Delhi High Court
Pr.Commissioner Of Income Tax-6 vs National Housing Bank on 28 August, 2018
$~13 to 18
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL Nos. 625/2017, 636/2017,
642/2017, 667/2017, 672/2017, 673/2017
Date of decision: 28th August, 2018
PR.COMMISSIONER OF INCOME TAX-6 ..... Appellant
Through: Mr. Zoheb Hossain, Sr. Standing
Counsel with Mr. Deepak Anand, Jr.
Standing Counsel for Revenue.
versus
NATIONAL HOUSING BANK ..... Respondent
Through: Mr. Rohit Jain and Mr. Aniket D.
Agarwal, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J. (ORAL):
These appeals by the Revenue under Section 260A of the
Income Tax Act, 1961 (Act, for short) assail the common order of the
Income Tax Appellate Tribunal (Tribunal, for short) dated 20th
February, 2017 in the case of National Housing Bank (respondent-
assessee bank, for short) for the Assessment Years 2003-04, 2004-05,
2005-06, 2006-07, 2008-09 and 2009-10.
2. The respondent-assessee bank is wholly owned by the Reserve
Bank of India.
ITA No. 625/2017+connected Page 1 of 16
3. The respondent-assessee bank has been accused by the Revenue
of concealment or furnishing inaccurate particulars, by making a claim
for deduction under Section 36(1)(viii) of the Act. The impugned
order deletes penalty imposed on the respondent-assessee bank for
concealment of income under Section 271(1)(c) of the Act.
4. The contention of the Revenue is that the Tribunal has erred in
accepting the explanation given by the respondent-assessee bank as to
why they had claimed deduction and benefit of Section 36(1) (viii) of
the Act, though the respondent-assessee bank was not engaged in
providing long-term finance for construction or purchase of houses in
India for residential purpose. It is submitted that penalty under
Section 271(1)(c) of the Act is to be imposed when an assessee
conceals its income and furnishes inaccurate particulars of income.
Mens rea or guilty mind is not required and necessary to impose
penalty under the said Section.
5. We agree with the counsel for the Revenue that mens rea or
guilty mind is not required to be established to impose penalty under
Section 271(1)(c) of the Act. However, Explanation 1 to Section
271(1)(c) states that where in respect of any facts material to
computation of total income of an assessee, the assessee offers no
explanation or where an assessee offers an explanation, which he is
ITA No. 625/2017+connected Page 2 of 16
not able to substantiate and fails to prove that such explanation is bona
fide and that all facts relating to the same and material to the
computation of the said total income had been disclosed, the amount
added or disallowed in computing the total income would be deemed
to represent income in respect of which particulars has been
concealed. As per mandate of clause (B) to Explanation 1, the
assessee has to prove that the explanation offered was bona fide and
that all facts relating to the same and material to the computation of
the total income had been disclosed by him. When the twin
conditions are satisfied, the amount added or disallowed while
computing the total income is not deemed to be income in respect of
which particulars have been concealed.
6. In the context of the present case, we would like to first
reproduce clause (viii) of Section 36(1) of the Act as applicable in the
Assessment Years 2003-2004 to 2009-2010, which reads:-
"36. (1) The deductions provided for in the following
clauses shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in section 28--
(viii) in respect of any special reserve created and maintained
by a financial corporation which is engaged in providing
long-term finance for industrial or agricultural
development or development of infrastructure facility in
India or by 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
ITA No. 625/2017+connected Page 3 of 16
of houses in India for residential purposes, an amount not
exceeding forty per cent of the profits derived from such
business of providing long-term finance (computed under
the head "Profits and gain of business or profession"
before making any deduction under this clause) carried to
such reserve account:
[***]
Provided [***]that where the aggregate of the amounts
carried to such reserve account from time to time exceeds
twice the amount of the paid up share capital and of the
general reserves of the corporation or, as the case may be,
the company, no allowance under this clause shall be made
in respect of such excess.
