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JCIT(OSD), RANGE-10, NEW DELHI , C.R. BUILDING ITO vs RURAL ELECTRIFICATION CORPORATION LTD., KASTURBA NAGAR | BharatTax

JCIT(OSD), RANGE-10, NEW DELHI , C.R. BUILDING ITO vs. RURAL ELECTRIFICATION CORPORATION LTD., KASTURBA NAGAR

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ITA 609/DEL/2025Status: DisposedITAT Delhi12 February 2026AY 2020-2142 pages

AI SummaryPartly Allowed

Facts

The assessee and Revenue filed cross-appeals concerning multiple assessment years (2018-19 to 2021-22) against the CIT(A)'s order. The core dispute involved the eligibility of various incomes for deduction under Section 36(1)(viii) of the Income Tax Act related to long-term finance, including issues of prepayment premiums and processing fees.

Held

The Tribunal ruled that processing fees, upfront fees, and other incomes with a direct nexus to the long-term finance business are eligible for deduction under Section 36(1)(viii). It also clarified that the characterization of a loan as long-term is based on the initial terms, not its premature repayment. The assessee's appeals for AY 2018-19 and 2019-20 were partly allowed, while the Revenue's appeals for all years were dismissed.

Key Issues

Eligibility of fees and premiums for deduction under Section 36(1)(viii) and the determination of 'long-term finance' based on loan terms versus premature closure.

Sections Cited

36(1)(viii), 36(1)(vii), 36(1)(viia), 14A, 80G, 143(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCHES ‘B: NEW DELHI.

Before: SHRIS.RIFAUR RAHMAN & SHRI ANUBHAV SHARMA

For Appellant: Shri Ashwani Taneja, Advocate, Shri Shivam Kukreja Advocate, Shri Shantanu Jain, Advocate, Shri D. Dubey, Advocate, Ms. Ria Jain, Advocate

For Respondent: Ms. Pooja Swroop, CITDR

Hearing: 20.11.2025

JCIT – 10 (OSD), vs, Rural Electrification Corporation Ltd., Delhi. Core-4, Scope Complex, Kasturba Nagar, 7 Lodhi Road, East Delhi 110003. (PAN : AAACR4512R) (APPELLANT) (RESPONDENT) ASSESSEE BY : Ms. Menal Goel, CA Ms. Tanya Upreti, Advocate REVENUE BY : Ms. Pooja Swroop, CIT DR Shri Rajesh Kumar Dhanesta, Sr. DR Date of Hearing : 20.11.2025 Date of Order : 12.02.2026 ORDER

PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :

1. The assessee and Revenue has filed cross appeals against the order of the Learned Commissioner of Income Tax (Appeals)-20, New Delhi [“Ld. CIT (A)”, for short] dated 22.11.2024 for the Assessment Years 2018-19 and 2019-20. The Revenue has also filed appeals against the order of the ld. CIT (A) dated 28.11.2024 for the Assessment Years 2020-21 and 2021-22.

Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order.

& 578/Del/2 Frist we take up and for AY 2018-19wherein both the assessee and revenue has taken following grounds of appeal, the assessee has taken the following grounds :-

1. That the action taken w/s 143(3) of the Income Tax Act and consequent assessment framed, as upheld by Ld. CIT(A) is vitiated, without jurisdiction and contrary to law.

2. That the Ld. CIT(A) has erred in law and on facts in upholding the action of the Ld. AO in making the additions/ disallowances on the issues which were beyond the scope of limited scrutiny, as such the assessment order passed is illegal, without jurisdiction and liable to be set aside.

