LIC HOUSING FINANCE LIMITED,MUMBAI vs. ACIT 2(2)(1), MUMBAI, AAYKAR BHAVAN, MUMBAI

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against the order dated 08.07.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the Ld. CIT(A)”], for the Assessment Year 2018–19, whereby the assessee has raised the following grounds of appeal:

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“1. Ground No. 1 - Disallowance u/s. 14A r.w.r. 8D-Rs. 3,07,77,660/-: 1.1 The Ld. CIT (A) erred in confirming the incremental disallowance of Rs. 3,07,77,660/-u/s 14A being expenses allocable to earning tax free income, u/s 14A read with Rule 8D (Gross disallowance of Rs. 3,40,73,426/- less suo-motu disallowance offered by the Appellant - Rs. 32,95,766/-). 1.2. The Ld. CIT(A) failed to appreciate and ought to have considered that the disallowance u/s. 14A applying Rule 8D can be made only upon recording of objective satisfaction on the part of the Id. AO having regard to the books of account of the assessee that the suo-motu disallowance offered by the assessee is not correct. 1.3. Without prejudice to the above, the Learned CIT(A) further erred in confirming allocation of interest of Rs. 2,68,69,253/- and Other Expenses at 1% of the annual average of monthly average of Investments computed at Rs. 72,04,173/-, though reduced disallowance of Rs. 32,95,766/- offered by Appellant Company in tax return. 1.4. The Appellant prays that the disallowance offered suo-motu by the Appellant be accepted and the incremental disallowance u/s. 14A r.w.r. 8D amounting to Rs. 3,07,77,660/-be deleted. 2. Ground No. 2-Incorrect computation of deduction u/s. 36(1)(viia) and 36(1)(viii) of the Act: 2.1. The Ld. CIT (A) erred in confirming reduction of Rs. 25,12,56,676/- from the allowance of Rs. 164,06,15,655/- for provision for bad and doubtful debts claimed by Appellant Company u/s 36(1)(viia) by computing the same independent of allowance u/s 36(1)(viii) in respect of Special Reserve. 2.2. The Ld. CIT(A) failed to consider that the Ld. AO reduced the amount of deduction under section 36(1) (viii) prior to computing the amount of deduction u/s. 36(1)(viia) and computed 5% allowance u/s 36(1) (viia) on the balance amount. 2.3. The Appellant prays that the deduction u/s. 36(1)(viia) and 36(1)(viii) as claimed by the Appellant be allowed. 3. Ground No. 3 - Disallowance u/s. 43B - Rs. 1,66,52,884/-: 3.1. The Ld. CIT (A) erred in confirming the order passed by the Ld. AO without considering the claim of deduction of Rs. 1,66,52,884/- made u/s. 43B towards Paid Leave (PL) Encashment which was added back in Intimation u/s 143(1)(a) due to mismatch in Tax Audit Report and was claimed during assessment proceedings with certificate of actual payment of PL issued by Tax Auditors of the Company.

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3.2. The Ld. CIT(A) misled himself in believing that Appellant Assessee is claiming deduction of actuarial provisions of PL though the fact is that the amount claimed has actually been paid before due date of filing the return and hence the same is fully allowable in terms of First Proviso to section 43B of the Act. 3.3. The Appellant prays that the claim of PL paid before the due date of filing of return of income be allowed u/s. 43B of the Act. 4. Ground No. 4 - Disallowance u/s. 36(1)va) - Rs. 87,35,540/-: 4.1. The Ld. CIT(A) erred in confirming the disallowance of Rs. 87,35,540/-u/s. 36(1)(va) of the Act towards the delayed deposit of Provident Fund Contribution without appreciating that the said delay was on account of technical glitches. 4.2. The Appellant prays that the disallowance u/s. 36(1)(va) be deleted. 5. Ground No. 5 - Deduction u/s. 36(1)(viia) to be computed based on income assessed: 5.1. Without prejudice to above grounds, Appellant further prays that in case additions/disallowance made in the assessment order are sustained, then the Id. AO be directed to recompute the allowance of deduction u/s 36(1)(viia) based on assessed total income computed before making any deduction u/s 36(1)(viia) and Chapter VIA as specifically provided in section 36(1) (viia) which is income based deduction. In other words, in respect of any addition / disallowance made by AO in income computation, automatically allowance u/s 36(1) (viia) should be enhanced by 5% of addition / disallowance. The Appellant craves leave to add to, delete from or alter any or all of the above grounds of appeal.” 2. Briefly stated facts of the case are that the assessee, a Public Limited Company, is engaged in the business of providing long-term finance for housing. For the year under consideration, it filed its original return of income on 29.10.2018 declaring a total income of ₹2,721,20,78,693/-. The return was subsequently revised on 18.03.2019 and again on 30.03.2019, whereby the total income was revised to ₹2,608,59,08,870/-.

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2.1 In the revised return of income, the assessee, inter alia, claimed deduction under Sections 36(1)(viia) and 36(1)(viii) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The return was processed under Section 143(1) of the Act on 21.12.2019 and the total income was determined at ₹2,611,12,97,300/- after making certain adjustments. 2.2 Subsequently, the case was selected for complete scrutiny assessment. In response to the statutory notices issued under the Act, the assessee furnished the requisite details and explanations from time to time. Upon examination of the material available on record, the Assessing Officer completed the assessment under Section 143(3) of the Act vide order dated 17.09.2021. 2.3 While framing the assessment, the Assessing Officer, inter alia, invoked the provisions of Section 14A read with Rule 8D of the Income-tax Rules, 1962 and computed a disallowance of ₹3,40,73,426/-. After granting credit for the suo motu disallowance of ₹32,95,766/- already offered by the assessee in its return of income, the Assessing Officer made a net addition of ₹3,07,77,660/- under Section 14A of the Act. 2.4 The Assessing Officer further reworked the deduction claimed by the assessee under Section 36(1)(viia) of the Act and consequently disallowed a sum of ₹25,12,56,676/-. Besides the aforesaid adjustments, certain other additions and disallowances,

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as reflected in the grounds of appeal, were also made while determining the taxable income of the assessee. 2.5 Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). However, the Ld. CIT(A), upon consideration of the submissions advanced and the material placed on record, upheld the action of the Assessing Officer on the issues under challenge. Being dissatisfied with the findings recorded by the first appellate authority, the assessee is now in further appeal before this Tribunal, raising the grounds extracted hereinabove for our adjudication. 3. Before us, the ld. counsel for assessee filed a paper book containing pages 1-129. 4. So far as Ground No. 1 relating to the disallowance under Section 14A of the Act is concerned, the Assessing Officer observed that the assessee had earned exempt dividend income of ₹3,63,33,902/- from its equity investments in subsidiary companies, which was claimed as exempt under the provisions of the Act. The assessee submitted that investments aggregating to ₹7,409.80 lakhs alone had yielded income exempt from tax and, therefore, fell within the ambit of Section 14A of the Act. According to the assessee, the remaining investments either generated taxable income or were otherwise outside the scope of Section 14A. Before the Assessing Officer, it was contended that no direct borrowings

