HOUSING DEVP. FIN.CORPN. LTD. vs. THE ADIT CIR. 1(1),

The Assessee is a Housing Finance Institution set up in 1977 with the main object of providing loans for purchase or construction of residential houses in India. It is regulated by National Housing Bank, which is an wholly owned subsidiary of Reserve Bank of India and satisfies all conditions stipulated by the National Housing Bank. The assessee’s business activity include, leasing and 2 ITA 552/Mum/2004 Housing Development Finance Corporation Limited providing loans for the purposes other than for purchase or construction of residential house. The assessee, for the purpose of providing housing loan mobilizes bonds from public and also secures loans from various international agencies. The assessee also borrows from National Housing Bank an Life Insurance Corporation of India. The assessee filed the return of income for the assessment year 1998-99 on 30/11/1998 declaring a total income of Rs.146,93,24,570/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer completed the assessment by assessing the income at Rs.232,01,37,101/-. Aggrieved, the assessee filed the appeal before the CIT(A), who partially allowed the appeal. Aggrieved, the assessee is in appeal before the Tribunal.

The effective issues arising for our consideration in the present appeal are as under – : (a) Whether the Appellant would be entitled to deduction in respect of provision for exchange loss on foreign currency borrowings arising on account of revaluation of the said borrowings at the year-end (refer Ground Nos. 1.1 to 1.3 of the Concise Grounds of Appeal);

During the course of hearing the ld AR did not press Ground 1 (Ground 1.1 to Gorund 1.3) relating to provision for forex loss arising out of reinstatement of loan balances and the same is dismissed as not pressed.

The Assessing Officer did not accept the contentions of the assessee for the reason that the definition of the term “long term finance” given in clause (e) of Explanation to section 36(1)(viii) provides that any income derived from providing loans other than from long term finance or loans given other than for residential purposes are debarred from the ambit of eligibility criteria. The Assessing Officer held that such income from loans for less than 5 years of maturity and loans for non residential purposes are clearly beyond the scope of consideration and quantification of deduction under section 36(1)(viii) of the Act.

In the course of assessment, the Assessing Officer also noticed that the assessee has included certain other incomes such as income from treasury activities of Rs.210,39,23,070/- and interest on loans against deposits, process fees profit and redemption / sale of debentures, etc. of Rs.40,19,09,989/- as income for the purpose of claiming deduction under section 36(1)(viii) of the Act). The Assessing Officer held that these categories of income would not fulfill the test of minimum

The assessee, while computing the deduction under section 36(1)(viii) had segregated the income and the expenses under 3 categories, i.e. income from housing finance, income from capital gains / dividends and other income. The assessee had segregated certain expenses based on the ratio between the income from housing finance and other income which was worked out at 81.59:18.41. The Assessing Officer, during the course of assessment inserted one more vertical of business viz., Income from leasing finance. The Assessing officer based on the revised allocation income between the verticals of business arrived at the revised ratio (excluding capital gain and dividend) at 64.99:35.01. The way in which the AO has allocated various expenses is described as under: - In the computation of income from business eligible for deduction under section 36(1)(viii) of the Act, the AO has reduced the entire interest on foreign currency borrowings and provision for contingencies as expenditure incurred for earning of income from long term housing finance i.e., the eligible business. - The AO has allocated depreciation on leased assets solely to the income from leasing - The AO has allocated interest expenditure (other than foreign currency borrowings) to income from housing business and other income in the ratio of 64.99 : 35.01.

The Assessing Officer accordingly altered the allocation of expenses made by the assessee to re-compute the income from housing finance business @ Rs.112,71,41,143. The Assessing Officer accordingly disallowed interest under section 36(1)(viii) to the tune of Rs.52,62,28,121 as against the claim of the assessee that it has short claimed the deduction under section 36(1)(viii) in the return of income with notes for Rs. 11,36,88,893. For ease of reference, the deduction claimed by the assessee in the return of income, the revision made by the assessee through notes and the computation done by the Assessing Officer is tabulated below:-