Explanation.--In this clause,--
(a) "financial corporation" shall include a public company and a
Government company;
(b) "public company" shall have the meaning assigned to it in
section 3 of the Companies Act, 1956 (1 of 1956);
(c) "Government company" shall have the meaning assigned to
it in Section 617 of the Companies Act, 1956 (1 of 1956);
(d) "infrastructure facility" shall have the meaning assigned to
it in clause (23G) of Section 10;
(e) "long-term finance" means any loan or advance where the
terms under which moneys are loaned or advanced provide
for repayment along with interest thereof during a period of
not less than five years;"
A reading of the said clause would indicate that the said
deduction was applicable in respect of any special reserve created or
maintained by a financial corporation engaged in providing long-term
finance for industrial or agricultural development or for development
of infrastructure facility in India or public company formed and
registered in India with the object of carrying on business or providing
long-term finance for construction or purchase of houses in India for
ITA No. 625/2017+connected Page 4 of 16
residential purpose. Such deduction cannot exceed 40% of the profits
derived from such business for providing long-term finance computed
under the head "profits and gains from business or profession" which
was carried to such reserve. Long- term finance has also been defined
in the proviso to mean loan or advance where the terms under which
money was loaned or advanced provide for repayment with interest
for a period not less than five years.
7. By Finance (No. 2) Act, 2009, with effect from 1st April 2010
and accordingly applicable in respect of Assessment Year 2010-2011
and subsequent Assessment Years, clause (viii) to Section 36 (1) was
amended to read as under:-
"36. (1) The deductions provided for in the following
clauses shall be allowed in respect of the matters dealt with
therein, in computing the income referred to in section 28--
(viii) in respect of any special reserve created and maintained
by a specified entity, an amount not exceeding twenty per
cent of the profits derived from eligible business computed
under the head "Profits and gains of business or profession"
(before making any deduction under this clause) carried to
such reserve account:
Provided that where the aggregate of the amounts carried to
such reserve account from time to time exceeds twice the
amount of the paid up share capital and of the general
reserves of the specified entity, no allowance under this
clause shall be made in respect of such excess.
Explanation.--In this clause,--
(a) "specified entity" means,--
(i) a financial corporation specified in section 4A of the
Companies Act, 1956 (1 of 1956);
(ii) a financial corporation which is a public sector company;
ITA No. 625/2017+connected Page 5 of 16
(iii) a banking company;
(iv) a co-operative bank other than a primary agricultural credit
society or a primary co-operative agricultural and rural
development bank;
(v) a housing finance company; and
(vi) any other financial corporation including a public company;
(b) "eligible business" means,--
(i) in respect of the specified entity referred to in sub-clause (i)
or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of
clause (a), the business of providing long-term finance for
--
(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;
(ii) in respect of the specified entity referred to in sub-clause (v)
of clause (a), the business of providing long-term finance
for the construction or purchase of houses in India for
residential purposes; and
(iii) in respect of the specified entity referred to in sub-clause
(vi) of clause (a), the business of providing long-term
finance for development of infrastructure facility in India;
(c) "banking company" means a company to which the Banking
Regulation Act, 1949 (10 of 1949) applies and includes any
bank or banking institution referred to in section 51 of that
Act;
(d) "co-operative bank", "primary agricultural credit society"
and "primary co-operative agricultural and rural
development bank" shall have the meanings respectively
assigned to them in the Explanation to sub-section (4)
of section 80P;
(e) "housing finance company" means a public company formed
or 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;
(f) "public company" shall have the meaning assigned to it in
section 3 of the Companies Act, 1956 (1 of 1956);
(g) "infrastructure facility" means--
(i) an infrastructure facility as defined in the Explanation to
clause (i) of sub-section (4) of section 80-IA, or any other
public facility of a similar nature as may be notified by the
Board in this behalf in the Official Gazette and which fulfils
the conditions as may be prescribed;
(ii) an undertaking referred to in clause (ii) or clause (iii) or
clause (iv) or clause (vi) of sub-section (4) of section 80-IA;
and
(iii) an undertaking referred to in sub-section (10) of section 80-
IB;
(h) "long-term finance" means any loan or advance where the
terms under which moneys are loaned or advanced provide
for repayment along with interest thereof during a period of
not less than five years;"
As per the amended provisions of clause (viii), the deduction
was reduced to 20% of the profits derived from eligible business. The
"eligible business" itself was defined to mean business for providing
long-term finance for industrial or agricultural development,
development of infrastructure facility in India or construction of
purchase of houses in India for residential purposes. Respondent-
assessee bank has been allowed deduction under Section 36(1)(viii),
post the amendment with effect from Assessment Year 2010-2011.
