Deduction under s 40A(2)(b)

Brokerage — Paying brokerage on the mobilisation of public deposits by a banking company is an accepted norm.

Deduction under s 36(1)(viii) — Securitisation income earned by housing finance company on long-term housing loan is allowable deduction under s 36(1)(viii).

The assessee claimed a deduction of payments of 0.5% of syndication charges/guarantee fee to M/s Weizmann Ltd which was a major shareholder of the assessee-company. The AO, invoking the provision of s 40A(2)(b), disallowed the claim of the assessee, observing that M/s Weizmann Ltd. was a promoter of the assessee-company and it should have provided services free of cost to the assessee – leading banks and financial institutions were also shareholders of the assessee-company and it could have raised loans directly from the banks. In an appeal filed before the CIT(A), the assessee contented that even though the provisions of s 40A(2)(b) of the Act had been invoked, the whole of the guarantee fee had been disallowed and no comparison had been made by the AO as per the provisions of s 40A(2)(b), a reasonable amount was liable to be allowed. Further, other banks were paying a guarantee fee of 1.5% for guaranteeing loans taken by small- and medium-enterprises and no disallowance should be made for the guarantee fee paid at 0.50% to M/s Weizmann Ltd. The CIT(A) allowed the appeal of the assessee. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the AO was justified in disallowing the payment of a guarantee fee made to a third party, even when the payment was not excessive or unreasonable on the ground that the third parties are shareholders in the assessee-company and they would have provided such services free of cost.

Section 40A(2)(b) is applicable where an AO is of the opinion that the payment is excessive or unreasonable when such payments had been made to related parties. Here, the AO has not shown how the payment made by the assessee to M/s Weizmann Ltd. was unreasonable or excessive.

The CIT(A) had taken into consideration that the National Housing Board, which is the accreditation authority for finance companies doing the business of long-term housing finance, has permitted 0.75% of guarantee fee for providing loans availed by housing finance companies. Public sector banks are also charging 1.5% for providing guarantee cover. The AO had not doubted the fees paid to third parties for providing identical range of services especially when such a fee was between 0.5% to 1%. In the circumstances, 0.5% of the guarantee fee paid to M/s Weizmann Ltd. by the assessee was not excessive or unreasonable but was well within the range as paid by the assessee to third parties.

The assessee had made a payment of brokerage at 2% of the deposits mobilised. The AO had disallowed 50% of the said expenditure. In an appeal, the CIT(A) has deleted disallowance made by the AO. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the AO was justified in disallowing a part of the brokerage on mobilisation of public deposits when he has not doubted the genuineness of the payment.

The disallowance was made out of the brokerage expenses on the ground that the payment of brokerage on mobilisation of public deposits by a banking company has never been heard of, and also on the ground that it was not ascertainable whether the recipients actually mobilised any deposits for the assessee-company or not. The fact that the National Housing Board has permitted 2% brokerage on the deposit mobilisation clearly shows that paying brokerage on the mobilisation of public deposits by a banking company is an accepted norm. Further, if the AO did not believe the payment of brokerage to eight persons, he should have disallowed the full amount. There is also no finding by the AO that the payments were not genuine or that the payments were bogus. Once the payment has been accepted as brokerage for the mobilisation of deposits, the same cannot be disallowed in part.

The assessee, a housing finance company accredited under accreditation authority being the National Housing Board, claimed a deduction under s 36(1)(viii) on account of securitisation income. The AO disallowed the assessee’s claim of a deduction. In an appeal, the CIT(A) reversed the findings of the AO. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the CIT(A) was justified in allowing a deduction under s 36(1)(viii) on account of securitisation income.

Explanation (b) and (c) to s 36(1)(viii) of the Act, “eligible business” means the business of providing long-term finance for the construction or purchase of houses in India for residential purposes. It is undisputed that the securitisation is of the long-term housing loan. The securitisation amount is nothing but the interest on the housing loan which is discounted to the present net value. This amount would obviously be the income of the assessee from the long-term housing loan disbursed by the assessee. Thus, the securitisation income is an income from the business of long-term housing finance and eligible for a deduction under s 36(1)(viii).

Section 40A(2)(b) is applicable where an AO is of the opinion that the payment is excessive or unreasonable when such payments had been made to related parties — as held by ChenTrib in DCIT v AIG Home Finance India Ltd. — In favour of: The Assessee ; ITA No. 2167/Mds/2010 : Assessment Year: 2005–2006

Decided on: 5 May 2011