TaxTMI 
TaxTMI 
2013 (9) TMI 637
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.... assessee-company is engaged in the business of infrastructure financing. The assessee filed its return of income for the assessment year 2003-04 on November 28, 2003. The Assessing Officer completed the assessment under section 143(3) on March 21, 2006. The Assessing Officer made certain disallowances/additions during the course of assessment in the return filed by the assessee. The Assessing Officer objected to certain exemptions/deductions and expenditure claimed by the assessee. The Assessing Officer, inter alia, made additions/dis-allowances on the following counts : (Rs.) (i) Disallowance of exemption claimed under section 10(23G) with reference to (a) Liquidated damages 21,28,296 (b) Penal interest 2,14,92,498 (c) Fees for monitoring 37,50,000 (d) Debt syndication 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 &....
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....rms of tax planning. The assessee had approximately Rs.1,510.83 crores of own funds to be utilised in the business. From the total investment of Rs. 3,484.99 crores the assessee in the first instance made investments in infrastructure loans in the institutions approved under section 10(23G), thereafter, the assessee made investments in infrastructure equity under section 80 to get the benefit of provisions of section 80M and the balance amount of the own funds were invested in infrastructure loans eligible for deduction under section 36(1)(viii). The remaining investments were made by the assessee from the borrowed funds. In order to support his contentions, the authorised representative referred to page 83 of the paper book where the details of the average funds owned by the assessee during the financial year 2002-03 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 J....
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....verboard in bringing into tax net, the income exempt from tax earned by the assessees. In the present case, the assessee had made investments from its own funds and the borrowed funds as per the details given at page 83 of the paper book. 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). For investment in taxable infrastructure loans the assessee utilised borrowed funds. The Commissioner of Income-tax (Appeals) discarded the aforementioned methodology of making investment/allocation of funds by the assessee. The Commissioner of Income-tax (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 Util....
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....ubmitted that even the liquidated damages claimed by the assessee are eligible for deduction under section 36(1)(viii) of the Act. On the other hand, the Departmental representative controverting the submissions made by the authorised representative submitted that this issue has already been decided against the assessee by the Tribunal in the assessee's own case for the assessment year 2002-03 in I. T. A. No. 1342/ Mds/2006 dated November 30, 2007 and I. T. A. No. 748/Mds/2005 dated March 29, 2007 relevant to the assessment year 2002-03 and 2001-02, respectively. On this issue, the Departmental representative relied on the order of the Commissioner of Income-tax (Appeals). We have heard the submissions of both parties on the issue. The order of the Tribunal in I. T. A. No. 748/Mds/2005 is at pages 104 to 134 of the paper 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 ....
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....ction 36(1)(viia)(c) of the Act. The authorised representative appearing on behalf of the assessee submitted that the Assessing Officer had recomputed the deduction under section 36(1)(viia)(c) contrary to the provisions of the law and the Commissioner of Income-tax (Appeals) in a mechanical manner has upheld the same. On the other hand, the Departmental representative pointed out that this issue has been decided against the assessee in the assessee's own case by the Tribunal in I. T. A. No. 748/Mds/2005. We have examined the orders passed by the authorities below on this issue and we have also perused the order of the Tribunal dated March 29, 2007 in I. T. A. No. 748/Mds/2005. The co-ordinate Bench of the Tribunal in paragraph 31 of the order has held as under : "We have heard the rival submissions and perused the material on 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 salarie....
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....itted that the assessee should be allowed to carry forward the long-term capital loss after setting it off against long-term capital gain earned during the year. He further submitted that when the investment was made, the Central Government had not approved the company for the benefit under section 10(23G) of the Act. At the time of investment the assessee had no intention to invest in a company to avail of any benefit under section 10(23G) nor it had claimed any benefit under the section up to the year of the disposal of shares. M/s. Hughes Telecom (India) Ltd. had received approval from the Government under section 10(23G) on September 17, 2002. The assessee had sold the shares of the said company during the relevant assessment year resulting into long-term capital loss. Therefore, the assessee is entitled to carry forward long-term capital 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 ....
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....d representative supported the order of the Commissioner of Income-tax (Appeals) on the issue. The authorised representative submitted that in support of the findings of the Commissioner of Income-tax (Appeals) on the issue, the assessee has also filed cross-objections. We are in consonance with the findings of the Commissioner of Income-tax (Appeals) on the issue. The Commissioner of Income-tax (Appeals) has rightly come to the conclusion that 3 percent of the tax-free income can be attributed to administrative expenses in connection with the earnings of the tax-free income. We do not find any reason to interfere with the findings of the Commissioner of Income-tax (Appeals) on this issue and dismiss this ground of appeal of the Revenue. The next issue raised by the Revenue in its grounds of appeal is that the Commissioner of Income-tax (Appeals) has 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 bifurc....
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....s-objection (C. O. No. 14/Mds/2012) on the issue in support of the findings of the Commissioner of Income-tax (Appeals) stating that restriction with respect to disallowance of administrative expenses for earning dividend income under section 80M of the Act at 3 percent of the dividend income by the Commissioner of Income-tax (Appeals) is reasonable. The authorised representative, supporting the order of the Commissioner of Income-tax (Appeals) on the issue, submitted that no interference in the findings of the Commissioner of Income-tax (Appeals) on this issue is called for, as the findings of the Commissioner of Income-tax (Appeals) are well reasoned. In support of his contentions, the authorised representative relied on the order of the Special Bench of the Tribunal in the case of Punjab State Industrial Development Corporation Ltd. v. Deputy CIT reported 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 its....