The ld AR explained that the residential loans for period less than 5 years are mainly granted to individuals for construction or purchase of house where the borrower is of an advanced age and his age of retirement from employment does not justify a loan for a period beyond five years. It is also submitted that the loans in this category also include bridge loans to builders and developers. The builders and developers who have been provided such loans, then, sell the residential unit in the project as approved by HDFC. If any purchaser of the residential unit in the project intends to take a loan, then, in such a scenario, proportionate part of loan given to the builder or developer is converted into a loan given to the purchaser of the residential unit which would be for a period of more than five years. In this 10 ITA 552/Mum/2004 Housing Development Finance Corporation Limited regard the ld AR drew our attention to the ledger of the flat purchaser/ borrowers on a sample basis to evidence this fact and to explain that there is no flow of funds but entries are passed shifting the loan from the builder/ developer to the flat purchaser. The ld AR also submitted the (i) a copy of the Master Facility Agreement between Builder and Assessee (“Exhibit – 1.1” - Refer Para 13.3 of the Agreement), (ii) copy of the Loan Agreement between Assessee and the Borrower (“Exhibit – 1.2”) (iii) copy of the Sale Agreement between Builder and the Borrower (“Exhibit – 1.3”) and (iv) copy of ledger showing internal adjustment (“Exhibit – 1.4”). The ld AR also submitted that it would not be commercially feasible for the Assessee to grant loans to the builder or developer for a period more than 5 years. Loans for non-residential purposes are also given to builders and developers engaged in the construction industry where the residential project includes commercial space like convenience shopping etc. The ld AR, therefore, submitted that income from housing finance for residential purposes for period less than 5 years and such income from housing finance for non-residential purposes should also qualify for deduction under section 36(1)(viii) of the Act as the same is part of the business of providing long term finance.

With regard to treasury income and other income being eligible for deduction u/s.36(1)(viii), the ld AR submitted that major portion of funds of the Assessee comprises of deposits from the public and it also raises funds from international organisations and financial institutions in India i.e. the Assessee borrows in wholesale and lends in retail. There is always a time gap between the raising of the funds and their utilisation in the activity of lending to the borrowers. Further the entire amount of approved loan is not disbursed immediately and the disbursement is based on progress of the project and demand raised by the builder or developer. In such cases also, there is always a gap between the approved loan 11 ITA 552/Mum/2004 Housing Development Finance Corporation Limited and the disbursed loan. During the year under consideration, the approved loans stood at Rs. 3,251.27 crores while the disbursed loans were only Rs. 2,753.61 crores. It would be practically impossible for the Assessee to raise funds only when the requirement to lend has arisen. Therefore, as stated above, funds that are raised are temporarily deployed in treasury operations during this period, with a view to recoup the interest cost in part. The Assessee also raises funds by way of public deposits as a part of its fund raising activity. As per the Guidelines issued by National Housing Bank, the Assessee is mandatorily required to invest a certain percentage of deposits raised in the approved Government securities [now commonly known as Statutory Liquidity Ratio (SLR)] which yields interest income. Therefore, the interest income in such cases necessarily emanates from the business of long term housing finance. In so far are debentures are concerned, only income from debentures held as current investment is taken as a part of income eligible for deduction under section 36(1)(viii) of the Act.

The Ld AR further submitted that if the Revenue’s stand is upheld in the present case, then, it would result in deduction being granted under the said section based on classification of each transaction rather than on profits of the eligible business. This would be contrary to the express provisions of the Act which require that such deduction should be allowed based on profits derived from the business of providing long term finance computed under the head “Profits and gains of business or profession”. Also, as per the scheme of the Act income under the head “Profits and gains of business” is to be computed for each source of income. In the present case, housing finance for residential purposes for loan period more than 5 years, or less than 5 years or for non-residential purposes or interest income earned on temporary deployment of funds cannot be regarded as separate sources of income justifying separate computations.