6. With regard to Ground Nos.3 to 3.2 raised by the assessee and grounds 1 and 2 raised by the revenue are common issues of deduction u/s 36(1)(viii) of the Act, the relevant facts are, during the assessment proceedings, the AO observed that the assessee is in the business of providing financing for rural electrification. Every loan is sanctioned with prior terms and conditions of loan repayment, interest and schedule of repayment. It is pre- decided based on individual loan policy and must maintain the details of various loan sanctions, maturity period, status of repayment and closure of loan account. He observed that as per the information available in the public domain, assessee had well defined policy guidelines in respect of 578/Del/2 premature repayment/prepayment of terms of loan and short-term loans. On perusal of the records, he noticed that the assessee has earned pre- payment premium of Rs. 1,06,41,31,740/- during the year under consideration. The pre-payment premiums are charged to be paid by the borrowers opting for pre-payments of loan to the assessee and sometimes such pre-payments happens before the end of 5 years from the date of granting of loan. Since the assessee is engaged in the business of providing long terms finance, accordingly, it claims deductions u/s 36(1)(viii) of the Act. He observed that as per the clause (h) of the above section, the long term finance means any loan where the terms under which the moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than 5 years. Further observed that as per above definition, the money should be payable during a period of not less than 5 years, therefore, wherever the money is repaid in a period less than 5 years no deduction u/s 36(1)(viii) of the Act should be granted on the income derived from such loans. He observed that this leads to misuse of the provisions. 6.2 He observed that as per the above provisions of the Act, the assessee is eligible to claim 20% of the profits derived from the eligible business. The prepayment premium is received from the applicant on the loans which are 578/Del/2 repaid before its maturity, accordingly the assessee had earned Rs. 106.41 crores, thus, withdrawal of deduction claimed u/s 36(1)(viii) of the Act is required in the year under consideration. He noticed that the assessee had earned Rs. 47.80 crores out of loans prepaid after 5 years and Rs. 58.61 crores out of loans prepaid in 5 years or less. Further he noticed that as per the policy documents, it charges 0.75% of the loans outstanding on the date of prepayment. Based on the above information, he worked the repayment of loan amount by factoring the premium earned with the fixed rate of premium of 0.75%, the total loan repaid was determined at Rs. 7815.12 crores, by adopting 11.5% as the estimated average interest rate, determined the estimated income earned by the assessee out of the above- mentioned loans at Rs. 898.74 crores. From the above, he disallowed the deduction u/s 36(1)(viii) of the Act, at 20% of the above estimated income at Rs. 179.75 crores. He added the above estimated deduction claimed by the assessee during the year. 6.3 Further he observed that the deduction u/s 36(1)(viii) is available in respect of special reserve created by the financial corporation for providing long term finance, an amount not exceeding 20% of the profits derived from such business of providing long term finance before making any deduction (under this clause) carried to such reserve account. It is available only & 578/Del/2 when the special reserve is created, the income should have been earned from the long term finance which should be out of loans advanced thereof during a period not less than five years. The assessee was asked to explain why the disallowance on account of deduction u/s 36(1)(viii) should not be made on the same reasoning as done in the preceding to the assessment year under consideration. In response, the assessee submitted that it is providing long term finance and is eligible to claim deduction u/s 36(1)(viii) along with the deduction u/s 36(1)(via)(c) of the Act. He observed that the assessee also considered into account various fees charged like processing fees, upfront fees, lead finance fees underwriting fees etc., from its borrowers on such eligible financing. AO observed that in the previous years, why this should not be disallowed. In response, it was submitted that the above said incomes are direct nexus to the long- term finance business of the assessee and undisputedly it is eligible for deduction. It was also submitted that the word used in the provisions of the Act that profit derived from the eligible business which is carried to the reserve account should be considered in calculating deduction under the section. The assessee relied on the decision of Hon’ble decision of Supreme Court in the case of National Organic Industries Limited (106 STC 467)(1997), Pandian Chemicals (129 Taxmann 539)(2003) and other 578/Del/2 related decisions on the issue of income derived from the business. Further it was submitted that the deduction u/s 36(1)(viii) should be determined and allowed before the computation of deduction u/s 36(1)(via)( c) of the Act. The assessee relied on the decision in the case of Infrastructure Development Finance Co. Ltd (2016) (67 taxmann.con 61) and also decision of coordinate bench decision in the case of Tourism Finance Corporation of India (31 SOT 495) (2009). With regard to mode of computation of deduction u/s 36(1)(viii) and 36(1)(viia) (c), it was submitted that as held in the assessee’s own case, the coordinate bench had decided in favour of the assessee that the deduction u/s 36(1)(viii) and 36(1)(via) are interdependent on each other. 6.4 After considering the above submissions of the assessee, the AO rejected the submission of the assessee and proceeded to determine the deductions by following the decision of the coordinate bench and came up with the new calculation and the same are reproduced at pages 53 to 57 of the assessment order, as per which the assessee had claimed excess to the extent of Rs. 64,83,31,467/-.

