Income Tax Appellate Tribunal - Chennai
Infrastructure Development Finance ... vs Assessee on 29 August, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER
AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA Nos.2065 & 2066/Mds/2011 and ITA Nos.99 to 101/Mds/2012
(Assessment Years: 2003-04, 2004-05 & 2005-06 to 2007-08)
M/s. IDFC Limited, Vs. The Assistant Commissioner of
KRM Towers, 8th floor, Income Tax, Company Circle-II(3),
No.1, Harrington Road, Chepet, Chennai.
Chennai-600 031.
PAN : AAACI2663N
(Appellant) (Respondent)
ITA Nos.2023 & 2024/Mds/2011 and ITA Nos. 86 to 88/Mds/2012
&
Cross Objection Nos.14, 15, 22 to 24 /Mds/2012
(in ITA Nos. 2023 & 2024/Mds/2011 and ITA Nos. 86 to 88/Mds/2012)
(Assessment Years: 2003-04, 2004-05 & 2005-06 to 2007-08)
The Assistant Commissioner of Vs. M/s. IDFC Limited,
Income Tax, Company Circle-II(3), KRM Towers, 8th floor,
Chennai. No.1, Harrington Road, Chepet,
Chennai-600 031.
PAN : AAACI2663N
(Appellant) (Respondent/Cross Objector)
Assessee by : Mr. Farrokh V. Irani, C.A
Revenue by : Mrs. Anupama Shukla, CIT DR
Date of Hearing : 29th August, 2012
Date of Pronouncement : 28th September, 2012
ORDER
PER BENCH:
The present set of appeals and cross objections have been filed by the assessee and the Revenue for the 2 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 assessment year 2003-04 to 2007-08 involving identical questions, therefore, the appeals and cross objections are taken up together for adjudication.
2. ITA Nos. 2065 & 2066/Mds/2011, 99 to 101/Mds/2012 have been filed by the assessee relevant to the assessment year 2003-04 to 2007-08 respectively. The Revenue has filed ITA Nos. 2023 & 2024/Mds/2011 and 86 to 88/Mds/2012 for the assessment year 2003-04 to 2007-08 respectively. For the same assessment years the assessee has also filed cross objections to the appeals filed by the Revenue i.e. C.O.Nos. 14, 15, 22 to 24/Mds/2012.
3. Brief facts of the case are that the assessee company is engaged in the business of infrastructure financing. The assessee filed its return of income for the assessment year 2003-04 on 28.11.2003. The Assessing Officer completed the assessment under section 143(3) on 21.3.2006. 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 3 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 assessee. The Assessing Officer inter-alia made additions/disallowances on the following counts:-
i) Disallowance of exemption claimed under section 10(23G) w.r.t.
(a) Liquidated damages of Rs. 21,28,296/-
(b) Penal Interest Rs.2,14,92,498/-
(c) Fees for monitoring Rs. 37,50,000/- &
(d) Debt Syndication Fee of Rs. 28,82,250/-
ii) Disallowance of expenditure claimed u/s.14A
iii) Disallowance u/s.36(1)(viia) (c) - Rs.3,98,40,330/-
iv) Disallowance u/s.36(1)(viii) Rs.15,48,32,719/-
v) Disallowance of long term capital Loss Rs.23,74,08,532/-
vi) Restriction of deduction u/s.80M Rs. 5,26,59,624/-
Aggrieved against the assessment order, the assessee preferred an appeal before the CIT(A). The CIT(A) vide order dated 27.09.2011 partly allowed the appeal of the assessee. Not satisfied with the order of CIT(A) both the assessee and the Revenue have come in appeal before the Tribunal assailing the order of the CIT(A).
ITA Nos. 2065(Assessee) & 2023/Mds/2011 (Revenue) & C.O.No.14/Mds/2012 - (A.Y. 2003-04) :-
4. The first issue raised by the assessee in its grounds of appeal is with regard to expenditure of ` 95,69,72,766/-
allegedly incurred by the assessee for earning income exempt under section 10(23G) of the Act.
4 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 4.1. The A.R. submitted that it is the prerogative of the assessee to allocate funds whether owned or borrowed for earning taxable and tax free income i.e. income exempt under section 10(23G), income eligible for deduction under section 36(1)(viii) etc. The A.R. submitted that the CIT(A) has erred in coming to the conclusion that where own funds were insufficient to meet the fund requirement for various investments and the funds have been borrowed to meet the deficiency for investment purposes, then own funds & borrowed funds have to be allocated for investments in the institutions approved under section 10(23G), eligible for deduction under section 36(1)(viii) and taxable investments on proportionate basis. The CIT(A) has erred in relying on the judgement of the Hon'ble Bombay High Court rendered in the case of Reliance Utilities &Power Ltd., reported as 221 CTR 435 and the order of the Mumbai Bench of the Tribunal in the case of HDFC Bank Ltd. in ITA No.4529/Mum/2005 relevant to the assessment year 2001-02, wherein it has been held that allocation of own funds both in taxable and tax free income would be on proportionate basis. The A.R. strongly 5 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 contended that it is the discretion of the assessee to apply and utilize the funds. The A.R. further submitted that the assessee had deployed funds in the manner most favourable to the assessee in terms of tax planning. The assessee had approximately Rs. 1510.83 crores own funds to be utilized in the business. From the total investment of ` 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 A.R. 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 A.R. submitted that it should be left to the discretion of the assessee to adopt the method most 6 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 favourable to the assessee. In order to support his contentions, the A.R. relied on the judgement of the Hon'ble Punjab & Haryana High Court in the case of Jaswant Rai Vs. Commissioner of Wealth Tax reported as 107 ITR 477. 4.2 The learned D.R., 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 CIT(A) on the issue.
