Inara Housing Finance Ltd. vs ITO

These appeals are directed against the common judgment of the Tribunal dt. 26-2-2010. Facts are more or less similar in both the appeals and therefore, facts as stated in Tax Appeal No. 1728 of 2010 are taken for deciding these appeals. At the outset, counsel for the assessee did not press question Nos. 1 and 2. Therefore, the surviving questions formulated by the assessee are as follows:

Whether on facts and on interpretation of law the Tribunal is right in confirming the disallowance of Rs. 2,39,490 in respect of bona fide and legitimate deduction u/s 36(1) (viii) of the Act ?

Whether on facts and evidence on record read along with explanation of the appellant the Tribunals findings and conclusions confirming the disallowance u/s 36(1)(viia) and section 36(1)(viii) of the Act result in a vitiated findings sustainable in law ?

Though two questions are framed, issue is single and pertains to deduction u/s 36(1) (viii) of the Income Tax Act, 1961 of Rs. 2,39,490 claimed by the assessee and disallowed by the Assessing Officer. The assessee claimed such deduction on the ground that it had given loans and advances to various persons for construction of residential units. The Assessing Officer when called upon the assessee to produce such details, full details were not made available. The assessee, however, did submit a list of persons who were given such loans. On the basis of such material, the Assessing Officer issued notices to three persons who deposed that they have not utilized the money for the purpose of construction of residential unit. On such ground, the Assessing Officer disallowed the claim holding that the assessee failed to establish that necessary conditions of section 36(1)(viii) were satisfied. The CIT (Appeals) rejected the assessees appeal observing that though the assessee is a firm registered for the purpose of providing long term finance for construction and purchase of houses for residential purpose, the assessee had not bothered to see if the money disbursed was being actually used for construction and purchase of residential house or not. The company simply took application in which it was mentioned that loan is required for purchase of residential unit and without any further verification issued cheque to the borrower. No system was established to check or verify whether the finance provided by it was actually used for the purpose of construction or purchase of house and no details were called for from the borrower regarding allotment of house or material to show that house was constructed.

The assessee approached the Tribunal. The Tribunal, however, dismissed the assessees appeal making following observations :

We have heard both the parties and gone through the facts of the case. It is well settled that the onus is on the assessee, claiming deduction u/s 36(1)(viii) of the Act to establish that it fulfilled the conditions stipulated in the said section. The relevant provision of section 36(1) (viii) read with the Notes and the Memorandum for Notes and Clauses in the Finance Bill, 1995, we find that the purpose of amending the section 36(1)(viii) was to restrict the deduction available to the assessee in respect of any special reserves created not exceeding 40 per cent of the profits derived from the business of providing long-term finance for construction or purchase of houses in India. Therefore, the immediate source of income which is eligible for deduction u/s 36(1)(viii) must be the business of providing long-term finance for construction or purchase of houses in India for residential purposes. During the course of assessment proceedings, the AO asked the assessee to furnish details and documentary evidence of each of the property purchased/constructed from the advances given by it, along with applications made by the borrowers, seeking advance for this purpose. However, the assessee did not furnish the required details properly. On the basis of the enquiries made from aforesaid three parties and the assessee having not discharged the onus that loans given by it were indeed used for purchasing and construction of any residential house, the AO denied the claim for deduction u/s 36 (1)(viii) of the Act in these two assessment years. Even before the learned CIT(A), the assessee could not establish that the money disbursed by it was used for the purpose of construction or purchase of residential houses. Accordingly, the learned CIT(A) concluded that the assessee having failed to establish that it has provided the loans/finances for the purposes envisaged in Section 36(1)(viii), deduction was not admissible. The copies of application for advances by various borrowers placed in paper book on page 41 to 90 submitted before us and referred to by the learned AR are in Gujarati. The learned AR contended that the various borrowers requested for advance for purchase and construction of houses. Apart from copies of these applications, no evidence has been referred to before us suggesting that advances given by the assessee were indeed utilized for purchase or construction of residential houses. If an assessee claimed the benefit of deduction u/s 36(1)(viii) of the Act, the onus squarely rested upon them to satisfy the revenue authorities that they fulfilled the condition stipulated under the said provision i.e. the advances given by it were used only for the purpose of purchase or construction of residential houses in the case under consideration, the assessee did not establish their claim nor submitted the relevant evidence before the AO or the learned CIT(A) that the advances given by it were indeed for purchase or construction of residential houses. Even before us situation is no better. In these circumstances, especially when there is no material before us to take a different view in the matter, we are not inclined to interfere with the findings of the learned CIT(A). Therefore, ground no. 3 in these two appeals of the assessee is dismissed.

Counsel for the assessee vehemently contended that the assessee had fulfilled all the conditions and necessary documents were also produced on record. Only on three borrowers making a statement that the loan was not utilized for the purpose of construction or acquisition of house, the entire deduction was disallowed.

However, from the record we notice that the authorities below have examined all the relevant aspects of the matter. It is not disputable that the assessee did not submit full details of the borrowers and their construction or acquisition of houses from the borrowed funds. It is not a case where large number of notices were issued and only three out of such notices came forward suggesting that the fund was not utilized for such purpose. It was a case wherein on three random notices being issued, all the three borrowers declined to have used the funds either for construction or for purchase of the house. The Tribunal rightly observed that onus was on the part of the assessee to establish that the conditions of claim for deduction were satisfied.

The entire issue is based on factual matrix. Three authorities concurrently found that the conditions are not fulfilled. No question of law arises. Issues in Tax Appeal No. 1729 of 2010 are also similar. In the result, both the Tax Appeals are dismissed.