M/s. EXPORT IMPORT BANK OF INDIA, MUMBAI V. ADDL CIT Rg. 3(1), MUMBAI

ITA 7362/MUM/2005

• Counselvise Citation: 736219914 RSA 2005
• Duration Of Justice: 7 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-06-2013
• Assessment Year: 2001-2002
• Appeal Filed On: 16-12-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S J SINGH
• Assessee Lawyers: DINESH VYAS
• Keywords: Source of fund
• Section: 37; 10; 15; 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI . . , ! ' #'' '$ , % ! & BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER . : 7361 / / 2005 A.Y. 2000-01 ITA NO. 7361/MUM/2005 (ASSESSMENT YEAR: 2000-01) . : 7362 / / 2005 A.Y. 2001-02 ITA NO. 7362/MUM/2005 (ASSESSMENT YEAR: 2001-02) . : 7363 / / 2005 A.Y. 2002-03 ITA NO. 7363/MUM/2005 (ASSESSMENT YEAR: 2002-03) EXPORT IMPORT BANK OF INDIA, CENTRE ONE BUILDING, FLOOR 21, WORLD TRADE COMPLEX, CUFFE PARADE, MUMBAI -400 005 .: PAN: AAACE 2769 D VS THE DY. CIT RG. 3(1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI DINESH VYAS RESPONDENT BY : SHRI S.J. SINGH /DATE OF HEARING : 05-06-2013 !' / DATE OF PRONOUNCEMENT : 14-08-2013 * O R D E R #'' '$ , : PER VIVEK VARMA, JM: THESE THREE APPEALS FILED BY THE ASSESSEE ARISE FROM THE THREE DIFFERENT ORDERS OF THE CIT(A) XXVIII, MUMBAI, COMMONLY DAT ED 11.10.2005. SINCE THE GROUNDS ARE COMMON, FOR THE SAKE OF CONVENIENCE AND BREVITY, WE ARE PASSING A CONSOLIDATED OR DER, COVERING THE THREE IMPUGNED YEARS. EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 2 2. THE BASIC FACTS ARE THAT THE ASSESSEE IS A PUBLIC FINAN CIAL INSTITUTION WITHIN THE MEANING OF SECTION 4A OF THE COMPAN IES ACT, 1956. THE ASSESSEE CAME INTO EXISTENCE AS A RESULT OF TH E ACT OF PARLIAMENT, AND WAS FORMED AS A STATUTORY CORPORATION CA LLED THE EXPORT IMPORT BANK OF INDIA ACT, 1981. 3. BEING A STATUTORY BODY, THE ASSESSEE WAS NOT LIABLE TO PAY INCOME TAX, SURTAX OR ANY OTHER TAX IN RESPECT OF ITS IN COME SINCE THE ASSESSEE WAS NOT LIABLE FOR ANY TAX, THE ASSESSEE WAS ALS O NOT OBLIGED TO FILE ITS RETURN OF INCOME. 4. WITH THE OMISSION OF SECTION 37 OF EXPORT IMPORT BANK O F INDIA ACT, 1981, BY THE FINANCE (NO. 2) ACT, 1998, THE ASSESSEE BECAME LIABLE TO TAX REGIMEN W.E.F. 01.04.1999. AS A RESULT THEREOF, THE FIRS T FINANCIAL YEAR FOR THE ASSESSEE WAS 01.04.1999 TO 31.03.2000, BEING ASSESSMENT YEAR 2000-01, BEING THE IMPUGNED ASSESSMENT YEAR. 5. BEING A CORPORATION, THE ASSESSEE WAS IN ANY CASE MA INTAINING REGULAR BOOKS OF ACCOUNTS FROM ITS INCEPTION, BUT SINCE THE ASSESSEE WAS NOT LIABLE FOR ANY STATUTORY LEVIES, IT WAS NOT FILING ITS RETURNS ANYWHERE. 6. SINCE SECTION 37 OF EXPORT IMPORT BANK OF INDIA ACT, WAS OMITTED THE ASSESSEE, ON THE BASIS OF AN OPINION, FILED ITS RETURN O F INCOME FOR ASSESSMENT YEAR 1999-2000 WITH A NOTE THAT, AS PER LAW , THE EXEMPTION UNDER SECTION 37 REMAINS IN FORCE UPTO 31.03.199 9 AND IT GETS ITS LIFE FROM FINANCIAL YEAR STARTING FROM 01.04.1999. THIS WAS DENIED AND THE AO PROCEEDED TO FRAME ASSESSMENT UNDER SECTION 143(3) FOR ASSESSMENT YEAR 1999-2000. THAT APPEAL WAS SE PARATELY PERUSED BY THE ASSESSEE, WHICH CAME UPTO THE ITAT, AND , IN ITA NO. 7360/MUM/2005, THE COORDINATE BENCH AT MUMBAI, HELD THAT THE ASSESSEE WAS NOT LIABLE TO PAY THE INCOME TAX IN RESPECT OF THE INCOME DERIVED OR RECEIVED BY THE ASSESSEE DURING THE YEAR EN DING 31.03.1999, EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 3 AND THE COORDINATE BENCH QUASHED THE PROCEEDINGS OF TH E REVENUE AUTHORITIES FOR ASSESSMENT YEAR 1999-2000. WE, THEREFORE, TAKE ITA NO. 7361/MUM/2005 FOR ASSESSMENT YEAR 2000-1 AS THE LEAD CASE: ITA NO. 7361/MUM/2005, A.Y. 2000-01 7. THE FOLLOWING GROUNDS ARE TAKEN: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN - (A) (I) CONFIRMING THE STAND TAKEN BY THE ASSESSIN G OFFICER IN QUANTIFYING INTEREST INCOME EXEMPT UNDER SECTION 10(23G) OF THE ACT AT NET INTEREST INCOME, I.E. AFTER TAKING THE AGGREGATE COST OF INT EREST INCURRED ON EARMARKED BORROWINGS UTILIZED FOR THE PURPOSE OF GR ANTING LOANS , THE INTEREST INCOME WHEREOF IS EXEMPT UNDER SECTION 10( 23G) OF THE ACT AND NOTIONAL COST OF INTEREST ON BORROWINGS ASSUMED TO HAVE BEEN MADE FOR THE PURPOSE OF GRANTING LOANS TO THE ENTERPRISES , THE INTEREST INCOME WHEREOF IS EXEMPT UNDER SECTION 10(23G) OF THE ACT; (II) WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALT ERNATE, IN ANY VIEW OF THE MATTER, NOT HOLDING THAT IF THE EXEMPTION OF INTERE ST INCOME UNDER SECTION 10(23G) OF THE ACT IS TO BE GRANTED AT NET OF INTEREST COST INCURRED , THEN, FOR THE SAID PURPOSE, INTEREST COS T IN RELATION TO EARMARKED BORROWINGS UTILIZED BY THE APPELLANT FOR THE PURPOSE OF GRANTING LOANS TO THE ENTERPRISES , THE INTEREST IN COME WHEREOF IS EXEMPT UNDER SECTION 10(230) OF THE ACT ONLY IS TO BE CONS IDERED. (B) CONFIRMING THE STAND TAKEN BY THE ASSESSING OF FICER OF QUANTIFYING THE DIVIDEND INCOME EXEMPT UNDER SECTION 10(33) OF THE ACT AT NET OF SUCH DIVIDEND INCOME I.E. AFTER DEDUCTING THE NOTIONAL I NTEREST COST ON THE BORROWING ASSUMED TO HAVE BEEN MADE FOR EARNING EXE MPT DIVIDEND INCOME; (C) CONFIRMING THE ASSESSMENT MADE BY THE ASSESSIN G OFFICER OF INTEREST AND PENAL INTEREST RECEIVED ON NON PERFORMING ASSETS (N PA) PERTAINING TO THE FINANCIAL YEARS ENDED UPTO 31ST MARCH, 1998! 