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2015 (11) TMI 1305 - ITAT MUMBAI

2015 (11) TMI 1305 - ITAT MUMBAI - TMI - Exemption of interest income under section 10 (23G) - whether CIT(A) ought to have held that if the exemption u/s 10(23G) of the Act was to be granted at net of interest income, then, the deduction for interest cost incurred was to be taken only in relation to earmarked borrowings utilized by the assessee for the purpose of granting loans to the enterprises, interest income whereof is exempt under section 10(23G) - Held that:- From the perusal of these wo .....

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nds. This view has also been supported by another judgment of Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd.,[2014 (8) TMI 119 - BOMBAY HIGH COURT]. Thus, respectfully following above we hold that deduction for the interest cost incurred was to be taken only in relation to earmarked borrowings utilized by the assessee for the purpose of granting loans to the enterprises, interest income whereof is exempt u/s 10(23G) of the Act for the purpose of computing net interest income eli .....

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the assessee

Taxability of penal interest and interest received during the year on non performing assets - selection of year of assessment - Held that:- It has been held by the Tribunal in assessee's own case for A.Y. 1999-2000 that income of the assessee earned upto 31.03.1999 is clearly exempt because of section 37 of Export-Import Bank of India Act, 1981. It was further held that omission of section 37 shall take place w.e.f. 01.04.1999. income of the assessee for, the period upto .....

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unsel or the material placed before us, to make a distinction from the facts of earlier years. Ld DR could not bring out anything to distinguish the orders of the Hon'ble Tribunal in Assessee's own case. Therefore, keeping in view all these facts and circumstances of the case, we decide these grounds in favour of the assessee and hold that penal interest and interest received during the year on non performing assets aggregating pertaining to F.Y. ended upto 31.03.1998/31.03.1999 is not taxable i .....

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ping in view, these facts and circumstances of the case, we find no reason to intervene in the findings recorded by Ld CIT(A), as per law. Action of the AO in reducing the amount of WDV on notional basis for the amount of depreciation which was neither claimed nor actually allowed, should not have been deducted from the original cost of the assets. Therefore, we hold that the claim of the assessee was justified and Ld CIT(A) has rightly reversed the action of AO in rejecting this claim. - Decide .....

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The grounds raised by the Assessee in the appeal memo are reproduced hereunder: "1(a)(i) &2(a)(i) The Learned Commissioner of Income Tax (Appeals)ought to have held that exemption of interest income under section 10 (23G) of the Income Tax Act, 1961 (the Act) is to be granted without deducting interest cost, i.e. actual as well as notional. 1(a)(ii)& 2(a)(ii) Without prejudice to the above and in the alternate: The Learned Commissioner of Income Tax (Appeals) ought to have held tha .....

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ets relating to the period upto 31st March, 1999, being the relevant financial year during which period, the appellant was not liable to pay income tax keeping in view the then existing Section 37 of the Export-Import Bank of India Act, 1981. First we take up the assessee's appeal: 2. Ground No.1(a)(i) and 2(a)(i) are not pressed by the Ld counsel and therefore these are dismissed. 3. Ground no.1(a)(ii) & Ground No.2(a)(ii): In these grounds, the assessee has contended, without prejudice .....

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39;), has discussed this issue in para 7.1 to 7.10 of the assessment order. 3.1 During the course of assessment proceedings, it was noted by the AO that the Assessee has claimed exemption u/s 10(23G) on the total amount of interest income earned by the Assessee. The AO observed that the Assessee has also incurred interest cost on the funds borrowed. In view of these facts, the AO pointed out that assessee was eligible to claim deduction of the interest income u/s 10(23G) on the amount of net int .....

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rest income. The AO did not agree with the submissions of the assessee and held that exemption u/s 10(23G) is to be granted at gross amount only. The AO rejected aforesaid alternative prayer also of the Assessee. 3.2. Being aggrieved, the Assessee carried the matter before the Ld. Commissioner of Income Tax (Appeals) {hereinafter called as Ld. CIT(A)} There also, submissions of the Assessee were not accepted. 3.3. Still aggrieved, the Assessee filed the appeal before the Tribunal against the ord .....