4.3 We have heard the submissions made by both the parties, perused the orders passed by the authorities below and have also perused the judgements referred to. We are of the considered opinion that investment or deployment of funds in various investment proposals is the absolute discretion of the investor. The investments are made to maximize profits/returns. While making investments, a 7 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 prudent investor whether it be an individual or a corporate house takes into consideration various factors viz returns, risk, tax implications etc. While selecting a particular investment proposal, an investor has to bear in mind that the returns from the investment are liable to be taxed under the provisions of the Income Tax Act. As a matter of tax planning it should be left to the discretion of an investor to deploy funds in the institution which earn maximum returns with minimum incidence of tax. It is relevant to mention here that the tax planning has to be done by the investor/assessee within the four corners of the provisions of the Income Tax Act. If an assessee has made investments from its own funds as well as borrowed funds, it should be left to the wisdom of the assessee to utilize the funds in the manner which can earn him maximum profits with minimum incidence of tax. 4.4 It is a well known fact that there has been a constant tussle between the assessee and the Revenue to minimize the payment of tax by adopting various tax planning methods and even at time exploring loopholes in the Act resulting into tax avoidance and sometimes adopting colourable methods 8 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 of tax evasion on the one hand. On the other hand it is the constant endeavor of the Revenue to collect maximum tax. The Revenue tries to bring to tax net as far as possible the maximum income earned by the assessees. At times, getting over board in bringing into tax net, the income exempt from tax earned by the assessees.
4.5 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 utilized borrowed funds. The CIT(A) discarded the aforementioned methodology of making investment/allocation of funds by the assessee. The CIT(A) held that own funds in such cases have to be allocated in various categories of investments in shares, mutual funds and 9 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 tax free bonds on proportionate basis based on the own funds to total funds. To support his findings, the CIT(A) has relied on the judgement of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd., reported as 221 CTR 435. We are of the considered opinion that the CIT(A) has gone overboard to come to such a conclusion. The ratio laid down by the Hon'ble Bombay High Court in the aforesaid judgement 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.
4.6. However, a perusal of the documents on record as referred to by the learned A.R. 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 the contentions and at the time of making investments in tax free institutions its own funds were available, the assessee is entitled to the benefit as aforesaid. 10 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 We, therefore, reverse the findings of the CIT(A) on this issue and remit this issue to the Assessing Officer for limited purpose to determine whether at the time of making investments as claimed by the assessee its own funds were available to the extent of investment made. In case, the assessee had own funds at the time of making investments, the benefit as mentioned hereinabove be granted to the assessee. As a result, this ground of appeal of the assessee is allowed for statistical purposes.
5. The assessee has assailed the order of the CIT(A) on the second ground that the CIT(A) has erred in not exempting income under section 10(23G) received by the assessee on account of (i) liquidated damages; (ii) fees for monitoring during pendency of debentures; and (iii) debt syndication fees. The A.R. for the assessee submitted that the aforementioned income were in the nature of interest covered by clause (f) to Explanation 1 of section 10(23G) of the Act. The A.R. submitted that the CIT(A) has also not considered the alternative plea of the assessee for considering fees for monitoring during the pendency of debentures and debt 11 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 syndication fee as income eligible for deduction under the head "business income". He further submitted that even the liquidated damages claimed by the assessee are eligible for deduction under section 36(1)(viii) of the Act. 5.1. On the other hand, the D.R. controverting the submissions made by the A.R. 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 ITA No. 1342/Mds/2006 dated 30.11.2007 and ITA No.748/Mds/2005 dated 29.03.2007 relevant to the assessment year 2002-03 and 2001-02 respectively. On this issue, the D.R. relied on the order of the CIT(A). 5.2 We have heard the submissions of both the parties on the issue. The order of the Tribunal in ITA No.748/Mds/2005 is at page 104 to 134 of the paper book filed by the assessee. The order of the Tribunal in ITA No.1342/Mds/2006 is at page 135 to 147 of the paper book relevant to the assessment year 2003-04. The Tribunal in ITA No.748/Mds/2005 relevant to the assessment year 2001-02 decided on 29.03.2007 with regard to liquidated damages has held in para 22 that : 12 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 "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 accrue 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 CIT(A) on the issue and reject the ground taken by the assessee."