31ST M ARCH,1999 (BEING THE RELEVANT YEARS UPTO WHICH THE INCOME OF THE APP ELLANT WAS NOT SUBJECT TO INCOME TAX) OF RS.50,89,66,421 AS TAXABL E INCOME FOR THE YEAR. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE - (A) (I) HELD THAT EXEMPTION UNDER SECTION 10(23G) OF THE ACT IS TO BE GRANTED AT GROSS INTEREST INCOME. (II) WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALT ERNATE, IN ANY VIEW OF THE MATTER, HELD THAT IF THE EXEMPTION UNDER SECTION 10 (230) OF THE ACT IS TO BE GRANTED AT NET OF INTEREST COST , THEN, THE DEDU CTION FOR THE INTEREST COST INCURRED IS TO BE TAKEN ONLY IN RELATION TO EA RMARKED BORROWINGS UTILIZED BY THE APPELLANT FOR THE PURPOSE OF GRANTI NG LOANS TO THE ENTERPRISES , INTEREST INCOME WHEREOF IS EXEMPT UND ER SECTION 10(230) OF THE ACT. (B) (I) HELD THAT EXEMPTION UNDER SECTION 10(33) O F THE ACT IS TO BE GRANTED ON GROSS DIVIDEND INCOME; (C) HELD THAT INTEREST AND PENAL INTEREST RECEIVED DURING THE YEAR OF RS.50,89,66,421 ON NON-PERFORMING ASSET (NPA) PERTA INING TO THE FINANCIAL YEARS ENDED UPTO 315T MARCH, 1998 , BEING THE RELEVANT EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 4 FINANCIAL YEARS UPTO WHICH THE INCOME OF THE APPELL ANT IS NOT SUBJECT TO INCOME TAX AS WELL AS FOR THE YEAR ENDED 3 MARCH, 1 999 THE CHARGEABILITY OF INCOME WHEREOF IS SUBJECT TO ACCEP TANCE BY THE HON. APPELLATE TRIBUNAL, CANNOT BE ASSESSED FOR THE YEAR . 3. IT IS HUMBLY PRAYED THAT THE RELIEFS AS PRAYED A ND SUCH OTHER AND FURTHER RELIEFS AS MAY BE JUSTIFIED BY THE FACTS AN D CIRCUMSTANCES OF THE CASE AND AS MAY MEET THE ENDS OF JUSTICE, SHOULD BE GRANTED. 8. THE FIRST GROUND IS AGAINST THE RESTRICTION OF E XEMPTION CLAIMED UNDER SECTION 10(23G) OF THE INCOME TAX ACT. 9. IN THE CURRENT YEAR, THE REVENUE AUTHORITIES PREFERRE D TO PROCEED ON THE LINES ADOPTED IN ASSESSMENT YEAR 1999-2000. THE FIRST OF THE ACTION TAKEN BY THE AO WAS TO RESTRICT THE EXEMPTION C LAIMED UNDER SECTION 10(23G), WHICH, THE AO COMPUTED ON NET BASIS, I.E. AFT ER REDUCING THE COST OF BORROWINGS SPECIFICALLY MADE FOR THE PURPOSES OF GRANTING OF LOANS. FROM THE DETAILS AS REPRODUCED IN THE A SSESSMENT ORDER, WE FIND THAT EXEMPTION CLAIMED BY THE ASSESSEE WAS AT RS. 8,58,00,484/- AS AGAINST THIS, THE AO ALLOWED THE EXEMPTION AT RS. 6,70,94,603/-. THE BASIS OF RESTRICTION OF THE EXEMPTION WAS THAT THE EXEMPTION CANNOT BE ALLOWED ON GROSS BASIS AND THAT THE COST OF INTEREST ON FUNDS BORROWED FOR FUNDING ITS CLIENTS SHOULD BE REDUCED, THEREBY, TO ALLOW THE EXEMPTION ON NET BASIS ONLY. 10. THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE BUS INESS OF THE ASSESSEE WAS IN THE NATURE OF UN-DIVISIBLE ACTIVITY, AND AS SUBMITTED ABOVE, THE QUANTIFICATION ON NET BASIS WAS DONE WHEREVER SPECIFIC COST INCURRED, OTHERWISE IN ABSENCE OF ANY SPECIFIC BORROWING MAD E FOR GRANTING LOANS TO ELIGIBLE ENTERPRISES, IT WAS CLAIMED ON GROSS BASIS. 11. TO SUPPORT ITS CONTENTION, THE ASSESSEE PLACED RELIANC E ON THE DECISIONS OF CIT VS INDIAN BANK REPORTED IN 56 ITR 77 (SC ) AND RAJASTHAN STATE WAREHOUSING CORPORATION REPORTED IN 242 ITR 45 0. EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 5 12. THE AO CITING VARIOUS DECISIONS BY VARIOUS FORA AND VA RIOUS PROVISIONS OF THE ACT, HELD THAT THE ARGUMENTS AND DECISI ONS RELIED UPON BY THE ASSESSEE COULD NOT BE ACCEPTED. HE HELD, 5.22 IN OUR CASE, THE ASSESSEE HAS INVESTED IN IN FRASTRUCTURAL LOANS ONLY TO EARN INTEREST INCOME. THEREFORE, IT IS A DIFFERENT VENTURE. THERE IS NO INTENTION TO PRODUCE ANY OTHER KIND OF INCOME. THEN INTEREST EXPENDITURE HAS TO BE SET OFF AGAINST THE GROSS INTEREST RECEIP TS. IT WAS IN THE CONTEXT WHERE THE TRADING OF EXEMPT BOND IS TAXABLE IN BUSI NESS INCOME WHERE THE SUPREME COURT HELD WHETHER THESE SECURITIES PRO DUCE SOME TAX-FREE INTEREST WOULD NOT MAKE ANY DIFFERENCE. THE PROPORT IONATE INTEREST CANNOT BE DISALLOWED BECAUSE THE ASSESSEE WOULD BE OTHERWISE ELIGIBLE TO CLAIM INTEREST AGAINST PROFIT FROM TRADING IN SE CURITIES, IN OUR CASE, THE ONLY INCOME SHOWN BY THE ASSESSEE IS INTEREST INCOM E. THE, EXPENDITURE ATTRIBUTABLE TO THE INVESTMENT UNDER SECTION 10(23G ) WOULD BE ALLOWABLE AGAINST THE INTEREST INCOME . 