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had been utilized for making investments yielding tax-free income. It was further submitted that the investments in question were long-standing investments held for more than a decade and constituted legacy investments financed entirely out of the assessee’s own funds. Consequently, according to the assessee, no portion of the interest expenditure could be attributed to such investments. The assessee also pointed out that in the preceding assessment years, the First Appellate Authority had accepted its contention that no disallowance of interest expenditure was warranted in relation to such investments. The assessee further submitted that, having regard to the substantial availability of its own funds, only indirect administrative expenditure could be said to be attributable to the earning of exempt income. Accordingly, it voluntarily computed and disallowed, on an estimated basis, indirect administrative expenditure amounting to ₹1,79,322/-, the details whereof are reproduced hereunder:

“a) During the FY 2017-18, Company has received dividend income of Rs.363.34 lakh in 5 transactions wherein dividend income was directly credited to the Bank Account of the Assessee Company and for recording these 5 transactions in its books, company estimates expenditure of Rs. 150/- per transaction i.e. Rs.750/- for 5 transactions. b) Significant part of these expenses are legacy Investment held by Company for more than a decade and company is not required to incur significant expenses in nurturing these Investments. It may also be appreciated that these Investments are mainly in Subsidiary and Associate Company which are managed by an independent professional team of Executives who carry on the business under the supervisions and control of independent Board of Directors. However, at times, on policy decisions certain Executives of the Assessee Company do assist the respective Investee Companies and their time for the same can be estimated

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at half a day per month i.e. 6 days a year and accordingly remuneration paid by Assessee Company to these Senior Executives can be allocated as follows:” Sr. Designation Annual Remuneration Allocable No. Remuneration per day remuneration for 6 days a year 1 Managing Director 51,51,396 14,113 84,678 2 General Manger and 29,92,659 8,199 49,194 Company Secretary 3 Chief Financial Officer 27,19,416 7,450 44,700 Total 1,78,572

“Total indirect expenditure allocable to Equity Investments is summarized herein below:- a) Expenditure on accounting of 5 transactions of dividend Income Rs. 750/- b) Remuneration of Senior Executives Rs. 1,78,572/- Total Rs. 1,79,322/- Thus the indirect expenditure allocable to Equity Investments is Rs. 1,79,322/-.” 4.1 Without prejudice, the assessee also computed disallowance under Rule 8D for indirect administrative expenses at the rate of 1% of the monthly average investment which was worked out to Rs. 72,04,173/- having details as under:

“WITHOUT PREJUDICE TO OUR ABOVE SUBMISSION we are annexing herewith calculation of indirect expenses allocable to earning of income exempt from tax in terms of Rule 8D, as required by you, which is summarized as follows: 1) Monthly average of Equity Investments Rs. 72,17,306/- 2) 1% of monthly average Investments Rs. 72,04,173.06 Month Investment in Shares as on Monthly average in First and last day of month each months (Rs.) 01/04/2017 576479806 30/04/2017 576479806 576479806 May-17 740979806 658729806 Jun-17 740979806 740979806

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Jul-17 740979806 740979806 August-17 740979806 740979806 Sep-17 740979806 740979806 Oct-17 740979806 740979806 Nov-17 740979806 740979806 Dec-17 740979806 740979806 Jan-18 740979806 740979806 Feb-18 740979806 740979806 Mar-18 740979806 740979806 Total of monthly average 864,50,07,672/- Annual average of monthly average 72,04,17,306/-

4.2 The aforesaid submissions of the assessee, however, did not find favour with the Assessing Officer. According to the Assessing Officer, the assessee itself had consistently maintained that its business activities were financed through a common pool of funds comprising both owned and borrowed funds, which were deployed across various business segments, including investments. The Assessing Officer further observed that, for the purpose of computing deduction under Section 36(1)(viii) of the Act, the assessee had itself allocated interest expenditure amongst different streams of income, thereby acknowledging that the cost of funds formed an integral component of the income-generating activities carried on by it. The Assessing Officer also disputed the assessee’s contention that the investments capable of yielding exempt income were merely old or legacy investments made in earlier years. Upon examination of the financial statements, he noted that the value of such investments had increased substantially over the years, from ₹30.14 crores as on 01.04.2016 to ₹57.65 crores as on 31.03.2017,

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and further to ₹74.10 crores as on 31.03.2018. According to the Assessing Officer, these figures clearly demonstrated that fresh investments had been made during the relevant period and that the assessee’s claim that all investments were historical investments funded exclusively out of own funds was not borne out from the record. Proceeding on the aforesaid premise, the Assessing Officer held that, since the investments were made out of a common pool of funds which also included interest-bearing borrowings, a proportionate part of the interest expenditure was liable to be attributed to the investments yielding exempt income. The relevant findings recorded by the Assessing Officer are reproduced hereunder:

“2.2 However, on careful examination, the method of computation adopted by the assessee for computing the disallowance u/s. 14A was found to be incorrect for the following reasons. The assessee claimed that the company had not made any direct borrowal for making tax free investment, is contradictory to its submission on another issue of deduction u/s 36(1)(viia) of the Act, wherein the assessee has claimed that it had to borrow money from the market which was utilized for the purpose of business; that funding of the business was done out of common pool of funds consisting of owned funds and borrowed funds and therefore, interest costs incurred by the assessee must be shared by the respective streams for the purpose of determining profit derived from eligible business; that none of the revenue can be generated without incurring interest cost; that the company had consistently adopted the policy of allocation of interest in the ratio of revenue generated from respective revenue streams. The detailed reply is reproduced in subsequent para. It is apparent that the assessee itself has claimed that funds from common pool have invested in various activities, which of course include investment in mutual funds; and it has itself allocated interest expenses to income from various sources for arriving at the deduction u/s 36(1)(viii) of the Act. Therefore, it is illogical to accept the assessee's different stands in different paras on a single issue. Even otherwise, the assessee's version all the investments were old, is also factually incorrect since the amount of investment as on 01.04.2016 was Rs.30.14 cr. which increased to Rs.57.65 cr. as on 31.03.2017 and Rs.74.10 cr. as on 31.03.2018. Therefore, the funds were regularly being