With respect to allocation of provision for contingencies and interest on foreign currency borrowings, the ld AR submitted that, if the aforesaid three categories of transactions are held to be eligible for claim of deduction under section 36(1)(viii) of the Act, then, this issue will not arise. However, if any category of such transactions is held to be not eligible for deduction, then consequently, part of the said cost may also be allocated to the so called income which is not eligible for claiming deduction under the said section because funds

The Ld.DR submitted a detailed written submission and the same is taken on record for adjudication. The brief of the key arguments of the ld DR are as given below - (1) The Finance Act, 1995 has amended Section 36(1)(viii) to limit the deduction to 40% only in respect of income derived from providing long- term finance for the activities specified in section 36(1)(viii). Now, income arising from other business activities or from sources other than business shall not be taken into account for computing deduction under section 36(1)(viii). ‘Long term finance’ was defined by the Finance Act 1996 and the “5 year” period is fixed by legislature. The deductions claimed by the assessee do not fall within the definition of long term finance for construction or purchase of houses in India for residential purposes. (2) The word “such business” is also very important. The scope of application is very limited and narrow. It clearly means that only profits which arise from such long term housing finance will be eligible for deduction and not 16 ITA 552/Mum/2004 Housing Development Finance Corporation Limited any other income. Even in respect of cases relied upon by the assessee on section 80IA/80IB or other sections for interpreting the phrase ‘derived from business of industrial undertaking’, the words used in those sections are ‘any business’, while here the words used are ‘such business’. The case laws cited by the assessee are therefore, on different footing and not applicable to the assessee. (3) The assessee has taken a plea of common management, common business organization, common administration, etc. to state that these businesses will also be considered for the purpose of deduction under section 36(1)(viii) where the assessee itself has offered the income under different business divisions and, therefore, this plea of the assessee cannot be entertained. (4) With regard to the contention that the main object of the assessee's business is to provide long term finance and that the entire profits of the said business should be allowed, is not correct since the Act does not specify any percentage to justify that if the housing loan advance for more than 5 years beyond certain percentage of total loan, then the same should be considered within the definition of long term housing finance. There is no ambiguity in the language of the provision and, therefore, any other interpretation imported artificially, is not correct. (5) The reason given by the assessee for lending loans for less than 5 years or for non-residential purpose is not relevant since the period and the purpose of loan are what is relevant for deciding the amount eligible for deduction. The loans given for less than 5 years and for non-residential purposes does not fall within the purview of deduction eligible u/s.36(1)(viii). (6) The assessee's claim of loans to developers for a period less than 5 years, which is later got converted as loans to individuals, who purchased the flats

The AO and the CIT(A) has denied the benefit of section 36(1)(viii) to the income from (i) and (ii) above on the ground that these two incomes do not fall within the definition of long term finance as defined in clause (e) of the Explanation to section 36(1)(viii). The income from (iii) is denied the benefit of 36(1)(viii) for the reason that the same is not "derived" from the business of long term finance and that it would not fulfill the test of immediate and effective source of direct and proximate source and hence they cannot be said to be derived from the business of providing long term finance for residential purposes. So for the purpose of adjudication we will consider the income derived from (i) & (ii) above and income from (iii) separately.

From the perusal of the above provisions it is clear that – (a) The deduction is allowable in respect of any Special Reserve that is created and maintained (b) In the case of a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes (c) Deduction is allowed for an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance

The assessee has segregated the total income into income from Housing Finance Business, Income from Capital Gains / Dividends and Other Income. The 22 ITA 552/Mum/2004 Housing Development Finance Corporation Limited assessee has also segregated the investments into those held under Housing Finance Business which are in the nature of short term and those held for long term investment purposes. The income from the investments is also offered based on the said segregation i.e. under the Housing Finance Business or Capital Gains/Dividend. Within the business of Housing Finance, the assessee derives income from loans which do not fall within the definition of "Long Term Finance" i.e. loans with repayment period of less than 5 years and also income from loans extended for non-residential purposes. The contention of the assessee is that the words "business of providing long-term finance" is wide encompassing and therefore would include housing loans for less than 5 years and loans given for non-residential purposes. The argument of the revenue is that the profits are derived from providing other than long term finance are not eligible for deduction under section 36(1)(viii).

