Judgment:
1. This appeal of the assessee has been filed against the order of Commissioner of Income-tax, Jammu (In short, "CIT") passed under Section 263 of the IT Act, 1961 (In short, "the Act") for the asst. yr.
2002-03.
1. The CIT is unjustified in cancelling the orders to the extent of issue of disallowance to be made under Section 14A of the IT Act, 1961 and also on the issue of non-availability of exemption under Section 10(23G) of the IT Act, 1961 earlier allowed by the AO rightly and correctly under Section 143(3) read with the order under Section 154 of the IT Act, 1961. The CIT is not correct to state that the order passed by the AO is erroneous and prejudicial to the interest of Revenue to the extent of above. The directions given by the CIT to AO to frame the assessment afresh on these issues is unjustified, bad in law and against the facts of the case. It is prayed that the order of CIT passed under Section 263 of the IT Act, 1961 may please be cancelled.
3. The facts of the case are that the assessee is a bank. In the return of income filed, the assessee had claimed exemption in respect of its income of Rs. 6,86,45,804 under Section 10(15), Rs. 20,57,03,438 under Section 10(23G) and Rs. 8,66,70,665 under Section 10(33) of the Act.
The total income in respect of which exemption was claimed aggregated to Rs. 36,10,19,907. The assessment was completed by the AO under Section 143(3) of the Act on 30th March, 2005, wherein the AO disallowed the exemption of income aggregating to Rs. 36.10 crores on the ground that the assessee was asked to furnish details with photocopies and documentary evidence, which had not been furnished. The AO observed that in the absence of proper evidence, the claim could not be verified. Subsequently, however, the assessee moved an application under Section 154 requesting the AO to rectify the assessment order for the reason that it had furnished all the relevant details during the course of assessment proceedings for the earlier asst. yrs. 2000-01 and 2001-02. It was also stated that interest income amounting to Rs. 6,46,04,130 earned on advances given by assessee to three infrastructure enterprises was claimed exempt under Section 10(23G) as per revised return. It was also stated that the copies of the notifications were enclosed with revised return of income. Thus, it was submitted that since the mistake was apparent from record, the same may be rectified under Section 154 of the Act. Accepting the contentions of the assessee, the AC) allowed the exemption of income aggregating to Rs. 36.10 crores under Sections 10(15), 10(23G) and 10(33) of the Act by observing as under: Exempted income under Sections 10(15), 10(23G) and 10(33) amounting to Rs. 36,10,19,907.
This income is the income which have been earned by the bank but exempt under Section 10 detailed as under: The learned Counsel of the assessee has shown necessary evidences from the records and it is found that this income has wrongly been added to the income of the bank and the same is reduced from the income already assessed under Section 143(3). (- Rs. 36,10,19,907) 3.1 Subsequently, the Addl. CIT, Range-1, Jammu, submitted a proposal under Section 263 of the Act vide his letter dt. 24th Nov., 2006 stating therein that the order under Section 143(3) dt. 30th March, 2005 read with the order under Section 154 dt. 18th May, 2005 passed by the AO was erroneous and prejudicial to the interest of Revenue. The reason given for such proposal was that the AO failed to examine the allow ability of exemption claimed by the assessee in respect of its income aggregating to Rs. 36,10,19,907 under Sections 10(15), 10(23G) and 10(33) of the Act, in the light of Section 14A of the Act, which has been brought to statute by Finance Act, 2001 w.e.f. 1st April, 1962 and was applicable to the assessment year under reference. Thus, it was mentioned that the AO failed to examine the disallowance of proportionate interest and management expenses against the income claimed as exempt within the meaning of Section 14A of the Act. Thus, it was submitted that the order passed by the AO was erroneous and prejudicial to the interests of the Revenue. The learned CIT examined the proposal along with the case records sent by the Addl. CIT and observed that in addition to non-consideration of provisions of Section 14A, the AO had also allowed exemption in respect of income of Rs. 6,46,04,130 under Section 10(23G) as per order under Section 154 without examining its allow ability or otherwise. He observed that the exemption under Section 10(23G) was available only to 'infrastructure capital fund' or 'infrastructure capital company' or 'co-operative bank'. Since the assessee was neither an 'infrastructure capital fund' or 'infrastructure capital company' nor 'co-operative bank', the assessee was not entitled to exemption of its income under Section 10(23G) of the Act. Thus, the learned CIT issued a notice under Section 263 of the Act to the assessee to show cause why action under Section 263 should not be taken on these points.
3.2 In reply to the show cause notice, the assessee filed written submissions objecting to the proposed action of the CIT wherein it was stated that there was no dispute about the applicability of Section 14A of the Act to the assessment year under consideration. However, as per provisions of Section 14A of the Act, only those expenses, which were incurred in relation to earning the income of Rs. 36.10 crores were to be considered for disallowance under Section 14A of the Act. It was submitted that the assessee had sufficient amount of surplus funds for making investment in the bonds and shares in respect of which income was claimed exempt under Section 10(23G). Reliance was also placed on the decision of Tribunal, Amritsar Bench, in assessee's own case for the asst. yr. 1992-93 in ITA No. 68/Asr/1997, where deduction under Section 80M was claimed and the Tribunal upheld the order of the CIT(A) to the extent that only expenses of Rs. 25,000 were to be considered against dividend income. Reliance was also placed on two judgments of Hon'ble Bombay High Court in the cases of CIT v. General Insurance Corporation of India and CIT v. Central Bank of India , where it was held that expenses incurred on account of salary paid to staff, stamp duty, transfer fees and safe custody charges disallowed by the AO but allowed by the Hon'ble High Court on the ground that these were not directly relatable to earning of dividend income. Three judgments of Hon'ble Calcutta High Court in the cases of CIT v. National & Grindlays Bank Ltd. , CIT v. United Collieries Ltd. and CIT v. Enemour Investments Ltd. (1994) 72 Taxman 370 (Cal) were also pressed into service. Reliance was also placed on two decisions of Tribunal, Delhi Benches on the issue of Section 14A of the Act in Maruti Udyog Ltd. v.Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 ITD 119 (Del) and Asstt.
