2013 (8) TMI 1107 - AT - Income Tax

Summary

Issues Involved:

1. Restriction of exemption claimed u/s 10(23G) of the Income Tax Act.
2. Denial of exemption claimed u/s 10(33) of the Income Tax Act.
3. Taxability of interest and penal interest on Non-Performing Assets (NPA) up to 31.03.1998.

Summary:

1. Restriction of exemption claimed u/s 10(23G):

The primary issue was whether the exemption under section 10(23G) should be allowed on a gross or net basis. The AO restricted the exemption on a net basis after deducting the cost of borrowings. The CIT(A) upheld the AO's decision. The ITAT found that the assessee, being a public financial institution and not a banking company, had substantial own funds, and the entire costs were embedded in the total expenses. Therefore, the exemption should be allowed on a gross basis. The grounds concerning exemption u/s 10(23G) were allowed in favor of the assessee.

2. Denial of exemption claimed u/s 10(33):

The assessee claimed an exemption of Rs. 22,96,96,605/- for dividend income u/s 10(33). The AO denied the exemption, stating that it should be allowed on a net basis after deducting expenses incurred to earn the dividend. The CIT(A) sustained the AO's order. The ITAT found that the assessee had substantial free funds and investments were made from these funds. Following the same logic as in the previous ground, the ITAT allowed the exemption on a gross basis. The ground of appeal was allowed in favor of the assessee.

3. Taxability of interest and penal interest on NPA up to 31.03.1998:

The AO included interest and penal interest on NPA up to 31.03.1998 as taxable income for the current year. The CIT(A) upheld this decision. The ITAT noted that the assessee was not liable to file returns or pay tax up to 31.03.1999. Following the Supreme Court's judgment in UCO Bank vs CIT, the ITAT held that interest on sticky loans pertaining to earlier years could not be taxed. The ITAT directed the AO to delete the interest and penal interest on NPA up to 31.03.1999 amounting to Rs. 50,89,66,421/-. The ground of appeal was allowed in favor of the assessee.

Conclusion:

The appeals for the assessment years 2000-01, 2001-02, and 2002-03 were allowed in favor of the assessee. The ITAT directed the AO to grant exemptions u/s 10(23G) and 10(33) on a gross basis and to delete the interest and penal interest on NPA up to 31.03.1999.