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invested in securities generating exempt income to the assessee; and as per the assessee's own claim, the funds were invested out of common pool of funds including interest bearing funds, Therefore, it is logical and as well as legal to allocate proportionate interest expenses to investment generating exempt income. Adopting the figures from the assessee's own calculations, interest expenses allocated is calculated as under: Income H/L Term

Income from investment at Rs.54,30,82,807/- includes exempt income at Rs.3,63,33,902/-. Thus, after making proportionate allocation, interest amounting to Rs.2,68,69,253/- has to be attributed to the investment yielding exempt income. 2.3 These facts and view of the department was confronted to the assessee in the shape of a show cause notice stating that why the proportionate interest cost should not be allocated against the exempt income. In response, the assessee furnished its reply on 13.02.2021 stating that as per the amendment made in Rule 8D vide notification no. 43/2016 dated 02.08.2016, the provisions was made to disallowed only the direct expenses relating to the exempt income and 1% of the annual average of monthly average of investment for indirect expenses; that therefore, interest expenses should not be allocated; that the assessee itself had proposed for making additional disallowance on the basis of 1% of the monthly average investments.” 4.3 Accordingly, he proposed disallowance under Rule 8D for (i) proportionate interest cost and (ii) administrative expenses at the rate of 1% monthly average investment. After considering the submission of the assessee, the A.O. disallowed proportionate interest cost as well as 1% monthly average investment observing as under:

“2.4 Facts of the case on record discussed in details above and submission of the assessee have been considered. It is noticed that the assessee has admitted that 1% of the annual average of monthly averages of the investments was required to be made. However, it has contested that interest cost cannot be attributed to the exempt income as no borrowed funds were directly invested into securities

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generating exempt income. The arguments of the assessee are without any force. As has been discussed in para 2.2 above, majority of the funds available with assessee are interest bearing funds. Logic of making disallowance u/s 14A is that for computing income under every head of income, all the expenses directly or indirectly related to that source should be allocated to the revenue to the particular source, to arrive at the true income. Cost of funds utilized for the business should be allocated to the business receipts, that utilized as investment in capital assets should be capitalized to arrive at the correct gain at the time sale of investment, and that utilized as surplus for earning interest or dividend income should be allocated to receipts of interest or dividend so that true income from that source is arrived at. If such allocation is not done, one may arrive at a distorted figure of net income from a particular source. Further the facts of the case laws are not applicable in the case of the assesee. From the detailed discussion made in para 2.2 and this para, I am satisfied that a part of total interest cost to the assessee is also attributable to the investments yielding exempt income. Therefore, the amount of disallowance u/s 14A of the Act is calculated as per method provided in Rule 8D of the Rules: Interest attributable to exempt income Rs. 2,68,69,253/- 1% of monthly average of investments Rs. 72,04,173/- Total Rs. 3,40,73,426/- Less: Disallowance made by the assessee in the return Rs. 32,95,766/- Additional disallowance made u/s 14 A Rs. 3,07,77,660/- Therefore, an addition of Rs.3,07,77,660/- is hereby made to the total income of the assessee. Penalty proceedings u/s 270A of the Act are hereby initiated for under reporting of income.” 4.4 On further appeal, the Ld. CIT(A), after considering the submission of the assessee, upheld the disallowance observing as under:

“The appellant has contested the disallowance of Rs 3,07,77,660 under section 14A read with Rule 8D made by the Assessing Officer, asserting that the disallowance is both factually and legally untenable. It is claimed that:  The appellant did not incur any direct expenditure or interest-bearing borrowings for the purpose of making investments that yielded exempt income.  Investments were made out of interest-free own funds, which far exceeded the amount of such investments.

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 Accordingly, the disallowance under clause (i) of Rule 8D(2) is not attracted, and disallowance under clause (ii) must be limited to 1% of the average monthly value of investments, computed by the assessee at Rs 72.04 lakhs.  The Assessing Officer, however, mechanically invoked Rule 8D, without recording the required satisfaction under section 14A(2) regarding the correctness of the assessee's claim.  Reliance is placed on decisions such as: 1. South Indian Bank Ltd. v. CIT [(2021) 438 ITR 1 (SC)] 2. Maxopp Investment Ltd. v. CIT [(2018) 402 ITR 640 (SC)] 3. PCIT v. West Bengal Infrastructure Dev. Finance Corp. [2022] 143 taxmann.com 135 (Cal HC) The appellant also contends that Rule 8D is not to be invoked as a default method and must be applied only upon express dissatisfaction with the assessee's computation, which is absent in this case. Assessing Officer's Position

The AO invoked Rule 8D(2)(ii) and (iii) to recompute the disallowance at Rs 3,80,82,634. After allowing the assessee's self-disallowance of Rs 72.04 lakhs, a net disallowance of Rs 3,07,77,660 was added to the returned income. The AO justified the use of Rule 8D on the ground that the assessee's methodology lacked objectivity and did not offer any verifiable basis for administrative and indirect interest cost allocation. Given the scale of investment operations, the AO considered the default Rule 8D method more appropriate and consistent with departmental practice. The AO also relied on CBDT Circular No. 5/2014, which clarifies that expenditure incurred in relation to exempt income must be disallowed even if such income is not actually received, as long as investments capable of earning such income exist. Analysis and Merits While the appellant's reliance on judicial pronouncements is noted, the facts of the present case merit a more cautious approach: 1. On the claim of interest-free funds The appellant asserts that investments are sourced from own funds, but has not submitted fund-flow statements or detailed matching of funds to rebut the AO's inference. The Supreme Court in Maxopp Investment Ltd. held that whether investment is strategic or not is irrelevant, and disallowance under section 14A applies where exempt income is capable

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of being earned. The claim of own funds must be demonstrably shown to be sufficient and traceable to the investment corpus not just present in the balance sheet. 2. On Rule 8D invocation and satisfaction Though the satisfaction recorded may appear brief, the AO has, in effect, expressed his view that the assessee's methodology is unsatisfactory. In light of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [(2017) 394 ITR 449 (SC)], a general dissatisfaction if borne out by reasoning is sufficient to invoke Rule 8D. Appellate authorities are not expected to substitute their computation for the AO's unless the latter is demonstrably arbitrary, which is not the case here. 3. On administrative expenses and composite interest cost Given the appellant's nature of business, the management of investments involves indirect administrative and financial oversight, and it is neither feasible nor expected to directly trace expenses. Hence, applying 1% of average investments under Rule 8D(2)(iii) is a standard proxy to account for such costs. Further, interest expenses are incurred in bulk by financial institutions, and apportionment though not perfect is a matter of prudence. The AO has simply adopted a formula approved by the legislature. 4. On legal principle Section 14A is a statutory override and must be interpreted in line with the fiscal intent to avoid tax-free returns being subsidized by deductible expenses. The assessee's argument that disallowance is capped at Rs 72.04 lakhs is self-serving and unsupported by Rule 8D's wording. Finding On careful consideration, it is found that: 1. The AO's application of Rule 8D was procedurally in order. 2. The assessee has not conclusively established that borrowed funds were not used for investments. 3. The computation under Rule 8D is not manifestly perverse or excessive. 4. No judicial precedent categorically mandates reversal of disallowance in such factual matrices. Accordingly, the disallowance of Rs 3,07,77,660 under section 14A read with Rule 8D is held to be in accordance with law. Conclusion