5.23 IF THE DEPARTMENT DOES NOT DO THIS EXERCISE, THEN AN ANOMALOUS SITUATION WOULD ARISE, WHEN EXPENDITURE OF THIS VEN TURE WOULD HAVE TO BE ALLOWED AGAINST THE INCOME FROM DIFFERENT VENTUR ES. SUCH EXPENDITURE CANNOT BE ALLOWED BECAUSE SUCH EXPENDIT URE WOULD NOT BE INCURRED FOR OTHER VENTURES. THE CLAIM OF ANY EXPEN DITURE CAN BE ALLOWED ONLY AGAINST SOME INCOME FOR WHICH SUCH EXP ENDITURE IS INCURRED. 5.24 IN OUR EASE, THE INCOME FROM SUCH ACTIVITY IS TAX-FREE INCOME. NO OTHER INCOME IS PRODUCED FROM THAT VENTURE THAT SHOULD QU ALIFY FOR ALLOWABILITY OF EXPENDITURE. IT IS NOT PERMISSIBLE TO SET OFF AN ITEM OF RECEIPT FROM OUT OF AN ITEM OF EXPENDITURE UNRELATED TO FORMER OR IN CURRED IN A DIFFERENT CONNECTION. THE RATIO OF DECISION OF SUPREME COURT IN THE CASE OF GARDEN SILK WEAVING MILLS (SUPRA) THAT INCOME FROM EACH SO URCE SHOULD BE DETERMINED WOULD BE APPLICABLE. EVEN THE SUPREME CO URT IN RAJASTHAN STATE WAREHOUSING CORPORATION HELD THAT PRINCIPLE O F APPORTIONMENT OF EXPENDITURE WILL APPLY IF ALL VENTURES DO NOT CONST ITUTE ONE INDIVISIBLE BUSINESS THERE WILL BE NO NEXUS BETWEEN EXPENDITURE ATTRIBUTABLE TO THE VENTURE (IN OUR CASE INVESTMENT IN TAX-FREE BONDS) AND EXPENDITURE (IN OUR CASE BANKING BUSINESS OF ADVANCING LOANS). 5.25 THE CASE OF THE ASSESSEE ALSO LIFTS INTO THE RATIONALE OF SUPREME COURT, BECAUSE THERE IS NO NEXUS BETWEEN EXPENDITURE INCUR RED FOR INVESTMENT IN INFRASTRUCTURAL LOANS AND OTHER BUSINESS OF ADVA NCING LOANS. BOTH THE ACTIVITIES CAN BE DONE INDEPENDENTLY WITHOUT AFFECT ING THE BUSINESS OF OTHER VENTURES. EVEN SEPARATE BORROWINGS HAVE BEEN MADE FOR SUCH TERM FINANCING. 5.26 IN RAJASTHAN STATE WAREHOUSING CORPORATIONS CASE, THE ASSESSEE DERIVED ITS INCOME FROM INTEREST, LETTING BUT WAREH OUSE AND ADMINISTRATIVE CHARGES FOR PROCUREMENT OF FOOD-GRAI NS, THE INCOME-TAX OFFICER ALLOWED ONLY SO MUCH OF THE EXPENDITURE AS COULD BE ALLOCATED TO THE TAXABLE INCOME AND DISALLOWED THE REST OF IT WH ICH WAS REFERABLE TO THE NON-TAXABLE INCOME, BEING EXEMPT UNDER SECTION. 10(2) OF THE ACT: THE SUPREME COURT NOTED THAT THE DISALLOWANCE OF TH E EXPENDITURE WAS NOT FOR NON-COMPLIANCE OF THE REQUIREMENTS OF SECTI ON 37(1) BUT FOR THE REASON THAT THE EXPENDITURE WAS INCURRED ON AN ACTI VITY FROM WHICH INCOME WAS EXEMPTED UNDER THE ACT. THE SUPREME COUR T ALSO REFERRED TO ITS OWN DECISION IN THE CASE OF WATERFALL ESTATE S LTD. VS. CIT (219 ITR 562)(SC). THE SUPREME COURT UPHELD THAT APPORTIONME NT OF EXPENDITURE WAS VALID AS THE ASSESSEE IS CARRYING ON DIFFERENT VENTURES, PROFITS FROM THEM WERE TAXABLE AND FROM THE OTHERS WERE EXEMPT U NDER THE ACT. EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 6 5.27 IT MAY ALSO BE POINTED OUT THAT THE SUPREME C OURT HAS DEALT WITH THE ISSUE OF EXEMPTION OF INCOME UNDER SECTION. 10(29) OF THE SAME ASSESSEE I.E., RAJASTHAN STATE WAREHOUSING CORPORAT ION IN APPEAL NO. 4042-4048 OF 1994 (237 ITR 589). THE ASSESSEE DERIV ED INCOME FROM LETTING OUT WAREHOUSES, INTEREST FROM BANKS, SUPERV ISION CHARGES, FUMIGATION CHARGES, MISCELLANEOUS INCOME, ETC. IN T HAT CASE, THE TRIBUNAL HELD THAT THE ACTIVITY OF RAJASTHAN STATE WAREHOUSING IS SINGLE, INDIVISIBLE AND INTEGRATED AND THAT ALL THE ACTIVIT IES ARE AIMED AT FACILITATING THE MARKETING OF THE GOODS. THE MATTER WENT TO RAJASTHAN HIGH COURT WHO HELD (210 ITR 906) THAT THE ASSESSEE MAY HAVE DIFFERENT SOURCES OF INCOME, BUT THE EXEMPTION IS N OT GIVEN TO THE ASSESSEE ON ITS ENTIRE INCOME, BUT ONLY THAT PART O F THE INCOME WHICH ARISES FROM LETTING OF GODOWNS FOR FACILITATING THE MARKETING OF COMMODITIES. THE HIGH COURT HELD THAT THE INCOME WH ICH WAS INDEPENDENT OF LETTING OF GODOWNS / WAREHOUSES COUL D NOT BE CONSIDERED TO BE EXEMPT. 5.28 THE SUPREME COURT (237 ITR 906) HELD (PAGE 60 3): THAT THE QUESTIONS OF EXEMPTION WOULD ARISE PERTAI NING TO THAT PART OF THE INCOME ONLY WHICH ARISES OR IS DERIVED FROM THE LETTING OF GODOWNS. THE STATUTE HAS BEEN RATHER CATEGORICAL AND RESTRIC TIVE IN THE MATTER OF GRANT OF EXEMPTION : STORAGE, PROCESSING OR FACILIT ATING THE MARKETING OF THE COMMODITIES ARE DEFINITELY REGARDED AS THREE DI FFERENT FORMS OF ACTIVITIES WHICH ARE ENTITLED TO EXEMPTION IN THE E VENT OF THERE BEING ANY INCOME THEREFROM. WE DO NOT LEND OUR CONSEQUENC E TO THE VIEW EXPRESSED BY THE MADHYA PRADESH HIGH COURT (133 ITP 158) AND RECORD THAT IN THE EVENT THE LETTING OF GODOWNS OR WAREHOUSES IS FOR ANY OTHER PURPOSE OR IF THE INCOME IS DERIVED FRON7 ANY OTHER SOURCE, THEN IN THAT EVENT SUCH AN INCOME CANNOT POSSIBLY C OME WITHIN THE AMBIT OF SECTION 10(2) OF THE ACT AND IS THUS NOT E XEMPT FROM TAX. THE FACTS IN ISSUE PERTAINING TO THE INTEREST INCOM E ON FIXED ASSETS OR ASCRIBING THE ACTIVITIES OF THE ASSESSEE BEING TERM ED TO BE ONE INTEGRATED ACTIVITY DOES NOT AND CANNOT ARISE. MR. C.S. VAIDYANATHAN, ADDL. SOLICITOR GENERAL, RIGHTLY CONTENDED THAT THE LANGUAGE BEING NO AMBIGUITY, THE QUESTION OF THERE BEING ANY INTEGRAT ED ACTIVITY AND READING THE SAME INTO THE STATUTES WOULD BE A VIOLE NT DEPARTURE FROM THE INTENT OF THE LEGISLATURE. FROM THE ABOVE, IT IS SEEN THAT THE SUPREME COURT O N FACTS OF THE SAME ASSESSEE (AS REFERRED IN 242 ITR 450) HELD THAT THE QUESTION OF THERE BEING ANY INTEGRATED ACTIVITY BEING EXEMPT WITHIN T HE MEANING OF SECTION 10(2) OF THE ACT DOES NOT AND CANNOT ARISE. 