2.4 That the Income Tax Department has drawn any adverse inference on the said issue in the preceding years but has drawn favourable inference in the subsequent years. The details are as under: Amount of Amount of upfront fees, processing fee processing etc disallowed AY (Rs.) (Rs.) Remarks Department has disallowed by stating that processing fee is not derived from LT financing. The matter is settled under VsV 2015-16 519306068 519306068 1.0 scheme. 2 Department has disallowed by stating that . processing fee is not derived from LT 5 financing. The matter is settled under VsV 2016-17 247129474 247129474 1.0 scheme. Department has disallowed by stating that T processing fee is not derived from LT h financing. The matter is settled under VsV a 2017-18 484880660 484880660 1.0 scheme. t Department has disallowed by stating that processing fee is not derived from LT i financing. Issue pending in the present 2018-19 151141174 151141174 appeal. n Department has disallowed by stating that processing fee is not derived from LT i financing. Issue pending in the present d 2019-20 295224202.2 295224202.2 appeal. e No addition on said issue by Ld. AO in the n 2020-21 554198049 0 Assessment Order passed dated 28.09.2022 No addition on said issue by Ld. AO in the t 2021-22 641301896.5 0 Assessment Order passed dated 26.12.2022 i 578/Del/2 That in identical facts and circumstances the Hon’ble High Court of Karnataka in the case of CIT vs. Weizmann Homes Ltd. in 33 taxmann.com 171(See CLC Page 7, Para 9)has held that the processing fee and penal interest received by the Assessee who is in the business of providing Long Term Finance shall be included in income eligible for deduction u/s 36(1)(viii) of the Act, as the same has direct nexus with the business of Long Term Finance. The relevant portion reads as under: - “9. In the instant case, the assessee is in the business of long term finance. In order to carry on the said business, a debtor, who needs the assistance, has to make an application in writing. To consider the said application before granting loan, the assessee collects processing charges. After the debtor is found to be eligible to grant loan, agreements are entered into and thereafter loan is advanced. The amount has to be repaid with interest within 7 years period for repayment of the loan. The agreement also contains the stipulation that the amounts are not paid periodically as agreed to, the debtor has to pay penal interest. If the debtor chooses to repay the amount and fore close before the agreed period, then not only he has to pay the loan amount plus interest, he has also to pay additional interest, as he is not entitled to the benefit in respect of lower rate of interest, which was spread over the period of 7 years. All these amounts, which are paid by the debtor to the assessee, have a direct nexus with the business, which he is carrying on. All these incomes are derived from the business, which he is carrying on. It is also on record except this long term finance business, the assessee is not carrying on any other business much less any short-term finance business. Therefore, all these categories of incomes which the assessee is receiving as a direct nexus with the long term finance and therefore Section 36(1)(viii) of the Act is attracted. Therefore, we do not see any merit in these appeals. Accordingly, the first substantial question of law is answered in favour of assessee."

“In this regard it is relevant to look at the ratio laid down by the Hon'ble Supreme Court in the case of Meghalaya Steels Ltd (supra) while considering the distinction between the expression "derived from" and "attributable to" where it is held that "derived from" as being something directly from, as opposed to "attributable to", which can be said to include something which is indirect as well. Therefore, the test for eligibility for deduction is to be the first degree/direct nexus between the income earned and the business of the assessee. The nature of business of the assessee is lending money for construction / purchase of residential houses which is funded by raising loans from institutions and there is bound to be a time gap in terms funds mobilised and utilised. The assessee is using the idle funds of housing finance business in temporary investments, and it is established that the source of investment from which the impugned 578/Del/2 income is derived is from the housing finance business of the assessee.Therefore, the deployment of surplus funds by the assessee in short term investments with an intention to reduce the burden of cost of interest paid on loans in our view has a direct nexus with the business of housing finance. Therefore, the income which has a direct nexus with the housing finance business of the assessee is to be considered as "derived from" the business of providing long- term finance for construction or purchase of houses in India for residential purposes and accordingly will be eligible for deduction u/s.36(1)(viii).The nomenclature of income is not so relevant as the nature of income since the same income which is a business income for somebody can be an income from other sources for someone else. A typical example would be the leasing of property which can either be a business income or income from property depending on whether the leasing is the doing of the business or the exploitation of the property by its owner. In the given case, the deployment of funds in short term investment is part and parcel of housing finance business of the assessee since the idle funds are available in the regular course of business of housing finance and as part of the business activity the assessee keeps these funds in short term investments which earn income.”  Pandian Chemicals Vs CIT (129 Taxman 539) [2003] (See CLC Page 136, 138 Para 6 & 8)

“The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.” [Para 20]  CIT vs Lucknow Public Educational Society 318 ITR 223 (ALL) “The Assessing Officer had treated the revised return as ‘non est’ wrongly, for the reason that he himself had passed the order under section 143(3) on the basis of the original return where the assessee was legally entitled to the exemption under section 11, if not under section 10(23C). The department should not take advantage of the ignorance of the assessee as per the CBDT Circular No. 14(XL- 35)/1955, dated 11-4-1955. Hence, it was the duty of the Assessing Officer to have asked information from the assessee at the time of scrutiny, but he had not done so before completing the assessment under section 143(3). Further, the tax audit report along with return 578/Del/2 is not a mandatory condition as per the ratio laid down in the case of CIT v. Rai Bahadur Bissesswarlal Motilal Malwasie Trust [1992] 195 ITR 825/65 Taxman 273 (Cal.) as well as in the case of CIT v. Sankalp Welfare Society [2008] 303 ITR 64 (Punj. & Har.). The audit report can be furnished before completing the assessment. [Para 9] In the instant case, the Assessing Officer had not asked for any information before denying the exemption for which the assessee was legally entitled. On the other hand, he had rejected the second return which was enclosed with the necessary documents for claiming the exemption. [Para 11] No opportunity was given to the assessee for any discrepancy. The assessee was entitled to exemption under section 11 and that exemption was the statutory exemption available to the assessee. [Para 12] In the light of above discussion, no substantial question of law emerged from the impugned order of the Tribunal. Therefore, the appeal was to be dismissed. [Para 13]” 2.8.6 Further, reliance is placed on J&K High Court in Snehlata (2004) 192 CTR 50: In this case, it has been held that: “When the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and section 114 of the State (J&K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law…”

11.

