Long Term Finance Provided For Purchase Of Residential House, Bank Entitled For Deduction ; Kerala High Court

The Kerala High Court has held that the South Indian Bank is entitled to the deduction envisaged under Section 36(1)(viii) of the Income Tax Act in respect of the long-term finance provided by it for the construction and purchase of houses in India for residential purposes.

The bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that a view has been expressed that the National Housing Bank was not entitled to the benefits of the unamended Section 36(1)(viii), on the ground that it was not engaged directly in the long-term financing for the construction or purchase of houses in India for residential purposes. The amendment was therefore deemed necessary to extend the benefit even to the National Housing Bank. It follows therefore that the amendment was intended to widen the scope of the deduction in relation to Financial Corporations specified in Section 4A of the Companies Act, Financial Corporations that were Public Sector Companies, Banking Companies, and Corporative Banks other than Primary Agricultural Credit Society or Primary Corporative Agricultural and Rural Development Banks, and to confine the benefit available to a Housing Finance Company only in relation to the provision by it of long-term finance for the construction or purchases of houses in India for residential purposes.

The appellant-bank/assessee is in the business of providing housing loans for the purchase or construction of houses and had been obtaining the benefit of the deduction contemplated under Section 36(1)(viii) in the years prior to the amendment.

The disallowance arose in consequence of an amendment that affected the provisions of Sections 36(1)(viii) with effect from April 1, 2010 through the Finance (No. 2) Act, 2009.

On account of the amendment and the change in the definition of eligible business, the assessing authority found that eligible business in relation to a banking company included only the business of 'providing long-term finance for the development of housing in India', and hence, the appellant would not get the benefit if it 'provided long-term finance for the construction or purchase of houses in India for residential purposes'.

The reasoning of the Appellate Tribunal, while confirming the view of the assessing officer, was that after the amendment and the deletion of the words 'construction or purchase of houses in India for residential purposes' from the definition of eligible business in relation to a banking company, the deduction envisaged for a banking company could not be availed in a situation where the bank was engaged in providing long-term finance for construction or purchase of houses for residential purposes. The deduction was available only to housing finance companies after the amendment.

The explanatory notes to the provisions of the Finance (No. 2) Act, 2009 state that the amendment was deemed necessary to enable the National Housing Bank, which was a notified financial corporation under Section 4A of the Companies Act and wholly owned by the Reserve Bank of India, to claim the deduction in respect of its activities of promotion and regulation of housing finance institutions in the country, by providing re-financing support to housing finance institutions and banks.

The assessee contended that National Housing Bank was not entitled to the benefits of the unamended Section 36(1)(viii) on the ground that it was not engaged directly in the long-term financing for the construction or purchase of houses in India for residential purposes. The amendment was therefore deemed necessary to extend the said benefit even to the National Housing Bank.

The court noted that the amendment was intended to widen the scope of the deduction in relation to financial corporations specified in Section 4A of the Companies Act. The financial corporations were public sector companies, banking companies, and cooperative banks other than primary agricultural credit societies or primary cooperative agricultural and rural development banks, and to confine the benefit available to a housing finance company only in relation to the provision by it of long-term finance for the construction or purchase of houses in India for residential purposes.

The court set aside the findings of the tribunal inasmuch as the providing of long-term finance for construction or purchases of houses in India for residential purposes was an activity that qualified for deduction under Section 36(1)(viii) only for housing finance companies; the same activity would not qualify for deduction in relation to a banking company.

The court, while allowing the appeal, held that the phrase 'Development of Housing in India' is wider in its scope and ambit and includes within its ambit the phrase 'construction or purchase of houses in India for residential purposes'.

Counsel For Appellant: Joseph Markose

Counsel For Respondent: Jose Joseph

Case Title: The South Indian Bank Ltd Versus ACIT

Citation: 2024 LiveLaw (Ker) 457

Case No.: ITA NO. 165 OF 2019

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