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2019 (3) TMI 1112 - HC - Income TaxExemption u/s 10(23G) - exemption u/s 10(23G) has to be on the net and not on the gross interest receipt - AO held that such exemption would be available on net income and not on the gross interest receipt - assessee raised foreign loan from which infrastructure projects were funded - As per assessee he had sufficient interest free funds and therefore, the AO was not correct in disallowing interest expenditure on local borrowings - HELD THAT - Tribunal noted that the assessee is not a Banking Company as defined under the Banking Regulations Act, 1949. It is also not a company registered under the Companies Act 1956. In fact, the assessee was a public finance institution constituted under the Act. The Tribunal also noted that the assessee had substantial own funds which were deployed in bonds and securities which yielded receipts exempt under Section 10(23G) of the Act. In our opinion, the Tribunal, therefore, correctly applied the decision of this Court in the case of Reliance Utilities & Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT . Revenue had not been able to establish any direct co-relation between the assessee s local borrowings and its investments in infrastructure development projects. For such reasons, no question of law arises. Hence, this question is not entertained. - decided against revenue Exemption under Section 10(33) - HELD THAT - The Tribunal relying on the same principle as in the previous question and applying the decision of this Court in the case of Reliance Utilities and Power Ltd (supra), ruled in favour of the assessee. We do not see need to give separate reasons for confirming this decision of the Tribunal. - decided against revenue Taxability of interest on non-performing assets ( NPA ) u/s 43D - Interest received during the year - when it accrued, was exempt and the assessee was not even required to file return, however, the assessee had maintained accounts clearly establishing the accrual of income and section 43D would not apply to the assessee - HELD THAT - Section 43D of the Act makes special provisions in case of income of public financial institutions, public companies etc and provides that notwithstanding anything to the contrary contained in any other provision of the Act, in the case of a public financial institution or a scheduled bank or a co-operative bank, the income by way of interest in relation to specified bad or doubtful debts shall be chargeable to tax in previous year in which it is credited by such institution to its profit and loss account or the year in which it is actually received whichever is earlier. This provision, thus, makes a receipt of specified NPAs taxable on receipts or crediting in the account whichever is earlier. In this context, the Tribunal correctly observed that though the assessee was not required to or even eligible to file return, it had maintained accounts and the interest income was embedded in the profit / loss. This was during the period which such income was exempt from tax. - decided against revenue
Issues:
1. Exemption under Section 10(23G) of the Income Tax Act 2. Exemption under Section 10(33) of the Income Tax Act 3. Taxability of interest and penal interest on non-performing assets (NPAs) Exemption under Section 10(23G) of the Income Tax Act: The dispute between the Revenue and the Assessee revolved around the restriction of exemption under Section 10(23G) of the Income Tax Act. The Assessing Officer contended that the exemption should be available on net income rather than gross interest receipt. The Tribunal, however, deleted the disallowance of exempt income based on the grounds that the assessee had sufficient interest-free funds. The Tribunal referred to the judgment in CIT Vs. Reliance Utilities and Power Ltd. to support its decision. The Tribunal correctly noted that the exemption under Section 10(23G) should be on the net interest receipt, considering the assessee's substantial own funds and investments in bonds and securities. The Tribunal's decision was upheld, emphasizing the lack of direct correlation between local borrowings and infrastructure development projects. Exemption under Section 10(33) of the Income Tax Act: The Tribunal, applying similar principles as in the previous issue, ruled in favor of the assessee regarding the claim of exemption under Section 10(33) of the Act. The Tribunal's decision was affirmed without the need for separate reasons, aligning with the judgment in the case of Reliance Utilities and Power Ltd. Taxability of interest and penal interest on non-performing assets (NPAs): The final issue concerned the taxability of interest and penal interest on NPAs received by the assessee during the relevant assessment year. The Revenue sought to tax the income in the current year based on actual receipts, citing Section 43D of the Act. However, the Tribunal rejected this argument, stating that the income accrued during earlier years when it was exempt from tax. The Tribunal emphasized that Section 43D did not apply to the assessee and that the income should be taxable based on accrual rather than actual receipts. The Tribunal's decision was supported, highlighting that the income was embedded in the profit/loss during the exempt period. Section 43D was analyzed to clarify the taxability of specified NPAs based on receipts or crediting in the account, whichever is earlier. In conclusion, the Income Tax Appeals were dismissed, affirming the Tribunal's decisions on all three issues.
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