2010 (11) TMI 626 - AT - Income Tax

Tribunal rules in favor of assessee on exemption for bond investments under section 10(23G)

Gujarat Power Corpn. Ltd. Versus ACIT

The Tribunal upheld the reopening of the assessment but ruled in favor of the assessee on the merits. It directed the Assessing Officer to allow the ... Exemption u/s. 10(23G) - Since the issue is squarely covered in favour of the assessee by the decision of ITAT Hyderabad Bench-B in the case of VBC Ferro Alloys Ltd. vs. ACIT Circle [2005 -TMI - 66812 - ITAT HYDERABAD-B], wherein it was held that Explanation 2 to section 10(23G), as introduced by the Finance Act, 1999 is declaratory and has to be construed as retrospective as it is retroactive in nature - Therefore, the assessee is entitled to exemption u/s. 10(23G) in respect of the investments made prior to 1-6-1998 - Decided in favour of assessee. Issues Involved:1. Reopening of assessment under section 148.2. Disallowance of claim under section 10(23G) amounting to Rs.1,08,87,675/-.3. Applicability of section 10(23G) as amended by the Finance (No.2) Act 1998.4. Classification of investments in bonds as long-term finance.Detailed Analysis:1. Reopening of Assessment under Section 148:The assessee filed a return showing a loss, which was processed under section 143(1). A notice under section 148 was issued later for reopening the assessment. The assessee objected to this reopening, arguing that there was no case of escapement of income. However, the Commissioner of Income Tax (Appeals) held that the reopening was justified as the return was processed under section 143(1) and the Assessing Officer had reasons to believe that income chargeable to tax had escaped assessment due to the claim made under section 10(23G). The Tribunal upheld this decision, noting that the reopening was within the six-year limit and covered by Explanation 2(b) to section 147.2. Disallowance of Claim under Section 10(23G):The Assessing Officer disallowed the exemption claimed under section 10(23G), arguing that the assessee did not meet the basic conditions of providing long-term finance to eligible enterprises. The Commissioner of Income Tax (Appeals) supported this view, noting that the investments were made before the cut-off date of June 1, 1998, and did not qualify for exemption under the amended section 10(23G). The Tribunal, however, found that the assessee was entitled to the exemption, referencing the ITAT Hyderabad Bench decision in VBC Ferro Alloys Ltd. vs. ACIT, which held that Explanation 2 to section 10(23G) is retrospective and applies to investments made before June 1, 1998.3. Applicability of Section 10(23G) as Amended by the Finance (No.2) Act 1998:The assessee argued that the investments were made before the 1998 amendment and should be governed by the provisions of section 10(23G) as they stood prior to the amendment. The Commissioner of Income Tax (Appeals) disagreed, holding that the investments did not qualify for exemption under the amended section. The Tribunal sided with the assessee, citing the ITAT Hyderabad Bench decision that the amendment is retroactive, and thus, the investments made before June 1, 1998, are eligible for exemption.4. Classification of Investments in Bonds as Long-Term Finance:The Assessing Officer contended that the investments in bonds did not qualify as long-term finance under section 10(23G) and section 36(1)(viii). The Commissioner of Income Tax (Appeals) upheld this view, noting that bonds are transferable and the investments were made before the cut-off date. The Tribunal, however, found that the investments in bonds should be considered long-term finance, as they were for a period of more than five years and met the criteria under section 36(1)(viii). The Tribunal directed the Assessing Officer to allow the exemption under section 10(23G).Conclusion:The Tribunal upheld the reopening of the assessment but ruled in favor of the assessee on the merits, directing the Assessing Officer to allow the exemption under section 10(23G) for the investments made in bonds, as they qualified as long-term finance and met the conditions prior to the 1998 amendment. The appeal was partly allowed.