Considered the rival submissions and material placed on record. We observed that the AO, while processing the deduction claimed by the assessee, observed that the assessee had earned other income from the processing fees on loan application (50% at the time of application and balance at the time of sanction of the project), Upfront fees, Lead financer fees, Security Trustee Fees, Underwriting Fees and letter of comfort fees during the year. He was of the view that these are additional income from other businesses and not connected to the long term finance business of the assessee. Similar view was taken by the department in the previous assessment years from 2015-16 to 2017-18. We noticed that the above disallowances were settled by the assessee under Vs V 1.0Scheme. However, the assessee raised this issue before us and also brought to our notice that the revenue has accepted the stand of the assessee in the subsequent assessment years i.e., from AY 2020-21 and 2021-22 onwards. We further noticed that the Ld CIT(A) had rejected the above plea on the basis of the decision in the case of Power Finance Corporation Ltd (supra) by the coordinate bench. In our view, the above decision was rendered on 25.06.2009. However, we noticed that Hon’ble Karnataka High Court held 578/Del/2 in the case of Weizmann Homes Ltd (supra) that the processing fee and penal interest received, who are in the business of providing long term finance shall be included in the eligible income for deduction u/s 36(1(viii) of the Act, as the same has direct nexus with the business of Long Term Finance. Respectfully following the same ratio, we are inclined to hold that the processing fees collected by the assessee has direct nexus with the long term finance provided by it. It cannot be dissociated and to the extent it is relates to the eligible loans granted under the long term schemes. Similarly, the other incomes like upfront fee, Lead Financer Fees, Security Trustee Fee and other fees are directly connected with the long-term finance business of the assessee. These fees are derived directly from the long term finance, towards processing the loan and administer of the long term loans, since, there is direct decision of the Hon’ble High Court, we are inclined to follow the same. With regard to decision of AAR quoted by the assessee, we are of the view that it is relating to the interest paid by REC on foreign currency loans, utilized for its business, was subject to withholding tax (TDS) under Section 195 of the Income-tax Act, 1961, as it deemed to accrue or arise in India. It is not relevant to the present issue.

27.

On the other hand, Ld AR submitted as under: “For the subject AY, the Assessee extended CSR donations amounting to Rs.156.68 crore to REC Foundation in furtherance of its charitable objects, which is duly registered under Section 12A and Section Gof the Act. The aforesaid sum being part of Assessee’s CSR obligation was suo motu disallowed in the return as per Explanation 2 Section 37(1) of the Act. However, eligible deduction (at 50%) amounting to Rs.78,34,00,000/-was claimed under Section 8G of the Act. That the aforesaid deduction was denied by the Ld. AO merely on the ground that the same formed part of CSR obligations under Section 135 of the Companies Act, 2013 and were not “voluntary" in nature. That the Ld. AO failed to appreciate that CSR expenditure though mandatory, is philanthropic in nature, without any quid pro quo, and hence qualities for deduction under Section G of the Act, upon satisfaction of prescribed conditions vide Interglobe Technology Quotient (P) Ltd v. ACIT [2024] 163 taxmann.com 542 (Delhi - Trib) and Cheil India (P) Ltd. v. DCIT, [2024] 169 taxmann.com 507. Further that the legislature nowhere specifies any exception qua ineligibility of deduction under Section 80G(2)(iv) of the Act regarding contributions made in pursuance of CSR obligations, except made towards the Swachh Bharat Kosh and Clean Ganga Fund as confined by Section 80G(2)(a)(iiihk) and Section 80G(2)(a)(iiihl) of the Act vide Gujarat Mineral Development Corporation Ltd. v. PCIT [2025] 176 taxmann.com 227 (Ahmedabad – Trib). That it is amply clear that the legislature has no intention to deny deduction of CSR contributions made under Section S0G of the Act, provided the conditions specified therein are satisfied vide IN Ericsson India Global Services (P) Ltd, e DCIT, [2024] 160 taxmann.COm 599 (Delhi - Trib), as under “7. Only condition for claiming deduction under section 80G of the Act as per the existing provisions is the institute to which donation is made must have been registered under section 80G of the Act. Once therefore said condition is fulfilled, the donor is 578/Del/2 entitled to avail the deduction. This is also the view expressed by the Co-ordinate Bench in case of Honda Motorcycle and Scooter India Pot. Ltd. (supra),"