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This ground of appeal is dismissed. The disallowance made by the AO is sustained.” 4.5 We have carefully considered the rival submissions advanced by the parties and perused the material available on record. The primary grievance raised by the assessee in Ground No. 1.2 is that the provisions of Rule 8D could not have been invoked in the absence of an objective satisfaction recorded by the Assessing Officer, having regard to the books of account of the assessee, that the suo motu disallowance offered by the assessee under Section 14A of the Act was incorrect. 4.6 Upon a perusal of the assessment order, we find that the Assessing Officer has specifically examined the methodology adopted by the assessee in computing the disallowance of ₹1,79,322/-, which was arrived at on the basis of the number of dividend transactions and an estimated allocation of a portion of the remuneration paid to the Managing Director, the General Manager-cum-Company Secretary, and the Chief Financial Officer. The Assessing Officer, after analysing the nature of the investments, the source of funds and the overall financial structure of the assessee, recorded detailed reasons for rejecting the aforesaid computation and expressed his dissatisfaction regarding the correctness thereof. The satisfaction so recorded cannot be regarded as either mechanical or devoid of reasoning.

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4.7 Even before us, the assessee has not placed any cogent material or contemporaneous evidence to substantiate the basis on which the aforesaid expenditure of ₹1,79,322/- was determined. The computation appears to be founded merely on estimates and assumptions without any verifiable correlation to the actual expenditure incurred in relation to the earning of exempt income. Significantly, the assessee itself, without prejudice to its principal contention, furnished an alternative computation of disallowance by applying Rule 8D. Such an alternative computation clearly demonstrates that the assessee had accepted, at least contingently, the applicability of Rule 8D to the facts of the case. In these circumstances, we are unable to accept the contention that the Assessing Officer failed to record the satisfaction contemplated under Section 14A(2) of the Act. Accordingly, Ground No. 1.2 raised by the assessee is devoid of merit and is rejected. 4.8 Through Ground No. 1.3, the assessee has challenged both the disallowance of interest expenditure amounting to ₹2,68,69,253/- and the disallowance computed at the rate of one per cent of the annual average of the monthly average value of investments. It is pertinent to note that although the assessee had, before the Assessing Officer, furnished an alternative computation under Rule 8D, it nevertheless contested the correctness of such disallowance before the Ld. CIT(A) as well as before us.

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4.9 In our considered opinion, once the provisions of Rule 8D are validly invoked, the computation mechanism prescribed therein becomes mandatory and leaves no discretion with the Assessing Officer to adopt any alternative method. The disallowance contemplated under Rule 8D(2)(iii), being one per cent of the annual average of the monthly averages of the value of investments, is therefore required to be computed strictly in accordance with the Rule. However, while computing such disallowance, only those investments which have actually yielded exempt income during the relevant previous year can be taken into consideration, in view of the ratio laid down by the Special Bench of the Tribunal in Vireet Investment (P.) Ltd. v. ACIT (2017) 165 ITD 27 (Delhi) (SB). The Assessing Officer is, therefore, directed to recompute the disallowance under Rule 8D(2)(iii) after restricting the value of investments to those which have generated exempt income during the year under consideration. 4.10 Insofar as the disallowance of interest expenditure of ₹2,68,69,253/- is concerned, the learned counsel for the assessee vehemently contended that the investments yielding exempt income were made out of substantial interest-free own funds available with the assessee and, therefore, no part of the interest expenditure could be attributed thereto. It was further submitted that most of the investments were old and represented legacy investments carried forward from earlier years.

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4.11 The learned Departmental Representative, on the other hand, drew our attention to the findings recorded by the Assessing Officer demonstrating that substantial investments had also been made during the immediately preceding assessment years, including Assessment Years 2016–17 and 2017–18. According to the Revenue, the issue whether such investments were sourced from own funds or from a common pool comprising both borrowed and non-borrowed funds requires a detailed factual verification.

4.12 Having regard to the rival submissions and the material available on record, we find that the issue relating to the source of investments has not been conclusively examined. The determination of whether the investments were made out of own funds or borrowed funds is essentially a question of fact which requires verification of the fund-flow statements, balance-sheet position and other supporting financial records. In the interest of justice, therefore, we deem it appropriate to restore this limited issue to the file of the Assessing Officer for fresh adjudication.

4.13 The assessee shall furnish all relevant documentary evidence, including fund-flow statements and supporting financial records, to establish the availability and sufficiency of interest-free own funds at the time the investments were made. The Assessing Officer shall examine the same and adjudicate the issue afresh in accordance

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with law after affording adequate opportunity of being heard to the assessee.

4.14 Accordingly, Ground No. 1 of the appeal is partly allowed for statistical purposes in the aforesaid terms.

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Section 36(1)(viii), and subsequently added back the provisions claimed under Section 36(1)(viia)(d) and Chapter VI-A. This mathematical matrix yielded an eligible base amount of ₹32,81,23,13,110/-, the 5% whereof quantified to ₹1,64,06,15,655/-, as detailed below:

“Computation of deduction u/s. 36(1)(viia)(d) of the Act

Sr. Particulars Amount (in Rs.) No. 1. Total income before claiming deduction u/s. 31,13,64,30,831 36(1)(viii) (as per pg. no. 1 of FPB) 2. Add: Deduction computed by the Appellant u/s 1,64,06,15,655 36(1)(viia)(d) and reduced while determining total income as per Sr. No. 1 (as per pg. No. 1 of FPB) 3. Add: Deduction u/s. 80G claimed by the 3,52,66,624 Appellant and reduced while determining total income as per Sr. No. 1 (as per pg. no. 1 of FPB) 32,81,23,13,110 4. Total income before claiming deduction u/s 36(1)(viii),36(1)(viia)(d) and deductions under Chapter VI-A [Sr. No. (2) + Sr. No. (3)] 1,64,06,15,655 5. Claim of deduction u/s 36(1)(viia)(d) at 5% of above [5% of Sr. No. 4]

