Tc/1288/2007 Of Infrastructure Development v. The Asst. Commr. Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HONOURABLE MR.JUSTICE V.RAMASUBRAMANIANANDTHE HONOURABLE MR.JUSTICE T.MATHIVANAN Tax Case (Appeal) Nos.1288 & 1290 of 2007 Infrastructure Development Finance Co.Ltd.,ITC Centre, 3[rd] Floor760, Anna SalaiChennai 600 002 ..Appellant in both the T.C.A.'s The Assistant Commissioner of Income TaxCompany Circle II(3)Chennai 600 034 ..Respondent in both the T.C.A.'s Memorandum of Grounds of Tax Case Appeals under Section260A of the Income Tax Act, 1961 against the order of the IncomeTax Appellate Tribunal, Chennai “A” Bench, Chennai dated29.3.2007 in I.T.A.No.2398/Mds/2003 against the order dated05/09/2003 and 19/01/2005 and made in ITA.No.111/03-04/A-III andITA TR.No.182/ITA 177/04-05 on the file of the Commissioner ofIncome Tax(Appeals)-III and XI, Chennai 34 respectively andagainst the order dated 21/03/03 for the assessment year 2000-2001 on the file of Deputy Commissioner of Income Tax, CompanyCircle II(3), chennai-34 (in TC(A)1288/07) and against the orderdated 30/03/04 and passed in G.I.No./P.A.No.IX 2-051/AAACI2663Non the file of Assistant Commissioner of Income Tax,CompanyCircle II(3), Chennai-34 for the assessment year 2000-2001 andin I.T.A.No.748/Mds/2005 for the assessment year 2001-2002. (Judgment of the Court was delivered by V.RAMASUBRAMANIAN, J.) These two appeals are by the assessee. 2. Heard Mr.Farrokh V.Irani, learned counsel for theappellant/assessee and Mr.T.R.Senthilkumar, learned seniorstanding counsel for the Revenue. https://hcservices.ecourts.gov.in/hcservices/ 3. Though five questions of law were framed in T.C.(A).No.1288 of 2007 and six questions of law were framed in T.C.(A).No.1290 of 2007 at the time when the appeals were admitted bythis Court on 24.9.2007, it is stated by Mr.Farrokh Irani,learned counsel for the assessee that question Nos.4 & 5 in T.C.(A) No.1288 of 2007 and question No.6 in T.C.(A) No.1290 of 2007are not pressed. As a consequence, questions 1 to 3 in T.C.(A)No.1288 of 2007 and questions 1 to 5 in the other appeal alonesurvive for consideration. 4. Questions 1 & 2 in both the appeals relate to theexemption claimed by the assessee under Section 10(23G) of theIncome Tax Act in respect of liquidated damages payable by aborrower to the assessee in the event of a borrower committingdefault in repayment of the loan advanced by the assessee.Therefore, we will group questions 1 & 2 in T.C.(A) No.1288 of2007 and questions 1 & 2 in T.C.(A) No.1290 of 2007 together foreasy appreciation. These questions read as follows:-“(1) Whether the Income Tax AppellateTribunal erred in holding that the appellantwas not entitled to the exemption underSection 10(23G) of the Income Tax Act inrespect of liquidated damages? (2) Whether the Income Tax AppellateTribunal ought to have held that liquidateddamages were entitled to the exemption underSection 10(23G) of the Act inter alia assuch liquidated damages fell within thedefinition of “interest” in Section 2(28A)of the Act?” 5. The assessing officer, by his order dated 30.3.2004 inrelation to the assessment years 2000-2001 and 2001-2002, heldthat the liquidated damages are a sort of compensation in naturereceived from defaulters and hence cannot be treated likeincome arising from the activities of the assessee in respect ofinfrastructure financing. At this stage it should be pointedout that T.C.(A) No.1288 of 2007 relates to the assessment year2000-2001 and the next appeal relates to the assessment year2001-2002. (2) Whether the Income Tax AppellateTribunal ought to have held that liquidateddamages were entitled to the exemption underSection 10(23G) of the Act inter alia assuch liquidated damages fell within thedefinition of “interest” in Section 2(28A)of the Act?” 5. The assessing officer, by his order dated 30.3.2004 inrelation to the assessment years 2000-2001 and 2001-2002, heldthat the liquidated damages are a sort of compensation in naturereceived from defaulters and hence cannot be treated likeincome arising from the activities of the assessee in respect ofinfrastructure financing. At this stage it should be pointedout that T.C.(A) No.1288 of 2007 relates to the assessment year2000-2001 and the next appeal relates to the assessment year2001-2002. 