Gujarat High Court
Gruh Finance Ltd vs Dy. Commissioner Of Income Tax Circle ... on 18 July, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
O/TAXAP/383/2017 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 383 of 2017
TO
TAX APPEAL NO. 389 of 2017
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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GRUH FINANCE LTD.....Appellant(s)
Versus
DY. COMMISSIONER OF INCOME TAX CIRCLE 2(1)(1)....Opponent(s)
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Appearance:
MR.J.P.SHAH, LD. ADVOCATE for MR MANISH J SHAH, ADVOCATE for the
Appellant(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
Date : 18/07/2017
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Page 1 of 13 HC-NIC Page 1 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT
1. These appeals filed by the same assessee arises out of common factual background. We may note facts from Tax Appeal No.383 of 2017. This appeal is filed by one Gruh Finance Limited, a company registered under the Companies Act to challenge the orders passed by the Revenue authorities which were confirmed by the Tribunal by impugned judgment dated 11.07.2016. Following questions have been presented for our consideration:
"(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant will not be entitled to the deduction of 40% of the profits derived from business of providing long term finance computed under the head "Profits and Gains of Business" in respect of income received on account of :EMI Residual?
(ii) Whether the interpretation done by the Tribunal of clause (viii) of section 36(1) is in order because the language is "Profits derived from business of providing long term finance" and not "Interest from such business of providing long term finance?"
2. For the assessment year 200405, assessee had filed return of income, disclosing total income of Rs.12.18 crores (rounded off) which was taken in scrutiny by the Assessing Officer. It was noticed that the assessee was engaged in the business of Page 2 of 13 HC-NIC Page 2 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT longterm housing finance and in the said assessment year, the assessee has claimed deduction of Rs.8.47 crores (rounded off) under section 36(1)(viii) of the Income Tax Act 1961 ('the Act' for short) by creating a reserve of Rs.8.50 crores. In many cases, the loan portfolios were transferred to HDFC before the completion of five years from the date of sanction of the loans. The assessee in respect of such cases, was called upon to explain how the income derived from such loan portfolios which were transferred to HDFC would be eligible for deduction under section 36(1)
(viii) of the Act. In response to such query of the Assessing Officer, the assessee pointed out that during the period relevant to assessment year, the assessee had assigned 5112 accounts to HDFC, of which, 87 accounts were more than five years old and the tenure of the remaining accounts was less than five years. With respect to such loan accounts also since the assessee had fulfilled the requirement of section 36(1)(viii) of the Act, the deduction should be granted. The assessee contended that it was engaged in the business of providing longterm finance and the housing loan was given for the period not less than Page 3 of 13 HC-NIC Page 3 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT five years. Once such longterm housing finance was made available and necessary reserve was created, the deduction under section 36(1)(viii) of the Act would be available.
3. The assessee further pointed out that after transfer of a particular portfolio, the HDFC had claimed deduction in respect of such portfolio of long term housing finance to the extent of interest received by it. The assessee even after the transfer of the portfolio, would retain a part of the interest received from the loanee and it is this interest component on which the assessee claimed the deduction. The Assessing Officer considered the contentions of the assessee but, found that the same cannot be accepted. He was of the opinion that once the portfolio was transferred, the assessee was no longer engaged in the business of long term housing finance with respect to such loan. Any income arising out of the said transaction would not be eligible for deduction under section 36(1)(viii) of the Act. He observed that the financial corporations engaged in the business of longterm housing finance would have greater risk exposure and the legislature has Page 4 of 13 HC-NIC Page 4 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT therefore provided for deduction in relation to the amount transferred to its special reserve which is to be created to meet with the higher risk involved in longterm financing. He therefore disallowed a sum of Rs.3.34 crores relatable to EMI of the residential income of the assesee for the income deductible under section 36(1)(viii) of the Act.
