2019 (3) TMI 366 - HC - Income Tax

Exemption u/s 10(23G) in respect of the liquidated damages - interest income earned from long term finance provided to enterprises undertaking developing, maintaining and operating infrastructure facilities - liquidated damages were admittedly on account of defaults committed by the borrowers - HELD 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 case of default in redemption of default payment of interest and all other monies (except Liquidated Damages) on their respective due dates, Liquidated Damages at the rate of 2.10% per annum is levied and is payable by the borrowers for the period of default. It is also seen that arrears of Liquidated Damages shall carry interest at the rate mentioned in Clause 2.4(iv) stating all interest on 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. 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. Consequently, we hold that the three authorities had erred in understanding the scope of the expression Liquidated Damages while coming to a conclusion that it would not come within the purview of the word interest under Section 2(28A) of the Act. - Decided in favour of assessee. Claim for deduction under Section 36(1)(viia)(c) after reducing from the appellant s income deduction under Section 36(i)(viii) - carrying of eligible business - HELD THAT - It is an admitted fact that the appellant comes within the definition of a specified entity and is carrying on eligible business as provided under Section 36(1)(viii). A provision had been made for deduction of provisions for Bad and Doubtful debts under Section 36(1)(vii)(c) independent of Section 36(1)(viii) which provide for deduction upto 40% for special Reserve created by Assessee providing long term finance for development of infrastructure facility. The Tribunal in the present case had actually not applied its mind on this issue. They had simply reaffirmed the earlier order dated 05.09.2003 for the Assessment Year 2000-2001, and the order dated 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. - Decided in favour of assessee.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal erred in holding that the appellant was not entitled to the exemption under Section 10(23G) of the Income Tax Act in respect of the liquidated damages.
2. Whether the Income Tax Appellate Tribunal erred in holding that the deduction under Section 36(1)(viia)(c) of the Act was not to be granted after reducing from the appellant's income, the deduction under Section 36(1)(viii) of the Act.

Issue-wise Detailed Analysis:

Issue 1: Claim for exemption under Section 10(23G) of the Act

Section 10 of the Act deals with "incomes not included in total income," and Clause (23G) specifically exempts income by way of dividends, interest, or long-term capital gains from investments in infrastructure projects. The appellant claimed exemption under this clause for liquidated damages received from borrowers due to defaults.

The Assessing Officer denied the exemption, arguing that liquidated damages do not constitute "interest" as defined under Section 2(28A) of the Act. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this view.

However, the High Court examined the definition of "interest" under Section 2(28A), which includes any service fee or other charge in respect of moneys borrowed or debt incurred. The court referred to a previous judgment in the appellant's own case, where it was held that the definition of "interest" is exhaustive and includes liquidated damages.

The court concluded that liquidated damages fall under the category of "interest" as defined in Section 2(28A) and thus qualify for exemption under Section 10(23G). Consequently, the court held that the authorities erred in denying the exemption and answered the question in favor of the appellant.

Issue 2: Claim for deduction under Section 36(1)(viia)(c) after reducing from the appellant's income deduction under Section 36(1)(viii) of the Act

Section 36(1)(viia)(c) allows for a deduction in respect of provisions for bad and doubtful debts made by public financial institutions, not exceeding five percent of the total income before making any deductions under this clause and Chapter VI-A. Section 36(1)(viii) allows a deduction for special reserves created by financial corporations engaged in providing long-term finance, up to forty percent of the profits derived from such business.

The Assessing Officer and the appellate authorities held that the deduction under Section 36(1)(viia)(c) should be allowed only after reducing the income by the deduction under Section 36(1)(viii). The High Court disagreed, stating that each clause under Section 36(1) operates independently and does not depend on the other for the extension of the benefit.

The court emphasized that the amendments introduced by the Finance Act 1995 changed the method of computation but did not alter the character of the deductions. The court also noted that the Tribunal had not applied its mind to this issue and had merely followed earlier orders, which had been overturned by a Coordinate Bench.

The court concluded that the computation of deductions under both clauses should be made independently without reducing the total income by the deduction under Section 36(1)(viii). Therefore, the substantial question of law was answered in favor of the appellant.

Conclusion:

Both questions of law were answered in favor of the appellant. The court held that the appellant was entitled to the exemption under Section 10(23G) for liquidated damages and that the deduction under Section 36(1)(viia)(c) should be computed independently of the deduction under Section 36(1)(viii). The Tax Case Appeal was allowed with no costs.

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