6. The CIT(Appeals) affirmed the decision of theassessing officer in this regard. It was held by the CIT(Appeals) in respect of both the assessment years thatliquidated damages cannot be equated to interest receipt orservice fee etc. According to the CIT(Appeals), it was in thenature of a penalty levied once the default continued in thepayment of principal, interest or penal interest. Consequentlythe CIT(Appeals) held that it is in the nature of compensationfor the loss of profit which is revenue in nature. https://hcservices.ecourts.gov.in/hcservices/ Tribunal, the Tribunal held in paragraph-22 of its decisiondated 29.3.2007 that the right to receive liquidated damagesaccrue on account of default in the payment of bills asstipulated in the agreement and did not arise on account of anydelay in the payment of loan. Therefore the Tribunal affirmedthe decision of the assessing officer and the CIT(Appeals) thatthe liquidated damages could not be construed as interest toattract the provisions of Section 10(23G) of the Act. 8. Before proceeding to consider the question of law, itshould be pointed out that the finding recorded by the Tribunalin paragraph-22 of its order was also factually wrong. Theliquidated damages, even as per the orders of the assessingofficer and the CIT(Appeals), did not accrue on account of anydefault in the payment of bills as stipulated in the agreement.Admittedly, the appellant is an infrastructure developmentfinance company, which provides long-term finance forinfrastructure development projects. The liquidated damagescharged by the assessee upon its borrowers, even as per theunderstanding of the assessing officer and the CIT(Appeals), wasin the event of a default committed by the borrower in repaymentof the principal and the interest. Therefore, it is clear thatthe Tribunal was caught wrong on the facts of the case, even atthe outset. 9. Now coming to the question as to whether theliquidated damages would qualify for deduction under Section 10(23G), it is seen that Section 10 stipulated that any incomefalling within any of the clauses contained therein should notbe included while computing the total income of a previous yearof any person. Under clause (23G), any income by way ofdividends (other than dividends referred to in section 115-O),interest or long term capital gains of an infrastructure capitalfund or an infrastructure capital company or a co-operative bankfrom investments made on or after the first day of June, 1998 byway of shares etc., should not be included in the total income.Clause (23G) of Section 10 as it stood before it was omitted bythe Finance Act, 2006 reads as follows:- 9. Now coming to the question as to whether theliquidated damages would qualify for deduction under Section 10(23G), it is seen that Section 10 stipulated that any incomefalling within any of the clauses contained therein should notbe included while computing the total income of a previous yearof any person. Under clause (23G), any income by way ofdividends (other than dividends referred to in section 115-O),interest or long term capital gains of an infrastructure capitalfund or an infrastructure capital company or a co-operative bankfrom investments made on or after the first day of June, 1998 byway of shares etc., should not be included in the total income.Clause (23G) of Section 10 as it stood before it was omitted bythe Finance Act, 2006 reads as follows:- “(23G) any income by way of dividends, otherthan dividends referred to in section 115-O,interest or long-term capital gains of aninfrastructurecapitalfundoraninfrastructure capital company or a co-operative bank from investments made on orafter the 1[st] day of June, 1998 by way ofshares or long-term finance in any enterpriseor undertaking wholly engaged in the businessreferred to in sub-section (4) of section 80-IA or sub-section (3) of section 80-IAB or ahousing project referred to in sub-section(10) of section 80-IB or a hotel project or ahospital project and which has been approvedby the Central Government on an application https://hcservices.ecourts.gov.in/hcservices/ made by it in accordance with the rules madein this behalf and which satisfies theprescribed conditions: Provided that the income, by way ofdividends, other than dividends referred toin section 115-O, interest or long-termcapital gains of an infrastructure capitalcompany, shall be taken into account incomputing the book profit and income taxpayable under section 115JB.Explanation-1.