2019 (12) TMI 459 - HC - Income Tax

Addition u/s 40(a) - payment made to a party residing outside India towards interest etc - HELD THAT - In the present case, the assessee had the specific exemption from the Ministry of Finance and therefore, was entitled not to deduct any tax at source from the interest payment made by it to M/s. London Forfaiting Asia Ltd., from which assessee took the Foreign Currency Loan in question and therefore, Section 40(a) of the Act could not attract to the present case at all. Even though the foreign currency loan in question was utilised by the assessee to repay the loan of one M/s.Raghava Enterprises P. Limited, which was admittedly taken from M/s. Raghava Enterprises Limited towards its working capital requirement, the purpose of Section 10(15)(f) of the Act, for the industrial development stood satisfied in the present case. The words in the said provision quoted above are not for industrial development , but the words having regard to the need for industrial development in India , which are wider in nature. These words employed in Section 10(15)(f) are wide enough to cover within its ambit and scope even the indirect utilisation of the funds for industrial development in India. Therefore, even if the loan taken as working capital loan from M/s. Raghava Enterprises Limited earlier and employed by the assessee for such industrial development and the foreign currency loan in question was utilised to repay the loan to M/s. Raghava Enterprises Private Limited, the exemption given by the Ministry of Finance in favour of the Assessee cannot be said to have been lost by such facts. It is not the case of the Revenue before us, that the exemption given to the assessee vide Letter dated 23.09.1997 stood revoked or withdrawn on any such contingency at any point of time. Assessee was entitled to exemption and was under no obligation to deduct any tax at source on such interest payment made on Foreign Currency Loan to M/s. London Forfaiting Asia Ltd., Therefore, the additions with reference to Section 40(a) made in the name of the Assessee, were rightly deleted by the two appellate authorities in the present case.

Issues:
1. Interpretation of Section 40(a) of the Income Tax Act, 1961.
2. Validity of exemption granted by the Ministry of Finance.
3. Compliance with Section 10(15)(f) regarding interest payment on foreign currency loans.

Analysis:

Issue 1: Interpretation of Section 40(a) of the Income Tax Act, 1961
The appeal raised substantial questions of law regarding the applicability of Section 40(a) of the Act. The Tribunal dismissed the Revenue's appeal, stating that the exemption obtained by the assessee from the Department of Economic Affairs, Ministry of Finance, Government of India, allowed them not to withhold or deduct any tax on the interest payment for a foreign currency loan. The Tribunal held that if the government exempts an assessee from withholding tax, then no such tax is deductible, and Section 40(a) cannot be attracted. The Tribunal also rejected the Assessing Officer's findings that the loan proceeds were used for a different purpose than approved by the government, emphasizing that once an exemption is granted, the Assessing Officer cannot question the purpose of the loan.

Issue 2: Validity of exemption granted by the Ministry of Finance
The Ministry of Finance granted the assessee a specific exemption from withholding tax on interest and administrative fees under Section 10(15)(iv)(f) of the Income Tax Act, 1961. The exemption was approved by both the Reserve Bank of India and the Department of Economic Affairs. The Tribunal noted that the exemption letter dated 23.09.1997 clearly stated that the assessee was not required to deduct any tax at source on the interest payment for the foreign currency loan. The Tribunal emphasized that the exemption was valid and binding, preventing the Revenue from adding back the interest payment to the assessee's income under Section 40(a) of the Act.

Issue 3: Compliance with Section 10(15)(f) regarding interest payment on foreign currency loans
The dispute also revolved around whether the interest payment on the foreign currency loan, used to repay a domestic loan, qualified for exemption under Section 10(15)(f) of the Act. The Revenue argued that since the foreign currency loan was not directly employed for industrial development in India, the interest payment should not be exempted. However, the Tribunal held that the exemption under Section 10(15)(f) was broader, focusing on the need for industrial development in India rather than direct utilization of the loan. The Tribunal concluded that the assessee met the requirements of Section 10(15)(f) by utilizing the loan for working capital, which indirectly contributed to industrial development. Therefore, the Tribunal upheld the exemption and dismissed the Revenue's appeal.

In conclusion, the High Court dismissed the Revenue's appeal, affirming the Tribunal's decision in favor of the assessee. The Court held that the assessee was entitled to exemption from tax deduction on the interest payment for the foreign currency loan, as granted by the Ministry of Finance. The Court emphasized that the exemption was valid, and the assessee complied with the provisions of Section 10(15)(f) regarding the utilization of the loan for industrial development in India.

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