2018 (4) TMI 1707 - AT - Income Tax

Disallowance of exemption u/s 10(23G) in respect of interest income earned by bank - HELD THAT - As decided in assessee's own case 2013 (8) TMI 1107 - ITAT MUMBAI there is no denial by the revenue authorities on the fact that the business of the assessee was of undivisible nature and assessee being the creation of the Parliament, is not a banking company and certainly not a company registered under the 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 are employed by it in bonds/securities, and is thus covered by the case of CIT vs Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and other case, as cited and placed/mentioned in the synopsis. The assessee having the business of lending, was correct in claiming the deduction, which was claimed at net figures because, the interest has got embedded in the specific costs. Whether exemption of interest under section 10(23G) of the Act should be granted after deducting actual interest cost instead of notional interest cost ? - HELD THAT - As decided in assessee's own case 2013 (8) TMI 1107 - ITAT MUMBAI and HDFC BANK LTD. 2014 (8) TMI 119 - BOMBAY 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. Exemption under section 10(34) of the Act is to be granted at dividend income without deducting notional interest cost and estimated managerial expenses - HELD THAT - As decided in own case 2015 (11) TMI 1305 - ITAT MUMBAI 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 case and therefore, respectfully following judgments of Hon ble Tribunal in assessee s own case and jurisdictional High Court, we decide these grounds in favour of the assessee Disallowance of interest expenses on foreign currency loan under section 14A read with section 8D - HELD THAT - We do not agree with the contention of the appellant that borrowings in Indian currency which are for a short period like under CBLO etc. should also be excluded simply because they are short-term borrowings which cannot be invested in long term investments. There is no bar to the appellant to invest money borrowed in the short term in assets which yield exempt income. In view of the above, the A.O. is directed to re-compute the disallowance u/s14A read with Rule 8D after excluding interest paid on foreign currency borrowings which are utilized for foreign currency lending abroad or out of India out of total interest paid by the appellant Depreciation u/s. 32 - sanctity in reducing the WDV of the assets by notional depreciation in the years in which the appellant was not assessable to income-tax - HELD THAT - The assessee placed reliance on Tribunal s order for AY 2005-06 2015 (11) TMI 1305 - ITAT MUMBAI , wherein the Tribunal has principally decided the issue that 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 asset. Taking a consistent stand and respectfully following the Tribunal s order, we dismiss this issue of Revenue s appeal.

Summary

Issues Involved:
1. Disallowance of exemption under section 10(23G) of the Income Tax Act for interest income.
2. Exemption of interest under section 10(23G) after deducting actual interest cost instead of notional interest cost.
3. Exemption under section 10(34) of the Income Tax Act for dividend income without deducting notional interest cost and estimated managerial expenses.
4. Recomputing disallowance of interest expenses on foreign currency loan under section 14A read with Rule 8D of the Rules.
5. Granting depreciation under section 32 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Exemption under Section 10(23G) for Interest Income:
The first common issue in these appeals is the disallowance of exemption under section 10(23G) of the Income Tax Act for interest income earned by the bank. The CIT(A) confirmed the action of the AO in disallowing the exemption. The Tribunal noted that this issue had been consistently decided against the assessee in previous years, citing the Tribunal's order for AY 2000-01 to 2002-03. The Tribunal reiterated that the assessee, not being a banking company or registered under the Companies Act, could not claim the exemption as the interest costs are embedded in the expenses. Consequently, the Tribunal dismissed the assessee's appeal on this issue.

2. Exemption of Interest under Section 10(23G) After Deducting Actual Interest Cost:
The next issue, raised without prejudice to the first, concerns the exemption of interest under section 10(23G) after deducting actual interest cost instead of notional interest cost. The Tribunal referred to its earlier decision for AY 2000-01 to 2002-03, which held that the interest cost should be considered only for earmarked borrowings utilized for granting long-term finance. The Tribunal allowed the assessee's appeal on this issue, directing that the exemption should be granted after deducting actual interest cost.

3. Exemption under Section 10(34) for Dividend Income:
The assessee argued that the exemption under section 10(34) should be granted for dividend income without deducting notional interest cost and estimated managerial expenses. The Tribunal, referencing its decision for AY 2005-06, upheld that the assessee's own funds exceeded the investments, thus no disallowance could be made. The Tribunal allowed the assessee's appeal, granting the exemption without deducting notional costs.

4. Recomputing Disallowance of Interest Expenses on Foreign Currency Loan under Section 14A read with Rule 8D:
The Revenue's appeal contested the CIT(A)'s direction to recompute the disallowance of interest expenses on foreign currency loans. The Tribunal noted that in previous years, the AO had excluded such interest expenses following CIT(A)'s directions, and the Revenue had accepted this position. The Tribunal upheld the CIT(A)'s order, directing the AO to exclude the interest paid on foreign currency borrowings utilized for foreign currency lending. The Revenue's appeal on this issue was dismissed.

5. Granting Depreciation under Section 32:
The Revenue also appealed against the CIT(A)'s direction to grant higher depreciation under section 32. The Tribunal confirmed that the WDV of assets should not be reduced by notional depreciation for years when the assessee was not taxable. This position had been consistently upheld in previous years and remained uncontested by the Revenue. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to grant depreciation as claimed by the assessee.

Conclusion:
The Tribunal's order resulted in the partial allowance of the assessee's appeals and the dismissal of the Revenue's appeal. The Tribunal consistently followed its earlier decisions and upheld the CIT(A)'s directions where applicable. The key determinations included the proper computation of exemptions under sections 10(23G) and 10(34), the exclusion of certain interest expenses under section 14A, and the correct calculation of depreciation under section 32.