5.29 THE EMPHASIS OF THE ASSESSEE IS THAT ITS BUSI NESS OF LENDING INCLUDING INFRASTRUCTURE FINANCING IS INDIVISIBLE AND CANNOT BE SEEN AS DIVISIBLE INTO INFRASTRUCTURE FINANCING AND OTHER ACTIVITIES. AS THE ENTIRE ACTIVITY IS ONE, THE EXPENDITURE CANNOT BE APPORTIONED AGAINST INCOME EARNED BY IT ON INFRASTRUCTURE FINANCING. 5.30 THUS, INFRASTRUCTURE FINANCING IS A SEPARATE/A CTIVITY/VENTURE/BUSINESS CARRIED ON BY THE ASSESSEE. SALIENT FUTURES OF THIS ACTIVITY ARE BRIEFLY AS UNDER: I) EXCLUSIVE/SEPARATE DEPARTMENT HAS BEEN CREATED T O LOOK AFTER INFRASTRUCTURE FINANCING. II) THE DEPARTMENT HAS BEEN GIVEN TOTAL FOCUS AND E MPHASIS NOT ONLY FOR FINANCING TO INFRASTRUCTURE SECTOR BUT ALS O TO FORMULATE POLICY MEASURES TO PROMOTE THE SECTOR. III) THE DEPARTMENT HAS BEEN MADE A SUPER SPECIALT Y ONE IN VARIOUS COMPLEX AND TECHNICAL SUBJECTS LIKE CONVERGENCE OF TECHNOLOGIES ACROSS TELECOM, INFORMATION TECHNOLOGY, MEDIA AND F REQUENCY SPECTRUM MANAGEMENT, TRANSPORTATION SECTOR, POWER E TC. EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 7 IV) IT MAINTAINED SEPARATE ACCOUNTS FOR RAISING FUN DS THROUGH PUBLIC ISSUE OF TAX SAVING BONDS, THE FUND RAISED THROUGH WHICH WAS COMMITTED TO INFRASTRUCTURE SECTOR. V) IT MAINTAINED SEPARATE ACCOUNTS FOR LENDING TO EACH SUB SECTOR UNDER INFRASTRUCTURE FINANCING, FOR ACCOUNTING FOR INCOME UNDER VARIOUS HEADS FOR THE SERVICES RENDERED TO EACH OF THE BORROWERS. ALL THIS WOULD NOT HAVE BEEN POSSIBLE BUT FOR TREAT ING THE INFRASTRUCTURE FINANCING AS A SEPARATE, DISTINCT AND DIVISIBLE VEN TURE/BUSINESS BY THE ASSESSEE. AS THE BUSINESS/VENTURE IS DIVISIBLE, THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAJASTHAN STATE WAREHO USING CORPORATION RELIED UPON BY THE ASSESSEE IS NOT APPLICABLE TO TH E FACTS OF THE CASE. 5.31 IN VIEW OF THE ABOVE DISCUSSION, IT IS HELD T HAT THE ASSESSEE IS ELIGIBLE FOR EXEMPTION UNDER SECTION. 10(23G) OF ITS INCOME (NET INTEREST) ON INFRASTRUCTURE FINANCING. THIS VIEW HAS BEEN RE-AFF IRMED BY THE CBDT VIDE CIRCULAR NO. 730 DATED 4.10.1999 CLARIFYING TH AT WHAT IS EXEMPT UNDER SECTION. 10(23G) IS THE NET INCOME AFTER REDU CING EXPENDITURE AND NOT THE GROSS RECEIPTS. THIS VIEW WAS FURTHER REITE RATED BY THE AMENDMENT TO INCOME TAX ACT BY THE FINANCE ACT 2001 WITH THE INSERTION OF SECTION 14A. CONSIDERING THIS AND BASE D ON THE DISCUSSION ABOVE, IT IS CLEAR THAT EXEMPTION AVAILABLE TO THE ASSESSEE WILL BE FOR NET INCOME EARNED FROM INFRASTRUCTURAL FINANCING. 5.32 COMING TO THE QUANTUM OF EXPENSES, THE ASSESS EE HAS FURNISHED THE INTEREST EXPENSES AT RS. 9,14,24,110/- ON THE FOREI GN CURRENCY LOANS WHICH WERE DIRECTLY USED FOR FINANCING INFRASTRUCTU RE PROJECTS. THE SAME WAS REDUCED BY THE ASSESSEE ON ITS OWN FROM THE INT EREST INCOME OF INFRASTRUCTURE COMPANIES WHICH IS ELIGIBLE FOR DEDU CTION UNDER SECTION 10(23G). OVER AND ABOVE, THE ASSESSEE HAS ALSO USED RUPEE-FUNDS., WHICH WERE RAISED DOMESTICALLY FOR THE SAID PURPOSE . SINCE THE AVERAGE RATE OF INTEREST HAS BEEN WORKED AT 8.30% WHILE DEA LING WITH THE EXEMPTION UNDER SECTION. 10(33), THE SAME PRINCIPLE IS APPLIED FOR ARRIVING AT THE INTEREST EXPENSES ATTRIBUTABLE FOR EARNING INTEREST INCOME FROM INFRASTRUCTURE PROJECTS. BASED OR THE ABOVE, T HE TOTAL INTEREST EXPENSES OTHER THAN INTEREST EXPENSES ON FOREIGN CU RRENCY LOANS HAS BEEN WORKED OUT AT AS UNDER: INFORMATI ON TECHNOLOGY PARK LTD. SR. NO. LOAN AMT. (RS.) DATE ON WHICH LOAN GIVEN DAYS UPTO 31.03.200 INTEREST @ 8.30% (RS.) 1 2,03,800,000 28.12.1999 95 4,510,652 2 61,200,000 13.01.2000 79 1,099,420 3 60,000,000 21.02.2000 40 545,755 4 45,000,000 02.03.2000 30 306,986 5 125,000,000 30.03.2000 2 56,849 A 6,519,631 SR. NO. LOAN AMT. DATE ON WHICH LOAN GIVEN DAYS UPTO 31.03.2000 INTEREST @ 8.30% (RS.) 1 140,000,000 01.04.99- 09.08.99 131 4,170,466 2 150,000,000 10.08.99- 31.03.00 235 8,015,753 EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 8 B 12,186,219 A + B = RS. 1,87,05,881/- THUS, THE TOTAL INTEREST EXPENSES ARE WORKED OUT AS UNDER: (A) INTEREST ON FOREIGN CURRENCY LOANS (AS PER ASSE SSEE) RS. 9,14,24,110 (B) INTEREST ON RUPEE-ADVANCES (AS WORKED OUT ABOVE ) RS. 1,87,05,881 TOTAL RS. 11,01,29,991 ============== 5.33 THUS, THE COST ATTRIBUTABLE ON THE BASIS OF W ORKING IN THE COURSE OF DEDUCTION UNDER SECTION 10(23G) IS RS 11,01,29,991/ -. THUS, THE DEDUCTION UNDER SECTION 10(23G) IS RESTRICTED TO RS . 