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TMI Blog2019 (3) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... t was not 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." 2. The appellant is a Public Limited Company incorporated on 30.01.1997 with the main object of providing Long Term Finance to enterprises engaged in developing, maintaining and operating infrastructure projects and facilities. 3. In the Assessment Year 2002-2003, matters surrounding which this appeal is concerned about, the appellant claimed exemption under Section 10(23G) of the Income Tax Act, 1961 ("the Act") in respect of interest income earned by it from long term finance provided to enterprises undertaking developing, maintaining and operating infrastructure facilities. The Appellant claimed entitled for exemption with respect to the Liquidated Damages which had been received from the borrowers on account of default on their part in making payments as per the terms of the loan agreements entered into by them with the appellant. 4. The appellant in the Assessment Year 2002-2003 also claimed deductions under Section 36(1)(viia)(c) and independently under Section 36(1)(viii) of the Act in respect of provisions made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clauses under Section 10 should not be included while computing the total income of the previous year of any Assessee.' Under Clause (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 first day of June, 1998 by way of shares etc., should not be included in the total income. Clause (23G) of Section 10 as it stood before it was omitted by the Finance Act, 2006, read as follows:-, "(23G) any income by way of dividends, other than 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 1st June, 1998 by any of shares or long term finance in any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of section 80-IA or sub-section (3) of Section 80-1AB 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (21 of 1998) shall apply to such income." 10. The Liquidated Damages earned by the Appellant to an extent of Rs. 21,28,296/- were admittedly on account of defaults committed by the borrowers. It is claimed that this income would not fall under the category income by way of dividends as provided under Clause 23(G) of Section 10 of the Act. As a matter of fact, it can be held that it may not even fall under the category of long term capital gain etc. But the question whether such income earned by way of Liquidated Damages would fall under the category of interest, as stipulated under Section 10 (23G) or not, can be determined only on examining the definition of the expression 'interest' as provided under Section 2 (28A) of the Act. "2(28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised." 11. Mr.Farook I. Irani, the learned counsel for the Appellant placed strong reliance on the Judgement in relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on interest or penal interest, in the event of borrower committing a default upto a particular level. In some finance agreements, the finance companies also stipulate the payment of liquidated damages, if the default exceeds a particular tolerance limit. Irrespective of what 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." 12. It is seen that an inference can be drawn that there are instances when lenders of money on long term basis impose an obligation on the borrowers to pay commitment charges. This is necessitated since after the sanction of the loan, the borrower could not make use of the funds upto a particular point of time. In the Judgement of the Co-ordinate Bench, this aspect has been dealt with as follows:- "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 authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Debentures and on all other monies accruing and due under this Agreement shall, in case the same be not paid on the respective due dates, carry further interest at the rate of 2.5% (plus applicable interest tax), over and above the interest rate mentioned in (i) and (iii) above prevailing on the date of such default. Such interest will be computed from the respective due dates and shall become payable upon the footing of compound interest with quarterly rests as provided above and shall be payable in the manner and on the dates specified in (1) above. " 17. It is thus seen that though the term Liquidated Damages is used in the agreement, it actually signifies interest claimed by the appellant. This term "interest" would come within the word 'charge' as provided under the definition of interest in the Act. This had also been held by the Co-ordinate Bench in T.C.A.Nos. 1288 to 1290 of 2007 dated 08.09.2015 in the Appellant's own case. It was held as follows:- "12. It must be remembered that under the terms of a loan agreement, a borrower is imposed with a primary obligation to repay the principal together with interest. An additional obligation is cast upon a bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this clause and Chapter VI-a." 21. Section 36 is included in Chapter - IV of the Act relating to Computing of Business Income. Chapter VI-A relates to "Deductions in respect of certain Payments". Section 36 (1)(viii) is as follows:- "in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head "profits and gains of business or profession" before making any deduction under this clause) carried to such reserve account." 22. In the explanation, eligible business had been stated to be business in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), namely the business of providing long-term finance f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising from other business activities or from sources other than business. " 25. The above must be given harmonious and purposive interpretation that each one of the Clauses under sub-section (1) of Section 36 is independent in its operation and each one of them does not depend upon the other for the extension of the benefit. 26. The learned counsel for the respondent relied on [2012]18 taxmann.com 129 (HP) Commissioner of Income Tax Vs. H.P.Housing Board. The facts in that case are as follows:- "The Assessee-housing board had floated a self financing scheme for sale of houses/flats wherein the allottees were required to deposit some amount with the assessee and construction was to be carried out of these amounts. One of the conditions of the terms of allotment was that in case the possession of the house/flat was not given to the allottee within a particular time frame, then the assessee-board was liable to pay interest to the allottees on the money received by it. There was delay in construction of the houses and therefore, the Housing Board paid interest at the agreed rate to the allottees in terms of the letter of allotment. The ITO (TDS) held that the amount paid by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 19.01.2004 for the Assessment Year 2001-2002 and followed the same principles. However, as pointed out above, the appeals against the said orders had been allowed by a Co-ordinate Bench of this Court and the answer has been given in favour of the Assessee. If Section 36(1) is examined, it is clear that sub-section (1) gives the list of matters in respect of which deduction can be allowed while computing the income referred under Section 28. Clause (i) to (xi) of sub-section 1 of Section 36 do not imply that those deductions depend on one another. If an Assessee is entitled to the benefit under Clause (i) sub-section (1) of Section 36, the Assessee cannot be deprived of the benefit the other Clauses. This is how the provisions have been arrayed. The computation of amount of deduction under both these clauses has to be independently made without reducing the total income by deduction under clause (viii) of Section 36 of the Act. 29. In view of the above reasons, we hold that this substantial question of law has to be answered in favour of the appellant and against the respondent. 30. Accordingly, both the questions of law framed for consideration are answered in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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