--For the purposes of thisclause,-- (a) “infrastructure capital company” meanssuch company as has made investments by wayof acquiring shares or providing long-termfinance to an enterprise wholly engaged inthe business referred to in this clause; (b) “infrastructure capital fund” means suchfund operating under a trust deed registeredunder the provisions of the Registration Act,1908 (16 of 1908) established to raise moniesby the trustees for investment by way ofacquiring shares or providing long-termfinance to an enterprise wholly engaged inthe business referred to in this clause;(c) [***](d) “long-term finance” shall have themeaning assigned to it in clause (viii) ofsub-section (1) of section 36; (e) “co-operative bank” shall have themeaning assigned to it in clause (dd) ofsection 2 of the Deposit Insurance and CreditGuarantee Corporation Act, 1961 (47 of 1961);(f) “interest” includes any fee or commissionreceived by a financial institution forgiving any guarantee to, or enhancing creditin respect of, an enterprise which has beenapproved by the Central Government for thepurposes of this clause; (g) “hotel project” means a project forconstructing a hotel of not less than three-star category as classified by the CentralGovernment;(h) “hospital project” means a project forconstructing a hospital with at least onehundred beds for patients.Explanation 2.--For the removal of doubts, itis hereby declared that any income by way ofdividends, interest or long-term capitalgains of an infrastructure capital fund or aninfrastructurecapitalcompanyfrominvestments made before the 1[st] day of June,1998 by way of shares or long-term finance in https://hcservices.ecourts.gov.in/hcservices/ any enterprise carrying on the business ofdeveloping, maintaining and operating anyinfrastructure facility shall not be includedand the provisions of this clause as it stoodimmediately before its amendment by theFinance (No.2) Act, 1998 (21 of 1998) shallapply to such income;” https://hcservices.ecourts.gov.in/hcservices/ any enterprise carrying on the business ofdeveloping, maintaining and operating anyinfrastructure facility shall not be includedand the provisions of this clause as it stoodimmediately before its amendment by theFinance (No.2) Act, 1998 (21 of 1998) shallapply to such income;” 10. The liquidated damages earned by the assessee to theextent of Rs.2,98,617/- was admittedly on account of a defaultcommitted by a borrower. It will not fall under the category“income by way of dividends” under clause (23G) of Section 10.It may not even fall under the category of long-term capitalgains etc. But the question is as to whether such income by wayof liquidated damages would at least fall under the category ofinterest, as stipulated in Section 10(23G) or not. For findingan answer to this question, we may have to refer to thedefinition of the expression “interest” under Section 2(28A).The definition of the expression “interest” reads as follows:-“(28A) “interest” means interest payable inany manner in respect of any moneys borrowedor debt incurred (including a deposit, claimor other similar right or obligation) andincludes any service fee or other charge inrespect of the moneys borrowed or debtincurred or in respect of any credit facilitywhich has not been utilised;” 11. The definition of the expression “interest” has beenconstrued by this Court in Viswapriya Financial Services andSecurities v. Commissioner of Income Tax, 258 ITR 496 to be moreexhaustive. The Court held in the said case as follows:- “The definition of interest, after referringto the interest payable in any manner inrespect of any moneys borrowed or debtincurred proceeds to include in the termsmoney borrowed or debt incurred, deposits,claims and “other similar right orobligation” and further includes any servicefee or other charge in respect of the moneysborrowed or debt incurred which would includedeposit, claim or other similar right orobligation, as also in respect of any creditfacility which has not been utilised. Thisstatutory definition regards amounts whichmay not otherwise be regarded as interest asinterest for the purpose of the statute. Evenamounts payable in transactions where moneyhas not been borrowed and debt has not beenincurred are brought within the scope of thedefinition as in the case of a service feepaid in respect of a credit facility whichhas not been utilised. Even in cases wherehttps://hcservices.ecourts.gov.in/hcservices/ there is no relationship of debtor andcreditor or borrower and lender, if paymentis made in any manner in respect of anymoneys received as deposits or on moneyclaims or rights or obligations incurred inrelation to money, such payment is, by thisstatutory definition, regarded as interest.” 