5.3 The Assessing Officer, however, did not accept the aforesaid computation. According to him, the deduction claimed under Section 36(1)(viia) exceeded the statutory ceiling prescribed under the Act. Proceeding on the basis of the total income determined while processing the return under Section 143(1), and after adding back only the deduction claimed under Chapter VI-A and Section

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36(1)(viia), he computed the eligible base at ₹27,78,71,79,579/- and determined the allowable deduction at ₹1,38,93,58,979/-, being five per cent thereof. Consequently, the excess claim of ₹25,12,56,676/- was disallowed. The ld AO computed deduction allowable to the assessee as under:

Total Income as order u/s 143(1) :Rs.2611,12,97,300/- Add: Deduction under Chapter VI-A :Rs. 3,52,66,624/- Add: Deduction u/s 36(1)(viia) claimed :Rs.164,06,15,655/- Base amount for deduction u/s 36(1)(viia) :Rs.2778,71,79,579/- 5% of the above :Rs. 138,93,58,979/-

5.6 The Assessing Officer was of the view that the assessee had adopted an inflated base for computing the deduction and that the claim effectively resulted in deduction exceeding the statutory limit prescribed under Section 36(1)(viia) of the Act. According to the Assessing Officer, the 5% of the base amount for deduction u/s 36(1)(viia) works out to Rs. 138,93,58,979/- and therefore the excess deduction claimed by the assessee (Rs. 164,06,15,655 – Rs. 138,93,58,979) = 25,12,56,676 was disallowed by the Assessing Officer. The said working of deduction claimed in excess of the prescribed limit is as under:

“Thus, it is apparent from the very clear wording used by the Legislature for computing the amount of deduction by providing upper limit of deduction under this clause which is 5% of the total income which is to be arrived at before making any deduction under Chapter VI-A and deduction u/s 36(1)(viia) of the Act. In the return of income filed finally on 30.03.2019, the assessee has disclosed total income at Rs.2608,59,08,870/-; deduction under Chapter VI-A has been claimed at Rs.3,52,66,624/- and as replied by the assessee, deduction u/s 36(1) (viia)

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has been claimed at Rs. 164,06,15,655/-. Thus, in percentage term, deduction claimed by the assessee comes to the following figures: Total Income returned :Rs.2608,59,08,870/- Add: Deduction under Chapter VI-A :Rs. 3,52,66,624/- Add: Deduction u/s 36(1)(viia) :Rs. 164,06,15,655/- Base amount for deduction u/s 36(1)(viia) :Rs.2776,17,91,149/- % of deduction claimed wrt base amount :5.91%.

5.7 Before the Assessing Officer, the assessee contended that deductions under Sections 36(1)(viia)(d) and 36(1)(viii) operate in distinct and independent fields. It was submitted that the deduction under Section 36(1)(viia)(d) is linked to the total income, whereas the deduction under Section 36(1)(viii) relates to the creation of a special reserve out of profits derived from eligible long-term financing activities. According to the assessee, while computing the ceiling prescribed under Section 36(1)(viia), the deduction admissible under Section 36(1)(viii) could not be reduced from the total income, as both provisions are independent incentives and neither is subordinate to the other.

5.8 Before the A.O., the assessee claimed that deduction u/s 36(1)(viia)(d) has to be computed before claiming the deduction in respect of the Special Reserve credited and maintained u/s 36(1)(viii). According to the assessee both the deduction u/s 36(1)(viia)(d) and deduction u/s 36(1)(viii) operate independently. The assessee relied upon the judgment of Hon'ble Madras High Court. But ld AO noted that with due respect he was not agreed.

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He noted that on going through para 28 of the judgment, it appeared that main stress of the Hon'ble Court was to hold that all the clauses i.e. clause (i) to (xi) of Sub-Section-1 of Section-36 do not imply that those deduction depend on one another; that if an assessee is entitle to benefit under clause (i) of Sub-Section-1 of Section-36, the assessee cannot be deprived of the benefit of other clauses. The AO further noted that that is how the provisions have been arrayed. He noted that that was the crux of the judgment on this issue. He referred to the last line of the para that 'The computation of the amount of deduction under both these clauses has to be independently made without reducing the total income by deduction under clause (viii) of Section-36 of the Act' and noted that same appears general observation as it again stresses that deduction under both the clauses has to be computed independently. The ld AIO noted that if the assessee's contention was applied to the facts of this case, deduction claimed by the assessee comes to 5.91% of the total income before deduction under Chapter VI-A and deduction under this clause, which was never the intention of the Hon'ble High Court to extend the benefit of deduction beyond the limit of 5%. The AO noted that it was only the misinterpretation of the court judgment, by the assessee that has created confusion in the mind of the assessee.

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5.9 The Assessing Officer rejected the aforesaid contention and held that the assessee had misconstrued the statutory provisions as well as the judicial precedents relied upon. According to him, the deduction claimed by the assessee effectively exceeded the permissible limit of five per cent of the total income contemplated under Section 36(1)(viia), and therefore the excess claim was liable to be disallowed.

5.10 The Ld. CIT(A) concurred with the Assessing Officer. According to the first appellate authority, both deductions drew their source from the same stream of business profits and, therefore, permitting the deductions independently without any adjustment would result in an unintended double benefit. The Ld. CIT(A) further held that the principle of consistency could not override the statutory provisions and accordingly upheld the disallowance made by the Assessing Officer. The relevant finding of the Ld. CIT(A) is reproduced as under:

“Ground No. 2 The appellant has claimed that it is eligible for deduction under section 36(1)(viia)(d) for an amount of Rs 25.12 crores on account of provisions for bad and doubtful debts made by a public financial institution. It submits that this deduction is independent of and not subject to any limitation or adjustment due to a separate claim under section 36(1) (viii), which allows deduction in respect of special reserves created for eligible long-term finance. The appellant has taken the position that:  Section 36(1)(viia) (d) and 36(1) (viii) are distinct incentives, serving different purposes one for provisioning and the other for encouraging long- term financing.