With regard to debt syndication fee the Tribunal in para 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 bank and financial institutions. Hence, this cannot constitute interest. We hold that the lower authorities have rightly disallowed this expenditure. Accordingly, we sustain the order of the CIT(A) on this issue and reject the ground taken by the assessee."13 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 As regards the issue of fees for monitoring during pendency of debentures, the Tribunal in ITA No.1342/Mds/2006 for the assessment year 2002-03 vide order dated 30th November, 2007 in para 9.2 has held that ".....we find that the term "interest" includes any service fee or other charge in respect of moneys borrowed or debt incurred cannot be read in isolation of "or in respect of any credit facility which has not been utilized"(underline ours). In other words, this service charge is meant to cover interest taken on unutilized portion of credit granted. Hence, interpolation that interest can include fees charged for monitoring the amount disbursed is not sustainable. Hence we set aside the order of the learned CIT(A) in this regard and decide the issue against the assessee."
5.3 Respectfully following the decision of the co-ordinate Bench of the Tribunal, we uphold the findings of the CIT(A) on these aforesaid issues and dismiss this ground of appeal of the assessee.
6. The next ground on which the assessee has assailed the order of the CIT(A) is that the CIT(A) has erred in holding 14 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 the computation of deduction under section 36(1)(viia) (c) of the Act.
6.1 The A.R. 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 CIT(A) in a mechanical manner has upheld the same.
6.2 On the other hand, the DR pointed out that this issue has been decided against the assessee in assessee's own case by the Tribunal in ITA No.748/Mds/2005. 6.3 We have examined the orders passed by the authorities below on this issue and we have also perused the order of the Tribunal dated 29.03.2007 in ITA No.748/Mds/2005. The co- ordinate Bench of the Tribunal in para 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% of the profit derived from business of providing long term finance. Sec. 36(1)(viia)(c) speaks about deduction of 5% of total income . The profit derived from business is one of the components of the total income which consists 15 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 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 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% 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. The case law relied on by the learned counsel for the assessee decided by the Hon'ble Supreme Court in the case of CIT Vs. Andhra Pradesh State Financial Corporation (233 ITR 195) is distinguishable on facts. It relates to the case where deduction under section 36(1)(viii) is to be computed on the total income or on the assessed income. The Hon'ble Supreme Court held in that case that it should be computed on the total 16 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 income. At that time, the words, " before allowing deduction under that clause" were not there in the section. These were inserted by the Finance Act subsequently. There is no dispute before us regarding the computation of deduction on the total income or assessed income. Accordingly, the ratio laid down by the Hon'ble Supreme Court is not applicable. In view of the above discussion, we reject this ground taken by the assessee."
6.4 We are of the opinion that the issue is squarely covered by the findings of the co-ordinate Bench of the Tribunal in assessee's own case. Respectfully following the order of the Tribunal, we dismiss this ground of appeal of the assessee.
7. The A.R. in next ground of appeal contended that the CIT(A) has erred in disallowing the set off and carry forward of long term capital loss amounting to Rs.23,79,08,532/- arising from sale of shares of Hughes Telecom (India) Ltd. (hereinafter referred to as "the company") by treating the investment as eligible for exemption under section 10(23G) of the Act. The A.R. submitted that the assessee should be allowed to carry forward the long term capital loss after setting off against long term capital gain earned during the year. He 17 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 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 any benefit under section 10(23G) nor it had claimed any benefit under the section upto the year of the disposal of shares. M/s. Hughes Telecom (India) Ltd. had received approval from the Government under section 10(23G) on 17.9.2002. 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.
7.1 On the other hand, the D.R. submitted that the CIT(A) 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.
18 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 7.2 On the issue under consideration, we agree with the findings of the CIT(A). 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 CIT(A) on this issue and dismiss this ground of appeal of the assessee as well.
8. In the result, the appeal of the assessee is partly allowed for statistical purposes in the aforesaid terms. ITA No.2023/Mds/2011(Revenue):-
9. The Revenue has assailed the order of the CIT(A) relevant to the assessment year 2003-04 on the ground that the CIT(A) has erred in holding that estimated income for earning exempt income under section 10(23G) has to be apportioned in accordance with interest free funds and interest bearing funds on the income earning channels of the assessee. The D.R. submitted that where the investment funds included interest free funds as well as interest bearing funds it will not be possible to identify the funds exclusively utilized for the purpose of earning exempt income. 19 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 9.1 This issue is connected with issue no.1 in the appeal of the assessee. The same has already been decided in ITA No.2065/Mds/2011 in para 4 hereinabove. Since, this issue has already been dealt in detail and has been remitted back to the Assessing Officer for limited consideration, this ground of appeal of the Revenue is disposed of accordingly.