CIT v. Etcher Ltd. (2006) 101 TTJ (Del) 369. Some other decisions of Tribunal, Bombay Bench, were also relied upon in support of the contentions that expenses could not be disallowed on proportionate basis. These have been referred to on pp. 3 and 4 of the impugned order. It was also contended that the proposal to disallow the proportionate interest and management expenses amounts to change of opinion.
3.3 As regards exemption claimed under Section 10(23G) and allowed by the AO, the assessee submitted that provisions of this section were inserted by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997 and eversince the assessee had been claiming and is being allowed exemption under Section 10(23G). Reliance was also placed on Circular No. 762 dt.
18th Feb., 1998, which contains the Explanatory Notes for insertion of this section in the Act. Para 17.4 of the Explanatory Notes explained the meaning of 'infrastructure capital company' as to mean a company which has made investment by way of acquiring shares or providing long-term finance to an enterprise engaged in the business of providing infrastructure facility i.e. road, highway, bridge, airport, port, a rail system, or any other public facility of a similar nature. It was submitted that since the assessee was an 'infrastructure capital company' and the amounts were invested in shares or providing long-term finance to the enterprises carrying on infrastructure facility, the assessee had rightly claimed and was allowed exemption under Section 10(23G) of the Act, right from the date when this section was inserted in the Act. The assessee also referred to Circular No. 14 dt. 22nd Nov., 2001 (2002) 172 CTR (St) 13 issued by the CBDT whereby co-operative banks which were neither companies nor infrastructure capital funds were also made eligible to exemption of their income under Section 10(23G) w.e.f. 1st April, 2002. Thus, it was contended that all those companies including banks which have made investment by way of acquiring shares or providing long-term finance to enterprises engaged in the providing infrastructure facility arc covered by the definition of 'infrastructure capital company'. It was contended that the assessee had made investments by way of acquiring shares or providing long-term finance to enterprises engaged in providing infrastructure facility and, therefore, the assessee was entitled to exemption under Section 10(23G) of the Act. Relying on the judgment of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CAT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), it was contended that in order to assume jurisdiction under Section 263 by the CIT, two conditions must be satisfied simultaneously i.e. (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of Revenue. It was submitted that the CIT cannot assume jurisdiction under Section 263 in cases where divergent views have been expressed by different High Courts and the order passed by the lower authority is in accordance with the view of the jurisdictional Bench.
Reliance was also placed on the judgment of Hon'ble Supreme Court in the case of CIT v. G.M. Mittal Stainless Steel (P) Ltd. .
4. The learned CIT considered the aforesaid submissions and observed that the learned Counsel has agreed that Section 14A of the Act was applicable to this case. The learned CIT observed that admittedly at the time of passing order under Section 143(3) r/w Section 154, the AO did not consider the provisions of Section 14A before allowing exemption in respect of gross income of Rs. 36.10 crores. The learned CIT(A) did not find any merit in the submissions of the assessee that the assessee was having interest-free funds, which were invested in shares or for providing long-term finances to the enterprises engaged in infrastructure facility. He observed that the assessee was having both interest bearing as well as own funds in a common pool and the assessee has not been able to pinpoint that the funds utilised to earn exempt income were out of interest-free funds. He also referred to the various judgments relied upon by the learned Counsel and observed that most of those judgments related to computation of dividend income for the purpose of claiming deduction under Section 80M of the Act. He observed that the decision of Tribunal, Amritsar Bench, for the asst.
yr. 1992-93 (supra) was also with reference to deduction under Section 80M where the Tribunal held that the apportionment of 10 per cent of the dividend income earned by the assessee was not done on reasonable basis. He also observed that two judgments of Hon'ble Bombay High Court in the cases of CIT v. General Insurance Corporation of India (supra) and CIT v. Central Bank of India (supra) also related to Section 80M.The decision of Tribunal, Indore Bench in the case of State Bank of Indore v. CIT in Misc. Appln. No. 1775 of 2004 related to Section 80M and not to the provisions of Section 14A of the Act. Therefore, those were distinguishable. He also referred to the decision of Tribunal, Delhi Bench in the case of Maruti Udyog Ltd. v. Dy. CIT (supra), where it was held that any expenditure which is proved to have nexus directly or indirectly with the utilisation of funds for earning tax-free income has to be disallowed while computing income qualifying for exemption.
He observed that the order of the AO was erroneous insofar as it was prejudicial to the interest of the Revenue because the AO did not make any enquiry in the light of provisions of Section 14A of the Act for the purpose of considering disallowance of expenditure incurred in relation to income claimed exempt. He also rejected the submission of the assessee that the action under Section 263 was being taken on the basis of mere change of opinion. He relied on the judgment of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. , where it was held that while computing the deduction under Section 80M, the proportional management expenses are required to be deducted from dividend receipts. Thus, the learned CIT(A) held that action of the AO not to consider disallowance of expenditure incurred in relation to income claimed exempt and not forming part of total income was erroneous and prejudicial to the interest of the Revenue.
4.1 As regards second point on which the learned CIT had proposed the action under Section 263 that the assessee was not entitled to exemption of its income under Section 10(23G) of the Act, the learned CIT referred to the Memorandum explaining the provisions of Finance (No. 2) Bill, 1996, vide which the said provision was brought to the statute and observed that the tax exemption was available only to such 'infrastructure capital fund' or 'infrastructure capital company', which is established for the purpose of mobilising resources for financing infrastructure facilities. He observed that since the assessee was not established for the purposes of mobilising resources for financing infrastructure facilities, it cannot be termed as 'infrastructure capital company'. Therefore, the assessee was not entitled to exemption claimed under Section 10(23G) of the Act. He also observed that the wording of Section 10(23G) was clear and unambiguous and, therefore, literal rule of interpretation should be applied. He also observed that the submissions of the learned Counsel that benefit under Section 10(23G) was subsequently extended to the income of co-operative banks would not mean that all banks were entitled to claim benefit under Section 10(23G). He also referred to the judgment of Hon'ble Supreme Court in the case of Malabar Industrial Co. Lid. v. CIT (supra) and observed that in this case twin conditions stipulated under Section 263 were duly met. He also found that the judgment of Hon'ble Supreme Court in the case of CIT us. G.M. Mittal Stainless (P) Ltd. (supra) was not applicable to the facts of the present case because the proposed action under Section 263 was not based on divergent views expressed by different High Courts. Thus, the learned CIT(A) held that the order under Section 143(3) r/w Section 154 of the Act was erroneous and prejudicial to the interests of the Revenue and accordingly cancelled the same to the extent mentioned above with the direction that the AO should frame the assessment afresh on the above issue as per law after giving the assessee adequate opportunity of being heard.
The assessee is aggrieved with the order of the CIT. Hence, this appeal before this Bench.
5. The learned Counsel for the assessee, Sh. R.K. Gupta, reiterated the submissions made before the authorities below. He referred to the assessment order dt. 30th March, 2005, where the AO had not allowed exemption in respect of income aggregating to Rs. 36,10,19,907 claimed under Sections 10(15), 10(23G) and 10(33) of the Act, for the reason that the requisite details and documentary evidence were not furnished.
Thereafter, the assessee moved an application under Section 154 where it was stated that all the requisite informations along with documentary evidence were furnished during the course of completion of assessment for the asst. yrs. 2000-01 and 2001-02 and, therefore, the assessee had rightly claimed exemption in respect of income of the aforesaid amount. He submitted that the AO accepted such claims under Section 154 and allowed the exemption of its income aggregating to Rs. 36.10 crores. He drew our attention to a copy of order passed under Section 154 of the Act. He submitted that thereafter the assessee received a show cause notice from CIT. proposing action under Section 263 on two grounds that while allowing exemption i.e. (i) the AO neither considered the provisions of Section 14A nor made any enquiry for the purpose of computing disallowance of expenses in respect of income claimed exempt, and (ii) the assessee was not entitled to exemption of its income under Section 10(23G). The learned Counsel submitted that a detailed reply to the show cause notice issued by the CIT was submitted vide letter dt. 19th March, 2007 and the same has been reproduced by the CIT at pp. 3 to 13 of the impugned order.
Relying on the judgment of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra), the learned Authorised Representative submitted that the jurisdiction of the CIT to revise order passed by the AO can be assumed only if twin conditions i.e. (i) the order sought to be revised must be erroneous and (ii) it must be prejudicial to the interests of the Revenue. He submitted that in regard to the allegation that while allowing exemption of income claimed by the assessee, the AO had neither made enquiry nor referred to the provisions of Section 14A was factually correct. The AO had overlooked the provisions of Section 14A while allowing exemption of income. Therefore, this was an error on the part of the AO. However, the second condition that the order must be prejudicial to the interests of the Revenue has not been satisfied. He submitted that during the course of revision proceedings under Section 263, it was pointed out to the CIT that the assessee had sufficient interest-free funds, which were invested in making investments in shares and providing long-term finances to enterprises engaged in providing infrastructural facility Therefore, no disallowance of interest was called for. Reliance was placed on the decision of the Tribunal, Amritsar Bench in the case of the assessee in ITA No. 68/Asr/1997 for the asst. yr. 1992-93 (a copy of order placed at pp. 13 to 15 of the paper book), where the AO had disallowed 10 per cent of the expenses against dividend income for claiming deduction under Section 80M.However, the learned CIT(A) had considered the disallowance of Rs. 25,000 as fair and reasonable. On appeal, the Tribunal upheld the order of the CIT(A). He further submitted that the CIT is not correct in holding that the proportional administrative expenses have to be disallowed for computing income claimed exempt under the aforesaid sections of the Act. He submitted that the judgment of the Hon'ble Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) relied upon by the learned CIT is with reference to deduction in respect of dividend income under Section 80M and not with reference to exemption of income claimed by the assessee, where the provisions of Section 14A have to be considered. He referred to the decision of Tribunal, Delhi Bench in the case of Asstt CIT v. Eicher Ltd. (supra) (a copy of order placed at pp. 106 to 120 of the paper book), where it has been held that the expenses to be disallowed under Section 14A in respect of income claimed exempt are those which have been actually incurred with a view to earning non-taxable income. He submitted that no disallowance can be made on notional basis. It is the duty of the AO to pinpoint such expenditure on the basis of material on record. He submitted that while taking such view, the Tribunal has distinguished the judgment of Hon'ble Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra), which was with reference to allowing the deduction under Section 80M of the Act. He further relied on the decision of Tribunal, Delhi Bench in the case of Maruti Udyog Ltd. v.CIT (supra) which was referred to by the Tribunal in the case of Asstt.
CIT v. Eicher Ltd. (supra). He further referred to the judgment of Hon'ble Madhya Pradesh High Court in the case of State Bank of Indore v. CIT (a copy of order placed at pp. 90 to 94 of the paper book), where the Hon'ble High Court has held that the expenditure to be considered against dividend income for the purpose of allowing deduction under Section 80M is actual expenditure and not notional expenditure. He also relied on the two decisions of Hon'ble Bombay High Court in the cases of CIT v. General Insurance Corporation of India (supra) (a copy of order placed at pp. 85-86 of the paper book) and CIT v. Central Bank of India (supra) (a copy of order placed at pp. 87 to 89 of the paper book), where it has been held that deduction under Section 80M has to be allowed in respect of net income computed as per provisions of the Act and the rule of proportionate expenditure and interest contemplated by Section 20, as it then stood, could not be imported into Section 80M. He submitted that establishment expenses are common and these were not incurred exclusively for the purpose of earning income claimed exempt by the assessee. Therefore, no expenses on that account could be allocated for disallowance on proportionate basis. He further submitted that for the purpose of assuming jurisdiction under Section 263, it is the duty of the CIT to call for and examine the case records at his end. He referred to para 1 of the impugned order, where the CIT has merely relied on the proposal dt.
24th Nov., 2006 submitted by the Addl. CIT, Jammu under Section 263 in respect of disallowance of expenses under Section 14A. He submitted that the CIT has not applied his independent mind and was merely guided by the proposal submitted by the Addl. CIT. He submitted that such action of the CIT was bad in law. He relied on the judgment of Hon'ble Gauhati High Court in the case of B & A Plantation & Industries Ltd. v.CIT (a copy of order placed at pp. 153 to 169 of the paper book), where order under Section 263 was struck down because such action was taken merely on the basis of objection raised by the internal audit party without independent application of mind.
5.1 As regards the claim of the assessee for exemption of its income under Section 10(23G), the learned Counsel submitted that the assessee is covered by the expression 'infrastructure capital company'. He referred to CBDT's Circular No. 762 dt. 18th Feb., 1998 (a copy placed at pp. 9 and 10 of the paper book), whereby the purpose of expanding the scope of exemption under Section 10(23G) was explained. It has been mentioned therein that the purpose of expanding the scope of exemption is to attract further investment in the infrastructure facility by providing more tax incentive to investors. He referred to para 17.4 of the said circular which explains the meaning of expression 'infrastructure capital company' as to mean a company which has made investment by way of acquiring shares or providing long-term finance to enterprises engaged in the business of providing infrastructure facility. He submitted that the case of the assessee is squarely covered under such definition. He further referred to pp. 11 and 12 of the paper book, which is copy of CBDTs Circular No. 14dt. 22nd Nov., 2001, which explains the purpose of amendments relating to Direct Taxes introduced by the Finance Bill, 2001. He submitted that as per para 18.1 of the said circular, it was mentioned that co-operative banks being neither a company nor a fund operating under the provisions of the Registration Act were not covered by the definitions of 'infrastructure capital fund' or 'infrastructure capital company'.
Thus, Clause (23G) of Section 10 has been amended so as to provide that income of a cooperative bank by way of interest, dividends (other than dividends referred to in Section 115-O) and long-term capital gains from investments made by way of equity or long-term finance in an approved enterprise will also be exempt from payment of income-tax.
This means that all other banks which were companies are covered under the definition of "infrastructure capital company" for the purpose of exemption under Section 10(23G). Thus, the learned Counsel submitted that the assessee has been allowed exemption under Section 10(23G) right from the asst. yrs. 1999-2000 to 2004-05. He referred to a copy of the assessment order passed under Section 143(3) for the asst. yr.
2003-04 (placed at pp. 18 to 50 of the paper book) and for the asst.
yr. 2004-05 (at pp. 51 to 81 of the paper book). He submitted that these assessments were completed under Section 143(3). Therefore, the principle of consistency is required to be followed in this case. For this proposition, he relied on the following judgments: (i) The judgment of Hon'ble Delhi High Court in the case of Director of IT (Exemption) v. Lovely Bal Shiksha Parishad ; (ii) The judgment of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT , (iii) The judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. leader Valves Ltd. (2008) 214 CTR (P&H) 429 : (2007) 295 ITR 273 (P&H); (iv) The judgment of Hon'ble Supreme Court in the case of Berger Paints India Ltd. v. CIT .
He further submitted that the claim of the assessee for exemption under Section 10(23G) has been accepted by the AO for both the earlier years as well as subsequent years after examining the relevant details and proper enquiry. Therefore, relying on the judgment of Hon'ble Gujarat High Court in the case of CIT v. Arvind Jewellers , the learned Counsel submitted that the order passed by the CIT deserves to be set aside.
6. The learned Departmental Representative, on the other hand, heavily relied on the order of the CIT, Jammu and also filed written submissions. He drew our attention to the Memorandum Explaining the Proposed Amendment to the Finance (No. 2) Bill, 1996 vide which the provisions of Section 10(23G) had been brought to statute. He submitted that second para of the said circular explains the purpose of providing tax exemption to such infrastructure capital funds and infrastructure capital companies, which are established for the purposes of mobilising the resources for financing the enterprises engaged in providing the infrastructure facilities. He submitted that in the present case, the assessee is not an 'infrastructure capital company' because it has not been established for the purpose of mobilising the resources for financing infrastructural facilities. Thus, he submitted that the assessee was not entitled to exemption under Section 10(23G) of the Act.
6.1 As regards the second issue, on which the order under Section 263 has been passed by the CIT, the learned Departmental Representative submitted that during the course of proceedings under Section 263, the assessee had itself accepted that the AO had not considered the provisions of Section 14A of the Act, which were applicable to the present case. There is no material to show that the assessee had interest-free funds, which alone were invested in earning income which was claimed exempt under Sections 10(15), 10(23G) and 10(33) of the Act. He also referred to Board's Circular No. 780, dt. 4th Oct. 1999 (1999) 156 CTR (St) 77, where it was clarified that exemption under Section 10(23G) would be allowed in respect of net income after taking into account all expenses incurred to earn the same. Thus, what would be exempt under Clause (23G) of Section 10 is the income by way of dividend, interest or long-term capital gain and not the gross receipts. He, therefore, argued that the failure on the part of the assessee to consider the expenses relating to income not forming part of total income and thereby allowing deduction of the entire gross income was against the provisions of the Act, resulting in prejudice to the Revenue. Thus, he submitted that the learned CIT was justified in coming to the conclusion that the order of the AO was erroneous and prejudicial to the interest of the Revenue. He also relied on the following judgments: (i) The judgment of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. (supra), where it was held that the proportionate management expenses are to be considered against dividend income while computing deduction under Section 80M. (ii) The judgment of Hon'ble Supreme Court in the case of CIT v. Ralson Industries Ltd., dt. 4th Jan., 2007, (2007) 207 CTR (SC) 201 : 2006-ITS-06, where it was held that order under Section 263 cannot be held to be bad in law merely because an order of rectification was passed (a copy placed at pp. 23 to 26 of the Departmental paper book (in short, 'DPB').
(iii) The decision of Tribunal, Delhi Bench in the case of Tehri Steel Ltd. v. Asstt. CIT in ITA No. 1249/Del/2006 for the asst. yr.
2002-03 reported in 2007 TIOL 240 ITAT (Del), where the Tribunal has held that an order is erroneous not only due to apparent error of law or reasoning but also where it accepts everything that is submitted by the assessee without making valid enquiries which are called for on the facts of the case, (a copy placed at pp. 27 to 31 of the DPB).
(iv) The decision of Tribunal, Delhi Bench in the case of Kotdwar Steel Ltd. v. Asstt. CIT, Cir-2, Dehradun, in ITA No. 1311/Del/2006 for the asst. yr. 2002-03, reported in 2007 TIOL 95 ITAT (Del), (a copy placed at pp. 32 to 35 of the paper book).
In this case, the Tribunal upheld the order passed under Section 263 on the ground that there were grey submissions made by the assessee for which detailed enquiries were called for. Failure to do so made the assessment order as erroneous and prejudicial to the interest of the Revenue.
(v) The decision of Tribunal, Chandigarh Bench in the case of Ind Sphinx Precision Ltd. v. CIT, in ITA Nos. 549 and 550/Chandi/2004 for the asst. yrs. 2000-01 and 2001-02, reported in (2007) 110 TTJ (Chd) 471 : 2007 TIOL 247 ITAT (Chd) (a copy placed at pp. 36 to 49 of the paper book).
In this case, the order passed under Section 263 by the CIT was upheld because the assessment order was passed without giving any reasons for accepting the contentions of the assessee and that too against jurisdictional Tribunal.
(vi) The decision of Tribunal, Amritsar Bench, in the case of Sexa Securities & Finance Co. Ltd. v. ITO, Ward 12(2), New Delhi, in ITA No. 2308/Del/2004 for the asst. yr. 1999-2000 reported in 2007 TIOL 43 ITAT (Del) (a copy placed at pp. 52 to 60 of the paper book).
In this case, the AO allowed the exemption of dividend income of Rs. 23,15,802 under Section 10(23) without considering the provisions of Section 14A. Such order of assessment was held to be erroneous and bad in law.Sh.
Mohanlal M. Shah v. Dy. CIT, CC. II, Mumbai, in ITA No. 3169/Mum/2004 for the asst. yr. 1999-2000 reported in 2007 TIOL 249 ITAT (Mum) (a copy placed at pp. 61 to 66 of the paper book).
In this case, it was held that interest paid on borrowed funds utilised for the purpose of investment in shares is not to be allowed either as expenditure or as part of cost of acquisition of the shares in view of the provisions of Section 14A of the Act.
6.2 The learned Departmental Representative also submitted that the cases relied upon by the learned Authorised Representative are not applicable to the facts of the present case because most of the judgments/decisions of the Tribunal were applicable to the provisions of Section 80M and not in respect of income claimed as exempt. He further relied on the judgment of Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT , where the order for revision passed by the CIT was upheld, even though it was claimed that some other person was liable to tax on income.
7. We have heard both the parties and carefully considered the rival submissions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below, referred to the relevant provisions of the Act and the pages of the paper book to which our attention has been drawn. The judgments relied upon by the parties have also been referred to. From the facts discussed above, it is obvious that at the time of completing the assessment for the assessment year under consideration under Section 143(3), the AO did not allow the claim of exemption of its income made under Sections 10(15), 10(23G) and 10(33) on the ground that the assessee failed to furnish the requisite documentary evidence and details for claiming exemption. However, the AO allowed such claim in the order passed under Section 154 of the Act by accepting the contentions of the assessee that such evidence was placed on record during the course of assessment proceedings for the earlier asst. yrs.
2000-01 and 2001-02. The undisputed facts of the case are that at the time of completing the assessments and even at the time of passing order under Section 154, the AO did not take into account the provisions of Section 14A of the Act. Section 14A of the Act provides that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. The CBDT has also clarified the meaning of income used in Clause (23G) of Section 10 vide Circular No. 780 dt. 4th Oct., 1999 where it was mentioned that it is the net income after taking into account all expenses incurred to earn the same that is exempt under Section 10(23G) of the Act. The Board has also clarified that the term "income" as used in the said section refers to income as computed under the provisions of the IT Act, 1961 and, therefore, it is not the "gross receipts" but the "net income" of the nature referred to in the said clause. In any case, Section 14A refers to expenditure incurred in relation to income which does not form part of the total income under this Act. The assessee had claimed exemption of its income aggregating to Rs. 36,10,19,907 which comprised of Rs. 6,86,45,804, Rs. 2,05,73,438 and Rs. 8,66,70,665 under Sections 10(15), 10(23G) and 10(33) respectively. While claiming such exemption, the assessee had taken only gross receipts and expenditure incurred relating to such income was not disallowed as per provisions of Section 14A of the Act. Thus, the assessee had claimed exemption in respect of gross receipts and not in respect of net income. It is admitted by the learned Counsel during the proceedings before the CIT as well as before this Bench that provisions of Section 14A were applicable to this case and non-consideration of the provisions of Section 14A by the AO was an error. However, the claim of the assessee is that such error did not cause or result into prejudice to the Revenue. Therefore, the learned Authorised Representative has contended that the twin conditions mentioned in Section 263 were not satisfied so as to enable the CIT to assume jurisdiction under Section 263 of the Act. Now the question that requires to be decided by this Bench is whether the CIT was justified in law to exercise his powers vested under Section 263 of the Act in setting aside the assessment order read with order under Section 154 of the Act passed by the AO. Before dealing with the merits of the case, it would be relevant to reproduce herein the main provisions of Section 263 of the Act which read as under: 263. (1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation--For the removal of doubts, it is hereby declared that, for the purposes of this Sub-section,- (b) 'record' shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT; (c) Where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the CIT under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
(2) No order shall be made under Sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in Sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Tribunal, the High Court or the Supreme Court.
Explanation--In computing the period of limitation for the purposes of Sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to Section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any Court shall be excluded.
A bare reading of the aforesaid section shows that the learned CIT is vested with powers to call for and examine the records of any proceedings under the Act and consider if the order passed by the AO is erroneous and prejudicial to the interests of the Revenue. Thus, in order to confer jurisdiction on the CIT under Section 263, the twin conditions i.e. (i) that order passed by the AO must be erroneous and (ii) the same should be prejudicial to the interests of the Revenue must be satisfied. Both the conditions should be satisfied simultaneously. In case, the order passed under Section 263 is erroneous, but the same is not prejudicial to the interests of Revenue, the CIT shall have no jurisdiction to revise such order. Likewise, if the order is prejudicial to the interest of Revenue, but is not erroneous, the CIT would have no jurisdiction to revise such order under Section 263 of the Act. Thus, it is quite clear that in order to confer jurisdiction on the CIT under Section 263, both the conditions mentioned above must be fulfilled simultaneously. This issue was considered by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd v. CIT (supra) relied upon by the learned Authorised Representative, where it was held that prerequisite for the exercise of jurisdiction by the CIT is that the twin conditions must be satisfied i.e. (i) the order of the AO sought to be revised is erroneous and (ii) it is prejudicial to the interests of the Revenue. The apex Court observed that if one of these conditions is absent i.e. if the order of AO is erroneous but is not prejudicial to the Revenue recourse cannot be had to Section 263 of the Act. The same view has been held by the various other judgments relied upon by the learned Authorised Representative.
7.1 Now the aspect that requires to be considered by this Bench is whether both the conditions laid down under Section 263 can be said to have been fulfilled in this case. In order to answer this issue, we have to first find out the meaning of expressions used in the section an assessment order being 'erroneous' and 'prejudicial to the interests of the Revenue'. This issue was also considered by the Hon'ble Supreme Court in the aforesaid case of Malabar Industrial Co. Ltd. v. CIT (supra). The Hon'ble apex Court held that the expression 'erroneous' would mean an incorrect assumption of facts or an incorrect application of law. The apex Court further observed that even the assessment orders passed without applying principles of natural justice or without application of mind would be regarded as erroneous. As regards the expression 'prejudicial to the interests of the Revenue', the apex Court observed that this is not an expression of art and was not defined in the Act. However, it was observed that in its ordinary meaning, it is of wide import and was not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the ITO, the Revenue is loosing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The Hon'ble apex Court also observed that the phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. The relevant findings recorded by the apex Court in (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) (supra) are as under: A bare reading of Section 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions namely (i) the order of the AO sought to be revised is erroneous and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the ITO is erroneous but is not prejudicial to the interests of the Revenue or if it is not erroneous but is prejudicial to the Revenue--recourse cannot be had to Section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO, cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.
From a bare reading of the above judgment, it is clear that the twin conditions laid down in Section 263 must be satisfied simultaneously before assuming jurisdiction by the CIT. However, the Supreme Court has also clarified that if the AO has taken one of the courses permissible in law or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an order erroneous or prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.
7.2 Now the present case also requires to be decided by applying the above tests laid down by the apex Court i.e. whether the twin conditions laid down for exercise of powers under Section 263 by CIT could be considered to have been satisfied.
7.3 Now admittedly, the failure on the part of the AO to consider the provisions of Section 14A while allowing exemption in respect of income aggregating to Rs. 36.10 crores was contrary to the provisions of the Act. We have already mentioned that CBDT has clarified that income referred to under Section 10(23G) is only net income to be computed in accordance with the provisions of the Act. Same is the position in respect of income claimed exempt under Sections 10(15) and 10(33) of the Act. It is not a case where the AO has examined the case from the point of view of Section 14A and then has recorded a finding that no disallowance for expenses incurred in relation to income claimed exempt was called for. The AO has totally overlooked this fact. Even the assessee had not apportioned any expenditure towards the income claimed exempt in the return of income. Therefore, such order of the AO was erroneous within the meaning of Section 263 of the Act as AO failed to examine the disallowance of expenses called for under Section 14A of the Act.
7.4 Now the other condition that the order must be prejudicial to the interest of the Revenue also needs to be satisfied before the order passed under Section 263 is considered to be valid. We are unable to accept the contention of the assessee that it had not incurred any expenditure for earning exempt income and, therefore, no disallowance was called for. It is the claim of the assessee that sufficient amount of surplus funds were available with the assessee to make investment in shares or long-term advances to enterprises engaged in providing infrastructure facility and, therefore, no disallowance was called for.
We are unable to accept this proposition, for the simple reason that the AO has not examined this issue at all either at the time of completing the assessment or at the time of passing an order under Section 154. No finding has been recorded by the AO to the effect that the assessee had not incurred any expenditure for earning huge amount of exempt income of Rs. 36.10 crores. What was required to be done by the AO is to enquire into the expenditure incurred by the assessee for earning income claimed exempt under the aforesaid sections of the Act.
In fact, the assessee had itself referred to the decision of Tribunal, Amritsar Bench in assessee's own case in ITA No. 68/Asr/1997 for the asst. yr. 1992-93 (a copy of order placed at pp. 13 to 15 of the paper book). The said decision related to deduction in respect of dividend income of Rs. 2,13,60,578 under Section 80M of the Act. The AO had disallowed expenses of Rs. 21,36,579 @ 10 per cent of the gross amounts of dividends. However, on appeal, the learned CIT(A) restricted the disallowance to Rs. 25,000 on the ground that there was only one clerk working in the investment department who received warrant from UTI and deposited with the bank for collection. On further appeal, the Tribunal upheld the order of CIT(A). The said decision is confined to its own facts, where dividend income was shown at meagre amount of Rs. 2.13 crores from the UTI and the issue related to deduction under Section 80M. The case was not considered from the point of disallowance to be made under Section 14A in respect of income claimed as exempt. For the assessment year under consideration, the assessee has earned huge amount of income of Rs. 36.10 crores which was claimed exempt. The total investment for earning such income must be more than 300 crores.
There has got to be a team of professionals for research, planning, monitoring, management of the investment portfolio. One clerk cannot manage huge amount of investment which require serious consideration and due application of mind. Therefore, the expenses incurred for earning such income needed to be determined and disallowed. The extent of expenses may vary depending on the facts of each case. In those cases, where the only business carried on by the assessee is to make investments in shares or of the nature for which income is exempt, the entire expenses incurred in relation to such income would warrant disallowance under Section 14A of the Act. However, if there are only one or two investments made in the last years say units of UTI for which a single dividend warrant is received and there is no regular staff employed, there would hardly be any establishment expenses incurred for earning such income and, therefore, disallowance cannot be made on proportionate basis. What is to be seen is the expenditure incurred in relation to income, which does not form part of the total income. The disallowance may not be made on proportionate basis but the fact remains that the expenditure incurred in relation to such income need to be determined and disallowed. This exercise was not done by the AO. Even for the asst. yr. 1992-93, when income was only 2.13 crores, the disallowance of expenses of Rs. 25,000 was upheld by the Tribunal.
Therefore, when we consider income of Rs. 36.10 crores, the disallowance would be of much higher magnitude. In any case an enquiry and examination were required to be made by the AO at the time of completing the assessment and passing an order under Section 154. The relevant details were to be called for and examined. Therefore, the order of the AO was definitely erroneous and also prejudicial to the interest of the Revenue insofar as the disallowance of expenses under Section 14A is concerned.
7.5 We may mention that various decisions relied upon by both the parties are on the issue of considering expenses for the purpose of allowing deduction under Section 80M. There are some decisions, which are with reference to the provisions of Section 14A of the Act. Two decisions of Tribunal, Delhi Benches in the cases of Asstt. CIT v.Eicher Ltd. (supra) and Maruti Udyog Ltd. v. Dy. CIT (supra) support the view that expenditure actually incurred in relation to income which does not form part of the total income is to be made and disallowance of management expenses on proportionate basis cannot be made. However, there is unanimity of the view in all the decisions that expenditure incurred in relation to income claimed exempt which does not form part of income has got to be disallowed as per provisions of Section 14A. In the case of Maruti Udyog Ltd. v. Dy. CIT (supra), the Tribunal has held that any expenditure which is proved to have nexus directly or indirectly with the funds for earning exempt income has to be disallowed. The extent and magnitude of disallowance is to be determined at the time of completing the assessment. But this does not vitiate the order of CIT Jammu, so far it relates to non-consideration of disallowance of expenditure under Section 14A of the Act. The decision of the Tribunal, Delhi Bench in the case of Sexa Securities & Finance Co. Ltd. v. ITO (supra) is directly on the issue where the order passed by the CIT under Section 263 on account of non-consideration of disallowance of expenses under Section 14A was held to be valid in law. Therefore, this decision also supports the case of the Revenue. As regards the contention of the assessee that the order passed under Section 263 is bad in law because he has acted merely on the proposal of Addl. CIT without independent application of mind, we do not find any substance in the same. Para 2 of the impugned order clearly shows that along with the proposal, the Addl. CIT had also sent the case records and these were examined by the CIT.Therefore, it cannot be said that CIT, Jammu acted merely on the proposal sent to him. Therefore, this plea is rejected and the judgment of Hon'ble Gauhati High Court in the case of B & A Plantation & Industries Ltd. v. CIT (supra) is not applicable to the facts of this case. Therefore, we are of the opinion that the order of assessment read with order under Section 154 was erroneous and prejudicial to the interest of Revenue so far as disallowance of expenses under Section 14A in relation to income claimed exempt is concerned. Both conditions laid down in Section 263 are satisfied. However, before parting with this issue, we wish to mention that quantum of expenses to be disallowed under Section 14A has to be determined at the time of completing the set aside assessment. If it is not acceptable to the assessee, it may challenge the same in appeal before the CIT(A).
8. Thus, having regard to these facts and circumstances of the case and the legal position discussed above, we uphold the order of CIT under Section 263 so far it relates to non-consideration of the provisions of Section 14A while allowing exemption of income of Rs. 36.10 crores.
9. Now we take up the second ground on which CIT has revised the order under Section 263. The same relates to allowing of exemption under Section 10(23G) of the Act. The undisputed facts of the case are that Section 10(23G) was introduced by the Finance (No. 2) Act, 1996 w.e.f.
1st April, 1997. The assessee had claimed and was being allowed exemption of its income under Section 10(23G) for the earlier as well as subsequent assessment years in respect of which assessment under Section 143(3) had been made. Before we record our findings on the validity of the action of the CIT on this issue, it would be appropriate to reproduce the relevant provisions of Section 10(23G) applicable to the assessment year under consideration. The same are reproduced as under: 10 (23G) : any income by way of dividends (other than dividends referred to in Section 115-O), interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or a co-operative bank from investments made on or after the 1st day of June, 1998 by way of shares of long-term finance in any enterprise or undertaking wholly engaged in the business referred to in Sub-section (4) of Section 80-IA or a housing project referred to in Sub-section (10) of Section 80-IB or a hotel project or a hospital project and which has been approved by the Central Government on an application made by it in accordance with the rules made in this behalf and which satisfies the prescribed conditions.
(a) 'infrastructure capital company' means such company as has made investments by way of acquiring shares or providing long-term finance to an enterprise wholly engaged in the business referred to in this clause; (b) 'infrastructure capital fund' means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908) established to raise monies or providing long-term finance to an enterprise wholly engaged in the business referred to in this clause; (d) 'long-term finance' shall have the meaning assigned to it in Clause (viii) of Sub-section (1) of Section 36; (e) 'co-operative bank' shall have the meaning assigned to it in Clause (dd) of Section 2 of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (47 of 1961); (f) 'interest' includes any fee or commission received by a financial institution for giving any guarantee to, or enhancing credit in respect of, an enterprise which has been approved by the Central Government for the purposes of this clause.
(a) the exemption provided under this section is applicable to an 'infrastructure capital fund' or "infrastructure capital company' or a 'cooperative bank'; (b) the income should be in the nature of dividend (not being covered under Section 115-O of the Act); or long-term capital gains or interest; (c) the aforesaid income is derived from investments made on or after June, 1998 by way of shares or the long-term finance in any infrastructure enterprise; and (d) the infrastructure enterprise is approved by the Central Government on an application made by it in accordance with the prescribed rules; (e) for this purpose, 'infrastructure capital company' means a company which has made investments by way of acquiring shares or providing long-term finance to an enterprise wholly engaged in the aforesaid business.
Nowhere the section and Explanation thereto say that the 'infrastructure capital company' should be established only for the purposes of mobilising resources for financing infrastructure facilities. There is no dispute about the fact that the income in respect of which assessee has claimed exemption has been earned by way of dividends on investment in shares and interest on long-terms finance in the infrastructure enterprise.
The claim of the assessee is that it is covered under the expression "infrastructure capital company" because it has made investment by way of acquiring shares or long-term finance to an enterprises engaged in the business of providing infrastructure facility. Both the Revenue and the assessee have referred to Explanatory Notes on provisions of the Finance (No. 2) Act, 1996, in Circular No. 762 dt. 18th Feb., 1998 explaining the purpose of providing such exemption. We consider it appropriate to reproduce hereunder the relevant paras explaining the provisions inserted in the Act: 17.1 In recognition of the need for adequate infrastructure facility which is vital for accelerating the economic development of the country, the existing provisions of the IT Act provide a five year tax holiday to an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. However, in order to attract further investment to this sector, an urgent need has been felt for providing more tax incentives to investors.
17.2 The Act, therefore, provides tax exemption to such infrastructure capital funds and companies which are established for the purposes of mobilising resources for financing infrastructure facilities.
17.3 Accordingly, any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investment made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility which fulfills the conditions specified in Sub-section (4A) of Section 80-IA has been exempted from income-tax.
17.4 The expression 'infrastructure capital fund' shall mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 established to raise moneys for investments by way of acquiring shares or providing long-term finance to an enterprise engaged in providing infrastructure facility. The expression 'infrastructure capital company' shall mean a company which has made investment by way of acquiring shares or providing long-term finance to an enterprise engaged in the business of providing infrastructure facility. The expression 'infrastructure facility' shall mean a road, highway, bridge, airport, port, a rail system or any other public facility of a similar nature as may be notified by the CBDT in this behalf in the Official Gazette. It will also include water supply projects, sewerage, sanitation or irrigation systems. The expression long-term finance' shall mean any loan or advance which is repayable along with the interest during a period of not less than 5 years.
While the Revenue supports its action by referring to para 17.2 of the above circular which provides tax exemption to an 'infrastructure capital fund' and 'infrastructure capital company', which are established for the purposes of mobilising resources for financing infrastructure facilities. It is the case of the Revenue that only such infrastructure capital companies which are established for the purposes of mobilising resources for financing infrastructure facilities are entitled to exemption of its income under Section 10(23G). The basic purpose of providing tax incentives is to encourage investment in the infrastructure facilities which are vital for the economic development of the country. Earlier, the legislature had provided incentives to the enterprises engaged in the business of developing, maintaining and operating any infrastructure facility in the form of Sections 80-IA and 80-IB of the Act. However, these measures were not found adequate.
Therefore, the legislature felt that the tax incentives should also be provided to investors in such sector. Therefore, Section 10(23G) was introduced in the Act. There is no dispute about the fact that the assessee is a banking company. The essential feature of the business of a banking company is to mobilise resources from the public and lend it on interest to various sectors. The Revenue has not denied that assessee had indeed made investment in shares and providing long-term finance to enterprises engaged in infrastructural facility. Therefore, all the conditions laid down for claiming exemption under Section 10(23G) are fulfilled by the assessee. Therefore, we are of the opinion that it is not proper to take a narrow view of the issue when the assessee had in fact made investments in shares and financed the enterprises engaged in providing infrastructure facilities on long-term basis. We therefore, feel that it is not necessary that the 'infrastructure capital company' should be formed solely for the purpose of mobilising resources for financing infrastructure facilities. If it includes one of the objects of the banking business, the same should be sufficient to entitle the assessee to claim exemption of its income under Section 10(23G). This view also finds' support from the fact that subsequently this benefit of Section 10(23G) has been extended to co-operative banks, though such banks have also not been set up for the purpose of mobilising resources for financing the infrastructure facilities. Therefore, we are of the opinion that the assessee falls in the category of 'infrastructure capital company' entitled to exemption under Section 10(23G).
9.1 The view that banks are entitled to exemption of its income falling in the nature mentioned under Section 10(23G) is reinforced by the recent news item which appeared in The Economic Times, dt. 19th Jan., 2008 and is reproduced in 297 ITR (Part 4), p. 5 under the caption 'News-Brief. The same is reproduced as under: Banks have urged the Finance Ministry to restore the tax exemption they enjoyed on investments in infrastructure projects. The income-tax exemption was provided under Section 10(23G) of the IT Act. The banking sector feels the removal of this exemption has resulted in increased interest rates for this sector.
'The floor rate of interest for infrastructure projects is around 12 per cent, depending on the projects and the borrowers. If banks were given exemption, a 50-75 basis point concession can be given, after taking into account the cost of funds and other operational costs', said Punjab National Bank GM, Credit.
When the exemption was removed, banks had increased rate of interest on existing infrastructure projects after negotiating with borrowers.
Under Section 10(23G), banks were allowed to claim deduction on the interest earned on long-term lending to infrastructure industries.
This section was deleted by the Finance Act, 2006. The provision exempted specified income by way of dividend, interest and long-term capital gains of infrastructure capital funds or infrastructure capital companies from investments in shares and long-term finance to an enterprise wholly engaged in infrastructure business, housing hotel or hospital industry.
An infrastructure capital company is defined as one that carries on the business of developing, maintaining, operating various infrastructure projects, developing special economic zones, developing and building housing projects, constructing certain specified hotels or specified hospitals.
The Government, in 2006, had justified removing the exemption since the interest rate regime and softened, reducing the overall cost of projects.
Even if banks were given exemption on income from investment in infrastructure projects, it remains to be seen whether they would pass on the benefit to the borrower. There are three key issues that are constraints for the banking sector while lending to infrastructure--availability of long-term debt, sect oral limits for various infrastructure--availability of long-term debt, exposure to single and group borrowers (Source : The Economic Times, dt. 19th Jan., 2008).
From the above news item, it is clear that the banking sector was enjoying exemption under Section 10(23G) which has been deleted by the Finance Act, 2006. If it were not so, there was no need for the banks to make such representation.
9.2 Further, it is a fact that the assessee has been allowed exemption in the earlier and subsequent assessment years. The facts of the case for the assessment year under consideration are the same as the facts for the other assessment years. In fact, we were informed that the AO had initiated proceedings under Section 147 for the asst. yr. 2000-01 (a copy placed at p. 208 of the paper book). The assessee had filed detailed reply at pp. 212 and 213 of the paper book and thereafter, the proceedings for the asst. yr. 2000-01 were dropped. This shows that the Revenue has accepted that the assessee is indeed entitled to exemption under Section 10(23G) of the Act. Since the facts of the case for the assessment year under consideration are similar to the facts of the case for the other assessment years, we are of the opinion that the principle of consistency also deserves to be followed. Reliance is placed on the following judgments: (i) The judgment of Hon'ble Delhi High Court in the case of Director of IT (Exemption) v. Lovely Bal Shiksha Parishad (supra).
(ii) The judgment of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT (supra).
(iii) The judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Leader Valves Ltd. (supra).
(iv) The judgment of Hon'ble Supreme Court in the case of Berger Paints India v. CIT (supra).
10. Thus, having regard to these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the learned CIT was not justified in holding that the assessee was not entitled to exemption under Section 10(23G) of the Act. The assessment order read with order under Section 154 for allowing exemption of income under Section 10(23G) cannot be considered as erroneous and prejudicial to the interests of Revenue. Therefore, order of CIT under Section 263 on this issue is set aside. Accordingly, this part of the ground is allowed.