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TMI Blog2013 (9) TMI 637X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee 28,82,250 (ii) Disallowance of expenditure claimed under section 14A (iii) Disallowance under section 36(1)(viia)(c) 3,98,40,330 (iv) Disallowance under section 36(1)(viii) 15,48,32,719 (v) Disallowance of long-term capital loss 23,74,08,532 Restriction of deduction under section 80M 5,26,59,624 Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) vide order dated September 27, 2011 partly allowed the appeal of the assessee. Not satisfied with the order of the Commissioner of Income-tax (Appeals) both the assessee and the Revenue have come in appeal before the Tribunal assailing the order of the Commissioner of Income-tax (Appeals). I. T. A. Nos. 2065 (assessee) and 2023/Mds/2011 (Revenue) and C. O. No. 14/Mds/2012-(assessment year 2003-04) : The first issue raised by the assessee in its grounds of appeal is with regard to expenditure of Rs. 95,69,72,766 allegedly incurred by the assessee for earning income exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-03 and deployment of funds during the relevant financial year is given. The authorised representative submitted that it should be left to the discretion of the assessee to adopt the method most favourable to the assessee. In order to support his contentions, the authorised representative relied on the judgment of the hon'ble Punjab and Haryana High Court in the case of Jaswant Rai v. CWT reported as [1977] 107 ITR 477 (P H). The learned Departmental representative, on the other hand, submitted that the investments should not be as per the whims and fancies of the assessee. The investment made in different funds whether eligible for deduction under section 10(23G) or exemption under section 36(1)(viii) or any other section, the investment has to be made on pro rata basis. The assessee cannot manipulate the application of funds as per its own discretion. He strongly supported the order of the Commissioner of Incometax (Appeals) on the issue. We have heard the submissions made by both parties, perused the orders passed by the authorities below and have also perused the judgments referred to. We are of the considered opinion that investment or deployment of funds in various inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) held that own funds in such cases have to be allocated in various categories of investments in shares, mutual funds and tax-free bonds on proportionate basis based on the own funds to total funds. To support his findings, the Commissioner of Incometax (Appeals) has relied on the judgment of the hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. reported as [2009] 313 ITR 340 (Bom). We are of the considered opinion that the Commissioner of Income-tax (Appeals) has gone overboard to come to such a conclusion. The ratio laid down by the hon'ble Bombay High Court in the aforesaid judgment does not support the case of the Revenue. It is the discretion of the assessee to allocate funds, viz., own funds or borrowed funds and decide the methodology of investment, provided such investment does not violate the provisions of the Income-tax Act or any other law for the time being in force. However, a perusal of the documents on record as referred to by the learned authorised representative and the orders of the lower authorities do not show, availability of the own funds at the time of making investment. In case the assessee has made investment as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book filed by the assessee. The order of the Tribunal in I. T. A. No. 1342/Mds/2006 is at pages 135 to 147 of the paper book relevant to the assessment year 2003-04. The Tribunal in I. T. A. No. 748/Mds/2005 relevant to the assessment year 2001-02 decided on March 29, 2007 with regard to liquidated damages has held in paragraph 22 that : "The assessee has received liquidated damages by way of compensation as stipulated in the agreement for default in payment of bills. The right to receive liquidated damages accrues on account of default in the payment of bills as stipulated in the agreement and it did not arise on account of any delay in the payment of loan. Hence, it cannot be construed as interest to attract the provisions of section 10(23G) of the Act. Accordingly, we uphold the order of the Commissioner of Income-tax (Appeals) on the issue and reject the ground taken by the assessee." With regard to debt syndication fee the Tribunal in paragraph 24 has held that : "Debt syndication fee is not interest accrued on loans and advances. The charge is collected by the assessee for preparation of information of memorandum, financing of business plan and negotiation charges