10. The next ground on which the Revenue has impugned the order of the CIT(A) is that the CIT(A) has directed the Assessing Officer to disallow 3% of tax free income towards administrative expenses in connection with earning of tax free income.
10.1 The D.R. submitted that the main business of the assessee is infrastructure financing. The administrative expenses mainly consist of expenditure incurred in connection with the earning of exempt income. Therefore, the findings of the Assessing Officer to disallow the expenditure on pro-rata basis should have been upheld by the CIT(A). 10.2 On the other hand, the A.R. supported the order of the CIT(A) on the issue. The A.R. submitted that in support of the 20 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 findings of the CIT(A) on the issue, the assessee has also filed cross objections.
10.3 We are in consonance with the findings of the CIT(A) on the issue. The CIT(A) has rightly come to the conclusion that 3% 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 CIT(A) on this issue and dismiss this ground of appeal of the Revenue.
11. The next issue raised by the Revenue in its grounds of appeal is that the CIT(A) 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. 11.1 The D.R. 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.
11.2 The learned A.R. submitted that the assessee out of `1468.86 crores of own funds had utilized ` 1396.26 crores 21 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 in investments earning tax free income and the balance of `72.60 crores was invested in assets giving rise to income eligible for deduction under section 36(1)(viii). He further submitted that 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 A.R. further submitted that this issue had cropped up in the assessment year 2002-03 as well. The Tribunal in ITA No. 795/Mds/2006 vide order dated 30.11.2007 had restored the matter back to the Assessing Officer for deciding the matter afresh.
11.3 We have heard the submissions made by the parties. The issue relating to allocation of expenditure in proportion in interest bearing funds and interest free funds had come up before the Tribunal in assessee's own case in the aforesaid appeal relevant to the assessment year 2002-03. The Tribunal had remitted the matter back to the Assessing Officer with a direction to compute own funds available for lending to institutions for long term finance which is eligible for deduction under section 36(1)(viii) and arrive at the 22 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 borrowed funds utilization for the said purpose. As has been held in para 4.6 above, it is not clearly evident from the records, the availability of assessee's own funds at the time of investment. The issue is remitted back to the Assessing Officer to determine the same. The amount of borrowed funds utilized shall be considered to compute the interest, if any, to be reduced from the profits eligible for deduction under section 36(1)(viii) . This ground of appeal of the Revenue is allowed for statistical purposes.
12. The Revenue has further impugned the order of the CIT(A) on the ground that it has restricted the disallowance for earning dividend income under section 80M at 3% of tax free income. The D.R. submitted that the Assessing Officer resorted to proportionate disallowance considering the fact that investment in interest bearing funds exceeded the interest free funds.
12.1 The assessee has filed cross objection (C.O.No.14/Mds/2012) on the issue in support of the findings of the CIT(A) stating that restriction with respect to disallowance of administrative expenses for earning dividend 23 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 income under section 80M of the Act at 3% of the dividend income by the CIT(A) is reasonable. The A.R., supporting the order of the CIT(A) on the issue, submitted that no interference in the findings of the CIT(A) on this issue is called for, as the findings of the CIT(A) are well reasoned. In support of his contentions, the A.R. relied on the order of the Special Bench of the Tribunal in the case of Punjab State Industrial Development Corporation Ltd. Vs. DCIT., reported as 102 ITD 1 (Chd) (SB).
The A.R. further contended that this issue has already been decided by the co-ordinate Bench of the Tribunal in ITA No.747 & 748/Mds/2005 relevant to the assessment year 1999-2000 & 2000-01 vide order dated 29.03.2007 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 CIT(A) has directed the Assessing Officer to disallow 3% of the dividend income as expenditure attributable to the earning of the said income is reasonable.
24 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 12.2 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 CIT(A) 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.
ITA No.2066(Assessee)&2024/Mds/2011(Revenue) & C.O.No.15/Mds/2012: (Assessment year : 2004-05):
13. The first issue raised by the assessee in its ground of appeal relevant to the assessment year 2004-05 relates to expenditure of `1,05,71,07,483/- allegedly incurred by the assessee for earning income exempt under section 10(23G) of the Act. This issue has been dealt in detail in para 4 above in ITA No.2065/Mds/2011 relevant to the assessment year 2003-04. Accordingly, the present ground of appeal of the assessee is allowed for statistical purposes in similar terms.
14. The next ground of appeal of the assessee is with regard to deduction of `12,54,70,042/- as interest expenditure 25 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 allegedly incurred for earning income exempt under section 10(34) of the Act.
14.1 The A.R. appearing on behalf of the assessee submitted that the entire investment in equity shares was made out of own funds of the assessee and the assessee has the right to utilize own funds for investments for earning exempt income.
14.2 On the other hand, the D.R. submitted that proportionate disallowance has to be made on account of the fact that investment in interest bearing funds exceeded the interest free funds.