6,70,94,603/- (I.E., INTEREST FROM INFRASTRUCTURE COMPANIES AMOUNTING TO RS, (17,72,24,594/- LESS INTEREST EXPENSES ATTRIBUTABLE FOR EARNING SUCH INTEREST INCOME AMOUNTING TO RS. 11,01,29,991/-) AS AGAINST THE ASSESSEES CLAIM OF RS. 8,58,00,484/-. 13. ON THE BASIS OF THIS DECISION, THE AO ATTRIBUTED THE INT EREST EXPENSES AT RS. 1,87,05,881/- AND ADDED THE SAME WITH INT EREST ON FOREIGN COMPANY LOANS AT RS. 9,14,24,110/-. 14. THE CIT(A), SUSTAINED THE WORKING OF THE AO, WITH REGAR D TO EXEMPTION CLAIMED UNDER SECTION 10(23G). 15. THE ASSESSEE IS NOW BEFORE THE ITAT. 16. BEFORE US, THE AR REITERATED THE SUBMISSIONS MADE BE FORE THE REVENUE AUTHORITIES AND SUBMITTED THAT THE EXEMPTION AS CLAIMED UNDER SECTION 10(23G) SHOULD BE ALLOWED, WHICH HAS BEEN ACC EPTED BY THE REVENUE AUTHORITIES. BUT THE ISSUE IS WITH REGARD T O RESTRICTION OF THE EXEMPTION AT A LOWER FIGURE, WHICH IS BASICALLY THE INTER EST EXPENSES ON RUPEE ADVANCES. 17. ON THE BASIS OF THESE ARGUMENTS, THE AR PLEADED THA T THE ASSESSEE WAS ELIGIBLE FOR EXEMPTION UNDER SECTION 10(23G) AN D ALSO ON THE AMOUNT ON WHICH IT HAS BEEN CLAIMED, WHICH THE ASSESS EE TOOK AS AN ALTERNATIVE PLEA. 18. THE DR ON THE OTHER HAND SUBMITTED THAT THE REVE NUE AUTHORITIES WERE VERY REASONABLE IN THEIR ORDERS, WHEREIN , THEY HAVE EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 9 ALLOWED THE EXEMPTION, BUT HAVE TAKEN ONLY THE NET QUA LIFYING AMOUNT, INSTEAD OF THE GROSS FIGURES, WHICH THE ASSESSEE HAS TAKEN. 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND THE SHORT IS SUE BEFORE US IS WHETHER THE EXEMPTION IS TO BE ALLOWED AT RS. 8,58,00 ,484/- OR RS. 6,70,94,603/-, AS RESTRICTED BY THE AO. 20. FROM THE DETAILS REPRODUCED BY THE AO, WE FIND THAT T HE IMPUGNED FIGURES ARE EXPENSE OF INTEREST ON LOAN GIVEN TO GUJARAT PIPAVO PORT LTD. AT RS. 1,21,86,219/- AND TO INFORMATION TE CH. PART AT RS. 65,19,660/-, BEING OTHER THEN FOREIGN CURRENCY BORROWINGS. 21. ASSESSEE IS NEITHER A COMPANY REGISTERED UNDER THE COMPANIES ACT NOR IS IT A BANKING COMPANY AS PER THE BANKING REGU LATION ACT, 1949. AS PER BANKING ACT, BANKING MEANS THE ACCEPTING, FOR THE PURPOSE OF LENDING OR INVESTMENT, OF DEPOSITS OF MONEY FROM ITS PUBLIC, REPAYABLE ON DEMAND OR OTHERWISE, AND WITHDRAWAL BY CHEQ UES, DRAFT, ORDER OR OTHERWISE AND C BANKING COMPANY MEANS ANY COMPANY WHICH TRANSACTS THE BUSINESS OF BANKING IN INDIA. BOTH THE SE CLASSIFICATIONS DOES NOT EMBRACE THE ASSESSEE WITHIN ITSELF. THEREFORE, THE ASSESSEE IS A LENDER FOR LOANS ONLY AND TO EARN INTEREST THEREON. AT TIMES, IT HAS TO PROCURE FOREIGN CURRENCY LOANS ITSELF, F OR MAKING FURTHER ADVANCES. WHEN WE GO THROUGH THE IMPUGNED ORDE RS AND THE SUBMISSIONS MADE WE FIND THAT THERE IS NO DENIAL BY THE RE VENUE AUTHORITIES ON THE FACT THAT THE BUSINESS OF THE ASSESS EE WAS OF UN- DIVISIBLE NATURE AND ASSESSEE BEING THE CREATION OF THE PA RLIAMENT, IS NOT A BANKING COMPANY AND CERTAINLY NOT A COMPANY REG ISTERED UNDER THE COMPANIES ACT, 1956. THE DEPARTMENT CANNOT TAKE TH E VIEW OF PROPOSING THE COST OF INTEREST TO BE SEPARATELY INDUCE D ON THE ASSESSEE, AS THE ENTIRE COSTS HAVE ALREADY GOT EMBEDDED IN THE C OSTS/TOTAL EXPENSES. IN ANY CASE, CIRCULAR NO. 780 DATED 07.10.1999, A S RELIED UPON BY THE DEPARTMENT CANNOT BE MADE APPLICABLE ON TH E ASSESSEE, AS THE ASSESSEE IS A PUBLIC FINANCIAL INSTITUTION AND NOT A B ANK. EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 10 FURTHER, ON GOING THROUGH WITH THE DETAILS, AS FILED, THE ASS ESSEE HAS SUBSTANTIAL OWN FUNDS, WHICH ARE EMPLOYED BY IT IN BONDS/SE CURITIES, AND IS THUS COVERED BY THE CASE OF CIT VS RELIANCE UTILITIE S & POWER LTD., REPORTED IN 313 ITR 340 (BOM) AND OTHER CASE, AS CIT ED AND PLACED/MENTIONED IN THE SYNOPSIS. 22. IN THESE CIRCUMSTANCES, THE ASSESSEE HAVING THE BUS INESS OF LENDING, WAS CORRECT IN CLAIMING THE DEDUCTION, WHICH WAS CLAIM ED AT NET FIGURES BECAUSE, THE INTEREST HAS GOT EMBEDDED IN TH E SPECIFIC COSTS. 23. THE GROUNDS, CONCERNING EXEMPTION UNDER SECTION 10(2 3G) ALONG WITH ALTERNATIVE PLEAS ARE THEREFORE ALLOWED. 24. THE SECOND GROUND IS AGAINST THE DENIAL OF EXEMPTIO N CLAIMED AT RS. 22,96,96,605/-, AS CLAIMED BY THE AS SESSEE UNDER SECTION 10(33). 25. THE FACTS ARE THAT DURING THE YEAR, THE ASSESSEE RE CEIVED DIVIDEND OF RS. 22,96,96,605/-, WHICH IT CLAIMED AS EXEMPT UNDE R SECTION 10(33). 26. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO SHO W CAUSED AS TO WHY THE GROSS FIGURE OF DIVIDEND RECEIPT HAS BEEN TAKE N. THE AO, AFTER CONSIDERING THE REPLY OF THE ASSESSEE HELD, WHAT IS EXEMPT UNDER SECTION 10(33) OF THE I.T. ACT IS ANY INCOME AND NOT GROSS RECEIPTS. TO CLARIFY THE ISSUE SECTION 10 (33) IS QUOTED BELOW: - ANY INCOME BY WAY OF (I) DIVIDEND REFERRED TO SECTION 115-0, OR FROM THE ABOVE IT IS VERY CLEAR THAT WHAT IS EXEMPT IS THE DIVIDEND MINUS EXPENSES INCURRED FOR EARNING THE DIVIDEND. 