with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record. Section 36(1)(viii) speaks about the deduction of 40 percent of the profit derived from business of providing long-term finance. Section 36(1)(viia)(c) speaks about deduction of 5 percent of the total income. The profit derived from business is one of the components of the total income which consists of various heads of income like salaries, income from house property, profits and gains, capital gains, income from other sources, etc. The profit derived from business comes first and such deduction under section 36(1)(vii) has to be computed first. The intention of the Legislation in interpreting the taxation statute is to bear in mind the object and the scheme of the entire Act and the interpretation leading to the provision becoming ultra vires should be avoided. A particular provisions cannot be considered or interpreted in isolation so as to give room for conflict between the provisions of the same Act. Hence, we are of the opinion that deduction under section 36(1)(viii) has to be computed at 40 percent of the business income and thereafter deducting this deduction from the total income, on the balance amount deduction under section 36(1)(viia)(c) has to be computed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal loss arising out of sale of shares of the aforesaid company. On the other hand, the Departmental representative submitted that the Commissioner of Income-tax (Appeals) has rightly dismissed the claim of the assessee. The assessee cannot be allowed to take benefit both ways. Since, the company has been granted benefit of the provisions of section 10(23G), the assessee cannot carry forward loss arising from the sale of shares of the said company. On the issue under consideration, we agree with the findings of the Commissioner of Income-tax (Appeals). Since the income is not taxable, the loss incurred from the sale of shares cannot be allowed to be carried forward. Therefore, we uphold the findings of the Commissioner of Income-tax (Appeals) on this issue and dismiss this ground of appeal of the assessee as well. In the result, the appeal of the assessee is partly allowed for statistical purposes in the aforesaid terms. I. T. A. No. 2023/Mds/2011 (Revenue) : The Revenue has assailed the order of the Commissioner of Income-tax (Appeals) relevant to the assessment year 2003-04 on the ground that the Commissioner of Income-tax (Appeals) has erred in holding that estimated inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as directed the Assessing Officer to compute the profits for the purpose of deduction under section 36(1)(viii) by allocating expenditure in proportion to the interest bearing funds and interest-free funds. The Departmental representative submitted that the nature of business of the assessee is such that it does not permit bifurcation of income as income earned from interest-free funds and interest bearing funds. The learned authorised representative submitted that the assessee out of Rs. 1,468.86 crores of own funds had utilised Rs. 1,396.26 crores in investments earning tax-free income and the balance of Rs. 72.60 crores was invested in assets giving rise to income eligible for deduction under section 36(1)(viii). He further submitted that the assessee on its own had disallowed the expenditure to the extent of borrowed funds. The other establishment expenditure are eligible for deduction under section 36(1)(viii). The authorised representative further submitted that this issue had cropped up in the assessment year 2002-03 as well. The Tribunal in I. T. A. No. 795/Mds/2006 vide order dated November 30, 2007 had restored the matter back to the Assessing Officer for deciding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as [2007] 292 ITR (AT) 268 (Chandigarh). The authorised representative further contended that this issue has already been decided by the co-ordinate Bench of the Tribunal in I. T. A. Nos. 747 and 748/Mds/2005 relevant to the assessment year 1999-2000 and 2000-01 vide order dated March 29, 2007 in the case of the assessee itself, wherein it has been held that only actual expenses incurred on tax-free income should be disallowed. As regards, administrative expenses, the Commissioner of Income-tax (Appeals) has directed the Assessing Officer to disallow 3 percent of the dividend income as expenditure attributable to the earning of the said income is reasonable. Respectfully following the decision of the co-ordinate Bench of the Tribunal, we do not deem it appropriate to interfere in the findings of the Commissioner of Income-tax (Appeals) on the issue and dismiss the ground of appeal of the Revenue. This ground of appeal of the Revenue is dismissed and the cross-objection