2016 (3) TMI 372 - HC - Income Tax

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, 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. 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 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 2(28A) does not make a distinction between a service fee charged in respect of the loans advanced by the assessee and those in respect of the loans organised from other financial institutions. In the absence 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. - Decided in favour of assessee Debenture Trusteeship Fees - whether debenture trusteeship fees charged by the assessee/appellant would come 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 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. 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 - Decided in favour of assessee 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)? - Held that - If each of the clauses under sub-section (1) of Section 36 is independent in its operation and if each one of them 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

Summary

Issues Involved:
1. Exemption under Section 10(23G) of the Income Tax Act for liquidated damages.
2. Debt Syndication Fee and its qualification under Section 10(23G).
3. Debenture Trusteeship Fees and its qualification under Section 10(23G).
4. Deduction under Section 36(1)(viia)(c) and Section 36(1)(viii) of the Income Tax Act.

Detailed Analysis:

1. Exemption under Section 10(23G) of the Income Tax Act for Liquidated Damages:
The primary issue was whether liquidated damages payable by a borrower to the assessee in case of default in loan repayment qualify for exemption under Section 10(23G) of the Income Tax Act.

The assessing officer, CIT(Appeals), and the Income Tax Appellate Tribunal (ITAT) held that liquidated damages are a form of compensation and not income arising from infrastructure financing activities, thereby not qualifying for exemption under Section 10(23G). The Tribunal's factual error was noted, as liquidated damages were indeed due to default in loan repayment, not bill payment.

Section 10(23G) exempts income by way of dividends, interest, or long-term capital gains of an infrastructure capital company from investments made in specified projects. The definition of "interest" under Section 2(28A) includes any service fee or charge in respect of moneys borrowed or debt incurred.

The court held that liquidated damages, even if termed differently by the finance company, fall under the exhaustive definition of "interest" in Section 2(28A). Hence, the liquidated damages qualify for exemption under Section 10(23G), and the questions of law were answered in favor of the assessee.

2. Debt Syndication Fee and its Qualification under Section 10(23G):
The issue was whether the debt syndication fee charged by the assessee qualifies for exemption under Section 10(23G).

The assessing officer and CIT(Appeals) held that debt syndication fees charged for arranging finance from other institutions do not qualify as "interest" under Section 2(28A). The Tribunal affirmed this view.

The court noted that Section 2(28A) defines "interest" to include any service fee or charge, without distinguishing between fees for loans advanced by the assessee and those arranged from other institutions. Therefore, the debt syndication fee qualifies as "interest" under Section 2(28A) and is eligible for exemption under Section 10(23G). The question of law was answered in favor of the assessee.

3. Debenture Trusteeship Fees and its Qualification under Section 10(23G):
The issue was whether debenture trusteeship fees charged by the assessee qualify for exemption under Section 10(23G).

The assessing officer and CIT(Appeals) held that debenture trusteeship fees are derived from ancillary services, not primary lending activities, and thus do not qualify for exemption. The Tribunal affirmed this view.

The court noted that the debenture trusteeship fee is charged under SEBI guidelines for issuing debt instruments and is paid by the borrower. The CIT(Appeals) had allowed this fee as exempt for the assessment year 2000-01, and this decision was not appealed by the department.

The court held that the debenture trusteeship fee qualifies for exemption under Section 10(23G) for the subsequent assessment year as well. The question of law was answered in favor of the assessee.

4. Deduction under Section 36(1)(viia)(c) and Section 36(1)(viii) of the Income Tax Act:
The issue was whether the deduction under Section 36(1)(viii) should be computed first before applying the deduction under Section 36(1)(viia)(c).

The authorities held that the deduction under Section 36(1)(viii) is on profits derived from business, while the deduction under Section 36(1)(viia)(c) is on total income, thus requiring the former to be computed first.

The court noted that each clause under Section 36(1) operates independently, and the amendment in 1995 changed only the computation method, not the character of the deduction. The interpretation given by the authorities would result in lesser benefits for Indian financial corporations compared to foreign institutions, which was not the intent of the amendment.

The court held that the deductions under Section 36(1)(viia)(c) and Section 36(1)(viii) should be computed independently. The questions of law were answered in favor of the assessee.

Conclusion:
Both tax case appeals were allowed, and all questions of law were answered in favor of the assessee. No costs were imposed.