER BEEN THE INTENTION OF THE LEGISLATURE AND THE SAME IS NO T ADMISSIBLE U/S 36(1 )(VIII) OF THE IT ACT, 1961. IN VIEW OF THE ABOVE MENTIONED FACTS THE ASSESSEE W AS ASKED TO EXPLAIN HOW THE INCOME RECEIVED ON ACCOUNT OF 'EMI RESIDUAL' CAN BE CONSIDERED AS INCOME DERIVED BY THE ASSESSEE FRO M LONG TERM HOUSING FINANCE BUSINESS, MORE PARTICULARLY IN VIEW OF THE FACT THAT THE LOAN PORTFOLIOS ON WHICH THE ASSESSEE HAS RECEI VED THE 'SERVICE CHARGES' AND HAS BEEN CATEGORIZED AS 'EMI RESIDUAL INCOME' HAVE ALREADY BEEN SOLD/TRANSFERRED TO M/S HDFC. IN RESPO NSE TO SAME THE ASSESSEE COMPANY VIDE LETTER DATED 26.12.2006 H AS SUBMITTED THE REVISED WORKING (ANNEXURE-4) OF ELIGIBLE DEDUCT ION U/S 36(1)(VIII) OF THE ACT AFTER EXCLUDING THE 'EMI RES IDUAL INCOME' AT RS.3,34,87,796/- FROM THE INCOME DERIVED FROM LONG TERM HOUSING FINANCE BUSINESS. AS PER THE SAID REVISED WORKING T HE ASSESSEE HAS COMPUTED THE ELIGIBLE DEDUCTION U/S.36(1)(VIII) OF THE I.T.ACT OF RS.6,05,75,243/-. 1.7 IN VIEW OF THE ABOVE MENTIONED DISCUSSION THE A SSESSEE'S ORIGINAL CLAIM OF DEDUCTION U/S.36(L)(VIII) OF THE ACT AT RS.8,47,63,564/- CANNOT BE ALLOWED . THE CLAIM OF T HE ASSESSEE IN RESPECT OF INCOME ARISING ON THE LOAN PORTFOLIOS WH ICH HAS BEEN SOLD/TRANSFERRED BEFORE THE EXPIRY OF 5 YEARS FROM THE DATE OF SANCTIONING SUCH LOAN HAS ALREADY BEEN REJECTED AS DISCUSSED ABOVE. FURTHER, THE INCOME ASSESSABLE U/S.41(1) OF THE ACT BEING THE RECOVERY OF BAD DEBTS AT RS.1,00,74,694/- CANNO T BE HELD TO BE PROFIT DERIVED FROM THE LONG TERM HOUSING FINANCE B USINESS AND HENCE THE SAME ARE NOT ELIGIBLE FOR DEDUCTION U/S.3 6(L )(VIII) OF THE ACT. SIMILARLY, THE INCOME ARISING ON ACCOUNT OF EM I RESIDUAL IT RS.3,34,87,796/- ALSO CANNOT BE HELD TO BE PROFIT D ERIVED FROM THE LONG TERM LOUSING FINANCE BUSINESS AND HENCE THE SA ME ARE NOT ELIGIBLE FOR DEDUCTION J/S.36(L)(VIII) OF THE ACT. AFTER TAKING INTO ACCOUNT THE ABOVE SAID POINTS THE ASSESSEE HAS SUBM ITTED THE REVISED WORKING OF ELIGIBLE DEDUCTION U/S.36(L)(VII I) VIDE ORDER SHEET ENTRY DATED 26.12.2006 AND FROM THE SAME IT C AN BE SEEN THAT ITA NO.2238/AHD/2007 AND 2 OTHERS 18 THE ELIGIBLE DEDUCTION U/S.36(L)(VIII) HAS BEEN WOR KED OUT AT RS.6,05,75,243/-. IN THE RETURN OF INCOME THE ASSES SEE COMPANY HAS CLAIMED DEDUCTION U/S.36(L)(VIII) AT RS.8,47,63 ,564/-. HOWEVER, IN VIEW OF THE ABOVE MENTIONED DISCUSSION THE DEDUC TION U/S.36(L)(VIII) IS RESTRICTED TO RS.6,05,75,243/- A ND THE DIFFERENCE OF RS.2,41,88,321/- (8,47,63,564 - 6,05,75,243) IS ADD ED TO THE INCOME OF THE ASSESSEE COMPANY. PENALTY PROCEEDINGS U/S.271 (L)(C) OF THE I.T.ACT, 1961 IS INITIATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS OF INCOME. 17. APPEAL TO THE CIT(A) DID NOT BRING ANY RELIEF T O THE ASSESSEE. 18. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVE, W E HAVE GONE THROUGH THE RECORD CAREFULLY. AS FAR AS FIRST FOLD OF SUBM ISSION IS CONCERNED, WE ARE OF THE VIEW THAT THIS ASPECT OF THE ASSESSEE IS COVERED BY OUR FINDING IN THE ASSTT.YEAR 2000-01 DISCUSSED IN THE AFORESAI D PART OF THIS ORDER. THE AO SHALL CARRY OUT SIMILAR EXERCISE AND THEN GR ANT DEDUCTION TO THE ASSESSEE. 