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u/s 10(23G) of the Act. In support of this alternative prayer, he has placed copy of the judgment of Hon'ble ITAT in own case of the Assessee vide order dated 14th 2013 for A.Ys. 2000-01 to 2002-03. Reliance has been placed upon the judgments of Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. 366 ITR 505 (Bom) and CIT vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom). Copies of Balance Sheet and Charts were submitted showing that own funds of the Assessee in the .....

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ome to conclusion, entirely contrary to the one reached by another Bench of the same tribunal on the same facts. It was further submitted, taking help of these judgments, that once the tribunal had come to the conclusion that the fact situation was identical, to the one obtaining in a decided matter, no coordinate bench of the tribunal has any right or jurisdiction to record a contrary decision, entirely contrary to that reached by another co-ordinate bench of the same tribunal on the same set o .....

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ly in relation to earmark borrowing utilized by the assessee for the purpose of granting loans to the customs, interest income whereof is exempt u/s 10(23G) of the Act, or proportionate amount of interest on notional basis can also be deducted from the gross interest income of the assessee to arrive at the amount of net interest income eligible for exemption u/s 10(23G) of the Act. It has been noted by us that this issue came up before the Tribunal in assessee's own case in the assessment ye .....

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st expenses on rupee advances. 17. On the basis of these arguments, the AR pleaded that the assessee was eligible for exemption under section 10(23G) and also on the amount on which it has been claimed, which the assessee took as an alternative plea. 18. The DR on the other hand submitted that the revenue authorities were very reasonable in their orders, wherein, they have allowed the exemption, but have taken only the net qualifying amount, instead of the gross figures, which the assessee has t .....

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stered under the Companies Act nor is it a Banking Company as per the Banking Regulation Act, 1949. As per Banking Act, "banking" means the accepting, for the purpose of lending or investment, of deposits of money from its public, repayable on demand or otherwise, and withdrawal by cheques, draft, order or otherwise and "banking Company" means any company which transacts the business of banking in India. Both these classifications does not embrace the assessee within itself. .....

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e Companies Act, 1956. The department cannot take the view of proposing the cost of interest to be separately induced on the assessee, as the entire costs have already got embedded in the costs/total expenses. In any case, circular no. 780 dated 07.10.1999, as relied upon by the department cannot be made applicable on the assessee, as the assessee is a public financial institution and not a bank. Further, on going through with the details, as filed, the assessee has substantial own funds, which .....

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e pleas are therefore allowed." 3.6. The perusal of the above order would reveal that Hon'ble Bench has taken a view that Revenue cannot take a view of proposing the cost of interest to be separately induced on the assessee, as the entire costs have already got embedded in the costs/total expenses. Further, in any case, circular no. 780 dated 07.10.1999, relied upon by the department, cannot be made applicable on the assessee, as the assessee is a public financial institution and not a .....

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own funds of the assessee are consistently far in excess of the amount of impugned loans granted and investment made in shares and securities, out of mixed funds, since last many years. From the perusal of these working sheets, with the assistance of Ld counsel, it is seen that the own funds of the assessee are to the tune of ₹ 2512.49/- crores whereas total of all the amounts of loans in INR granted and investment in shares and securities out of mixed funds are to the tune of ₹ 236 .....

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le jurisdictional High Court, we hold that deduction for the interest cost incurred was to be taken only in relation to earmarked borrowings utilized by the assessee for the purpose of granting loans to the enterprises, interest income whereof is exempt u/s 10(23G) of the Act for the purpose of computing net interest income eligible for deduction u/s 10(23G) of the Act. Thus, Ground No.1(a)(ii) and Ground No.2(a)(ii) are allowed. 4. Ground No.1(b) and Ground No.2(b): The assessee has contended t .....

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o specific cost incurred in earning such income. But the assessing officer was not satisfied with the claim of the assessee and therefore, it was held by the assessing officer that there was interest cost and managerial cost attributable for earning dividend income and therefore benefit of exemption on the proportionate notional amount of cost was not available to the Assessee. 4.2 Before the Ld CIT(A), the assessee made detailed submissions but no relief was given to the assessee by the Ld. CIT .....