12. It must be remembered that under the terms of a loanagreement, a borrower is imposed with a primary obligation torepay the principal together with interest. An additionalobligation is cast upon a borrower to pay interest on interestor penal interest, in the event of borrower committing a defaultupto a particular level. In some finance agreements, thefinance companies also stipulate the payment of liquidateddamages, if the default exceeds a particular tolerance limit.Irrespective of what the finance company itself may choose toterm it, such liquidated damages cannot be excluded from thedefinition of the expression “interest” under Section 2(28A), asthe definition is so exhaustive. The definition is so exhaustiveas to include even any service fee or other charge that islevied in respect of the monies that remain unutilised. 13. In certain cases, the lenders impose an obligation onthe borrowers to pay the commitment charges, if after thesanction of the loan, the borrower could not make use of thefunds upto a particular point of time. The definition of theword “interest” under Section 2(28A) includes even suchcommitment charges. Therefore we are of the considered view thatall the three authorities committed a mistake in understandingthe scope of the expression “liquidated damages” and in comingto a conclusion that the same would not come within the purviewof the word “interest” under Section 2(28A). Hence the questionsof law 1 & 2 in T.C.(A) Nos.1288 & 1290 of 2007 are answered infavour of the assessee. 14. Question No.3 in T.C.(A) No.1290 of 2007: The thirdquestion in T.C.(A) No.1290 of 2007 relates to what is known asDebt Syndication Fee. Insofar as this issue is concerned, theassessing officer held that the debt syndication fee is a feecharged by the assessee from the borrower, when the assesseefunded the project not only from out of their own monies, butalso by arranging finance from others. Therefore, in his order,the assessing officer held that though what is charged as debtsyndication fee may be a service fee, the same would not comewithin the purview of Section 10(23G), on account of the factthat the said fee is not charged for the money that was lent bythe assessee themselves. 15. This finding of the assessing officer was alsoapproved by the CIT(Appeals) in his orders in respect of theassessment year 2001-2002. https://hcservices.ecourts.gov.in/hcservices/ 16. Before the CIT(Appeals), the assessee sought to relyupon Explanation 1(f) under Section 10(23G). But the CIT(Appeals) held that even if the Explanation 1(f) would beapplicable, it will be applicable only from the assessment year2002-03 and not in relation to the assessment year 2001-02 orany previous year. 17. The Tribunal agreed with the views of the assessingofficer and CIT(Appeals) to the effect that the debt syndicationfee represented a charge collected by the assessee for thepreparation of information of memorandum, financing of businessplan and negotiation charges with the bank and financialinstitutions. Therefore the Tribunal held in paragraph-24 of itsorder dated 29.3.2007 that the debt syndication fee cannotconstitute interest within the purview of Section 2(28A). 18. In other words, all the three authorities agreed onone point, namely, that if the assessee had collected the debtsyndication fee for the monies advanced by them, then the samewould fall within the definition of the expression “interest”.According to all the three authorities, if the debt syndicationfee is charged in respect of a loan arranged by the assesseefrom other financial institutions, the same would not comewithin the purview of the definition under Section 2(28A). 19. But at the outset, we do not find that such adistinction is borne out of Section 2(28A). While dealing withthe interpretation to be given to the expression “interest”under Section 2(28A), we have indicated as to how the definitionis very exhaustive. The definition is not merely an inclusivedefinition. The expression “interest” is not only defined toinclude something, but also defined to mean something and alsoto include something else. If the second part of the definitionin Section 2(28A) is carefully looked into, it could be seenthat what is included therein is “any service fee”. By itself,Section 2(28A) does not make a distinction between a service feecharged in respect of the loans advanced by the assessee andthose in respect of the loans organised from other financialinstitutions. In the absence of any indication either inSection 2(28A) or in 10(23G), we do not think that thedistinction made out by the respondent could be approved. Hencethe third question of law in T.C.(A) No.1290 of 2007 is alsoanswered in favour of the assessee. 20. Debenture Trusteeship Fees: The fourth question inT.C.