14.3 We are of the opinion that this issue is similar to the one already decided in ITA No.2065/Mds/2011 in para 4 above. Accordingly, this issue is also remitted back to the Assessing Officer to determine whether the investment was made by the assessee from own funds or borrowed funds. In case, the investments were made by the assessee from own funds, the assessee is entitled for relief. This ground of the assessee is allowed for statistical purposes. 26 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012
15. The third ground of appeal of the assessee relates to income claimed to be exempt by the assessee earned on account of :
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 para 5 of ITA No.2065/Mds/2011 hereinabove. Accordingly, both these income do not qualify for exemption under section 10(23G) of the Act.
15.1 As regards front end fees, the A.R. 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 A.R. referred to page 135 of the paper book relevant to the assessment 27 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 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 utilized."
15.2 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 of Explanation 1(f) of section 10(23G) shows that "interest" includes any fee or commission received by a financial institution for giving any guarantee. The front end fee charged by the assessee at the time of disbursement of loan and the fee charged is relating to conducting of project. In our considered opinion, front end fee falls within the definition of interest as defined 28 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 under section 2(28A) and is therefore eligible for exemption under section 10(23G) of the Act. This ground of appeal of the assessee is partly allowed in the aforesaid terms.
16. The next ground of appeal of the assessee is with regard to deduction under section 36(1)(viia)(c) . This issue has already been decided against the assessee in para 6 of this order in ITA No.2065/Mds/2011. Accordingly, this ground of appeal of the assessee is dismissed.
17. In the next ground of appeal, the assessee has assailed the order of the CIT(A) on the ground that the CIT(A) has erred in allocating `8,20,27,399/- towards administrative expenditure attributed to income eligible for deduction under section 36(1)(viii) based on the ratio of assets yielding income eligible for deduction under section 36(1)(vii) to total assets. This issue is co-related to issue no.1 which has been remitted back to the Assessing Officer. Accordingly, this issue is also remitted back to the Assessing Officer for deciding it afresh after keeping in mind the outcome of the earlier issue.
18. Ground no.6 of the assessee is identical to the ground challenged in para 7 of the ITA No.2065/Mds/2011 relevant to 29 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 the assessment year 2003-04 of the appeal of the assessee. Therefore, this ground of appeal of the assessee is also dismissed.
ITA No.2024/Mds/2011 (Revenue Appeal):-
19. The Revenue has assailed the order of the CIT(A) by taking as many as eight grounds of appeal. Ground no.1 and 8 are general in nature and therefore require no adjudication. 19.1 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.
19.2 In ground no.3, the Revenue has assailed the order of the CIT(A) on the ground that the CIT(A) 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 D.R. 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.
30 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 19.3 The A.R., on the other hand, submitted that the premium is charged as upfront for interest rate deduction/prepayment agreed with the borrower as against original terms. The A.R. 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. 19.4 We have heard the rival submissions made by both the 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 "interest" defined under section 2(28A) of the Act. Accordingly, the assessee is entitled for exemption under section 10(23G) of the Act in respect of the premium charged. This ground of appeal of the Revenue is therefore dismissed.
20. The next ground of appeal of the Revenue relates to allocation of administrative expenses in connection with 31 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 earning of exempt income under section 10(23G) of the Act. The assessee has also filed cross objection on this issue. The issue has already been dealt in detail in para 10 hereinabove in ITA No.2023/Mds/2011 relevant to the assessment year 2003-04. Since both the issues are identical, for the reasons recorded in para 10 of the aforesaid appeal the present ground of appeal of the Revenue is dismissed.
21. The fifth ground of appeal of the Revenue relates to deduction under section 36(1)(viii) in allocating expenditure in proportion to the interest bearing funds and interest free funds.
21.1 This issue has already been adjudicated in para 11 in ITA No.2023/Mds/2011 relevant to the assessment year 2003-04. This ground of appeal of the Revenue is disposed of in the similar terms.
22. The sixth ground of appeal of the Revenue relates to restricting of disallowance for earning dividend income under section 80M at 3% of tax free income. This issue has already been decided against the Revenue in para 12 32 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 hereinabove in ITA No.2023/Mds/2011. Accordingly, the present ground of appeal of the Revenue is dismissed in similar terms.
23. The last ground of appeal of the Revenue relates to indexation of long term capital loss on listed securities. The D.R. submitted that the CIT(A) 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 CIT(A) ought to have given opportunity to the Assessing Officer under Rule 46A to verify and examine this issue.
23.1 On the other hand, the A.R. supported the order of the CIT(A) on the issue.
23.2 We have heard the submissions of both the 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 33 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 provides for the tax on long term capital gains at the flat rate of 20%. 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%. We are in consonance with the findings of the CIT(A). We uphold the view of the CIT(A) and dismiss this ground of appeal of the Revenue.
24 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.
ITA No.99/Mds/2012, ITA No.86/Mds/2012 & C.O.No.22/Mds/2012:- (Assessment year : 2005-06): ITA No.99/Mds/2012 (Assessee):-
25. The assessee has assailed the order of the CIT(A) dated 12.10.2011 . The assessee has taken as many as six grounds of appeal.