6.3 IN VIEW OF THE ABOVE, THE ASSESSEE WAS ASKED T O EXPLAIN AS TO WHY DEDUCTION UNDER SECTION 10(33) SHALL RIOT BE RE-COM PUTED TAKING THE EXPENSES INCURRED FOR EARNING SUCH DIVIDEND INCOME INTO CONSIDERATION. THE ASSESSEE VIDE ITS LETTER DATED 23.1.2002 SUBMIT TED THE EXPLANATION WHICH ARE SUMMARIZED AS BELOW: (A) THERE IS NO SPECIFIC BORROWINGS MADE AT INTERE ST FOR THE PURPOSE OF MAKING INVESTMENTS IN SHARES/UNITS OF UTI/MUTUAL FUNDS ON WHICH DIVIDEND IS RECEIVED; EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 11 (B) INVESTMENT MADE AND HELD IN SHARES/UNITS OF UT I/MUTUAL FUNDS AND ON WHICH DIVIDEND INCOME IS RECEIVED, REPRESENT S ONE OF THE ACTIVITY OF THE INDIVISIBLE BUSINESS OF THE ASSESSE E. FOR THE PURPOSE, MY ATTENTION IS DRAWN TO CHAPTER IV, CLAUS E 10(2) OF THE EXPORT IMPORT BANK OF INDIA ACT, 1981; (C) WHAT IS REQUIRED TO BE EXEMPT UNDER SECTION 10 (33) OF THE ACT IS THE DIVIDEND AS REFERRED TO IN SECTION 115-0 OF THE ACT. THE DIVIDEND RECEIVED IS THE GROSS DIVIDEND AND ACCORDI NGLY EXEMPTION IS TO BE GRANTED AT GROSS DIVIDEND; (D) THE INVESTMENTS IN SHARES OF CIPLA LIMITED ON WHICH DIVIDEND OF RS. 5,47,605 RECEIVED REPRESENTS THE SHARES DEVOLVE D ON THE ASSESSEE IN THE CAPACITY AS UNDERWRITER OF THE PUBL IC ISSUE OF THE SHARES/UNITS OF UTI/MUTUAL FUNDS OF THE SAID CO MPANY, BEING ONE OF THE INDIVISIBLE BUSINESS ACTIVITY OF T HE ASSESSEE.; (E) THE ASSESSEE HAS AT ITS DISPOSAL ,SUBSTANTIAL AMOUNT OF INTEREST FREE FUNDS AND SOURCES AS COMPARED TO THE INVESTMEN TS MADE IN THE SHARES /UNITS OF UTI/MUTUAL FUNDS ON WHICH DIVI DEND RECEIVED IS CLAIMED AS EXEMPT AT GROSS; (F) THE INTEREST FREE FUNDS AVAILABLE WITH THE ASS ESSEE FROM THE YEAR ENDED 31 ST MARCH, 1991 TO 31 ST MARCH, 2000 WERE AS GOOD AS RS. 377 CRORES TO RS. 1508 CRORES, AS AGAINST TH E TOTAL AMOUNT INVESTED IN SHARES/UNITS/MUTUAL FUNDS AT RS. 246 CRORES. HENCE, THERE IS NO NEED OR WARRANT TO PRESU ME THAT THE INVESTMENT MADE IN SHARES/UNITS/MUTUAL FUNDS EITHER IN FULL OR IN PART IS MADE OUT OF FUNDS BORROWED AT INTEREST; (G) INVESTMENT IS ONE OF THE MODE APPLIED BY THE A SSESSEE TO FINANCE THE OBJECT FOR WHICH IT IS ESTABLISHED.: (H) THE ASSESSEE HAS FURTHER RELIED ON VARIOUS DEC ISIONS TO SUPPORT ITS CLAIM THAT EXEMPTION HAS TO BE QUANTIFIED AT GR OSS AMOUNT AND NOT AT NET AMOUNT, MORE PARTICULARLY OF THE DEC ISIONS OF THE SUPREME COURT WHICH HAVE BEEN REFERRED TO AND RELIE D UPON BY THE ASSESSEE IN RELATION TO ITS CLAIM OF QUANTIFICA TION OF INTEREST INCOME EXEMPT UNDER SECTION 10(23G) OF THE ACT AT G ROSS AMOUNT. 6.4 THE EXPLANATION OF THE ASSESSEE HAS BEEN EXAMI NED AND THE SAME IS NOT ACCEPTABLE. THERE ARE NUMBER OF JUDICIAL DECISI ONS AS MENTIONED BELOW TO ALLOW THE DEDUCTION UNDER SECTION 10(33) O N NET DIVIDEND AND NOT ON GROSS DIVIDEND. (I) CIT V/S MADAN LAL CHAGAN LAL P. LTD. 236 ITR 45 6 (MUM); (II) CIT V/S UNITED GENERAL TRUST PVT. LTD., 200 IT R 488(SC); (III) DISTRIBUTORS (BARODA) PVT. LTD., V/S UNION OF INDIA 155 ITR 120 (SC). 6.5 THE CENTRAL BOARD OF DIRECT TAXES HAS ISSUED A CIRCULAR REGARDING WHAT IS EXEMPT UNDER SECTION 10(23G). SINCE DEDUCTION UN DER SECTION 10(33) IS ALSO UNDER THE SAME SECTION AS THAT OF SECTION 1 0(23G), THE PRINCIPAL LAID DOWN IN THE RELEVANT CIRCULAR NO. 780 DATED 7. 10.1999 IS ALSO VALID FOR DEDUCTION UNDER SECTION 10(33). THROUGH THIS CI RCULAR THE BOARD CLARIFIED WHAT IS EXEMPT IS NET INCOME AFTER REDUCI NG EXPENDITURE AND NOT THE GROSS RECEIPT. SECTION 14A WAS INTRODUCED B Y THE FINANCE ACT 2001 W.E.F. 1.4.1962. THE SAID SECTION SAYS NO DEDU CTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. TH E DIVIDEND BEING EXEMPTED INCOME UNDER SECTION 10(33), ACCORDINGLY A S PER THE PROVISIONS OF SECTION 14A, THE DIVIDEND IS ALLOWED AS EXEMPT ONLY AFTER DEDUCTION OF EXPENSES FOR EARNING SUCH DIVIDEND. VA RIOUS JUDICIAL PRONOUNCEMENTS WHICH SUPPORTED THIS VIEW WERE DISCU SSED ABOVE IN EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 12 THE CONTEXT OF EXEMPTION UNDER SECTION 10(23G). ACC ORDINGLY, THE SAME WERE NOT DISCUSSED AGAIN. 6.6 IN VIEW OF THE VARIOUS DECISIONS, CIRCULAR NO. 780 DATED 4.10.1999, SECTION 14A, THE DEDUCTION WAS ALLOWED TO THE ASSES SEE ON NET DIVIDEND. 