8. It is an accepted and admitted case that the respondent-assessee
bank is a certified corporation specified in Section 4A of the
Companies Act, 1956.
9. The respondent-assessee bank, it is accepted and admitted by
the Revenue, was engaged in promotion and regulation of housing
finance institution in the country and had provided re-finance support
to financial institutions, banks, etc. for development of housing in
India. They had also undertaken business of financing some projects,
rural housing projects, etc. They had not, however, directly granted
housing loans or long-term finance for housing to individuals.
10. The respondent-assessee bank, before filing its return for the
Assessment Year 2003-04, had written letter dated 22nd October, 2002
to the Director ITA-2, Central Board of Direct Taxes with a request
for issue of notification certifying that the respondent-assessee bank
was eligible for deduction under Section 36(1)(viii) on transfer of 40%
of the profits derived from business for providing long-term finance
for housing to the special reserve. Meetings were held with the
officers of the Central Board of Direct Taxes on the question of
deduction and benefit under Section 36(1)(viii) of the Act.
Consequent to the said meetings, the respondent-assessee bank had
written a letter dated 2nd December, 2002 referring to the discussions
held and the view expressed that the respondent-assessee bank was
eligible and entitled to deduction under Section 36(1)(viii) of the Act,
as it would satisfy the requirement and condition of providing long-
term finance for housing.
11. The respondent-assessee bank had also taken legal opinion from
a Chartered Accountant, who had opined that they were eligible and
would be entitled to benefit of deduction under Section 36(1)(viii) of
the Act being engaged in re-financing of long-term financing loans
given by other financial institutions for purchase of residential houses
in India. Thus, the respondent-assessee bank had bonafidely and
genuinely believed that they were eligible and entitled to the said
deduction.
12. Accordingly and in terms of the genuine belief predicated on the
opinions expressed, the respondent-assessee bank had created a
special reserve in the respective years to which the profits from the
business of long-term finance were transferred to claim deduction
under Section 36(1)(viii) of the Act.
13. To us there cannot be any doubt or debate, therefore, that the
conduct of the respondent-assessee bank was bona fide. They were
initially in doubt and debate whether the claim for deduction under
Section 36(1)(viii) of the Act was admissible. Therefore, they had
written to the Director ITA-2, Central Board of Direct Taxes.
Meetings were held and the opinion expressed then was that the
respondent-assessee bank would be eligible for deduction. Legal
opinion was also taken from a Chartered Accountant.
14. The respondent-assessee bank, in the return of income filed by
them, had taken care and caution to make a specific disclosure in
respect of deduction claimed under Section 36(1)(viii) of the Act. We
would quote from the return of income for the Assessment Year 2003-
04:-
"1. The assessee was established as a Bank by the National
Housing Bank Act, 1987. Section 3 of the Act provides that the
Bank is a body corporate having perpetual succession and a
common seal with power, subject to the provisions of the Act,
to acquire, hold and dispose of property and to contract and by
that name, sue and be sued.
The object with which the National Housing Bank (herein after
referred to as NHB/ Bank for short] was established is to
provide long term finance for construction and/or purchase of
residential housing or residential township-cum-housing
development or slum clearance projects.
The entire capital of NHB is held by the Reserve Bank of India
and the Bank is established as a SPV (Special Purpose Vehicle)
for providing long term finance for residential housing in India.
It provides long term housing finance through the Housing
Finance Institutions, Scheduled Banks, State Co-operative
agricultural and Rural development Banks etc as well as
directly.