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 There is no express requirement in the Act that one deduction must be reduced from the other, nor is there any stipulation that deduction under (viia) (d) should be computed after considering the deduction under (viii).  Past assessments have allowed both deductions independently, and the AO's departure from this approach is unjustified.  The relevant statutory language, in their view, supports independent quantification. The appellant, therefore, pleads that the deduction under section 36(1)(viia) (d) be allowed in full without reference to or adjustment for the amount allowed under section 36(1)(viii). Assessing Officer's Position The Assessing Officer has disallowed the deduction under section 36(1)(viia) (d) on the reasoning that the quantum of deduction allowable under this provision must be computed after adjusting for any deduction allowed under section 36(1)(viii). The AO noted that the deductions under both sections are linked to the same pool of qualifying profits i.e., the total income of the institution and if both are claimed without mutual exclusion, it leads to double deduction on the same stream of income. The AO has further reasoned that:  Section 36(1)(viia) (d) requires a provision to be made not exceeding 5% of total income, which must necessarily be computed post-deductions allowed under Chapter VI-A and other sections, including section 36(1)(viii).  If both deductions are allowed without considering their interplay, it results in an artificial inflation of eligible base, contrary to the scheme of the Act.  The deduction claimed under section 36(1)(viii) is substantial, and allowing full deduction under section 36(1)(viia)(d) would have led to double tax benefit on overlapping income. Analysis and Merits This issue raises a technical but significant question of statutory interpretation: whether the deductions under sections 36(1)(viia)(d) and 36(1)(viii) are mutually exclusive, sequential, or wholly independent. 1. On the Language of Section 36(1)(viia)(d) Section 36(1)(viia) (d) allows deduction of "an amount not exceeding five per cent of the total income", subject to conditions. However, the Act does not define "total income" in this context with the same finality as in section 2(45), which refers to income after deductions.

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The department's view, supported by judicial reasoning in other deduction contexts, is that "total income" for this purpose should be net of deductions already claimed under other heads, particularly where they arise from the same operating surplus. 1. On Interaction with Section 36(1)(viii) Both deductions draw from the profits of the same business operations namely, long-term lending by public financial institutions. If both deductions are claimed in full, on the same income base, without interplay, the effective deduction could exceed actual profits, a result Parliament never intended. While the two provisions are placed under different clauses and cover different themes provisioning vs. reserve creation the absence of an explicit bar does not imply the right to double deduction, especially when the same set of qualifying profits are being used. 1. On Judicial Interpretation and Legislative Intent The absence of direct judicial precedent does not entitle the assessee to interpret the law solely in their favor. The rule of strict interpretation of deduction provisions applies here, as reaffirmed by the Supreme Court in Liberty India v. CIT [(2009) 317 ITR 218 (SC)] and Commissioner of Customs v. Dilip Kumar [(2018) 9 SCC 1]. The guiding principle remains that deductions are exceptions to the charging section and must be interpreted narrowly. In cases of ambiguity, benefit does not automatically go to the assessee especially where a liberal interpretation would frustrate the equity of the tax base. 1. On Consistency Argument The claim that similar deductions were allowed in earlier years, even if true, does not create a vested right. As held in Distributors (Baroda) Pvt. Ltd. [(1985) 155 ITR 120 (SC)], a wrong practice does not gain legitimacy by repetition. Finding The Assessing Officer's approach to reconcile and prevent overlap between deductions under section 36(1)(viia)(d) and section 36(1)(viii) is reasonable, legally sustainable, and fiscally prudent. The appellant has not established that the provisions permit parallel and unadjusted claims from a common pool of profits. In absence of any binding precedent mandating a contrary interpretation, the AO's adjustment is upheld.

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Conclusion This ground of appeal is dismissed. The disallowance of Rs 25,12,56,676 under section 36(1) (viia) (d) is found to be valid and in conformity with law”. 5.11 We have given our thoughtful consideration to the rival submissions advanced by the parties and have carefully perused the material available on record. At the outset, it is necessary to delineate the precise controversy arising for our adjudication. The issue before us is not whether an eligible assessee can simultaneously avail deductions under Sections 36(1)(viia) and 36(1)(viii) of the Act. That proposition stands settled and is no longer res integra. The limited controversy pertains to the determination of the expression “total income” which constitutes the base for computing the statutory ceiling of five per cent prescribed under Section 36(1)(viia) of the Act. The Revenue contends that, while arriving at such total income, the deduction admissible under Section 36(1)(viii) must first be reduced. The assessee, on the other hand, maintains that the computation contemplated under Section 36(1)(viia) is independent and that the deduction allowable under Section 36(1)(viii) ought not to be deducted while determining the base amount for the purposes of Section 36(1)(viia).

5.12 The record reveals that, while computing the deduction admissible under Section 36(1)(viia), the Assessing Officer adopted the total income returned by the assessee, as processed under

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Section 143(1)(a) of the Act, as the starting point. Thereafter, the Assessing Officer added back the deduction claimed under Chapter VI-A amounting to Rs.3,52,66,624/- together with the deduction claimed under Section 36(1)(viia), and accordingly determined the base amount for the purposes of Section 36(1)(viia) at Rs.27,76,17,91,149/-. On such computation, the deduction claimed by the assessee under Section 36(1)(viia), amounting to Rs.1,64,06,15,655/-, was found to exceed the prescribed limit of five per cent, the claim working out to approximately 5.9 per cent of the base amount so determined.

5.13 The assessee, however, adopted an altogether different basis for computation. According to the assessee, the “total income” relevant for the purposes of Section 36(1)(viia) was required to be taken at Rs.31,13,64,30,831/-, being the income computed prior to allowing the deduction under Section 36(1)(viii). The computation furnished by the assessee, placed at page 1 of the paper book, indicates that after determining the business income and making the requisite additions and deductions in accordance with the provisions of the Act, the income before deduction under Section 36(1)(viii) was arrived at Rs.31,13,64,30,831/-. Thereafter, the assessee claimed deduction under Section 36(1)(viii) amounting to Rs.5,25,39,06,495/-, resulting in a total income of Rs.25,88,25,24,336/-. For ready reference, relevant computation of

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the total income available on paper book page 1 is reproduced as under:

Sr. No. DESCRIPTION AMT. IN Rs. AMT. IN Rs. PROFITS AND GAINS OF BUSINESS 30,61,87,11,417 PROFIT BEFORE TAX AS PER P& L A/C Add: Disallowables/considered separately Book Depreciation 9,98,07,648 Loss on sale of fixed assets – exps in cap. (2,04,114) Nature Loss on account of w/off of fixed assets 310 Int. income not booked as per NHB 42,51,87,800 guidelines, however taxable u/s 43D Provision for PL encashment-AS15 2,37,26,470 Provision for Sick leave as per AS-15 61,75,359 Provision for PL encashment – AS 15 Bonus act Provision for Housing Loans 2,33,92,22,512 Provision for diminution in value of 10,14,65,830 investment Provision for Housing Loans written back (23,29,39,694) Provision for Contingencies (1,200) Provision for gratuity 4,62,01,724 Provision for Investment written back (1,26,93,865) Provision for other doubtful debts written (1,10,00,000) back Provision for Loan Against Public deposit 34,928 CSR Expenses (80g based on opinion) 7,05,33,247 Disallowance under Chapter 14A 32,95,766 Sub-Total 2,85,88,12,721 33,47,75,24,138 Less: Expenses allowed\income shown separately Dividend Amount 3,63,33,902 Depreciation taken as per Income-tax 8,33,16,341 Net Capital gain considered separately 20,33,84,536 Unrealised gain on mutual fund 52,95,673 One time swap gain booked as income, 1,92,20,762 earlier offered to tax Int. income received during FY 17-18 pertains 10,61,21,678

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to FY 05-06 & offered for tax for FY 05-06 on accrual basis under Rule 6EB Int. income received during FY 17-18 pertains 8,41,03,679 to FY 06-07 & offered for tax for FY 06-07 on accrual basis under Rule 6EB Int. income received during FY 17-18 pertains 6,81,221 to FY 07-08 & offered for tax for FY 07-08 on accrual basis under Rule 6EB Int. income received during FY 17-18 pertains - to FY 08-09 & offered for tax for FY 08-09 on accrual basis under Rule 6EB Int. income received during FY 17-18 pertains 10,84,185 to FY 09-10 & offered for tax for FY 09-10 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 9,90,795 to FY 10-11 & offered for tax for FY 10-11 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 6,69,021 to FY 11-12 & offered for tax for FY 11-12 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 1,60,01,877 to FY 12-13 & offered for tax for FY 12-13 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 605246 to FY 13-14& offered for tax for FY 13-14 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 48249681 to FY 14-15 & offered for tax for FY 14-15 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 21464172 to FY 15-16 & offered for tax for FY 15-16 on accrual basis under Rule 6EB Int. Income received during FY 17-18 pertains 21035375 to FY 16-17 & offered for tax for FY 16-17 on accrual basis under Rule 6EB Housing loan written off – Provision u/s 1,64,06,15,655 36(viiia) PL encashment disallowed u/s 43B, allowed 1,66,52,884 on the basis of pyt Deduction u/s 80G 3,52,66,624 2,34,10,93,307 DEDUCTIONS:- 31,13,64,30,831 Special Reserve u/s 36(1)(viii)

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Of I.T. Act 1961 (20% of income from long term Housing 5,25,39,06,495 Loan) TOTAL INCOME 25,88,25,24,336 Rounded to 25,88,25,24,336 INCOME TAX @ 34.608% 8,95,74,24,022 Mutual Fund capital gain (Profit on sale of 20,33,84,536 mutual funds –units) 20,33,84,536 Tax on short term gain 7,03,87,320 Total tax payable 9,02,78,11,343 Tax payable for the year 9,02,78,11,343 5.14 Proceeding on the aforesaid basis, the assessee added back the deduction claimed under Section 36(1)(viia) amounting to Rs.1,64,06,15,655/- and the deduction claimed under Section 80G amounting to Rs.3,52,66,624/-, being a deduction falling under Chapter VI-A, to the income computed before the deduction under Section 36(1)(viii). Consequently, the assessee determined the eligible base amount for the purposes of Section 36(1)(viia) at Rs.32,81,23,13,110/-. Five per cent of the said amount worked out to Rs.1,64,06,15,655/-, and, on that basis, the assessee claimed the entire deduction of Rs.1,64,06,15,655/- under Section 36(1)(viia) as being within the statutory ceiling prescribed under the Act.

5.15 The controversy that falls for our consideration is a narrow yet significant one, namely, whether, for the purpose of computing the

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deduction allowable under Section 36(1)(viia) of the Act at the prescribed rate of five per cent of the “total income”, the total income should be computed after reducing the deduction admissible under Section 36(1)(viii) of the Act.

5.16 The learned Departmental Representative submitted that the expression “total income” has a well-defined statutory connotation under the Act. According to him, total income represents the aggregate income computed under the various heads of income in accordance with the provisions of the Act, after giving effect to all deductions permissible while computing income under the respective heads and thereafter allowing deductions admissible under Chapter VI-A. It was contended that the deduction under Section 36(1)(viii) is an allowable deduction while computing income under the head “Profits and Gains of Business or Profession”. Consequently, the business income, after reducing the deduction under Section 36(1)(viii), alone forms part of the total income. Therefore, while determining the “total income” for the purpose of Section 36(1)(viia), the deduction under Section 36(1)(viii) must necessarily be given effect to, and only the deduction claimed under Section 36(1)(viia) is required to be added back in view of the specific language employed in that provision.

5.17 The dispute between the parties, therefore, centers upon the manner of computing the “total income” for the purposes of Section

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36(1)(viia). The Revenue contends that the deduction under Section 36(1)(viii) must necessarily be allowed while arriving at such total income and, consequently, the balance amount alone should constitute the base for computing the deduction under Section 36(1)(viia). The assessee, on the other hand, asserts that the deduction under Section 36(1)(viii) ought not to diminish the total income for this purpose and that the base amount should be determined without reducing the said deduction. Accordingly, the precise issue requiring adjudication is the correct interpretation of the expression “total income” occurring in Section 36(1)(viia) and its interplay with the deduction available under Section 36(1)(viii) of the Act.

5.18 The learned counsel for the assessee has placed strong reliance upon the judgments of the Hon'ble Madras High Court in Infrastructure Development Finance Co. Ltd. v. ACIT [(2019) 412 ITR 115 (Mad.)] and Infrastructure Development Finance Co. Ltd. v. ACIT [(2016) 67 taxmann.com 61 (Mad.)], as well as the decision of the Coordinate Bench of the Tribunal in DCIT v. Small Industries Development Bank of India [(2025) 179 taxmann.com 348 (Mum.- Trib.)].

5.19 We find considerable merit in the contention advanced on behalf of the assessee. The Hon'ble Madras High Court in Infrastructure Development Finance Co. Ltd. (supra), while

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examining an identical controversy, categorically held that the deductions available under different clauses of Section 36(1) operate independently and are not dependent upon one another. The Hon'ble Court observed that merely because the method of computation under clause (viii) was amended by the Finance Act, 1995, it did not alter the essential character of the deduction nor make the availability of one deduction contingent upon the allowance of another.