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....lief. This ground of the assessee is allowed for statistical purposes. The third ground of appeal of the assessee relates to income claimed to be exempt by the assessee earned on account of: (Rs.) (i) Liquidated damages 27,70,502 (ii) Fees for monitoring during pendency of debentures 36,71,786 (iii) Front end fees 7,97,71,250 As far as liquidated damages and fees for monitoring is concerned, the issue has already been decided against the assessee in paragraph 13 of I.T.A. No. 2065/Mds/2011 hereinabove. Accordingly, both these income do not qualify for exemption under section 10(23G) of the Act. As regards front end fees, the authorised representative submitted that in any transaction, the creditworthiness of the borrower has to be tested and verified before sanction 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 p....
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.... ground challenged in paragraph 7 of the I. T. A. No. 2065/Mds/2011 relevant to the assessment year 2003-04 of the appeal of the assessee. Therefore, this ground of appeal of the assessee is also dismissed. I. T. A. No. 2024/Mds/2011 (Revenue appeal) : The Revenue has assailed the order of the Commissioner of Income-tax (Appeals) by taking as many as eight grounds of appeal. Ground Nos. 1 and 8 are general in nature and therefore require no adjudication. Ground No. 2 of the appeal of the Revenue is identical to ground No. 2 of its appeal relevant to the assessment year 2003-04. Therefore, this ground of appeal of the assessee is dismissed in the same terms. In ground No. 3, the Revenue has assailed the order of the Commissioner of Income-tax (Appeals) on the ground that the Commissioner of Income-tax (Appeals) has allowed 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 cann....
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....he Revenue relates to indexation of longterm capital loss on listed securities. The Departmental representative submitted that the Commissioner of Income-tax (Appeals) ought to have taken into consideration the fact that the long-term capital loss on listed securities is to be computed without indexation, by following the same analogy which is applied on capital gains on listed securities. The Commissioner of Income-tax (Appeals) ought to have given opportunity to the Assessing Officer under rule 46A to verify and examine this issue. On the other hand, the authorised representative supported the order of the Commissioner of Income-tax (Appeals) on the issue. We have heard the submissions of both parties on this ground. 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....
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....h regard to liquidated damages has already been taken up and decided in paragraph 17 of this order in I. T. A. No. 2065/Mds/2011 relevant to the assessment year 2003-04. Accordingly, we uphold the findings of the Commissioner of Income-tax (Appeals) on this issue and reject this issue of the assessee. As regards front end fees, this issue has been dealt in detail in paragraph 49 of this order in I. T. A. No. 2066/Mds/2011 for the assessment year 200405. For the reasons recorded in paragraph 49 of this order on the similar issue, we allow this issue of the assessee. Therefore, this ground of appeal is partly allowed. The fourth ground of appeal raised by the assessee is with regard to method of computation of deduction under section 36(1)(viia)(c) of the Act. This issue has been dealt in detail in paragraph 18 of I. T. A. 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 ....
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....ore, cross-objection of the assessee has become infructuous and the same is dismissed. The second issue relates to disallowance of administrative expenses in running dividend income at 3 percent of interest-free and exempt income. The assessee has supported the order of the Commissioner of Income-tax (Appeals). Since this issue has already been dealt in detail in the earlier appeals filed by the assessee and the Revenue. We have upheld the findings of the Commissioner of Income-tax (Appeals). In the result, the cross-objections of the assessee relevant to the assessment year 2005-06 are dismissed as infructuous. I. T. A. No. 100/Mds/2012 (assessee) (assessment year : 2006-07) : The assessee has impugned the order of the Commissioner of Incometax (Appeals) dated October 12, 2011 relevant to the assessment year 200607 in the present appeal. 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....
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....ny guarantee or enhancing credit in respect of enterprises which has been approved by the Central Government for the purpose of this clause. Underwriting commission, in our considered opinion, does not fall within the definition of "interest" as provided in Explanation 1 to the proviso of section 10(23G). We accord ingly reject the contention of the assessee and dismiss this issue of the assessee. As regards structuring fee, the authorised representative submitted that the structuring fee is collected towards conversion of a long-term facility into guarantee. He submitted that as per Explanation 1(f) of section 10(23G) of the Act, structuring fee is in the nature of fee or commission for giving guarantee to an enterprise. The Departmental representative has supported the order of the 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 ....
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....assessee is dismissed being devoid of merit. The next ground of appeal is with regard to method of computation of deduction under section 36(1) (viia)(c) of the Act. This issue has already been dealt in paragraph 18 in I. T. A. No. 2065/Mds/2011. Therefore, this ground of appeal of the assessee is dismissed. The next ground is with regard to disallowance of 3 percent of tax-free income towards administrative expenses. This issue has already been decided in paragraph 29 in I. T. A. No. 2023/Mds/2011 relevant to the assessment year 2003-04. With regard to the issue of interest, the same has been adjudicated in paragraph 33 in I. T. A. No. 2023/Mds/2011. Therefore, this ground of appeal is disposed of accordingly. Ground No. 7 of the appeal is general in nature and thus requires no adjudication. In the result, 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. Gro....
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....t of any credit facility which has not been utilised". Legal fees cannot be considered as part of the service fee or other charges in respect of moneys borrowed. In our considered opinion, "service fee" or "other charges" must relate to borrowings, after the grant and disbursement of loan. Thus, this ground of appeal of the Revenue is allowed. The next ground of appeal of the Revenue relates to allowing exemption under section 10(23G) on the lenders agency fee. The Departmental representative submitted that it is in the nature of commission and thus do not constitute interest under section 2(28A) of the Act. A perusal of the orders passed by the lower authorities and documents on record do not substantiate the nature of lenders agency fee. The authorised representative also could not point out how the lenders agency fee falls 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 202....