TMI Blog2016 (3) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... emain unutilised. In certain cases, the lenders impose an obligation on the borrowers to pay the commitment charges, if after the sanction of the loan, the borrower could not make use of the funds upto a particular point of time. The definition of the word “interest” under Section 2(28A) includes even such commitment charges. Therefore we are of the considered view that all the three authorities committed a mistake in understanding the scope of the expression “liquidated damages” and in coming to a conclusion that the same would not come within the purview of the word “interest” under Section 2(28A) - Decided in favour of assessee Debt Syndication - AO held that the debt syndication fee is a fee charged by the assessee from the borrower, when the assessee funded the project not only from out of their own monies, but also by arranging finance from others - Held that:- While dealing with the interpretation to be given to the expression “interest” under Section 2(28A), we have indicated as to how the definition is very exhaustive. The definition is not merely an inclusive definition. The expression “interest” is not only defined to include something, but also defined to mean som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem does not depend upon the other clause for the extension of the benefit, then the interpretation given by the respondent cannot be accepted. Yet another distinction brought forth by the learned counsel for the appellant, also deserves consideration. While the benefit of deduction under clause (viia)(c) is available to any public financial institution or State financial corporation or State industrial investment corporation, in respect of a provision for bad and doubtful debts, the benefit of the deduction under clause (viii) is available only for the financial corporations engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India. Therefore, if the interpretation as given by the authorities are accepted, the benefit that will accrue to a finance corporation incorporated in India and providing long-term finance for infrastructure development would be lesser than what is received by the foreign banks and foreign financial institutions. This could not have been the purport of the amendment brought forth under the Finance Bill, 1995.- Decided in favour of assessee - Tax Case (Appeal) Nos.1288 & 1290 of 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00-2001 and the next appeal relates to the assessment year 2001-2002. 6. The CIT(Appeals) affirmed the decision of the assessing officer in this regard. It was held by the CIT(Appeals) in respect of both the assessment years that liquidated damages cannot be equated to interest receipt or service fee etc. According to the CIT(Appeals), it was in the nature of a penalty levied once the default continued in the payment of principal, interest or penal interest. Consequently the CIT(Appeals) held that it is in the nature of compensation for the loss of profit which is revenue in nature. 7. On a further appeal to the Income Tax Appellate Tribunal, the Tribunal held in paragraph-22 of its decision dated 29.3.2007 that the right to receive liquidated damages accrue on account of default in the payment of bills as stipulated in the agreement and did not arise on account of any delay in the payment of loan. Therefore the Tribunal affirmed the decision of the assessing officer and the CIT(Appeals) that the liquidated damages could not be construed as interest to attract the provisions of Section 10(23G) of the Act. 8. Before proceeding to consider the question of law, it should be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than dividends referred to in section 115-O, interest or long-term capital gains of an infrastructure capital company, shall be taken into account in computing the book profit and income tax payable under section 115JB. Explanation-1.--For the purposes of this clause,-- (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 by the trustees for investment by way of acquiring shares or providing long-term finance to an enterprise wholly engaged in the business referred to in this clause; (c) [***] (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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of any moneys borrowed or debt incurred proceeds to include in the terms money borrowed or debt incurred, deposits, claims and other similar right or obligation and further includes any service fee or other charge in respect of the moneys borrowed or debt incurred which would include deposit, claim or other similar right or obligation, as also in respect of any credit facility which has not been utilised. This statutory definition regards amounts which may not otherwise be regarded as interest as interest for the purpose of the statute. Even amounts payable in transactions where money has not been borrowed and debt has not been incurred are brought within the scope of the definition as in the case of a service fee paid in respect of a credit facility which has not been utilised. Even in cases where there is no relationship of debtor and creditor or borrower and lender, if payment is made in any manner in respect of any moneys received as deposits or on money claims or rights or obligations incurred in relation to money, such payment is, by this statutory definition, regarded as interest. 12. It must be remembered that under the terms of a loan agreement, a borrower is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1(f) under Section 10(23G). But the CIT(Appeals) held that even if the Explanation 1(f) would be applicable, it will be applicable only from the assessment year 2002-03 and not in relation to the assessment year 2001-02 or any previous year. 17. The Tribunal agreed with the views of the assessing officer and CIT(Appeals) to the effect that the debt syndication fee represented a charge collected by the assessee for the preparation of information of memorandum, financing of business plan and negotiation charges with the bank and financial institutions. Therefore the Tribunal held in paragraph-24 of its order dated 29.3.2007 that the debt syndication fee cannot constitute interest within the purview of Section 2(28A). 18. In other words, all the three authorities agreed on one point, namely, that if the assessee had collected the debt syndication fee for the monies advanced by them, then the same would fall within the definition of the expression interest . According to all the three authorities, if the debt syndication fee is charged in respect of a loan arranged by the assessee from other financial institutions, the same would not come within the purview of the definition u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of Debt Instrument under SEBI (Disclosure Investor Protection) Guidelines, 2000. Under these Guidelines, a borrower is required to appoint a Debenture Trustee for issue of Debt Instruments. A fee is paid by the borrower for the debt borrowed. The assessing officer as well as the CIT(Appeals) did not go into the prescription contained in the aforesaid Guidelines of SEBI. 24. Interestingly, in respect of the assessment year 2000-01, the CIT(Appeals) held that the debenture trusteeship fee is eligible for exemption under Section 10(23G). The order of the CIT(Appeals) in relation to the assessment year 2000-01 has attained finality and the department has not taken it on appeal to the Tribunal. In paragraph-3.3 of his order dated 5.9.2003, the CIT(Appeals) specifically dealt with this aspect in relation to the assessment year 2000-01. Therefore to hold that for the assessment year 2000-01 debenture trusteeship fee would come within the purview of Section 10(23G) but it would not come within the purview of the section in relation to the next assessment year, may not be proper. Hence the fourth question of law in T.C.(A) No.1290 of 2007 is also to be answered in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at 40 percent on the profits derived out of business. 30. Such an interpretation is what appears to be borne out by the memorandum explaining the provisions in the Finance Bill, 1995, whereunder the amendment was introduced. The relevant portion of the memorandum reads as under:- Under clause (viii) of sub-section (1) of section 36 of the Income Tax Act, 1961, an approved financial corporation engaged in providing long-term finance for industrial or agricultural development in India, or an approved public company formed and registered in India with the main object of carrying on business of providing long-term finance for construction or purchase of residential houses, is entitled for a deduction of an amount not exceeding 40 per cent of its total income carried to a special reserve. The deduction is allowed on the total income and not with reference to the income from the activities specified in section 36(1)(viii). These organisations have diversified their activities and are claiming deduction under this section even in respect of their income from activities other than those specified in this section. There is no justification for allowing the deduction with re ..... 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