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e upon the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) and HDFC Bank Ltd. (supra). 4.4. On the other hand, Ld DR relied upon the orders of the lower authorities and requested for upholding the same. 4.5. We have gone through the orders of the lower. It is observed by us that this issue came up before the Hon'ble Tribunal in assessee's own case in assessment years 2000-01 to 2002-03 in ITA No.7361 to 7363/Mum/2005. The relevant port .....

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oth the parties and gone through the entire material. It is seen by us that the facts of the impugned year are similar to that as were discussed in the earlier years' orders. Detailed discussion has already been by us in this regard while disposing Ground No.1(a)(ii) and Ground No.2(a)(ii), above. It is seen by us that assessee's own funds exceed the investment made and therefore no disallowance could have been made by the assessing officer in the given facts and circumstances of the cas .....

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31st March, 1999, being the relevant years upto which the income of the assessee was not subject to income tax, cannot be assessed as income for the year under consideration. The AO has discussed this issue in para 9.1 to 9.10 and Ld CIT(A) has discussed this issue in para 6 to 6.3 and 7 of appellate order. 5.1 The brief facts in this regard are that the assessee is a Public Financial Institution within the meaning of section 4A of the Companies Act 1956. The assessee came into existence as a re .....

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1981". The relevant provisions of section 37 of the Export- Import Bank of India Act, 1981 reads as under: "Notwithstanding anything contained in the Incometax Act, 1961, or the Companies (Profits) Surtax Act, 1964 or any other enactment for the time being in force relating to tax on income, profits or gains. The Exim Bank shall not be liable to pay income tax, surtax or any other tax in respect of- (a) any income. profits or gains accruing to the Export Development Fund or any amount .....

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as informed, the Assessee has been filing its return of income regularly. 5.4. The Assessing Officer in his assessment order has observed that in the statement of income submitted during the year under reference, the assessee has deducted ₹ 21.60,34,746/- and ₹ 49,27,388/-, representing the penal interest received during the year on loans classified as Non Performing Assets for the Financial year ended 31-3-1999 and penal interest received during the year pertaining to the period up .....

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hat the assessee was accounting interest on NPA loans and penal interest on cash basis. Hence, pending receipts, no such interest is credited in P & L a/c. The assessee explained that the interest income claimed as not subject to income lax under reference included interest income on NPA loans and penal interest pertaining to the period ended upto 31-3-1999, being the period upto which, in any view of the matter, the assessee was not liable to income tax. It was further explained that provis .....

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the assessee on the ground that there is no explicit provisions either u/s.43D or any other provisions of the Act, providing for exclusion of income. Regular accounting policy is followed by the assessee' bank in recognizing the income. Accordingly, the penal interest and interest received during the year on loans classified as non-performing assets aggregating to ₹ 22,09,62,134/- i.e. (Rs.49,26,388 + ₹ 21,60,34,746) was included in taxable income for the year under consideration .....

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sessee and confirmed the order of the AO by observing as under: "I have carefully considered the reply given by the appellant and perused the assessment order. The basic issue involved in this case whether the provisions of scc.43D arc applicable in the case of the assessee or not. The appellant has received the interest and penal interest on non performing assets during the year and the appellant is following system of accounting to recognize such interest on receipt basis, therefore the s .....

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s fact, the addition on account of interest and penal interest amounting to ₹ 22,09,62,134/- towards the income of the assessee is justified and confirmed. This ground of appeal is decided against the appellant." 5.7. Before us, Ld counsel submitted that assessing officer has wrongly taxed the income for the period prior to 01.04.1999, when the income of the assessee was exempt in view of section 37 of Export-Import Bank of India Act, 1981. It was further argued by him that this issue .....

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the Hon'ble Tribunal, in assessee's own case, there was nothing with Ld DR to distinguish the same on facts or law. 5.9. We have gone through the orders of the lower authorities, the submissions made by both the sides and orders of the Hon'ble Tribunal in assessee's own case of earlier years. It is noted by us that it has been held by the Tribunal in assessee's own case for A.Y. 1999-2000 that income of the assessee earned upto 31.03.1999 is clearly exempt because of section .....

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1.03.2009, the assessee was not liable to pay any income-tax, sur-tax or any other tax in respect of its income of the General Fund and Export Development Fund. The said section 37, which was in the statute before its deletion read as under: "Notwithstanding anything contained in the Incometax Act, 1961, or the Companies (Profits) Surtax Act, 1964 or any other enactment for the time being in force relating to tax on income, profits or gains, the Exim Bank shall not be liable to pay income t .....

