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TMI Blog2023 (3) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... ngent 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. - ITA No. 2011/Hyd/2018 - - - Dated:- 19-8-2022 - SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER SHRI K.NARASIMHA CHARY, JUDICIAL MEM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not interest but only a compensation on the failure of the assessee to go for IPO, and therefore no TDS is required to be made in respect of such an expenditure. 4. Learned Assessing Officer, however, did not agree with the assessee on the ground that the language of the court clearly referred to the percentage as interest only and what is payable to secured creditors is a predetermined interest as per the scheme of arrangement entered into by the assessee company with them and the same scheme was approved by the Hon'ble High Court, and such additional amount was paid to the secured creditors only on the directions of the Hon ble Apex Court. According to the learned Assessing Officer the mode of payment of debts by issuing debentures or equity shares, instead of paying in cash, does not change the legal character of that and the payment associated with the debt is nothing but interest only as per the provisions of the Act; that even if it is a redemption premium on CCDs, the redemption premium on the convertible debentures has all the characters of interest defined under section 2(28) of the Act and, therefore, the payment is undoubtedly covered under section 194A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, it remains interest and merely because the mode of repayment of debt was by issuing debentures or equity shares, instead of making the payment in cash, it does not change the legal character of that and, therefore, the payments made by the assessee are falling within the ambit of the expression interest . Under section 194A of the Act and consequently attracting the provisions under section 40(a)(ia) of the Act. 8. We have gone through the record in the light of the submissions made on either side. 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. Such an application was allowed approving the SOA by way of order dated 5/10/2007. One of the classes of SOA reads that,- (d) A sum of Rs. 325 crores out of the Outstanding amount to be paid by issuance of Compulsorily convertible Debentures (CCDs) to the Secured Creditors (pro rata inter se) as more particularly mentioned in Appendix A hereto, which will carry a coupon rate of 5% per annum payable half yearly to be converted into equity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d pending IPO for the equity shares of the company an amount of Rs. 13,75,00,000/- has been recoqnized as other financial charges in the financial statements for the year ending 31st March, 2012 as contemplated in the SOA/MOU. The amount paid to the secured creditors is in terms of SOA The amount so paid is not on the CCDs as they were extinguished by the issue of equity shares of the company to the secured creditors as already explained in the above paragraph. Further the amount is paid to the shareholders of the company for the delay in bringing out IPO for the equity shares of the company. Since the payment is not covered u/s.194A of the I-T Act, 1961 no TDS was made on such payments. Further, the provisions of section 40(a)(ia) of the Income tax Act, 1961 refer to the section 193 and 194A in the case of payment of interest on securities and interest other than 'interest on securities'. The payment made during the year by the company neither attracts the provisions of 193 nor 194A. As stated earlier, the payment has been made to the shareholders of the company, which was towards compensation for the delay in IPO of the company and not as interest attracting the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dinate Bench of this Tribunal after discussing the ambit of the definition of interest under section 2(28A) of the Act held that if the immediate source of receipt of payment is a loan, deposit, etc., then the payment is in the nature of interest but if the immediate source of receipt of payment is trade activity, then the nature of receipt is not interest payment but in the nature of payment of compensation. 14. In West Bengal Housing infrastructure Development Corporation Ltd (supra) the assessee, who was engaged in the development of land, housing and infrastructural facilities was to make certain payments at a rate equivalent to the SBI interest rate of FDs in case of failure to make plots available to the allottees within a stipulated time. According to the learned Assessing Officer such additional payments are in the nature of interest as defined under section 2(28A) of the Act. When the matter reached the Hon ble High Court, Hon ble High Court held that since there was neither any borrowing of money nor was there incurring of debt on the part of the assessee, such payment of additional amount does not answer the description of interest, and consequently sections 194A or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of equities. It has been the case of the assessee all through the proceedings that the amount now in question is not paid on the CCDs, as the CCDs were extinguished by the issue of equity shares of the company to the secured creditors. The additional amount was paid not because of the debt, but because of the delay caused in the assessee going to the IPO. On a careful consideration of the matter in the light of clause (d) extracted above, there is no doubt in our mind that what triggers the payment of additional amount is neither the debt nor in respect of the CCDs, but it is only such event occurs till the assessee goes for IPO. If the assessee goes to the IPO the moment the equity conversion takes place, no liability to pay the additional amount incurs to the assessee. If the assessee delayed the IPO till five years, there arises two consequences. The first consequence is that the assessee has to pay the additional amount calculated at 5% p.a. and the second consequence is that the secured creditors shall have the put option on the bidder for selling equity stake/CCDs of the secured creditors for a total value together with accrued interest at the above-mentioned rate. 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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