5.20 The relevant finding of the Hon’ble High Court in Infrastructure Development Finance Company Ltd. reported in 412 ITR 115 is reproduced as under;

“28. But keeping aside the amendment introduced in 1995 for a moment, if we have a look at the import of Section 36(1) by itself, it is clear that sub-section (1) of Section 36 lists out the matters in respect of which deductions can be allowed while computing the income referred to in Section 28. Clauses (i) to (xi) of sub- section (1) of Section 36 did not make any of those matters dependent upon one another. If an assessee is entitled to the benefit under one clause of sub-section (1) of Section 36, the assessee was not deprived of the benefit of the other clause. This is how several clauses in sub-section (1) have been arranged.” 5.21. Further, the Hon’ble Madras High Court in the case of Infrastructure Development Finance Co. Ltd. reported in [2016] 67 taxmann.com 61 (Madras) also decided the question of law on this issue in favour of the assessee observing as under:

“25. That leaves us only with the third question in T.C.(A) No. 1288 of 2007 and the fifth question in T.C.(A) No. 1290 of 2007. Since they are identical, they are extracted only once as follows:-

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"Whether the Income Tax Appellate Tribunal erred in holding that the deduction to which the appellant was entitled under Section 36(1)(viia) (c) of the Act was to be granted after reducing from the appellant's income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act?" 26. In short, the question that falls for consideration is as to whether the deduction should first be allowed in terms of Section 36(1)(viii) for the application of the deduction under Section 36(1)(viia)(c). 27. All the three authorities were of the unanimous view that there is a distinction between the two types of deduction. The deduction allowable under Section 36(1)(viii), after its amendment under the Finance Act, 1995, is on the profits derived from business. The deduction allowable under Section 36(1)(viia)(c) is on the total income. Therefore the authorities held that the deduction under clause (viii) will have to be computed first before applying the deduction under clause (viia)(c). 28. But keeping aside the amendment introduced in 1995 for a moment, if we have a look at the import of Section 36(1) by itself, it is clear that sub-section (1) of Section 36 lists out the matters in respect of which deductions can be allowed while computing the income referred to in Section 28. Clauses (i) to (xi) of sub- section (1) of Section 36 did not make any of those matters dependent upon one another. If an assessee is entitled to the benefit under one clause of sub-section (1) of Section 36, the assessee was not deprived of the benefit of the other clause. This is how several clauses in sub-section (1) have been arranged. 29. It is true that before the amendment introduced under the Finance Act, 1995, the deduction to be allowed under clause (viia)(c) and clause (viii) were placed on par. The deduction was only on the total income. But, as rightly contended by the learned counsel for the appellant, the amendment did not change the character of the deduction, but changed merely the method of computation. Instead of directing the assessee to compute it at 40 percent on the total income, the amendment directed the assessee to compute the deduction at 40 percent on the profits derived out of business. 30. Such an interpretation is what appears to be borne out by the memorandum explaining the provisions in the Finance Bill, 1995, whereunder the amendment was introduced. The relevant portion of the memorandum reads as under:- "Under clause (viii) of sub-section (1) of section 36 of the Income Tax Act, 1961, an approved financial corporation engaged in providing long-term finance for industrial or agricultural development in India, or an approved public company formed and registered in India with the main object of carrying on business of providing long-term finance for construction or purchase of residential houses, is entitled for a deduction of an amount not

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exceeding 40 per cent of its total income carried to a special reserve. The deduction is allowed on the "total income" and not with reference to the income from the activities specified in section 36(1)(viii). These organisations have diversified their activities and are claiming deduction under this section even in respect of their income from activities other than those specified in this section. There is no justification for allowing the deduction with reference to income from other activities or from sources other than business. It is, therefore, proposed to limit the deduction of 40 per cent only to the income derived from providing long- term finance for the activities specified in section 36(1)(viii). It will thus take outside the purview of deduction. income arising from other business activities or from sources other than business." 31. If each of the clauses under sub-section (1) of Section 36 is independent in its operation and if each one of them does not depend upon the ther clause for the extension of the benefit, then the interpretation given by the respondent cannot be accepted. 32. Yet another distinction brought forth by the learned counsel for the appellant, also deserves consideration. While the benefit of deduction under clause (viia)(c) is available to any public financial institution or State financial corporation or State industrial investment corporation, in respect of a provision for bad and doubtful debts, the benefit of the deduction under clause (viii) is available only for the financial corporations engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India. Therefore, if the interpretation as given by the authorities are accepted, the benefit that will accrue to a finance corporation incorporated in India and providing long-term finance for infrastructure development would be lesser than what is received by the foreign banks and foreign financial institutions. This could not have been the purport of the amendment brought forth under the Finance Bill, 1995. 33. Therefore the third question in T.C.(A) No. 1288 of 2007 and the fifth question in T.C.(A) No. 1290 of 2007 are also answered in favour of the assessee. In fine, both the tax case appeals are allowed. No costs.” 5.22. The Hon'ble High Court unequivocally held that the deduction under Section 36(1)(viia) is required to be computed independently and without reducing the total income by the deduction allowable under Section 36(1)(viii). The relevant observations of the Hon'ble

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High Court leave no room for ambiguity and constitute a complete answer to the controversy before us. The Hon'ble Court further emphasized that each clause of Section 36(1) provides a distinct and independent benefit and that the entitlement under one clause cannot be curtailed by importing limitations arising from another clause unless expressly provided by the Legislature.The ratio laid down by the Hon'ble Madras High Court squarely governs the issue before us. Respectfully following the aforesaid binding exposition of law, we hold that while computing the ceiling prescribed under Section 36(1)(viia), the deduction admissible under Section 36(1)(viii) cannot be reduced from the total income. The computation adopted by the assessee, whereby the total income before deduction under Section 36(1)(viii) was taken as the starting point and thereafter the deductions under Section 36(1)(viia) and Chapter VI-A were added back for determining the statutory base, is in consonance with the legal position enunciated by the Hon'ble Madras High Court.

5.23 On the basis of such computation, the assessee correctly determined the base amount at ₹32,81,23,13,110/-, five per cent whereof works out to ₹1,64,06,15,655/-. Consequently, the deduction claimed by the assessee under Section 36(1)(viia) is fully within the statutory limit prescribed by the Act.

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5.24 Accordingly, the findings recorded by the Assessing Officer as well as the Ld. CIT(A) are set aside. The disallowance of ₹25,12,56,676/- made under Section 36(1)(viia) is directed to be deleted.

Order pronounced in the open Court on 24/06/2026.

Sd/- Sd/- (ANIKESH BANERJEE) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 24/06/2026 Kunal Kr, P.S. Copy of the Order forwarded to :

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BY ORDER,

//True Copy// (Assistant Registrar) ITAT, Mumbai