25.1 The first ground of appeal relates to disallowance of Rs.1,57,14,69,035/- as expenditure allegedly incurred for earning income exempt under section 10(23G) of the Act. 34 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 This issue has been dealt in detail in para 4 of ITA No.2065/Mds/2011. Accordingly, this ground of appeal is allowed for statistical purposes with the similar direction as mentioned in ITA No.2065/Mds/2011.
26. In the second ground of appeal the assessee has assailed the order of the CIT(A) on the ground that the CIT(A) has confirmed the finding of the Assessing Officer with regard to deduction of Rs.8,30,51,276/- as interest expenditure allegedly incurred for earning income exempt under section 10(34) of the Act.
26.1 We have already accepted the findings of the CIT(A) with regard to disallowance to the extent of 3% of tax free income in ITA No.2023/Mds/2011. The assessee has already conceded and accepted the findings of the CIT(A) on the issue in its cross objections. Similarly with regard to interest, we restrict the disallowance to 3% of the amount exempt under section 10(23G) of the Act. We, therefore, uphold the findings of the CIT(A) and dismiss this ground of appeal of the assessee.
35 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012
27. The third issue is with regard to disallowance of exemption under section 10(23G) in respect of
(i) Liquidated Damages Rs. 1,13,935/-
(ii) Front End Fees Rs.3,30,31,469/- 27.1 The issue with regard to liquidated damages has
already been taken up and decided in para 5.3 of this order in ITA No.2065/Mds/2011 relevant to the assessment year 2003-04. Accordingly, we uphold the findings of the CIT(A) on this issue and reject this issue of the assessee. 27.2 As regards Front End Fees, this issue has been dealt in detail in para 15.2 of this order in ITA No.2066/Mds/2011 for the assessment year 2004-05. For the reasons recorded in para 15.2 of this order on the similar issue, we allow this issue of the assessee. Therefore, this ground of appeal is partly allowed.
28. 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 para 6 of ITA No.2065/Mds/2011 relevant to the 36 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 assessment year 2003-04. Accordingly, this ground of appeal of the assessee is dismissed.
29. 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 para 11 of this order in ITA 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.
30. The sixth ground of appeal of the assessee is general in nature and requires no adjudication.
31. In the result, the appeal of the assessee is partly allowed.
ITA No.86/Mds/2012 (Revenue) & C.O.No.22/Mds/2012:-
32. The Revenue has assailed the order of the CIT(A) relevant to the assessment year 2005-06 raising six grounds of appeal. Since ground no.1 and 6 are general in nature, they are not taken up for adjudication.
37 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012
33. In ground no.2, the Revenue has assailed the order of the CIT(A) on the ground that the CIT(A) has erred in allowing exemption under section 10(23G) on the premium received in advance.
33.1 This issue is identical to the issue in para 19.4 of this order in ITA No.2024/Mds/2011 relevant to the assessment year 2004-05. Accordingly, we dismiss this ground of appeal of the Revenue.
34. The next ground of appeal is with regard to administrative expenses incurred in connection with the earning of exempt income.
34.1 This issue has been dealt in detail in para 10 of the order in ITA No.2023/Mds/2011 relevant to the assessment year 2003-04. Accordingly, this ground of appeal of the Revenue is dismissed.
35. The next issue is with regard to computation of 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.
38 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 35.1 This issue has been dealt in detail in para 11 in ITA No.2023/Mds/2011. Accordingly, this ground is allowed for statistical purposes.
35.2 The appeal of the Revenue for the assessment year 2005-06 is partly allowed for statistical purposes. C.O.No.22/Mds/2012:-
36. The assessee has filed Cross Objection to the ITA No.86/Mds/2012 filed by the Revenue. In the first cross objection, the assessee has supported the order of the CIT(A) with regard to restriction of administrative and other expenses to the extent of 3% of tax free income. Similar ground raised by the Revenue has already been dismissed. Therefore, Cross Objection of the assessee has become infructuous and the same is dismissed.
37. The second issue relates to disallowance of administrative expenses in running dividend income at 3% of interest free and exempt income. The assessee has supported the order of the CIT(A). Since this issue has already been dealt in detail in the earlier appeals filed by the 39 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 assessee and the Revenue. We have upheld the findings of the CIT(A).
In the result, the Cross Objections of the assessee relevant to the assessment year 2005-06 are dismissed as infructuous.
ITA No.100/Mds/2012 (Assessee) (Assessment Year : 2006-07):
38. The assessee has impugned the order of the CIT(A) dated 12.10.2011 relevant to the assessment year 2006-07 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 earlier years are mentioned in the present appeal. The only issues which are not adjudicated earlier are dealt with in detail.
39. 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(32G). This issue has already been dealt in detail in para 4 hereinabove in ITA 40 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 No.2065/Mds/2011 relevant to the assessment year 2003-04. Therefore, this ground is allowed for statistical purposes.