of the assessee has become infructuous and the same is also dismissed. I. T. A. No. 2066 (assessee) and 2024/Mds/2011 (Revenue) and C. O. No. 15/Mds/2012: (assessment year : 2004-05) : The first issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of any loan. Front end fees is charged at the time of disbursement of loan which is akin to initial appraisal fee charged appraising the feasibility. The assessee charges certain percentage of the loan amount disbursed as front end fee to the borrower on signing of a letter of intent at the time of disbursement. The authorised representative referred to page 135 of the paper book relevant to the assessment year 2004-05 and submitted that front end fee charged by the assessee falls within the purview of term "interest" as defined under section 2(28A) of the Act. The term "interest" as defined in section 2(28A) of the Act is reproduced herein below : "Interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised." A bare perusal of the definition shows that the term "interest" includes any service fee or other charges in respect of monies borrowed or debt incurred or in respect of any credit facility. Further a perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d exemption under section 10(23G) on the premium received in advance considering it to be interest under section 2(28A) of the Act. The Departmental representative submitted that premium was lump sum amount collected by the assessee for agreeing to certain conditions and is not in the nature of interest. The receipt is in the nature of advance which cannot partake the character of interest. The authorised representative, on the other hand, submitted that the premium is charged upfront for interest rate deduction/prepayment agreed with the borrower as against original terms. The authorised representative contended that all financial institutions and the banks charge premium to hedge the falling rate of interest and agree for a lower interest rate by charging a premium for loss of interest for future period. We have heard the rival submissions made by both parties on the issue. In our considered opinion the premium is charged by the assessee to protect their interest in view of the falling interest rate in future. The premium is nothing but interest charged in advance. Therefore, the premium charged by the assessee is in the nature of interest and falls within the ambit of "inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 We are in consonance with the findings of the Commissioner of Income-tax (Appeals). We uphold the view of the Commissioner of Income-tax (Appeals) and dismiss this ground of appeal of the Revenue. Accordingly, the appeal of the assessee for the assessment year 2004-05 is partly allowed for statistical purposes. The appeal of the Revenue is partly allowed. The cross-objections of the assessee are dismissed as infructuous. I. T. A. No. 99/Mds/2012, I. T. A. No. 86/Mds/2012 and C. O. No. 22/ Mds/2012 (assessment year : 2005-06): I. T. A. No. 99/Mds/2012 (assessee) : The assessee has assailed the order of the Commissioner of Income-tax (Appeals) dated October 12, 2011. The assessee has taken as many as six grounds of appeal. The first ground of appeal relates to disallowance of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2065/Mds/ 2011 relevant to the assessment year 2003-04. Accordingly, this ground of appeal of the assessee is dismissed. The fifth ground of appeal of the assessee relates to allocation of the expenditure in proportion to interest bearing funds and interest-free funds and deduction thereon claimed under section 36(1)(viii). This issue has been decided in paragraph 33 of this order in I. T. A. No. 2023/Mds/2011 filed by the Revenue, wherein the issue was remitted back to the Assessing Officer with a direction mentioned therein. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes. The sixth ground of appeal of the assessee is general in nature and requires no adjudication. In the result, the appeal of the assessee is partly allowed. I. T. A. No. 86/Mds/2012 (Revenue) and C. O. No. 22/Mds/2012 : The Revenue has assailed the order of the Commissioner of Income-tax (Appeals) relevant to the assessment year 2005-06 raising six grounds of appeal. Since grounds Nos. 1 and 6 are general in nature, they are not taken up for adjudication. In ground No. 2, the Revenue has assailed the order of the Commissioner of Income-tax (Appeals) on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal. Majority of the issues in this appeal have already been decided in the earlier appeals of the assessee relevant to the assessment years 2003-04 and 2004-05 hereinabove. For the sake of brevity only conclusion of the issue decided in the earlier