(A) No.1290 of 2007 relates to the question whetherdebenture trusteeship fees charged by the assessee/appellantwould come within the meaning of the expression “interest” underSection 2(28A) or not. 21. The assessing officer construed debenture trusteeshipfee as an income derived by the assessee, not from the primarybusiness of lending carried on by them, but from an ancillaryhttps://hcservices.ecourts.gov.in/hcservices/ service rendered by them. The CIT(Appeals) approved of the samewith a caveat that may be from the assessment year 2002-03, theassessee may be entitled to the benefit of Explanation 1(f) ofSection 10(23G). In other words, the CIT(Appeals) was of theview that after the introduction of Explanation 1(f), debenturetrusteeship fees would come within the purview of Section 10(23G) and not before. 22. The Tribunal simply affirmed the findings of theassessing officer and the CIT(Appeals), without getting intogreater detail. 23. Before looking into the provisions, we must firstunderstand the nature of this debenture trusteeship fee. Thedebenture trusteeship fee is something that a financialinstitution is entitled to charge, when such a company isregistered with the SEBI as a Debenture Trustee under Chapter Xof the Guidelines for the issue of Debt Instrument under SEBI(Disclosure & Investor Protection) Guidelines, 2000. Underthese Guidelines, a borrower is required to appoint a DebentureTrustee for issue of Debt Instruments. A fee is paid by theborrower for the debt borrowed. The assessing officer as well asthe CIT(Appeals) did not go into the prescription contained inthe aforesaid Guidelines of SEBI. 24. Interestingly, in respect of the assessment year2000-01, the CIT(Appeals) held that the debenture trusteeshipfee is eligible for exemption under Section 10(23G). The orderof the CIT(Appeals) in relation to the assessment year 2000-01has attained finality and the department has not taken it onappeal to the Tribunal. In paragraph-3.3 of his order dated5.9.2003, the CIT(Appeals) specifically dealt with this aspectin relation to the assessment year 2000-01. Therefore to holdthat for the assessment year 2000-01 debenture trusteeship feewould come within the purview of Section 10(23G) but it wouldnot come within the purview of the section in relation to thenext assessment year, may not be proper. Hence the fourthquestion of law in T.C.(A) No.1290 of 2007 is also to beanswered in favour of the assessee. 25. That leaves us only with the third question in T.C.(A) No.1288 of 2007 and the fifth question in T.C.(A) No.1290 of2007. Since they are identical, they are extracted only once asfollows:- “Whether the Income Tax Appellate Tribunalerred in holding that the deduction to whichthe appellant was entitled under Section 36(1)(viia)(c) of the Act was to be grantedafter reducing from the appellant's income,the deduction to which the appellant wasentitled under Section 36(1)(viii) of theAct?” 26. In short, the question that falls for considerationis as to whether the deduction should first be allowed in termsof Section 36(1)(viii) for the application of the deductionunder Section 36(1)(viia)(c). 27. All the three authorities were of the unanimous viewthat there is a distinction between the two types of deduction.The deduction allowable under Section 36(1)(viii), after itsamendment under the Finance Act, 1995, is on the profits derivedfrom business. The deduction allowable under Section 36(1)(viia)(c) is on the total income. Therefore the authorities held thatthe deduction under clause (viii) will have to be computed firstbefore applying the deduction under clause (viia)(c). 26. In short, the question that falls for considerationis as to whether the deduction should first be allowed in termsof Section 36(1)(viii) for the application of the deductionunder Section 36(1)(viia)(c). 27. All the three authorities were of the unanimous viewthat there is a distinction between the two types of deduction.The deduction allowable under Section 36(1)(viii), after itsamendment under the Finance Act, 1995, is on the profits derivedfrom business. The deduction allowable under Section 36(1)(viia)(c) is on the total income. Therefore the authorities held thatthe deduction under clause (viii) will have to be computed firstbefore applying the deduction under clause (viia)(c). 28. But keeping aside the amendment introduced in 1995for a moment, if we have a look at the import of Section 36(1)by itself, it is clear that sub-section (1) of Section 36 listsout the matters in respect of which deductions can be allowedwhile computing the income referred to in Section 28. Clauses(i) to (xi) of sub-section (1) of Section 36 did not make any ofthose matters dependent upon one another. If an assessee isentitled to the benefit under one clause of sub-section (1) ofSection 36, the assessee was not deprived of the benefit of theother clause. This is how several clauses in sub-section (1)have been arranged. 