TMI Blog2010 (11) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... me on 23.10.2001 showing loss of Rs.5,12,53,570/-. This return of loss was processed under section 143(1) of the Income Tax Act, 1961. Subsequently, a notice under section 148 was issued on 15.11.2006. In compliance to the said notice, vide letter dated 27.11.2006 the assessee-company requested the Assessing Officer to consider its original return filed on 23.10.2000 as return furnished in compliance to notice under section 148. Thereafter, the assessee asked the reasons for reopening the assessment under section 148, which were supplied. The assessee raised primary objections against re-opening of assessment under section 148, the Assessing Officer decided the same vide a separate order dated 29.11.2007. 2.1. Subsequently, the Assessing Officer framed the assessment under section 143(3) read with section 147 on 07.12.2007, wherein he assessed the total income of the assessee at a loss of Rs.4,03,65,895/-. While computing this loss, the Assessing Officer disallowed the exemptions claimed under section 10(23G) of the Income Tax Act amounting to Rs.1,08,87,675/-. In order itself, the Assessing Officer computed the book profit under section 115JB of the Act. Against the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20(23G) i.e. prior to 1/4/1997 and, therefore, the question of applicability of section 10(23G) does not arise in respect of interest income. 3.2. It may be worthwhile lo mention here that the Assessing Officer on similar reasoning has disallowed exemption of capital gains of Rs.2,00,92,80,000/- on sale of shares of GPEC, which has not been contested in the appellate proceedings. 3.3. Before me, the appellant has supported its claim on the grounds which can be summarized as follows:- (i) The appellant has granted long term finance to the two companies in form of "bonds" and issue of bonds is a process in which a company borrows the face amount of bonds from its buyer, pays interest on that debt while it is outstanding and then redeems the bonds by paying back the debt Hence bond fits into the definition of long term finance and is a loan which requires repayment of Loan with interest. (ii) The bonds in question are repayable after seven years and hence the limit of more than five years will fall within the provisions of section 36(1)(viiii) of the Act. (iii) The bonds were purchased as follows: (a) Sardar Sarovar Narmada Nigam Ltd. on 25/4/95 and 18/4/96; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. It is an exemption for the income of that particular assessment year only. 3.6. Coming to the facts of the case, although financially borrowing by bonds is to be treated on par with standard loans and advances but the tact that bonds are transferable would be a crucial difference in the two situations. Incidentally, in this case, the investment has been made in 1996 and it is only in hindsight it can be stated that the investment in bonds was also more than five years and hence it fulfills the condition laid down in section 36(1)(viii). The reply dated 22nd October 1997 of Director (TPS), CBDT to M/s. SSNNL is very general in nature, reiterating the fact that, subject to fulfilling the conditions both by the investor and the investee, exemption u/s. 10(23G) will be available. 3.7. As stated earlier, the section as it stands, has given a cut off date for investment i.e. 1st June 1998. Investment made prior to that obviously did not qualify for this section. There is no such provision in the section as it existed even in 1997 that the income by way of interest or dividend from such long term investment will be exempt for the entire tenure of such investment. It is an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made prior to 1-6-1998, the provisions of section before amendment made in 1998 shall apply, hence the exemption denied erroneously for the only reason that investments are made before 1st June 1998 is bad in law. It is submitted that it be so held now. 3.2. The Commissioner of Income Tax (Appeals) erred in holding that exemption notification issued by CBDT foe SSNNL, and GIPCL, the exemption u/s. 10 (23G) is not applicable to the year under consideration- In the facts and circumstances of the case it is submitted that no approval of central government was inquired u/s. 10(23G) for income from the investments made prior to amendment in year 1998, hence the exemption u/s. 10(23G) ought to have, been granted according to earlier section irrespective of CBDT's notification for financial year 2002-03 to 2004-05. It is submitted that it be so held now. 4. The Commissioner of Income Tax (Appeals) failed to appreciate that investments made in the bonds of GIPCL and Sardar Sarovar Narmada Nigam Limited is in the nature of long term finance. It is submitted that the investments in the Debentures and bonds satisfies the definition of long term finance as given in section 36(1)(vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee took us through the reasons recorded by the AO and contended that there is no case of escapement of income and as no reopening proceedings were required u/s. 147 of the Act. The assessee company had not understated the income or claimed excessive loss, deduction, allowance or relief, therefore, there could not have been any reason for AO to believe that any income had escaped the assessment. It was further submitted that AO had given reasons for reopening the assessment as "as per the provisions of section 10(23G) of the Act, interest earned by an infrastructure company on investments made by way of acquiring shares or providing long term finance to an approved enterprise are exempt. But the records reveal that the appellant had earned interest on investment made out of surplus money in bond and no loan or advance had earned interest on investment made out of surplus money in bond and no loan or advance is given and interest is not derived from long term finance as defined in section 10(23G) r.w.s. 36(1) (vii) of the Act." 6. The Counsel of the assessee submitted that above could not have been the reason to believe for reopening because the fact that interest inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r after the 1st day of June, 1998 by way of shares or longterm finance in any enterprise or undertaking wholly engaged in the business referred to in sub-section(40 of section -80IA or a housing project referred to in sub-section (10) of section 80IB or a hotel project or a hospital project and which has been approved by the Central Government on an application made by it in accordance with the rules made in this behalf and which satisfies the prescribed conditions. Provided that the income, by way of dividends, other than dividends referred to in section 115-O, interest or long-term capital gains of an infrastructure capital company, shall be taken into account in computing the book profit and incometax payable under section 115JB: Explanation 1: For the purposes of the clause, - (a) "infrastructure capital company" means such company as has made investments by way of acquiring shares or providing long term finance to an enterprise wholly engaged in the business referred to in this clause. (b) "infrastructure capital fund" means such fund operating under a trust deed, registered under the provisions of the Registration Act,1908(16 of 1908) established to raise moni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. 4. The said section 10(23G) further refers to section 36(1) (viii) of the Act for defining the term Long Term Finance, Section 36(1) (viii)of the Act defines Long Term Finance as: "Long term finance means any loan or advance where the terms under which moneys are loaned or advanced provided for repayment along with interest thereof during a period of not less than five years." Appellant has granted long-term finance to the two companies in form of bonds. The Oxford Dictionary defines Bonds as "a certificate issued by a government or a public company promising to relay money lent to it at a fixed rate of interest at a specific time. Thus a company "borrows" the face amount of bonds from its buyer, pays interest on that debt while it is outstanding and then "redeems" the bonds by paying back the debt. Thus a bond fits the definition of long term finance as reproduced above as it is loan given and its terms requires along with interest. Accordingly bonds are long term finance as per section 36(1)(viii) of the Act. Section 36(1)(viii) further requires that the loan should be given for a period which is not less than five years. In this respect it is submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose behind introduction of section 10(23G) of the Act and reproduce the same as under: Income-tax exemption to infrastructure development funds and companies. 17.1. In recognition of the need for adequate infrastructure facility which is vital for accelerating the economic development of the country, the existing provisions of the Income tax Act provide a five-year tax holiday to an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. However, in order to attract further investment to this section, an urgent need has been felt for providing more tax incentives to investors. Thus section 10(23G) of the Act was brought on the statute book to accelerate develop the infrastructure facilities and the economic development of the country and hence was a section which provided incentive for making investment. Therefore, the provisions thereof should be considered liberally. 9. As submitted at point No.4 above the appellant had invested money in these bonds in 1995/1996. The appellant had claimed exempt of this income in all the preceding years and in all those years it has been granted the said exemption. 10. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasoning given by the CIT (A) in this regard. She submitted that investment made by the assessee prior to 1st June, 1998 do not qualify it for exemption u/s. 10(23G) of the I.T. Act, 1961. Therefore, the view taken by the Ld. C.I.T. (A) be upheld. 9. Having heard both the sides we have carefully gone through the orders of the authorities below. It is pertinent to note that in the Note forming part of the Return of Income the assessee has clearly stated that it has claimed the interest income exempt u/s. 10(23G) of the Act, 1961.The reasons recorded by Assessing Officer before issuing notice u/s. 148 as intimated to the assessee vide letter dated 13-11-2007 reads as under:- "From the records, it is seen that the assessee Corporation has earned interest of Rs.1,08,87,675/- on investment in bonds of Gujarat Industrial Power Corporation Ltd., and Sardar Sarovar Narmada Nigam Ltd. and the same interest has been claimed exempt u/s. 10(23G) of the I.T. Act,1961.As per provisions of section 10(23G) of the I.T. Act, 1961, interest earned by an Infrastructure Capital Company on investments made by way of acquiring shares or providing long term finance to an approved enterprise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered in favour of the assessee by the decision of ITAT Hyderabad Bench-B in the case of VBC Ferro Alloys Ltd. vs. ACIT Circle 3(4) Hyderabad (2007) 107 ITD 367 (Hyd.), wherein it was held that Explanation 2 to section 10(23G), as introduced by the Finance Act, 1999 is declaratory and has to be construed as retrospective as it is retroactive in nature. Therefore, the assessee is entitled to exemption u/s. 10(23G) in respect of the investments made prior to 1-6-1998. Te Head-notes of the said decision reads as under:- "Section 10(23G) of the Income-tax Act,1961 - Infrastructure capital fund or infrastructure capital company -Assessment Year 2001-02. Whether Explanation 2 to section 10(23G),as introduced by Finance Act, 1999,is declaratory or explanatory and has to be constructed as retrospective as it is retroactive in nature - Held, yes - Assessee-company purchased some equity shares of a company on 4-12-1996, which was recognized as an industrial undertaking with infrastructure facility for power generation having commenced same after 31-3-1997 and was notified as such under section 10(23G) by Central Government -Assessee sold said shares on 3-11-2000 and claimed that long-ter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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