4. The assessee carried the matter in appeal. Commissioner of Income Tax (Appeals) accepted the view of the Assessing Officer, upon which, the assessee approached the Tribunal. The Tribunal, by the impugned judgment, confirmed the view of the Assessing Officer, making following observations:
"20. As far as the third limb is concerned, while considering the issue, with regard to EMI residual in the Asstt. Year 200001, we have reproduced the finding of the ITAT in the Asstt. Year 200001. The nature of income is by providing services to the HDFC. It is not the interest income as such earned by the assessee from long term finance. The ld.AO has also considered this aspect in the finding extracted supra. Considering the finding of the Assessing Officer, in the light of the discussion made by the ITAT in the Asstt. Year 200001 and 200102 extracted supra, we are of the view that the income from EMI residual offered for taxation is an income which represents difference of interest charged by the assessee for the services rendered by it for collecting EMI etc. on behalf of the HDFC. It is not linked Page 5 of 13 HC-NIC Page 5 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT with long term finance. Therefore, this income will not form part of the eligible profit derived from long term finance for the purpose of calculating 40% of the amount to claim deduction under section 36(1)(viii) of the Act. To this extent, we uphold the finding of the AO, and the rest of two folds of grievance of the assessee are allowed."
5. Before us, learned counsel Shri J.P.Shah for the assessee contended that the assessee is engaged only in one business of longterm housing finance. Mere fact that a particular portfolio was transferred before a tenure of five years, would not mean that the assessee ceased to be engaged in such business qua the portfolio also. Even after transferring the portfolio, the assessee continued to collect the EMI. Out of the interest so received, the assessee would retain 6.75% transferring the rest to HDFC. It is towards this retention money that the assessee claimed deduction. The Tribunal committed a serious error in rejecting the assessee's claim. Counsel produced documents pertaining to the assessment of the assessee for the earlier years and contended that in the earlier years, the claim under similar circumstances was accepted by the Revenue. For the later years, a different view cannot be taken.
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O/TAXAP/383/2017 JUDGMENT
6. To appreciate the precise nature of the transfer and the manner in which the assessee earns or retains the interest income, we had requested the learned counsel to produce a sample copy of the agreement between the assessee and the HDFC. Under this agreement, a loan portfolio would be transferred. We would refer to this document at a later stage. For the time being, we may recall that the assessee had during the period relevant to the assessment year in question, transferred 5112 portfolios, of which, 793 were of a period more than five years. The rest were before the end of such term and as observed by the Assessing Officer in many cases, the transfer took place barely within a few months of sanctioning the loans. According to the assessee, even after transferring the loan accounts, the assessee would continue to act as a collection agent. The loanees would deposit the EMIs with the assessee. The assessee would retain a small portion of the interest and transfer the rest to the HDFC. It is pointed out that the HDFC receives the benefit under section 36(1)
(viii) of the Act on such income. We have noticed that the Revenue authorities and the Tribunal have Page 7 of 13 HC-NIC Page 7 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT held that, that the assessee for transferring the portfolios cannot be stated to have been in the business of longterm housing finance qua such accounts.
7. It was in this context we had a desire to peruse the agreement. A copy of the agreement produced before us is one dated 31.03.2004 executed by the assessee and HDFC. Assessee is referred to as the seller. HDFC is referred to as the beneficiary. Article II of the agreement pertains to sale/transfer of the receivables. Under clause 2.1, the seller agreed to sale, transfer and assign to the beneficiary and the beneficiary agreed to purchase from the seller receivables set out in the First Schedule subject to the terms and conditions contained in the said agreement. As per clause 2.2, the beneficiary would at the time of purchase of the receivable and in any case not later than 28th March, 2002, pay to the seller the purchase price for purchase of receivables, upon which, the seller would assign and transfer in the beneficiary all rights, title and interest and the entire ownership of the receivables. Pending said transfer and assignment, the beneficiary would be Page 8 of 13 HC-NIC Page 8 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT deemed to be trustee.
8. Article V pertained to servicing and administration. Clause 5.1 provided the seller agreed to act as the receiving and paying agent to discharge the duties and obligations as such for the purpose of receiving payments of the amounts due and for making payment to the beneficiary. As per clause 5.2, seller as receiving and paying agent, would collect all amounts falling due from time to time and enforce obligations against the borrowers. As per clause 5.5, the seller would continue to act as receiving and paying agent until all receivables have been paid.