6.7 COMING TO THE QUANTUM OF EXPENSES, THE ASSESSE E SUBMITTED VIDE ANNEXURE-B THE TOTAL EXPENSES ATTRIBUTABLE FOR EARN ING SUCH DIVIDEND AT RS.14,38,55,041/-. WHILE ARRIVING AT THE SAME THE A SSESSEE HAS TAKEN AVERAGE RATE OF INTEREST @ 5.91%. THE WORKING OF TH E ASSESSEE HAS BEEN EXAMINED AND THE SAME IS NOT ACCEPTABLE AND THE WOR KING HAS BEEN RE- COMPUTED AS UNDER: (RS. IN LAKHS) 1) SHARE CAPITAL & RESERVE RS. 150840.50 2) BORROWED FUNDS RS. 439153.37 3) TOTAL FUNDS (1 + 2) RS. 589993.87 4) INVESTMENT N SHARES AND SECURITIES. RS. 5059 .72 5) INVESTMENT IN SHARES OUT OF BORROWED FUNDS RS. 203536.85 X RS.5059.72 RS. 2906.05 RS. 354377.35 6) TOTAL INTEREST PAID ON BORROWED FUNDS (AS PER RETURN) RS. 36448.72 7) TOTAL BORROWED FUNDS (A) BORROWING AS PER SCHEDULE-5 RS. 203536.85 (B) DEPOSITS AS PER SCHEDULE-4 RS. 261072.00 (C) NOTES, BONDS & DEBENTURES RS. 209444.52 RS. 439153.37 8) AVERAGE RATE OF INTEREST = RS. 36448.72 ------------------- = 8.30% RS. 439153.37 9) INVESTMENT IN SHARES (A) INVESTMENT IN EQUITY SHARES & STOCK RS. 5059,72 (B) OTHER INVESTMENTS RS.27186.4O RS. 77886.12 10) INTEREST ATTRIBUTABLE TO INVESTMENT IN SHARES = RS. 439153.37 X RS. 77886.12 =RS. 57973.00 RS. 589993.87 11) INTEREST COST ATTRIBUTABLE TO INVESTMENTS OU T OF BORROWED FUNDS: 8 X 10 = 8.30% X RS. 57973.40 = RS. 4811.79 12) TOTAL DIVIDEND RECEIVED = RS. 2296.96 LESS: 1% MANAGERIAL EXPENSES RS. 2.30 INTEREST COST AS DISCUSSED ABOVE RS. _4811.79 RS. 4814.09 LESS: DEDUCTION UNDER SECTION. 10(33) (-) RS.2517.13 13) DEDUCTION ALLOWED . RS. NIL. 6.8 THUS, THE TOTAL EXPENSES FOR EARNING DIVIDEND INCOME HAS BEEN WORKED AT RS. 4814.09 LAKHS. SINCE THE DIVIDEND EXPENSES A RE MORE THAN THR DIVIDEND RECEIVED, THE ASSESSEE IS NOT ENTITLED FOR ANY EXEMPTION UNDER SECTION 10(33). THUS, THE DEDUCTION UNDER SECTION 1 0(33) IS TAKEN AT RS. NIL AS AGAINST THE ASSESSEES CLAIM OF RS. 22,96,96 ,605/-. 27. ON THE BASIS OF THE COMPUTATION, AS MADE BY HIM, HE, RE STRICTED THE EXEMPTION TO THE EXPENSES ATTRIBUTABLE TOWARDS THE EARNING, WHICH EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 13 HE HAD COMPUTED MORE THAN THE DIVIDEND INCOME. HE, THERE FORE, DENIED THE ENTIRE EXEMPTION CLAIMED AT 10(33). 28. THE CIT(A) SUSTAINED THE ORDER OF THE AO. 29. THE ASSESSEE IS NOW BEFORE THE ITAT. 30. BEFORE US, THE SENIOR COUNSEL APPEARING ON BEHALF OF TH E ASSESSEE, THE BASIC ISSUE IS THE QUANTUM AND AVAILABILITY O F FREE FUNDS WITH THE ASSESSEE TO MAKE INVESTMENTS AND TO TOP IT UP WITH COST OF INTEREST, WHICH ACCORDING TO THE AO EXCEEDED THE INCOME. 31. AT THE TIME OF HEARING THE SENIOR COUNSEL SUBMITTED THAT THE ENTIRE COMPUTATION DONE BY THE AO IN THE ASSESSMENT OR DER WAS FUTILE, BECAUSE, THE BALANCES OF PAID UP CAPITAL AND RESERVES IS IN ANNEXURE C EXPORT IMPORT BANK OF INDIA STATEMENT SHOWING B ALANCES IN PAID UP CAPITAL A ND RESERVES BALANCE IN YEAR END PAID UP CAPITAL AMOUNT (RS.) RESERVES AMOUNT (RS.) TOTAL AMOUNT (RS.) 31 ST MARCH, 1991 2,568,000,000 1,204,459,687 3,772,459,687 31 ST MARCH, 1992 2,961,518,115 1,475,395,115 4,436,913,230 31 ST MARCH, 1993 3,355,771,329 1,818,724,706 5,174,496,035 31 ST MARCH, 1994 3,574,177,881 2,261,314,275 5,835,492,156 31 ST MARCH, 1995 4,403,257,881 3,118,861,202 7,522,119,083 31 ST MARCH, 1996 4,999,918,881 3,996,789,822 8,996,708,703 31 ST MARCH, 1997 4,999,918,881 5,444,630,341 10,444,549,222 31 ST MARCH, 1998 4,999,918,881 7,056,738,859 12,056,657,740 31 ST MARCH, 1999 4,999,918,881 8,352,142,983 13,352,061,864 31 ST MARCH, 2000 5,499,918,881 9,584,131,045 15,084,049,926 31 ST MARCH, 2001 5,499,918,881 10,663,800,021 16,163,718,902 31 ST MARCH, 2002 6,499,918,881 12,026,412,246 18,526,331,127 AND THE AVAILABILITY OF INTEREST FREE FUNDS AVAILABLE AND INVEST MENT MADE BY THE ASSESSEE ARE ANNEXURE E EXPORT IMPORT BANK OF INDIA STATEMENT SHOWING IN TEREST FREE FUNDS AVAILA BLE AND INVESTMENT IN SHARES AND SE CURITIES (RUPEES IN CRORES) EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 14 ASSESSMENT YEAR CAPITAL & FREE RESERVES INVESTMENT 2000-2001 1,508.40 245.79 2001-2002 1,616.37 245.73 2002-2003 1,852.63 352.53 32. THE SENIOR COUNSEL SUBMITTED THAT NOT ONLY THE DED UCTION WAS TO BE ALLOWED, BUT IT SHOULD HAVE BEEN ALLOWED AS PER THE CLAIM MADE BY THE ASSESSEE. 33. THE DR ON THE OTHER HAND SUBMITTED THAT THE DEDUC TION IF AT ALL ALLOWABLE SHOULD BE ALLOWED ON NET BASIS, NOT ON GROSS, AS C LAIMED, IN ANY CASE, THE CALCULATION DONE BY THE AO IN THE ASSESSM ENT ORDER WAS IN LINE WITH THE PROVISIONS OF LAW. 34. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND WE FIND THE ASSESSEE HAD SUBSTANTIAL FREE FUNDS COMING FROM PRECEDING YEARS, WHICH WERE PURE INCOME, AS THERE WAS NO LIABILITY OF TAX UPT O THE CURRENT YEAR. BASICALLY MOVING ON THE SAME ANALOGY, AS IN THE EARLIER GROUND OF APPEAL AND DECISION TAKEN THEREIN, THIS GROUND, A LSO DESERVES TO BE ALLOWED IN FAVOUR OF THE ASSESSEE. 35. THE GROUND OF APPEAL, IS THEREFORE, ALLOWED. 36. EFFECTIVE GROUND NO. 3 IS WITH REGARD TO TAXING PEN AL INTEREST AND INTEREST ON NON PERFORMING ASSET (NPA) UPTO 31.03 .1998, FOR WHICH THERE WAS NO LIABILITY OF TAX ON THE ASSESSEE . 37. IT IS SEEN FROM THE ORDERS OF THE REVENUE AUTHORITIES THAT THEY HAVE VIRTUALLY FOLLOWED THE LINE ADOPTED BY THE REVENUE AU THORITIES IN THE PRECEDING YEAR. IT HAS TO BE MENTIONED THAT IN THE PRECEDING YEAR, THE ORDERS OF THE REVENUE AUTHORITIES WERE QUASHED BY THE COORDINATE BENCH, AS THERE WAS NO EXIGIBILITY OF TAX UPTO 31.03.1999. I N THIS CIRCUMSTANCE, THE IDEA OF RELIANCE ON THE PRECEDING YEAR H AS TO BE PUT IN OBLIVION. WE HAVE TO EXAMINE THE TAXABILITY OF INCOME IN TH E CURRENT EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 15 YEAR, WHEN SECTION 37 OF EXPORT IMPORT BANK OF INDIA, 19 81 WAS REPEALED. 