9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2023 (3) TMI 657 - AT - Income TaxTDS u/s 194A - Disallowance u/s 40(a)(ia) - expenditure was incurred by the assessee under the head other borrowing cost and financial charges - whether the payment made by the assessee to the secured creditors pro rata inter se, towards additional amount till the date of IPO, amounts to interest under section 2(28A) of the Act, or it is in the nature of compensation? - HELD THAT - It is an admitted fact that the assessee entered into an SOA with its secured creditors and members proposing to restructure the debts as well as the capital and filed an application before the Hon ble High Court of Andhra Pradesh. The liability to pay the additional amount has nothing to do with the debt or CCDs, inasmuch as the CCDs were extinguished by such date, but it gets triggered only till the assessee goes to the IPO. When the payment has nothing to do with the debt or CCDs, in our considered opinion such payment does not fall under section 2(28A) of the Act. Inasmuch as the liability is not depending upon the debt or CCDs, but contingent upon the happening of the IPO, such payment cannot be called as payment of interest. Consequently, the provisions under section 194A or 40(a)(ia) of the Act are not attracted. Such an amount partakes the character of compensation accrued to the secured creditors because of the default committed by the assessee in going to the IPO and the moment the assessee goes to the IPO such a liability comes to an end. With this view of the matter, we find it difficult to sustain the addition. We, therefore, direct the learned Assessing Officer to delete the addition made on this account and consequently allow the grounds of appeal relating to this aspect. In view of our finding on the issue relating to the application of section 40(a)(ia) of the Act, the other amounts relating to the alternative plea of the assessee become academic. Grounds in respect of the interest on refund received by the assessee and verification of claim of the assessee that there was no warrant for the addition of prior period expenses is not pressed and accordingly dismissed.
Issues Involved:
1. Characterization of payment as interest or compensation. 2. Applicability of Section 194A and Section 40(a)(ia) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Characterization of Payment as Interest or Compensation: The primary issue in this case is whether the additional payment made by the assessee to the secured creditors at a rate of 5% per annum, due to the delay in going for an Initial Public Offering (IPO), should be characterized as "interest" under Section 2(28A) of the Income Tax Act, 1961, or as compensation. The assessee argued that the payment was not interest but compensation for the delay in the IPO. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the payment was predetermined interest as per the Scheme of Arrangement (SOA) approved by the High Court. The Tribunal examined the SOA, which stipulated that the debt would be discharged by issuing Compulsorily Convertible Debentures (CCDs) to secured creditors, carrying a coupon rate of 5% per annum, convertible into equity. If the IPO did not materialize within five years from 12/12/2006, the secured creditors had a put option to sell their equity stake/CCDs at a specified value plus accrued interest. The Tribunal concluded that the debt was discharged upon issuance of equity shares, and the additional payment was triggered by the delay in the IPO, not by the existence of a debt or CCDs. Consequently, the payment was characterized as compensation rather than interest. 2. Applicability of Section 194A and Section 40(a)(ia) of the Income Tax Act, 1961: The AO and CIT(A) held that the payment was interest under Section 2(28A) and thus subject to Tax Deducted at Source (TDS) under Section 194A. Consequently, non-deduction of TDS would attract disallowance under Section 40(a)(ia). The Tribunal, however, found that the payment did not qualify as interest since it was not related to any debt or CCDs but was contingent on the delay in the IPO. Therefore, Sections 194A and 40(a)(ia) were not applicable. Conclusion: The Tribunal directed the AO to delete the addition made on account of the disputed payment, allowing the assessee's appeal. The Tribunal's decision emphasized that the payment was compensation for the delay in the IPO and not interest, thereby not attracting the provisions of Sections 194A and 40(a)(ia). Other Matters: The Tribunal dismissed other grounds related to interest on refund and prior period expenses as academic or not pressed. Final Order: The appeal of the assessee was allowed, and the order was pronounced in the open court on August 19, 2022.
|