The Bank was exempted from the payment of Income Tax by
section 48 of the National Housing Bank Act, 1987. The
section has been omitted with effect from 1st April, 2002.
Section 36(1)(viii) of the Income Tax Act, 1961 provides a
Special deduction of forty percent of the income derived from
the business of providing long term finance for housing in the
computation of its taxable income to a Bank or financial
corporation.
The special allowance is subject to fulfilling certain other
conditions prescribed in that section more particularly creation
of a special reserve to the extent of claim under the section.
The assessee fulfills the required conditions of section
36(1)(viii) of the IT Act, and had also created the necessary
Special Reserve to the extent of Rs. 35.50 crores, in the
accounts for the year ended on 31.3.2003.
Housing finance loans are to be extended for a period not less
than 5 years each. Therefore some of the loans recovered can
not be advanced again but retained to meet its obligations of
repayment of borrowings.
The bank has obligations like repayment of borrowings at
committed dates. Further banking prudence requires certain
portion of the funds to be kept in liquid form or in Gilts to meet
the financial commitments. The RBI which owns this bank, has
prescribed the norms of such liquid funds by way of SLR and
CRR ratios for the Commercial/ Scheduled Banks. This bank
also follows such ratios of the purposes of financial prudence.
These funds are deployed by way of call money or short
deposits, overnight deposits and other deposits with other banks
for short periods as well as in Gilts. The income earned on it is
nothing but recouping a part of interest paid on the funds and is
incidental to the only main business of Housing finance.
Since the only object of the Bank is long term housing finance,
the whole of the profits are eligible for the Special deduction of
40% of its profits.
2. Reserve for Doubtful/ Loss Assets-Claim u/s
36(1)(viii) [c]:
The Bank has provided a sum of Rs. 4.50 crores as Reserve for
Doubtful assets/ loss assets covered by the provisions of Section
36(1) (viii) of the Income Tax Act, 1961. Keeping in view the
privilege available to Banks, such provision has been reduced
from the Gross receipt of Interest of the bank. It is being added
back in the computation of taxable income for being claimed
again as per the provisions of law in this regard."
Similarly, disclosures were made in returns for other assessment
years. It is not disputed and cannot be debated that the respondent-
assessee had disclosed full and correct facts to claim deduction under
Section 36(1) (viii) of the Act. Noting was concealed or withheld.
15. Despite the aforesaid factual background and clear explanation
given by the respondent-assessee bank to establish and show their
bona fides, the Assessing Officer had initiated and levied penalty
under Section 271(1)(c) of the Act in respect of Assessment Years
2003-04 to 2009-10. The reason was that the Assessing Officer did
not accept the claim of the respondent-assessee bank in the quantum
or assessment proceedings for deduction under clause (viii) to Section
36(1) of the Act. In the meanwhile, the respondent-assessee bank had
continued to raise the issue with the Central Board of Direct Taxes.
Consequently, clause (viii) of Section 36(1) was amended by Finance
(No.2) Act of 2009 with effect from 1st April, 2010 to specifically
enact and give benefit to the respondent-assessee bank engaged in re-
financing of long-term finance for construction and purchase of
houses in India. The said amendment obviously was enacted for the
benefit of the respondent-assessee bank in view of different opinion
expressed by the income tax authorities during the course of the
assessment/quantum proceedings. Memorandum explaining the
amendments made by Finance (No.2) Act, 2009 reads as under:-
" A view has been expressed that NHB is not entitled to the
benefits of section 36(1)(viii) on the ground that it is not
engaged in the long-term financing for construction or
purchase of houses in India for residential purpose. The
proposed amendment seeks to provide that corporations
engaged in providing long-term finance(including re-
financing) for development of housing in India will be
eligible for the benefit under section 36(1)(viii)."
16. Section 3 (22) of General Clauses Act, 1897 states that a thing
shall be deemed to be done in good faith where it is in fact done
honestly, whether it is done negligently or not. Section 52 of the
Indian Penal Code, 1860 says that nothing is said to be done or
believed in "good faith" which is done or believed without due care
and attention. In Shiv Sarup Gupta Vs. Dr. Mahesh Chand Gupta
AIR 1999 SC 2507, the Supreme Court interpreted the word „genuine‟
to mean not spurious, natural, real, pure and sincere. It means absence
of fraud or deceit. It should reflect the state of mind of the doer.