40. 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 para 26.1 in ITA No.99/Mds/2012 relevant to the assessment year 2005-06. Accordingly this ground of appeal of the assessee is dismissed.
41. The third ground of appeal relates to denial of exemption under section 10(23G) in respect of:
i) Liquidated Damages Rs. 2,82,705/- ii) Underwriting Commission Rs.3,67,94,349/- iii) Front End Fees Rs.5,78,52,440/- iv) Structuring Fees Rs. 23,75,000/-
41.1 As far as liquidated damages is concerned, this issue has already been decided against the assessee in para 5 of ITA No.2065/Mds/2011 hereinabove. Accordingly, the claim thereof is dismissed.
41.2 With regard to Front End Fees, this issue has already been dealt in detail in para 14.2 in ITA No.2066/Mds/2011 41 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 relevant to the assessment year 2004-05. Therefore, the same is allowed in this assessment year also. 41.3 As regards underwriting commission, the A.R. for the assessee submitted that the underwriting commission is charged for underwriting unsubscribed portion of loans, bonds and debentures of the issue of Infrastructure Enterprises. He further contended that underwriting commission has direct nexus with infrastructure financing business and has the nature of credit enhancement. 41.4 On the other hand, the D.R. supported the order of the CIT(A) on this issue.
41.5 We have heard the submissions made by the respective parties. As per the provisions of section 10(23G) any income by way of dividend interest on long term capital gains is eligible for deduction. As per Explanation 1(f) to the proviso of Section 10(23G) " interest" includes any fee or commission received by a financial institution for giving any guarantee or enhancing credit in respect of enterprises which has been approved by Central Government for the purpose of this clause." Underwriting Commission, in our considered 42 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 opinion, do not fall within the definition of 'interest' as provided in Explanation 1 to the proviso of section 10(23G). We accordingly reject the contention of the assessee and dismiss this issue of the assessee.
41.6 As regards structuring fee, the A.R. 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.
41.7 The D.R. has supported the order of the CIT(A) on this issue.
41.8 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 CIT(A) and hold that structuring fee do not fall within the ambit of definition of 'interest' as defined in clause (f) of Explanation 1 of section 10(23G). Therefore, this issue is dismissed. Accordingly, the third ground of appeal of the assessee is partly allowed. 43 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012
42. The fourth ground of appeal of the assessee relates to directions given by the CIT(A) to the Assessing Officer to delete the addition made in assessment year 2004-05 on account of interest income of Rs.2,85,00,019/- received from BPL Cellular Ltd.(hereinafter referred to as "BPL"). 42.1 The A.R. 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 preference shares. In the year 2006, M/s. BPL was again referred to Corporate Debt Restructuring. After this, the advance against preference shares was converted into loan with interest from 1.10.2003 to 31.03.2006. The A.R. submitted that the amount is to be taxed over a period of three years starting from the assessment year 2004-05 to 2006-07.
42.2 We are of the considered opinion that the amount is taxable in the assessment year 2006-07 itself as the restructuring has been approved in March, 2006. A perusal of the order of the CIT(A) relevant to the assessment year 2005- 44 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 06 shows that this issue had come up before the CIT(A). The CIT(A) therein had categorically stated that income accrues when assessee has a right to receive, the income. As the right to receive the income has become due on 24.3.2006, the income accrues and arises in assessment year 2006-07. The said findings of the CIT(A) were not challenged by the assessee in its ground of appeal assailing the order of the CIT(A) relevant to the assessment year 2005-06. Once the issue has not been raised by the assessee in appeal before the Tribunal in the relevant assessment year, the assessee cannot be allowed to take the issue in subsequent assessment year arising from the order of the CIT(A) in earlier assessment year. We do not find any infirmity in the order of the CIT(A) . Accordingly, this ground of appeal of the assessee is dismissed being devoid of merit.
43. 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 para 6 in ITA No.2065/Mds/2011. Therefore, this ground of appeal of the assessee is dismissed.
45 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012
44. The next ground is with regard to disallowance of 3% of tax free income towards administrative expenses. This issue has already been decided in para 10 in ITA No.2023/Mds/2011 relevant to the assessment year 2003-04. With regard to the issue of interest, the same has been adjudicated in para 11 in ITA No.2023/Mds/2011. Therefore, this ground of appeal is disposed of accordingly.
45. The 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. ITA No.87/Mds/2012(Revenue) & C.O.No.23/Mds/2012:-
46. The Revenue has assailed the order of the CIT(A) dated 12.10.2011 relevant to the assessment year 2006-07. In the present appeal, the Revenue has raised as many as ten grounds of appeal. Ground no.1 & 10 are general in nature and therefore do not require any adjudication.
47. In the second ground of appeal, the Revenue has assailed the order of the CIT(A) 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 46 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 para 19.4 of ITA No.2024/Mds/2011 relevant to the assessment year 2004-05. Accordingly, this ground of appeal is dismissed.