The basic conditions for availing the deduction under section 36(1)(viii) are that the assessee should be engaged in the business of providing long term finance and the long term finance should be extended for construction or purchase of houses in India for residential purposes. In the given case there is no dispute that the assessee is engaged in the business providing long term finance for construction or purchase of houses for residential purposes. Accordingly the assessee is entitled to claim deduction under section 36(1)(viii). The dispute here is whether the entire income from the business of long term finance should be considered for the purpose of section 36(1)(viii) or only that part of income which is earned from lending long term finance are eligible for deduction under section 36(1)(viii). The language of the legislature while quantifying the amount of deduction is "**** of the profits derived from such business of providing long- 23 ITA 552/Mum/2004 Housing Development Finance Corporation Limited term finance" and whether this would mean the entire profits of the business of providing long-term finance is the issue here.

We notice that section 33AB of the Act which allows deduction to assessee carrying on business of growing and manufacturing tea in India uses similar wordings as under ( a) a sum equal to the amount or the aggregate of the amounts so deposited ; or ( b) a sum equal to twenty per cent of the profits of such business (computed under the head "Profits and gains of business or profession" before making any deduction under this section), whichever is less : 32. The Hon'ble Calcutta High Court in the context of deduction allowable under the said section in the case of Goodricke Group Ltd. vs CIT ([2011] 11 taxmann.com 130 (Calcutta)) held that the a purposive interpretation of the aforesaid provision should be made instead of literal construction of the same otherwise, the legislative purpose will be frustrated. The Hon'ble High Court concluded by holding that – 28. …………………. the second point in the negative against the revenue by setting aside the part of the finding of the authorities below on the second question and hold that the assessee is entitled to the benefit of the entire profit arising out of the business of growing and manufacturing the tea and the amount of tea purchased from outside for blending should not be deducted as the said amount is insignificant in comparison to the amount of tea grown and manufactured by the assessee. …..…………..

The Hon'ble High Court expressed a similar view in the case Singlo (India) Tea Ltd. vs CIT [2016] 68 taxmann.com 187 (Calcutta) where it is held that – 14. Hence the expression "profits of such business" in clause (b) as aforesaid relates to the expression "business of growing and manufacturing tea" as appearing in the beginning of subsection (1) of section 33AB of the Act.

We notice that in the Memorandum explaining the provisions in the Finance Bill, 1995 and paragraph 26 of Circular No. 717 dated 14.08.1995 (pages 5 to 7 of the case law compilation), it has been clarified that the legislative intent behind the amendments brought in section 36(1)(viii) of the Act were to deny such deduction in respect of income arising from (a) other business activities or (b) from sources other than business. The income, on which deduction is claimed by the assessee, is not from other business activities but from the core business of long term finance and the source of income is the said business. The purpose for which the loans on which the impugned interest is earned are granted for construction or purchase of house and this fact is not disputed by the lower authorities. In view of these discussions in our considered view, the interest income earned from loans extended 25 ITA 552/Mum/2004 Housing Development Finance Corporation Limited for construction or purchase of house for a period of less than 5 years should also be included in the profits for the purpose of deduction under section 36(1)(viii). Income from housing finance for non-residential purposes 35. The assessee has added a sum of Rs. 42,18,07,237 as part of income for the purpose of claiming deduction under section 36(1)(viii) which was denied by the assessing officer for the reason that the interest is earned from loans that are given for non-residential purposes. The contention of the ld AR is that the housing projects which are constructed by corporate or developer may have an element of non-residential amenities and these cannot be isolated from housing projects. Therefore the ld AR argued that the interest income earned should be considered as part of the profits derived from the business of long term finance for construction or purchase of residential housing.

The main purpose of allowing deduction under section 36(1)(viii) is to encourage financial corporations/approved public companies to lend for construction or purchase of residential houses. The income derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes is eligible for deduction under section 36(1)(viii). In the given case the claim of the assessee is towards interest on loans given for non- residential purposes. Therefore the same cannot be said to be from the business activity of long-term finance for construction or purchase of houses. The assessee has made the claim separately through notes to the return of income from which it is clear that the assessee is able to identify the income as from separate business activity. Therefore we are unable to agree with the contention that lending loans for non-residential is an integral part of the loans lent for residential purposes. Accordingly we hold that the interest income earned by the assessee from loans

