No TDS on Excess Interest Spread as Originator Not an Investor Under Section 194LBC

Hebros AHL IFMR Capital 2014 Vs ITO (ITAT Mumbai)

The appeal before the Income Tax Appellate Tribunal, Mumbai Bench, arose from an order of the Commissioner of Income-tax (Appeals) dated 29.08.2025, which had upheld a demand under Sections 201 and 201(1A) of the Income-tax Act, 1961 for Assessment Year 2017–18. The assessee, a securitisation trust under trusteeship, had paid ₹61,55,769/- to originators as Excess Interest Spread (EIS) without deducting tax at source. The Assessing Officer treated the non-deduction as a violation of Section 194LBC and held the assessee to be an “assessee in default,” also levying interest under Section 201(1A). The CIT(A) sustained the order, observing that EIS was income arising from securitisation and that the Act did not distinguish between committed returns and EIS for TDS purposes. It was also noted that the assessee did not furnish Form 26A as required.

Before the Tribunal, the assessee relied on earlier coordinate bench decisions on identical facts, including cases where it was held that surplus distributed to originators as EIS was not liable to TDS under Section 194LBC. The Tribunal examined the statutory conditions of Section 194LBC, which require that income be payable to an “investor” and be in respect of investment in the securitisation trust. It was undisputed that the originator had not subscribed to Pass Through Certificates (PTCs) and had only maintained Minimum Retention Requirement (MRR) through cash collateral. The Tribunal observed that since the originator was not a holder of securitised debt instruments, it could not be regarded as an investor. Further, EIS was a residual surplus flowing under the waterfall mechanism and was not income in respect of any investment in the trust. Respectfully following earlier decisions on identical facts, the Tribunal held that Section 194LBC was not attracted, set aside the appellate order, and directed deletion of the demand under Sections 201 and 201(1A). The appeal was allowed.