17. In the context of Explanation 1 to Section 271(1)(c), the word
bona fide, i.e. good faith, would require due care and attention, which
means reasonable care and attention. There should be an element of
honesty attached to the defence and the explanation given by the
assessee and there should be absence of any pretence, deceit or fraud
(see paragraph 184 and onward in Subramanian Swamy Vs. Union of
India (2016) 7 SCC 221)
18. Questioning the bona fides of the respondent-assessee bank,
learned counsel for the Revenue had submitted and referred to the
order passed by the Commissioner of Income Tax (Appeals) affirming
the order of penalty. Commissioner of Income Tax (Appeals) had
held that the respondent-assessee had paid advance tax for the
Assessment Year 2003-04, without including and computing benefit
of deduction under Section 36(1) (viii) of the Act, which would
indicate and show that the respondent-assessee was not entitled to the
benefit. We do not agree that payment of advance tax would show and
establish lack of bona fides. It is not only the respondent-assessee
bank who had verily believed their entitlement to deduction under
clause (viii); even officers of the Central Board of Direct Taxes were
of the same opinion. Bona fides, therefore, of the respondent-assessee
cannot be doubted or debated as advance tax was paid. There is no
column of income tax returns whereby the assessee, in case of claim,
can call upon Assessing Officer to decide and adjudicate claim for
deduction. Provisions of Advance Ruling were not applicable.
Therefore, to claim any benefit of any deduction, a claim is required to
be made in the return with full particulars and details.
19. It is in this context that we have to examine the bona fide of the
claim made in return for benefit under Section 36(1)(viii) of the Act.
Bona fides are accordingly examined with reference to statutory
provision, which is required to be interpreted, and whether
interpretation placed by assessee was plausible and could have been
accepted. Where the explanation is not make belief and sham but
genuine, the assessee would satisfy the requirement of Explanation 1
to Section 271(1)(c) of the Act. This test and requirement is satisfied
in the present case. Further, full and complete facts were clearly stated
in the income tax returns. In our opinion, the respondent-assessee had
acted bonafidely and were under a genuine belief that they were
entitled to benefit of the said deduction. Appropriate for this case are
the observations of the Delhi High Court in New Holland Tractors
(India) Private Limited Vs. The Commissioner of Income -tax Delhi
(2015) 275 CTR 291, wherein it was held as under:
"Test of bona fide has to be applied keeping in mind the
position as it existed, when the return of income was filed. The
Act, i.e. the Income Tax Act, is a complex legislation involving
intricate and often debatable legal positions. The legal issue
involved may relate to principles of accountancy. Invariably, on
questions of interpretation, the assessees do adopt a legal
position which they perceived as most beneficial or suitable.
This would not be construed as lack of bona fides as long as the
legal position so adopted is not per se contrary to the language
of the statute or an undebatable legal position not capable of a
different connotation and understanding. When two legal
interpretations were plausible and there was a genuine or
credible plea, penalty for concealment/furnishing of inaccurate
particulars, should not and cannot be imposed. If the view taken
by the assessee required consideration and was reasonably
arguable, he should not be penalized for taking the position. The
tax statutes are convoluted and complex and there can be
manifold opinions on interpretation and understanding of a
provision or the tax treatment. In such cases, even when the
interpretation placed by the Revenue is accepted, penalty should
not be imposed if the contention of the assessee was plausible
and bona fide. Of course full facts should be disclosed. While
applying the test of bonafide, we have to also keep in mind that
even best of legal minds can have difference of opinion. It is not
uncommon to have dissenting opinion on the question of law, in
the courts."
20. Recording the above, we dismiss the present appeals with no
order as to costs.
SANJIV KHANNA, J.
CHANDER SHEKHAR, J.
AUGUST 28, 2018
VKR
