2015 (11) TMI 1305 - AT - Income Tax

Tribunal grants exemptions for interest, dividend income; upholds higher depreciation claim

The Tribunal ruled partly in favor of the assessee, allowing exemptions for interest and dividend income without deducting notional costs and excluding ... Exemption of interest income under section 10 (23G) - whether CIT(A) ought to have held that if the exemption u/s 10(23G) of the Act was to be granted at net of interest income, then, the deduction for 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 under section 10(23G) - Held that:- From the perusal of these working sheets, with the assistance of Ld counsel, it is seen that the own funds of the assessee are to the tune of ₹ 2512.49/- crores whereas total of all the amounts of loans in INR granted and investment in shares and securities out of mixed funds are to the tune of ₹ 236.02 crores only, which happens to be merely 9.39 % of the aggregate amount of the own funds of the Assessee. Under these circumstances, investments in shares and loans can be presumed to have been made out of own funds. This view has also been supported by another judgment of Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd.,[2014 (8) TMI 119 - BOMBAY HIGH COURT]. Thus, respectfully following above 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. Decided in favour of assessee. Exemption u/s 10(34) granted on the amount of gross dividend income - Held 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 Taxability of penal interest and interest received during the year on non performing assets - selection of year of assessment - Held that:- It has been held by the Tribunal in assessee's own case for A.Y. 1999-2000 that income of the assessee earned upto 31.03.1999 is clearly exempt because of section 37 of Export-Import Bank of India Act, 1981. It was further held that omission of section 37 shall take place w.e.f. 01.04.1999. income of the assessee for, the period upto 31.03.1999, was exempt. Hon'ble Bench has also taken into consideration, the effect of provisions of section 43D, while holding that income of the assessee pertains to the period upto 31.03.1999, and even if it was received by the assessee subsequent to that date, would not be liable to tax. It is seen by us that there is no change in the facts in this year as compared to the facts of A.Ys. 2000-01, 2001-02 & 2002- 03. The Ld DR also could not point out anything wrong in submissions of the Ld Counsel or the material placed before us, to make a distinction from the facts of earlier years. Ld DR could not bring out anything to distinguish the orders of the Hon'ble Tribunal in Assessee's own case. Therefore, keeping in view all these facts and circumstances of the case, we decide these grounds in favour of the assessee and hold that penal interest and interest received during the year on non performing assets aggregating pertaining to F.Y. ended upto 31.03.1998/31.03.1999 is not taxable in the hands of the assessee in the year under consideration. - Decided in favour of assessee. Depreciation adopting WDV of assessment year 1999-00 - Held that:- Ld DR has not been able to point out anything wrong in the findings of Ld CIT(A). It has been informed that decision of the Ld. CIT(A) on this issue, in earlier years, has attained finality, as it remained uncontested by the Revenue. Thus, as a matter of consistency and harmony, no different view can be taken in this year. Keeping in view, these facts and circumstances of the case, we find no reason to intervene in the findings recorded by Ld CIT(A), as per law. Action of the AO in 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 assets. Therefore, we hold that the claim of the assessee was justified and Ld CIT(A) has rightly reversed the action of AO in rejecting this claim. - Decided in favour of assessee. Issues Involved:1. Exemption of interest income under section 10(23G) of the Income Tax Act, 1961.2. Exemption of dividend income under section 10(34) of the Income Tax Act, 1961.3. Taxability of penal interest and interest received on non-performing assets (NPA) for periods before 31st March 1999.4. Depreciation allowance and the adoption of written down value (WDV) for assessment year 1999-00.Detailed Analysis:1. Exemption of Interest Income under Section 10(23G):- Ground No.1(a)(ii) & 2(a)(ii): The assessee contended that if exemption under section 10(23G) was to be granted at net interest income, then the deduction for interest cost should only relate to earmarked borrowings utilized for loans to enterprises whose interest income is exempt under section 10(23G). The AO argued that exemption should be on net interest income (gross interest income less interest cost). The Tribunal, referencing its own previous decisions and judgments from the Bombay High Court (CIT vs. HDFC Bank Ltd. and CIT vs. Reliance Utilities & Power Ltd.), held that the deduction for interest cost should only be for earmarked borrowings. Thus, the Tribunal allowed the assessee's grounds.2. Exemption of Dividend Income under Section 10(34):- Ground No.1(b) & 2(b): The assessee argued that exemption under section 10(34) should be on the gross amount of dividend income. The AO and CIT(A) had previously deducted notional interest and managerial costs. The Tribunal, referencing its own prior decisions and the Bombay High Court judgments, noted that the assessee had substantial own funds exceeding investments made. Therefore, no disallowance was warranted. The Tribunal allowed these grounds in favor of the assessee.3. Taxability of Penal Interest and Interest on NPAs:- Ground No.1(c) & 2(c): The assessee contended that interest and penal interest received on NPAs for periods before 31st March 1999 should not be taxed, as the income was exempt under section 37 of the Export-Import Bank of India Act, 1981. The AO included these amounts in taxable income, and the CIT(A) upheld this. The Tribunal, referencing its own previous decisions and the specific exemption under section 37, held that such income up to 31st March 1999 was exempt. Therefore, the Tribunal ruled in favor of the assessee, excluding the interest and penal interest from taxable income.4. Depreciation Allowance and WDV for Assessment Year 1999-00:- Revenue's Appeal: The AO computed depreciation at a lower amount by adopting WDV for the assessment year 1999-00, arguing that the income was chargeable to tax for that year. The CIT(A) allowed the assessee's higher depreciation claim, stating that WDV should be based on actual cost less depreciation actually allowed. The Tribunal upheld the CIT(A)'s decision, noting that the revenue had not contested this in earlier years, and thus, consistency was required. The Tribunal dismissed the revenue's appeal.Conclusion:The Tribunal ruled partly in favor of the assessee, allowing exemptions for interest and dividend income without deducting notional costs and excluding penal interest and interest on NPAs for periods before 31st March 1999 from taxable income. The Tribunal also upheld the higher depreciation claim by the assessee, dismissing the revenue's appeal.