A division bench of the Gujarat High Court in Gruh Finance Ltd v. DCIT, held that a Finance Corporation cannot claim of deduction under section 36(1)(viii) of the Income Tax Act, 1961 in respect of interest received on EMI after the sale of portfolios to another Company.
Assessee, in the instant case, was engaged in the business of providing long-term finance to individuals. Assessee transferred the entire business of housing finance to HDFC in connection with the loan portfolios before the completion of five years from the date of sanction of the loans. After transfer of a particular portfolio, the HDFC had claimed deduction in respect of such portfolio of long term housing finance to the extent of interest received by it. Even after the transfer of the portfolio, assesse collected the EMI as an agent and retained a part of the interest received from the loanee and therefore, it claimed deduction in respect of such interest component. However, the claim was rejected by the Assessing Officer.
Assesse maintained that once such long term housing finance was made available and necessary reserve was created, the deduction under section 36(1)(viii) of the Act would be available.
Both the first and second appellate authority confirmed the department’s view. Aggrieved by the order, assesse approached the High Court.
After analyzing the sale agreement between the assesse and HDFC, the bench noted that all profits, losses and risks would thus, be borne by HDFC. The assesse merely continued to act as a receiving and paying agent. For such services, the assessee would receive 6.75% of the interest component.
Section 36(1)(viii) of the Income Tax 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.
A bench of Justices Akil Khureshi and Biren Vaishnav noted that the term ‘long-term finance’ as explained in clause (e) of the explanation 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 long-term 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 long-term 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 long-term finance.”
Read the full text of the Judgment below.