48. In Ground no.3, the Revenue has assailed the order of the CIT(A) for allowing exemption under section 10(23G) on 'management fee' considering it to be interest under section 2(28A) of the Act.
48.1 We have perused the order of the CIT(A) on this issue. The loan agreement provided for charging management fee which is difference between the rate of interest charged to the borrower and the PLR and it takes the character of interest. The CIT(A) has directed the Assessing Officer to verify the loan agreement entered with the borrower to ascertain if it represents differential interest and if so, allow the amount under section 10(23G). We do not find any reason to interfere with the findings of the CIT(A) on this issue. Therefore, this ground of appeal of the Revenue is dismissed being devoid of any merit.
49. The fourth ground of appeal relates to 'legal fees'. The CIT(A) allowed exemption under section 10(23G) stating it to 47 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 be within the definition of interest under section 2(28A) of the Act.
49.1 The A.R. submitted that legal fee is charged for legal documentation done by the assessee for the purpose of long term finance to the clients. The CIT(A) has allowed the same. However, we do not agree with the findings of the CIT(A) on this issue. Legal fees charged on account of legal documentation do not fall within the definition of "interest" under section 2(28A). Under section 2(28A), '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 utilized." 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. 48 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012
50. The next ground of appeal of the Revenue relates to allowing exemption under section 10(23G) on the lenders agency fee. The DR submitted that it is in the nature of commission and thus do not constitute interest under section 2(28A) of the Act.
50.1 A perusal of the orders passed by the lower authorities and documents on record do not substantiate the nature of lenders agency fee. The A.R. 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.
51. Ground no.6 of the Revenue 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 ITA No.2065 & 2023/Mds/2011 relevant to the assessment year 2003-04. This ground of appeal is disposed of in similar terms.
52. Ground no.7 of the Revenue appeal relates to disallowing 3% of tax free income towards administrative expenses in connection with earning of tax free income. We 49 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 have already accepted the findings of the CIT(A) on this issue in ITA No.2023/Mds/2011 with regard to disallowance to the extent of 3% of tax free income. We therefore uphold the findings of the CIT(A) on this issue and dismiss this ground of appeal of the Revenue.
53. Ground no.8 of the Revenue appeal relates to restriction of disallowance of administrative expenses for earning dividend income. This issue has already been decided in earlier assessment year. Accordingly, this ground of appeal of the Revenue is dismissed.
54. Ground no.9 of the Revenue appeal has already been adjudicated in para 11 of ITA No.2023/Mds/2011 relevant to the assessment year 2003-04. Accordingly this ground of appeal of the Revenue is disposed of.
55. In the result, the appeal of the Revenue is partly allowed in the aforesaid terms.
C.O.No.23/Mds/2012:-
56. The assessee has filed cross objection to ITA No.87/Mds/2012 relevant to the assessment year 2006-07. 50 ITA Nos.2065, 2066, 2023, 2024/Mds/2011
86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 The A.R. for the assessee has supported the order of the CIT(A) with respect to restriction of disallowance of administrative and other expenses at 3% of the tax free income and also restriction with respect to administrative expenses for earning dividend income at 3%.
57. Since we have confirmed the findings of the CIT(A) on both the issues in the earlier assessment years, the cross objections of the assessee have become infructuous and the same are dismissed as such.
ITA No. 101/Mds/2012(Assessee) , 88/Mds/2012(Revenue) & C.O.No.24/Mds/2012:-
58. These two appeals have been filed by the assessee and the Revenue respectively impugning the order of the CIT(A) dated 12.10.2011 relevant to the assessment year 2007-08. The grounds of appeal raised by the assessee/Revenue are identical to the grounds already raised in the appeals for the assessment years 2002-03, 2003-04 and 2005-06. No new ground of appeal has either been raised by the assessee or the Revenue. Even the Cross Objection filed by the assessee does not have any fresh 51 ITA Nos.2065, 2066, 2023, 2024/Mds/2011 86 to 88, 99 to 101/Mds/2012 & CO Nos.14, 15, 22 to 24/Mds/2012 ground for adjudication. Therefore, all the issues raised in the appeals of the assessee and Revenue and the Cross Objection are disposed of in accordance with the issues already decided hereinabove in earlier assessment years.
59. In the result, the appeal of the assessee is partly allowed for statistical purposes and that of the Revenue is partly allowed. The Cross Objection filed by the assessee is dismissed.
60. In the result, all the five appeals of the assessee and all the five appeals of the Revenue are partly allowed for statistical purposes. All the five cross objections of the assessee are dismissed as infructuous.
Order pronounced in the open court on Friday, the 28th day of September, 2012 at Chennai.
Sd/- Sd/-
( Abraham P.George) (Vikas Awasthy)
Accountant Member Judicial Member
Chennai,
Dated the 28th September, 2012.
somu
Copy to: (1) Appellant (4) CIT(A)
(2) Respondent (5) D.R.
(3) CIT (6) G.F.