9. Article VI referred to monthly payments to the beneficiary and service charges. This chapter contained following two articles:
"6.1 In consideration for the Purchase Price paid by the Beneficiary to the Seller, the Seller shall remit the Amounts Due received in respect of the Assigned Receivables to the Beneficiary every month in such manner as may be directed by the Beneficiary so as to reach the Beneficiary by the end of the month for which the same are due.
6.2 The Seller shall be entitled to retain the residual from the interest component of each EMI after paying interest to the Beneficiary (in addition to the entire principal component of the EMI) at the rate of 6.75% per annum, on an annual rest basis."Page 9 of 13
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10. Article XI provided as under:
"The Seller agrees that the Seller shall hold all the Amounts Due, Prepayment and Prepayment Premia as and when received and or collected by it in respect of the Receivables in trust for and for the benefit of the Beneficiary and that the full legal title in the Receivables shall be held by the Seller in trust for and for the benefit of the Beneficiary and shall deal with the same only in accordance with this Agreement."
11. It can be seen that under the said agreement, the assessee transferred number of loan portfolios to the HDFC in lieu of HDFC paying sale consideration. Despite the transfer, the seller continued as a receiving and paying agent. As per clause6.1, the seller would remit the amounts due in respect of assigned benefits of the assigned receivables to the beneficiary every month. As per clause6.2, the seller would retain the residual from the interest component at the rate of 7.6% of each EMI.
12. It can thus be seen that under the said deed, the assessee as a seller, had transferred all its rights and liabilities in connection with the housing finance advances made to the individuals. All profits, losses and risks would thus, be borne by HDFC. The assessee merely continued to act as a receiving and paying Page 10 of 13 HC-NIC Page 10 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT agent. For such services, the assessee would receive 6.75% of the interest component. Significantly, Article XI provided that seller would hold all amounts due and the payments received from the receivables in trust for and for the benefit of the beneficiary. In essence therefore, the assessee transferred the entire business of housing finance to HDFC in connection with the loan portfolios in question. Neither the profit, nor the risk involved with such business remained with that of the assessee. The HDFC would receive the EMI including the interest and would also run the risk of defaults in repayment of loans. The assessee's involvement remained to the extent of acting as a receiving agent, transferring the received EMIs to the HDFC and in the process, retaining a small portion of 6.75% of the interest component.
13. Section 36(1)(viii) of the Act provides for the deduction in respect of any reserve created and maintained by a specified entity of an amount not exceeding twenty per cent of the profit derived from eligible business computed in the heads of profit and losses of the business or profession which is carried to its reserve account.
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14. Term 'longterm finance' has been explained in clause(e) of the explanation as to mean any loan or advance where the term for which the moneys are loaned or advanced provided for repayment along with interest thereof during a period of not less than five years. The fact that the assessee company is a financial corporation which is engaged in providing longterm finance including for residential purposes is not in dispute. However, with respect to the loan portfolio which the assessee company held for less than five years for transferring, in our opinion, after such transfer, the assessee would cease to be engaged in the business of longterm finance with respect to such loan accounts. The income arising out of such activity would therefore not be the assessee's income from the business of providing longterm finance.
15. As noted, counsel for the assessee had sought to press in service the principle of consistency by producing certain returns and assessment orders for the earlier years. However, no such documents were produced before the lower authorities, no attempt was made to advance and develop these arguments. For the Page 12 of 13 HC-NIC Page 12 of 13 Created On Sun Aug 20 05:48:31 IST 2017 O/TAXAP/383/2017 JUDGMENT first time before the High Court, we would not permit raising of such a ground which would essentially require examination of basic facts. Whether in earlier assessment years such a precise question had come up, whether the returns filed by the assessee were accepted after scrutiny or otherwise and whether in such scrutiny assessments, this issue was considered by the Revenue, are issues which cannot without proper examination of facts, be gone into. At this stage therefore, we do not enter into this arena.
16. In the result, Tax Appeals are dismissed.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) ANKIT Page 13 of 13 HC-NIC Page 13 of 13 Created On Sun Aug 20 05:48:31 IST 2017