The main contention of the assessee with regard to this income is that there is first degree nexus between the business of the assessee and the source of income. Therefore the income is part of the income "derived from" the business of providing long finance. However the revenue denied the benefit on the ground that the investment activity should be considered separately and accordingly the income arising is not eligible for deduction u/s.36(1)(viii). Before proceeding further we will understand the nature on interest income earned by the assessee which considered as part of business income for the purpose section 36(1)(viii). The assessee being in the business of lending long term finance for residential purpose raises funds from organizations and financial institutions in India and utilizes the same for lending. At any point in time there is always surplus fund mobilized by the assessee for the reason that the disbursement of loan takes place in tranches and also that the assessee cannot raise a loan only when the requirement to lend arises. These surplus funds are parked by the assessee in investments in order to off set the interest income earned against the interest cost incurred. The assessee also raises funds from public deposits and as per the Guidelines issued by National Housing Bank, the Assessee is mandatorily required to invest a certain percentage of deposits raised in the approved Government securities which yields interest income. Therefore it was argued by the ld AR that there is a first degree nexus between the interest income earned and the business of long term finance for residential purposes. The concept of “income derived from” in contrast to other related concept like “income attributable to” has been a subject

The judgment in Sterling Foods case (supra) lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains 29 ITA 552/Mum/2004 Housing Development Finance Corporation Limited are derived from the business of the assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned.

Similarly, the judgment in Pandian Chemicals Ltd.'s case (supra) is also distinguishable, as interest on a deposit made for supply of electricity is not an element of cost at all, and this being so, is therefore a step removed from the business of the industrial undertaking. The derivation of profits on such a deposit made with the Electricity Board could not therefore be said to flow directly from the industrial undertaking itself, unlike the facts of the present case, in which, as has been held above, all the subsidies aforementioned went towards reimbursement of actual costs of manufacture and sale of the products of the business of the assessee.

Liberty India's case (supra) being the fourth judgment in this line also does not help Revenue. What this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself.

The Calcutta High Court in Merinoply & Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:— "We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee's business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error."

We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan Oil and Flour Mills' case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: "The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (non- remote) areas. The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other north- eastern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transportation between a point in central area (Siliguri in West Bengal) and the actual location of the industrial unit in the remote area, so that the industry could become competitive and economically viable." (Paras 14 and 15) 25. The decision in Sahney Steel and Press Works Ltd.'s case (supra) dealt with subsidy received from the State Government in the form of refund of sales tax paid on raw materials, machinery, and finished goods; subsidy on power consumed by the industry; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the assessee.

A Delhi High Court judgment was also cited before us being Dharam Pal Prem Chand Ltd.'s case (supra) from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80- IB of the Act. 28. *** 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India's cases (supra) to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove.

From the plain reading of the above judicial pronouncement of Hon’ble Supreme Court, it can be said that so long as profits and gains emanate directly from the business itself and that there should be a direct nexus between such profits and gains and the industrial undertaking or business then the assessee would be eligible to get a deduction u/s.80IA.

Now coming to the merits in assessee's case, on perusal of the records we notice that the assessee has segregated the income from investments between the business of housing finance and other income and the basis for the segregation was explained during the course of hearing. The ld AR submitted that on the income from short term investment of surplus funds which are mobilised for housing finance purposes have been taken under the income stream from housing finance. The ld AR further submitted that the income arising out of other regular investment / treasury activity and long term investments have been considered separately as 33 ITA 552/Mum/2004 Housing Development Finance Corporation Limited other income and no deduction u/s.36(1)(viii) is claimed on the same. Accordingly the ld AR countered the submission of the ld DR that the investments are held by the assessee as long term investments and the income there from is claimed as deduction u/s.36(1)(viii). We notice that the AO/CIT(A) have not looked into this contention and segregation done by the assessee and have denied the deduction by stating that the entire interest income should be considered as other income as the immediate and effective source of such income is "investments" and not "business of housing finance" and accordingly the said income is not "derived from" the business of providing long-term finance for construction or purchase of houses in India for residential purposes. 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 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

The ld DR submitted that the decision of the Hon'ble Delhi High Court is directly on the issue under consideration where it is held that –

The ld AR as a counter submitted that the Hon'ble High Court has not analysed the issue and has not given any detailed finding on the legality of whether the interest earned is "derived from" the business of long term housing finance. On 35 ITA 552/Mum/2004 Housing Development Finance Corporation Limited perusal of the above observations of the Hon'ble High Court, we are inclined to agree with the submission of the ld AR that the court has not given any specific finding with regard to the correctness of the claim of interest on temporary deployment of funds to be part of deduction claimed u/s.36(1)(viii). Therefore we applying the ratio of the Hon'ble Supreme Court in the case of Meghalaya Steels Ltd (supra), we hold that the income earned by the assessee from deployment of surplus funds on a short term basis is to considered as derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes since there is a direct nexus between the income earned and the business of the assessee. Accordingly the same shall be included for the purpose of claiming deduction u/s.36(1)(viii).