38. IT IS A FACT THAT THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNTS IN THE FORM, AS APPLICABLE. THIS IS ALSO A FACT THAT ANY INCOME /LOSS SHOWN IN ITS ACCOUNTS WERE JUST FIGURE WORK, BECAUSE, TH E ASSESSEE WAS NEITHER ELIGIBLE NOR LIABLE NOR OBLIGED TO FILE ANY RETURN U NDER ANY LEGISLATIONS, FOR THE TIME BEING IN FORCE. WE DO FIND RELEVANCY IN THE ARGUMENTS OF THE DR THAT SINCE MERCANTILE SYSTEM IS BEING ADOPTED FOR MAINTAINING THE BOOKS, THE ASSESSEE WOULD BE AWARE AS T O WHICH PERIOD/YEAR THE INTEREST AND PENAL INTEREST RELATED TO, A ND SINCE BEING TAXED FOR THE FIRST TIME, THE ADDITION OF INTEREST/PENAL INTER EST WAS VALID. THIS ARGUMENT, MAY HAVE BEEN ACCEPTABLE, WHERE THE RETURNS ARE BEING FILED AND ADJUSTMENTS BEING MADE YEAR TO YEAR AND AS SUCH, & THERE IS NO LOSS TO THE REVENUE. BUT THE INSTANT CASE IS DIFFERENT. IN THE INSTANT CASE UPTO 31.03.1999, ASSESSEE WAS NOT ELIGIBLE TO FILE ITS RETURN, THOUGH IT WAS MAINTAINING ITS BOOKS (AS ADMITTED BY THE AR). WHEN THE BOOKS ARE MAINTAINED, ALL EXPENSES AND INCOMES G ET EMBEDDED IN THE RESULTS, MEANING WHEREBY, THAT INTEREST A ND PENAL INTEREST PERTAINING TO THE PRECEDING YEARS, WOULD HAVE GO T EMBEDDED IN THE YEARS WHICH THEY RELATED TO. ON THIS OBSERVATION, IN OUR OPINION, THE INTEREST AND PENAL INTEREST UPTO 31.03.1999 CANNOT BE BROUGHT TO TAX IN THE CURRENT YEAR, AS CLAIMED BY THE AO/DR. WE MU ST ALSO MENTION THAT THE PROVISIONS OF SECTION 43D SHALL NOT BE AP PLICABLE IN THE CASE OF THE ASSESSEE. THE AO/DR, RELYING ON THE MINO RITY DECISION IN THE CASE OF STATE BANK OF TRAVANCORE VS CIT, REPORTE D IN 158 ITR 102, HELD THAT INTEREST OF STICK LOANS WAS RIGHTLY TREATED AS INCOME , WHICH HAD ACCRUED TO THE ASSESSEE. THIS, IN OUR OPINION, C ANNOT BE ACCEPTED, BECAUSE, WHAT THE REVENUE AUTHORITIES ARE ATT EMPTING TO DO IS, TO TAX INTEREST AND PENAL INTEREST ON NPA UPTO 31.03.1 999, WHICH, PERIOD WAS NON EXISTENT, SO FAR AS TAX PROVISIONS WERE CO NCERNED. IN ANY CASE, HONBLE SUPREME COURT IN THE CASE OF UCO BANK VS CIT, EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 16 REPORTED IN 237 ITR 889, HAS COVERED CIRCULAR DATED 09 .10.1984. THIS CIRCULAR COULD NOT APPLIED, BECAUSE IT WAS BENEFICIAL FOR THE B ANKS AND NOT FOR THE ASSESSEE. THE HONBLE SUPREME COURT HELD, T HAT INTEREST ON STICKY LOANS, PERTAINING TO EARLIER YEARS COULD NOT BE TAXE D. IN THE LIGHT OF THIS JUDGMENT, AND RESPECTFULLY FOLLOWING THE SAME, WE CA NNOT ENDORSE THE VIEWS TAKEN BY THE REVENUE AUTHORITIES. 39. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND DIR ECT THE AO TO DELETE THE INTEREST AND PENAL INTEREST ON NPA ACCOUN T UPTO 31.03.1999, AT RS. 50,89,66,421/-. 40. THE GROUND OF APPEAL IS, THEREFORE, ALLOWED. 41. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. 42. BEFORE PARTING, WE ACKNOWLEDGE THAT PLETHORA OF DECISION S HAVE BEEN CITED AND SUBMITTED BY THE ASSESSEE, DURING THE CO URSE OF APPEAL BEFORE US. WE HAVE CONSIDERED THE DECISIONS, IN THE LIGHT OF OUR OBSERVATIONS, IN EACH OF THE GROUNDS OF THE APPEAL TAKEN , WE DO NOT FIND IT NECESSARY TO GET INTO THE DECISIONS AND DETAILS/ME RITS/RATIOS AS DECIDED IN THE CITED CASES, AS FILED IN THE PAPER BOOKS. ITA NO. 7362/MUM/2005, AY 2001-02 : ITA NO. 7363/MUM/2005, AY 2002-03 : 43. SINCE THE ISSUES INVOLVED IN THESE TWO ASSESSMENT YEA RS ARE IDENTICAL AS THAT IN ASSESSMENT YEAR 2000-01, IN ITA NO. 7361/MUM/2005. FOLLOWING THE DECISIONS TAKEN BY US IN THE RESPECTIVE GROUNDS IN ITA NO. 7361/MUM/2005, WE FOLLOW TH E DECISIONS TAKEN IN EACH OF THE GROUNDS ON THE GROUNDS O F APPEAL, TAKEN IN THESE TWO APPEALS, I.E. ASSESSMENT YEARS 2001-02 AND 2002-03 . EXPORT IMPORT BANK OF INDIA ITA NO. 7361, 7362 & 7363/MUM/2005 17 44. THE APPEALS, AS FILED IN ASSESSMENT YEARS 2001-02 AND 2002-03 ARE ALLOWED. IN THE RESULT ITA NO. 7361/MUM/2005 FOR ASSESSMENT YEAR 2000-01 IS ALLOWED ITA NO. 7362/MUM/2005 FOR ASSESSMENT YEAR 2001-02 IS ALLOWED ITA NO. 7363/MUM/2005 FOR ASSESSMENT YEAR 2002-03 IS ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH AUGUST, 2013. SD/- SD/- ( . . ) ( #'' '$ ) ! ! (P.M. JAGTAP) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 14 TH AUGUST, 2013 / COPY TO:- 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) & & ' ( ) - XXVIII MUMBAI / THE CIT (A)- XXVIII , MUMBAI. 4) & & ' 3, MUMBAI / THE CIT3, MUMBAI, 5) )*+ , - , & , , ./ / THE D.R. A BENCH, MUMBAI. 6) +0 1 COPY TO GUARD FILE. &23 / BY ORDER / / TRUE COPY / / [ 4 / 5 6 & , , ./ DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *895 . . * CHAVAN, SR. PS