2013 (9) TMI 637 - AT - Income Tax

Disallowance u/s 36(1)(iii) of interest expenditure of ₹ 95,69,72,766 allegedly incurred by the assessee for earning income exempt under section 10(23G) of the Act use of own funds or borrowed funds - Held that - the assessee had made investments from its own funds and the borrowed funds - The assessee has made investment in certain order of preference, viz., infrastructure loans which are eligible for deduction under section 10(23G), thereafter in infrastructure equity for claiming benefit under section 80M and remaining amount of own funds in infrastructure loan for claiming exemption under section 36(1)(viii) Issue remitted to the Assessing Officer for limited purpose to determine whether at the time of making investments as claimed by the assessee its own funds were available to the extent of investment made. In case, the assessee had own funds at the time of making investments, the benefit be granted to the assessee Appeal allowed Decided in favor of Assessee. Carry forward of loss under the head Capital Gains arising from sale of shares by treating the investment as eligible for exemption under section 10(23G) of the Act Held that - The assessee cannot be allowed to take benefit both ways i.e. exemption u/s 10(23G) and setting off of loss - Since the income is not taxable, the loss incurred from the sale of shares cannot be allowed to be carried forward Decided against the Assessee. Indexation of long term capital loss on listed securities Held that - The provisions of section 48 of the Act provides that the benefit of indexation is not available in case of certain specified long-term capital assets. Apart from the specified assets the benefit of indexation is available to all long-term capital assets. The provisions of section 112 provides for the tax on long term capital gains at the flat rate of 20 percent In case listed securities/ shares/units are transferred without the benefit of indexation, then the long-term capital gain is taxable at the rate of 10 percent Decided in favor of Assessee. Eligibility of underwriting commission for exemption u/s 10(23G) of the Income Tax Act Held that - As per the provisions of section 10(23G) any income by way of dividend, interest on long-term capital gains is eligible for deduction. As per Explanation 1(f) to the proviso of section 10(23G) interest includes any fee or commission received by a financial institution for giving any guarantee or enhancing credit in respect of enterprises which has been approved by the Central Government for the purpose of this clause. Underwriting commission does not fall within the definition of interest as provided in Explanation 1 to the proviso of section 10(23G) Decided against the Assessee.

Issues Involved:
1. Disallowance of exemption claimed under section 10(23G).
2. Disallowance of expenditure claimed under section 14A.
3. Disallowance under section 36(1)(viia)(c).
4. Disallowance under section 36(1)(viii).
5. Disallowance of long-term capital loss.
6. Restriction of deduction under section 80M.
7. Allocation of funds and investments.
8. Administrative expenses related to tax-free income.
9. Method of computation of deduction under section 36(1)(viia)(c) and 36(1)(viii).

Detailed Analysis:

1. Disallowance of Exemption Claimed Under Section 10(23G):
The primary issue raised by the assessee was the expenditure incurred for earning income exempt under section 10(23G). The assessee argued that it is their prerogative to allocate funds for earning taxable and tax-free income. The Tribunal opined that investment decisions should be left to the discretion of the investor, provided they comply with the Income-tax Act. The Tribunal reversed the findings of the Commissioner of Income-tax (Appeals) and remitted the issue to the Assessing Officer to verify the availability of own funds at the time of investment.

2. Disallowance of Expenditure Claimed Under Section 14A:
The Tribunal upheld the findings of the Commissioner of Income-tax (Appeals) that 3% of the tax-free income could be attributed to administrative expenses in connection with earning the tax-free income. The Tribunal dismissed the Revenue's appeal on this issue.

3. Disallowance Under Section 36(1)(viia)(c):
The Tribunal followed the previous decision in the assessee's own case, holding that deduction under section 36(1)(viia)(c) has to be computed after deducting the deduction under section 36(1)(viii) from the total income. The Tribunal dismissed the assessee's appeal on this issue.

4. Disallowance Under Section 36(1)(viii):
The Tribunal remitted the issue back to the Assessing Officer to determine the availability of the assessee's own funds at the time of investment. The Tribunal directed the Assessing Officer to compute the interest to be reduced from the profits eligible for deduction under section 36(1)(viii).

5. Disallowance of Long-Term Capital Loss:
The Tribunal agreed with the Commissioner of Income-tax (Appeals) that since the income is not taxable, the loss incurred from the sale of shares cannot be allowed to be carried forward. The Tribunal dismissed the assessee's appeal on this issue.

6. Restriction of Deduction Under Section 80M:
The Tribunal upheld the findings of the Commissioner of Income-tax (Appeals) that restricting the disallowance of administrative expenses for earning dividend income under section 80M at 3% of the dividend income is reasonable. The Tribunal dismissed the Revenue's appeal on this issue.

7. Allocation of Funds and Investments:
The Tribunal opined that the allocation of funds should be left to the discretion of the assessee, provided it does not violate the provisions of the Income-tax Act. The Tribunal remitted the issue back to the Assessing Officer to verify the availability of own funds at the time of investment.

8. Administrative Expenses Related to Tax-Free Income:
The Tribunal upheld the findings of the Commissioner of Income-tax (Appeals) that 3% of the tax-free income could be attributed to administrative expenses in connection with earning the tax-free income. The Tribunal dismissed the Revenue's appeal on this issue.

9. Method of Computation of Deduction Under Section 36(1)(viia)(c) and 36(1)(viii):
The Tribunal followed the previous decision in the assessee's own case, holding that deduction under section 36(1)(viia)(c) has to be computed after deducting the deduction under section 36(1)(viii) from the total income. The Tribunal dismissed the assessee's appeal on this issue.

Conclusion:
The Tribunal partly allowed the appeals of the assessee and the Revenue for statistical purposes and dismissed the cross-objections of the assessee as infructuous. The Tribunal remitted several issues back to the Assessing Officer for verification and fresh consideration.

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