19. AS FAR AS THE BAD DEBTS RECOVERED BY THE ASSESS EE ARE CONCERNED, THE AO HAWS OBSERVED THAT RATIO OF OPERATING INCOME FROM LONG TERM FINANCE IS 97.01%. IN THE YEAR IN WHICH THE LOANS H AVE GONE BAD AND THE ASSESSEE HAS WRITTEN OFF THEM, THE ELIGIBLE PROFIT DERIVED FROM LONG TERM HOUSING FINANCE WAS REDUCED BY THE AMOUNT WRITTEN O FF BY THE ASSESSEE AS BAD DEBT. IN THIS YEAR, WHEN THE ASSESSEE RECOV ERED BAD DEBTS, ITS INCOME FROM LONG TERM FINANCE WOULD BE ENHANCED BY THAT MUCH AMOUNT. THUS, THE AO HAS ERRED IN REJECTING THE CL AIM OF THE ASSESSEE. THE AO HAS MADE REFERENCE TO THE JUDGMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF CIT VS. STERLING FOODS, 237 IT R 579 (SC). IN THAT CASE WHILE CONSTRUING EXPRESSION DERIVED, THE HON BLE COURT HAS ITA NO.2238/AHD/2007 AND 2 OTHERS 19 OBSERVED THAT THERE SHOULD BE A NEXUS BETWEEN THE I NCOME DERIVED FROM INDUSTRIAL UNDERTAKING. THE ASSESSEE HAS SOLD IMPORT ENTITLEMENT, AND IN THAT CONTEXT, IT WAS CONSTRUED THAT SUCH INC OME WAS NOT DERIVED FROM INDUSTRIAL UNDERTAKING. IN THE PRESENT CASE, INCOME DERIVED BY THE ASSESSEE IS FROM LONG TERM FINANCE I.E. INTEREST IN COME. IT WAS REDUCED BY VIRTUE OF WRITTEN OFF OF CERTAIN DEBTS WHICH HAS DIRECT NEXUS WITH THE INCOME DERIVED BY THE ASSESSEE. THIS YEAR, THESE E NTRIES HAVE BEEN REVERSED BY RECOVERY OF THIS BAD DEBT. THUS, NEXUS IS AVAILABLE. THE AO IS NOT JUSTIFIED TO EXCLUDE THE AMOUNT OF BAD DEBTS RECOVERED BY THE ASSESSEE FOR CALCULATING THE CLAIM UNDER SECTION 36 (1)(VIII) OF THE ACT. 20. AS FAR AS THE THIRD LIMB IS CONCERNED, WHILE CO NSIDERING THE ISSUE, WITH REGARD TO EMI RESIDUAL IN THE ASSTT.YEAR 2000- 01, WE HAVE REPRODUCED THE FINDING OF THE ITAT IN THE ASSTT.YEA R 2001-02. THE NATURE OF INCOME IS BY PROVIDING SERVICES TO THE HD FC. IT IS NOT THE INTEREST INCOME AS SUCH EARNED BY THE ASSESSEE FROM LONG TERM FINANCE. THE LD.AO HAS ALSO CONSIDERED THIS ASPECT IN THE FI NDING EXTRACTED SUPRA. CONSIDERING THE FINDING OF THE AO, IN THE LIGHT OF THE DISCUSSION MADE BY THE ITAT IN THE ASSTT.YEAR 2000-01 AND 2001-02 EXTR ACTED SUPRA, WE ARE OF THE VIEW THAT THE INCOME FROM EMI RESIDUAL OFFER ED FOR TAXATION IS AN INCOME WHICH REPRESENTS DIFFERENCE OF INTEREST CHAR GED BY THE ASSESSEE FOR THE SERVICES RENDERED BY IT FOR COLLECTING EMI ETC. ON BEHALF OF THE HDFC. IT IS NOT LINKED WITH LONG TERM FINANCE. T HEREFORE, THIS INCOME WILL NOT FORM PART OF THE ELIGIBLE PROFIT DERIVED F ROM LONG TERM FINANCE FOR THE PURPOSE OF CALCULATING 40% OF THE AMOUNT TO CLAIM DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT. TO THIS EXTE NT, WE UPHOLD THE ITA NO.2238/AHD/2007 AND 2 OTHERS 20 FINDING OF THE AO, AND THE REST OF TWO FOLDS OF GRI EVANCE OF THE ASSESSEE ARE ALLOWED. 21. IN THE RESULT, ALL THREE APPEALS ARE PARTLY ALL OWED. ORDER PRONOUNCED IN THE COURT ON 11 TH JULY, 2016 AT AHMEDABAD. SD/- SD/- (MANISH BORAD) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER