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2016 (3) TMI 372 - MADRAS HIGH COURT

2016 (3) TMI 372 - MADRAS HIGH COURT - TMI - Entitlement to the exemption under Section 10(23G) in respect of liquidated damages - Whether the Income Tax Appellate Tribunal ought to have held that liquidated damages were entitled to the exemption under Section 10(23G) of the Act inter alia as such liquidated damages fell within the definition of “interest” in Section 2(28A) of the Act? - Held that:- An additional obligation is cast upon a borrower to pay interest on interest or penal interest, i .....

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ervice fee or other charge that is levied in respect of the monies that remain 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 mista .....

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terpretation 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 something and also to include something else. If the second part of the definition in Section 2(28A) is carefully looked into, it could be seen that what is included therein is “any service fee”. By itself, Section .....

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e within the meaning of the expression “interest” under Section 2(28A) or not? - Held that:- The debenture trusteeship fee is something that a financial institution is entitled to charge, when such a company is registered with the SEBI as a Debenture Trustee under Chapter X of the Guidelines for the issue 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 .....

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al. 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 - Decided in favour of assessee

Whether the deduction should first be allowed in terms of Section .....

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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 ac .....

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t :: Mr.Farrokh V.Irani for Mr.O.R.Santhanakrishnan For The Respondent :: Mr.T.R.Senthilkumar Senior Standing Counsel JUDGMENT (Judgment of the Court was delivered by V.RAMASUBRAMANIAN, J.) These two appeals are by the assessee. 2. Heard Mr.Farrokh V.Irani, learned counsel for the appellant/assessee and Mr.T.R.Senthilkumar, learned senior standing counsel for the Revenue. 3. Though five questions of law were framed in T.C.(A).No.1288 of 2007 and six questions of law were framed in T.C.(A).No.129 .....

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ction 10(23G) of the Income Tax Act in respect of liquidated damages payable by a borrower to the assessee in the event of a borrower committing default in repayment of the loan advanced by the assessee. Therefore, we will group questions 1 & 2 in T.C.(A) No.1288 of 2007 and questions 1 & 2 in T.C.(A) No.1290 of 2007 together for easy appreciation. These questions read as follows:- (1) Whether the Income Tax Appellate Tribunal erred in holding that the appellant was not entitled to the e .....

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a sort of compensation in nature received from defaulters and hence cannot be treated like income arising from the activities of the assessee in respect of infrastructure financing. At this stage it should be pointed out that T.C.(A) No.1288 of 2007 relates to the assessment year 2000-2001 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 assessmen .....

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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 pointed out that the findin .....

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r the understanding of the assessing officer and the CIT(Appeals), was in the event of a default committed by the borrower in repayment of the principal and the interest. Therefore, it is clear that the Tribunal was caught wrong on the facts of the case, even at the outset. 9. Now coming to the question as to whether the liquidated damages would qualify for deduction under Section 10(23G), it is seen that Section 10 stipulated that any income falling within any of the clauses contained therein s .....

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was omitted by the Finance Act, 2006 reads as follows:- (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 cooperative bank from investments made on or after the 1st day of June, 1998 by way of shares or longterm finance in any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of section 80-IA or sub-section ( .....

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to 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) est .....

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es 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; (g) hotel project means a project for constructing a hotel of not less than three-star category as classified by the Central Government; (h) hospital project means a project for constructing a hospital with at least one hundred beds for patients. Explanation 2.-For the removal .....

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o.2) Act, 1998 (21 of 1998) shall apply to such income; 10. The liquidated damages earned by the assessee to the extent of ₹ 2,98,617/- was admittedly on account of a default committed by a borrower. It will not fall under the category income by way of dividends under clause (23G) of Section 10. It may not even fall under the category of long-term capital gains etc. But the question is as to whether such income by way of liquidated damages would at least fall under the category of interest .....

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in respect of any credit facility which has not been utilised; 11. The definition of the expression interest has been construed by this Court in Viswapriya Financial Services and Securities v. Commissioner of Income Tax, 258 ITR 496 to be more exhaustive. The Court held in the said case as follows:- The definition of interest, after referring to the interest payable in any manner in respect of any moneys borrowed or debt incurred proceeds to include in the terms money borrowed or debt incurred, .....

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orrowed 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. 1 .....

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at the finance company itself may choose to term it, such liquidated damages cannot be excluded from the definition of the expression interest under Section 2(28A), as the definition is so exhaustive. The definition is so exhaustive as to include even any service fee or other charge that is levied in respect of the monies that remain unutilised. 13. 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 c .....

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290 of 2007 are answered in favour of the assessee. 14. Question No.3 in T.C.(A) No.1290 of 2007: The third question in T.C.(A) No.1290 of 2007 relates to what is known as Debt Syndication Fee. Insofar as this issue is concerned, the assessing officer 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. Therefore, in his order, the assessing off .....

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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 .....

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tion 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 under Section 2(28A). 19. But at the outset, we do not find that such a distinction is borne out of Section 2(28A). 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 ex .....

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bsence of any indication either in Section 2(28A) or in 10(23G), we do not think that the distinction made out by the respondent could be approved. Hence the third question of law in T.C.(A) No.1290 of 2007 is also answered in favour of the assessee. 20. Debenture Trusteeship Fees: The fourth question in T.C.(A) No.1290 of 2007 relates to the question whether debenture trusteeship fees charged by the assessee/appellant would come within the meaning of the expression interest under Section 2(28A) .....

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benture trusteeship fees would come within the purview of Section 10(23G) and not before. 22. The Tribunal simply affirmed the findings of the assessing officer and the CIT(Appeals), without getting into greater detail. 23. Before looking into the provisions, we must first understand the nature of this debenture trusteeship fee. The debenture trusteeship fee is something that a financial institution is entitled to charge, when such a company is registered with the SEBI as a Debenture Trustee und .....

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s) 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 purv .....

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g that the deduction to which the appellant was entitled under Section 36(1)(viia)(c) of the Act was to be granted after reducing from the appellant's income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act? 26. In short, the question that falls for consideration is as to whether the deduction should first be allowed in terms of Section 36(1)(viii) for the application of the deduction under Section 36(1)(viia)(c). 27. All the three authorities were of t .....

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d in 1995 for a moment, if we have a look at the import of Section 36(1) by itself, it is clear that sub-section (1) of Section 36 lists out the matters in respect of which deductions can be allowed while computing the income referred to in Section 28. Clauses (i) to (xi) of sub-section (1) of Section 36 did not make any of those matters dependent upon one another. If an assessee is entitled to the benefit under one clause of sub-section (1) of Section 36, the assessee was not deprived of the be .....

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ing the assessee to compute it at 40 percent on the total income, the amendment directed the assessee to compute the deduction 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 approve .....

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ome 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 reference to income from other activities or from sources other than business. It is, therefore, proposed to limit the deduction of 40 per cent only to the income derived from providing long-t .....

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