Kerala HC allows Income Tax Deduction to South Indian Bank on Long-Term Finance Provided for Purchase of Residential House [Read Order]

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 South Indian Bank Ltd, 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 as a 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.

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 Appellate Tribunal viewed 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 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.

It was 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 division bench of Justice A.K. Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that National HousingBank was not entitled to the benefits of the unamended Section  36(1) (viii) of the Income tax legislation, on the ground that it was not engaged directly in the long term financing for construction or purchase of houses in India for residential purpose. The amendment was therefore deemed necessary to extend the said benefit even to the National Housing Bank.

While allowing the appeal, 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.

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