Sections 2(28A), 10(23G), 36(1)(viia)(c) and 36(1)(viii) – Exemption u/s. 10(23G) – Assessee providing long-term finance for infrastructure projects and facilities – Exemption of interest – Definition of “interest” – Borrowers liable to pay “liquidated damages” at 2.10% in case of default in redemption or payment of interest and other moneys on due dates, for period of default – Liquidated damages fall within purview of word “interest” – Assessee entitled to exemption

21

Infrastructure Development Finance
Co. Ltd. vs. ACIT; 412 ITR 115 (Mad)

Date of order: 1^st March,
2019

A.Y.: 2002-03

Sections
2(28A), 10(23G), 36(1)(viia)(c) and 36(1)(viii) – Exemption u/s. 10(23G) –
Assessee providing long-term finance for infrastructure projects and facilities
– Exemption of interest – Definition of “interest” – Borrowers liable to pay
“liquidated damages” at 2.10% in case of default in redemption or payment of
interest and other moneys on due dates, for period of default – Liquidated
damages fall within purview of word “interest” – Assessee entitled to exemption

Business
expenditure – Provision for bad and doubtful debts – Deduction u/s. 36(1)(viii)
and section 36(1)(viia)(c) to be allowed independently

The
assessee provided long-term finance to enterprises which developed, maintained
and operated infrastructure projects and facilities. For the A.Y. 2002-03 the
assessee claimed exemption u/s. 10(23G) of the Income-tax Act, 1961 in respect
of the interest earned by it from the long-term finance provided and the
liquidated damages received from the borrowers on account of default on their
part in making payments according to the terms of the loan agreements. The
assessee also claimed deductions u/s. 36(1)(viia)(c) and independently u/s.
36(1)(viii) in respect of provision made for bad and doubtful debts.

The A.O. rejected the claim for exemption u/s.
10(23G) on the ground that the amounts earned by the assessee did not
constitute “interest” as defined u/s. 2(28A). He further held that the claim
for deduction u/s. 36(1)(viia)(c) was allowable only after reducing from the
assessee’s income, the deduction allowable u/s. 36(1)(viii) and that deduction
could not be granted independent of each provision.

The Commissioner (Appeals) and the Tribunal
affirmed the order of the A.O.

On appeal by the assessee, the Madras High Court
reversed the decision of the Tribunal and held as under:

“i)   The
liquidated damages earned by the assessee were admittedly on account of
defaults committed by the borrowers. According to the terms of the agreement
with the borrowers, in case of default in redemption or payment of interest and
all other money (except liquidated damages) on their respective due dates,
liquidated damages at the rate of 2.10% per annum were levied and payable by
the borrowers for the period of default. Though the term “liquidated damages”
was used in the agreement, it actually signified the interest claimed by the
assessee. This term “interest” would come within the word “charge” as provided
under the definition of interest.

ii)   It was
an admitted fact that the assessee fell within the definition of a “specified
entity” and it carried on “eligible business” as provided u/s. 36(1)(viii).
Clauses (i) to (ix) of section 36(1) did not imply that those deductions
depended on one another. If an assessee was entitled to the benefit under
clause (i) of section 36(1), he could not be deprived of the benefits of the
other clauses. This is how the provision was arrayed. The computation of amount
of deduction under both these clauses had to be independently made without
reducing the total income by deduction u/s. 36(1)(viii).

iii)   Accordingly,
both the questions of law are answered in favour of the appellant assessee.”