years are mentioned in the present appeal. The only issues which are not adjudicated earlier are dealt with in detail. The first ground is with regard to disallowance of Rs. 2,17,77,37,949 as expenditure allegedly incurred for earning exempt income under section 10(23G). This issue has already been dealt with in detail in paragraph 4 hereinabove in I. T. A. No. 2065/Mds/2011 relevant to the assessment year 2003-04. Therefore, this ground is allowed for statistical purposes. The second ground of appeal raised by the assessee is with regard to deduction of Rs. 4,38,30,225 as interest expenditure allegedly incurred for earning income exempt under section 10(34) of the Act. This issue has been already decided in paragraph 69 in I. T. A. No. 99/Mds/2012 relevant to the assessment year 2005-06. Accordingly this ground of appeal of the assessee is dismissed. The third ground of appeal relates to denial of exemption under section 10(23G) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Com missioner of Income-tax (Appeals) on this issue. After hearing the submissions made by the respective parties and perusing the orders of the lower authorities, we are in consonance with the findings of the Commissioner of Income-tax (Appeals) and hold that structuring fee does not fall within the ambit of definition of "interest" as defined in clause (f) of Explanation 1 to section 10(23G). Therefore, this issue is dismissed. Accordingly, the third ground of appeal of the assessee is partly allowed. The fourth ground of appeal of the assessee relates to directions given by the Commissioner of Income-tax (Appeals) to the Assessing Officer to delete the addition made in the assessment year 2004-05 on account of interest income of Rs. 2,85,00,019 received from BPL Cellular Ltd. (here inafter referred to as "BPL"). The authorised representative submitted that the assessee had given a loan to M/s. BPL in the year 1998. On account of financial difficulties faced by M/s. BPL, it was referred to corporate debt restructuring in the year 2004. Subsequently, the loan was converted into advance against prefer ence shares. In the year 2006, M/s. BPL was again referred to corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sult, the appeal of the assessee is partly allowed for statistical purposes. I. T. A. No. 87/Mds/2012 (Revenue) and C. O. No. 23/Mds/2012: The Revenue has assailed the order of the Commissioner of Income-tax (Appeals) dated October 12, 2011 relevant to the assessment year 2006-07. In the present appeal, the Revenue has raised as many as ten grounds of appeal. Ground Nos. 1 and 10 are general in nature and therefore do not require any adjudication. In the second ground of appeal, the Revenue has assailed the order of the Commissioner of Income-tax (Appeals) on the ground that exemption under section 10(23G) has been granted on the "premium" received in advance. This issue has already been decided in paragraph 57 of I. T. A. No. 2024/Mds/2011 relevant to the assessment year 2004-05. Accordingly, this ground of appeal is dismissed. In Ground No. 3, the Revenue has assailed the order of the Commis sioner of Income-tax (Appeals) for allowing exemption under section 10(23G) on "management fee" considering it to be interest under section 2(28A) of the Act. We have perused the order of the Commissioner of Income-tax (Appeals) on this issue. The loan agreement provided for cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls within the definition of interest under section 2(28A) of the Act. Therefore, this ground of appeal of the Revenue is allowed. Ground No. 6 of the Revenue's appeal relates to apportionment of income under section 10(23G) in accordance with interest-free funds and interest bearing funds. This issue has already been decided in I. T. A. Nos. 2065 and 2023/Mds/2011 relevant to the assessment year 2003-04. This ground of appeal is disposed of in similar terms. Ground No. 7 of the Revenue's appeal relates to disallowing 3 percent of tax-free income towards administrative expenses in connection with earning of tax-free income. We have already accepted the findings of the Commissioner of Income-tax (Appeals) on this issue in I. T. A. No. 2023/ Mds/2011 with regard to disallowance to the extent of 3 percent of tax free income. We therefore uphold the findings of the Commissioner of Income-tax (Appeals) on this issue and dismiss this ground of appeal of the Revenue. Ground No. 8 of the Revenue's appeal relates to restriction of disallow ance of administrative expenses for earning dividend income. This issue has already been decided in the earlier assessment year. Accordingly, this g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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