29. It is true that before the amendment introduced underthe Finance Act, 1995, the deduction to be allowed under clause(viia)(c) and clause (viii) were placed on par. The deductionwas only on the total income. But, as rightly contended by thelearned counsel for the appellant, the amendment did not changethe character of the deduction, but changed merely the method ofcomputation. Instead of directing the assessee to compute it at40 percent on the total income, the amendment directed theassessee to compute the deduction at 40 percent on the profitsderived out of business. 30. Such an interpretation is what appears to be borneout by the memorandum explaining the provisions in the FinanceBill, 1995, whereunder the amendment was introduced. Therelevant portion of the memorandum reads as under:- “Under clause (viii) of sub-section (1)of section 36 of the Income Tax Act, 1961,an approved financial corporation engaged inproviding long-term finance for industrialor agricultural development in India, or anapprovedpubliccompanyformedandregistered in India with the main object ofcarrying on business of providing long-termfinance for construction or purchase ofresidential houses, is entitled for adeduction of an amount not exceeding 40 percent of its total income carried to ahttps://hcservices.ecourts.gov.in/hcservices/ special reserve. The deduction is allowed onthe “total income” and not with reference tothe income from the activities specified insection 36(1)(viii). These organisations have diversifiedtheir activities and are claiming deductionunder this section even in respect of theirincome from activities other than thosespecified in this section. There is nojustification for allowing the deductionwith reference to income from otheractivities or from sources other thanbusiness. It is, therefore, proposed tolimit the deduction of 40 per cent only tothe income derived from providing long-termfinance for the activities specified insection 36(1)(viii). It will thus takeoutside the purview of deduction, incomearising from other business activities orfrom sources other than business.” 31. If each of the clauses under sub-section (1) ofSection 36 is independent in its operation and if each one ofthem does not depend upon the other clause for the extension ofthe benefit, then the interpretation given by the respondentcannot be accepted. 31. If each of the clauses under sub-section (1) ofSection 36 is independent in its operation and if each one ofthem does not depend upon the other clause for the extension ofthe benefit, then the interpretation given by the respondentcannot be accepted. 32. Yet another distinction brought forth by the learnedcounsel for the appellant, also deserves consideration. Whilethe benefit of deduction under clause (viia)(c) is available toany public financial institution or State financial corporationor State industrial investment corporation, in respect of aprovision for bad and doubtful debts, the benefit of thededuction under clause (viii) is available only for thefinancial corporations engaged in providing long-term financefor industrial or agricultural development or development ofinfrastructure facility in India. Therefore, if theinterpretation as given by the authorities are accepted, thebenefit that will accrue to a finance corporation incorporatedin India and providing long-term finance for infrastructuredevelopment would be lesser than what is received by the foreignbanks and foreign financial institutions. This could not havebeen the purport of the amendment brought forth under theFinance Bill, 1995. 33. Therefore the third question in T.C.(A) No.1288 of2007 and the fifth question in T.C.(A) No.1290 of 2007 are alsoanswered in favour of the assessee. In fine, both the tax caseappeals are allowed. No costs. https://hcservices.ecourts.gov.in/hcservices/ /TRUE COPY/ SUB-ASSISTANT REGISTRAR ssTo1. The Income Tax Appellate Tribunal Chennai “A” Bench Chennai2. The Assistant Commissioner of Income Tax Company Circle II(3), Chennai 600 0343. The Commissioner of Income Tax(Appeals)-III 121, Mahatma Gandhi Road, Chennai 344. The Commissioner of Income Tax(Appeals)-XI 121, Mahatma Gandhi Road, Chennai 345. The Deputy Commissioner of Income Tax Company Circle II(3), 121, Mahatma Gandhi Road, Chennai 34+1 CC to MR.O.R.Santhanakrishnan Advocate. SR.NO.48727 +1 CC to MR.T.R.Senthilkumar Advocate. SR.NO.49091T.C.(A)Nos.1288 & 1290 of 2007CO-VDJD 04/01/2016