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exemption was absolute and overriding the provisions of the Incometax Act. Clause 117 of the Finance (No.2) Act, 1998, whih had effect on omission of section 37 of Export Import Bank of India Act 1981 reads as under: "117. Omission of section 37 of Act 28 of 1981 - In the Export-Import Bank of India Act, 1981, section 37 shall be omitted with effect from the 1st day of April, 1999." There is no ambiguity that the omission of section 37 of Export Import Bank of India Act 1981 is w.e.f 0 .....

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ble to tax because of the amendment. Identical issue was dealt by the Hon'ble Madras High Court in the case of CIT v. Ronald William Trikard (215 ITR 638) and the Hon'ble Bombay High Court in the case of Mcdermott International Inc. (no.1) v. Union of India (173 ITR 155) and the issue has been decided in the manner in which the assessee is now canvassing before us. Therefore, we hold that the interest income of the assessee for the year ended, 31.03.1999 is exempt from the Interest tax A .....

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venue authorities that they have virtually followed the line adopted by the revenue authorities in the preceding year. It has to be mentioned that in the preceding year, the orders of the revenue authorities were quashed by the coordinate Bench, as there was no eligibility of tax upto 31.03.1999. In this circumstance, the idea of reliance on the preceding year has to be put in oblivion. We have to examine the taxability of income in the current year, when section 37 of Export Import Bank of Indi .....

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ich period/year the interest and penal interest related to, and since being taxed for the first time, the addition of interest/penal interest was valid. This argument, may have been acceptable, where the returns are being filed and adjustments being made year to year and as such, & there is no loss to the revenue. But the instant case is different. In the instant case upto 31.03.1999, assessee was not eligible to file its return, though it was maintaining its books (as admitted by the AR). W .....

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/DR, relying on the minority decision in the case of State Bank of Travancore vs CIT, reported in 158 ITR 102, held that interest of stick loans was rightly treated as income, which had accrued to the assessee. This, in our opinion, cannot be accepted, because, what the revenue authorities are attempting to do is, to tax interest and penal interest on NPA upto 31.03.1999, which, period was non- existent, so far as tax provisions were concerned. In any case, Hon'ble Supreme Court in the case .....

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o delete the interest and penal interest on NPA account upto 31.03.1999, at ₹ 50,89,66,421/-. 40. The ground of appeal is, therefore, allowed." 5.11. The perusal of the above decisions of the Hon'ble Tribunal clarifies that income of the assessee for, the period upto 31.03.1999, was exempt. Hon'ble Bench has also taken into consideration, the effect of provisions of section 43D, while holding that income of the assessee pertains to the period upto 31.03.1999, and even if it wa .....

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e. Therefore, keeping in view all these facts and circumstances of the case, we decide these grounds in favour of the assessee and hold that penal interest and interst received during the year on non performing assets aggregating to ₹ 22, 09,62,134/-( inclusive of ₹ 85,94,581/- for year ended 31.03.1999) pertaining to F.Y. ended upto 31.03.1998/31.03.1999 is not taxable in the hands of the assessee in the year under consideration. 6. In the result, the appeal of the assessee is partl .....

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may be necessary." 8. The Revenue has challenged the action of Ld CIT(A) in allowing depreciation of ₹ 6,82,99,443/- by adopting WDV of assessment year 1999-00. During the course of hearing, Ld DR has relied upon the order of Assessing Officer whereas Ld. Counsel has relied upon the order of Ld CIT(A), on this issue. 8.1 AO has discussed this issue in para 11 to 11.4 of the assessment order. 8.2 On the other hand, Ld CIT(A) has discussed this issue in para 8 and 9 of the appellate or .....

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n of the department, the income of the assessee was chargeable to income tax for the financial year ended upto 31.3.1999. Accordingly, assessment was made by the assessing officer and the assessee was required to claim depreciation as per the stand taken by the department. 8.4. The Assessee carried the matter before the Ld CIT(A), re-iterating the submissions as were made by the assessee before the Assessing officer. The Ld CIT(A) examined this issue in detail and decided it in favour of assesse .....

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