The AO is directed to re-compute the income eligible for deduction u/s.36(1)(viii) afresh in accordance with the directions given in this order and allow the deduction accordingly.

Aggrieved, the assessee filed appeal before the CIT(A). The assessee submitted before the CIT(A) that the investment in shares which is earning dividend income is a separate, distinct and divisible activity from the business of housing finance and, therefore, the Assessing Officer is not correct in allocating the interest expenses in proportion to the investment made in dividend earning shares. The CIT(A) recomputed the interest amount by attributing weighted cost method as per below working to arrive at the interest amount of Rs.30,81,41,271/- as against the amount of Rs.53,01,00,00/- arrived at by the Assessing Officer.

With regard to the other expenditure, the CIT(A) confirmed the stand taken by the Assessing Officer. Accordingly, the CIT(A) gave partial relief to the assessee with regard to the exemption under section 10(33) of the Act.

The Ld.AR in this regard invited our attention to paragraphs 7.45 and 7.46 at pages 33 and 34 of the assessment order passed by the AO, wherein, while dealing with section 36(1)(viii) of the Act, the AO has held that the entire borrowings of the Assessee have been utilised for the purposes of the business of housing finance and not for investment in shares. He has specifically held that, shares have been acquired by the Assessee from own funds which are interest free. In view thereof, the ld AR submitted that no part of interest paid on borrowings could be disallowed as incurred for earning of dividend income from shares. The ld AR also 38 ITA 552/Mum/2004 Housing Development Finance Corporation Limited submitted that in the allocation of expenses made by the AO for the purposes of section 36(1)(viii) of the Act, no part of interest expenditure has been allocated to income from capital gains/dividend. The ld AR further submitted that the Hon`ble Jurisdictional High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bombay) (refer pages 68 to 72 of the case law compilation) and CIT vs. HDFC Bank Ltd. 366 ITR 505 (refer pages 64 to 67 of the case law compilation), have held that if investments have been made out of mixed funds and sufficient interest free funds are available with the assessee, then, the presumption should be that such investments have been made out of interest free funds and not borrowed funds. This view has also been approved by the Hon’ble Apex Court in the case of South Indian Bank vs. CIT (2021) 438 ITR 1 (SC).

The Ld.DR, on the other hand, relied on the order of the lower authorities.

We heard the parties and perused the materials available on record. We notice that the Assessing Officer while arriving at the proportionate interest to be adjusted against the dividend income has considered the own funds of the assessee to be at Rs.1777.24 crores and the borrowed funds to be at Rs.8148.45 crores. It is also admitted fact that the cost of shares yielding dividend income is lower than that of the own funds of the assessee. Further the Assessing Officer himself while arriving at the profit eligible for deduction u/s.36(1)(viii) had not allocated any interest expense to the vertical "income from capital gains / dividend". Further it is a settled position that when sufficient own funds are available then, the presumption should be that such investments have been made out of the same and not out of borrowed funds. We are therefore of the considered view that no interest cost need to be adjusted against the dividend income for the purpose of exemption

We heard the parties and perused the material on record. It is an admitted position that the assessee is having own funds more than the amount invested in the tax free bonds. Further the impugned investments as per the submissions of the assessee are resulting in both exempt as well as taxable income. We place reliance on the decision of the coordinate bench in the case of Prakash K. Shah Shares & Securities Pvt. Ltd.(supra) to hold that no disallowance is warranted u/s.14A. The disallowance made in this regard is deleted.

Ground No.5 and 6 are general not warranting separate adjudication.

In result the appeal of the assessee is partly allowed. Order pronounced in the open court on 12/01/2024.