COMMISSIONER OF INCOME TAX Vs. WEIZMANN HOMES LTD

JUDGEMENT

(1.) All these appeals are taken up for consideration together, because the assessee is the same, but the assessment years are different, where one question of law is common in three cases and yet another question of law is common to the subsequent two years. The assessee. M/s. Weizmann Homes Ltd., is a company carrying on the business of long-term finance. The assessee claimed Rs. 48,26,000 as deduction under section 36(1)(viii) of the Income-tax Act, 1961, being the amount transferred to the special reserve. The assessee has taken long-term income of Rs. 176.75 lakhs. The assessee included fee, penal interest and other charges of Rs. 30.63 lakhs in the long-term income. The assessee was called upon to explain why the miscellaneous receipts like fee, penal interest and other charges should be included as income from long-term housing finance. The assessee replied by saying that the company has included the penal interest and pre-closure charges, for special reserve calculation which are collected from the housing loan borrowers who have availed of housing loan for periods of five years and above. The penal interest is levied for delayed payment of interest and/or monthly instalments and the pre-closure charges are levied for early closure of the loan as per the norms of the company. Hence, these incomes are in the nature of long-term only and the company does not lend individual housing loans for a period of less than five years.

(2.) The assessing authority did not accept the said explanation. As per section 36(1)(viii) of the Act, 40 per cent. of the profit derived from providing long-term finance only is eligible for deduction. Profits derived from the loan, the terms of which stipulate repayment within a period of more than five years only are eligible for deduction. The income in respect of loans closed before five years does not come under income from long-term finance. Processing fee is derived from the normal business activity, which is independent of terms and conditions of loan, quantum of the loan, etc. It is just income received from formal procedure of clearing loan document. It cannot be held to be the income for long-term finance. It is not related to actual loan asset per se, but it is reimbursement of handling expenses and it is not related to long-term finance. Therefore, the assessing authority held that income from fees, penal interest, pre-closure charges, etc., are not part of the profits derived from the business of long-term income. Therefore, he proceeded to recompute the income after excluding Rs. 30 lakhs of fees and other charges from long-term finance income. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals), Bangalore.

(3.) The appellate authority agreed with the contentions of the assessee that the processing fee, penal charges and other miscellaneous charges are directly attributable to and derived from the business of long-term finance. Therefore, the Assessing Officer was directed to consider the processing fee, penal charges and miscellaneous income as part of eligible profit under section 36(1)(viii) of the Act. Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal. The Tribunal held that the processing fee, penal interest and other charges are incidental to earning of interest on long-term finance. So far as the processing fee is concerned, there is a direct nexus with the business of the assessee for the purpose of long-term finance. Regarding pre-closure charges, etc., are also directly linked with the interest earned by the assessee out of long-term finance. Penal interest charges by the assessee is nothing but late payment of interest, which is earned by the assessee as provided in the contract with the party. Therefore, the Tribunal upheld the order of the appellate authority and dismissed the appeal. Aggrieved by the said order, the Revenue is in appeal.