Siva Industries and Holdings Ltd. Vs DCIT (ITAT Chennai)
ITAT Chennai held that factoring charges could not be termed as Interest under section 2(28A) of Income Tax Act, 1961. Accordingly, disallowance of the same u/s 40(a)(ia) unsustainable.
Facts-
The assessee claimed factoring charges of Rs.782.68 Lacs in the Profit & Loss Account. It transpired that the assessee took unsecured loan from its holding company M/s Siva Ventures Ltd. (SVL) and advanced the same to its subsidiary company M/s Vantage Reality Pvt. Ltd. (VRPL). The assessee also obtained loan of Rs.100 Crores from M/s Easy Access financial Services Ltd. (EAFSL) and paid factoring charges of Rs.782.68 Lacs by pledging receivables from M/s VRPL. The Ld. AO held that factoring charges was nothing but interest and therefore, the deduction of which would not be allowed to the assessee in terms of Sec.40(a)(ia), inter-alia, for want of deduction of tax at source. The Ld. CIT(A) confirmed the stand of Ld. AO against which the assessee is in further appeal before us.
Conclusion-
We find that factoring charges could not be termed as interest u/s 2(28A) as per the decision of Hon’ble High Court of Delhi in PCIT vs. M. Sons Gems N Jewellery (P) Ltd.
Held that no such disallowance could have been made u/s 40(a)(ia). Since we have already directed that the interest income earned by the assessee would be assessable as ‘business income’ and there is complete nexus of factoring charges with the funds advanced by the assessee and therefore, the factoring charges, would be an allowable deduction to the assessee.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1.1 The captioned appeals by assessee arise out of separate appellate orders. However, the facts as well as issues are identical in all the years. The appeal for Assessment Year (AY) 2007-08 arises out of the order of learned Commissioner of Income Tax (Appeals)-15, Chennai [CIT(A)] dated 16.02.2016 in the matter of an assessment framed by learned Assessing Officer u/s 143(3) r.w.s. 147 on 22.12.2011. The erstwhile assessee M/s V.S.Net Limited was later known as M/s SVL Technologies & Network Limited which has finally merged with M/s Siva Industries and Holdings Limited w.e.f. 01.04.2011 vide order dated 22.08.2013 of Hon’ble High Court of Madras. The assessee is stated to be engaged in making strategic investments in real estate space and having objective to invest in large projects both in commercial and residential space. The assessee’s case was reopened for this year and an assessment was framed after making certain additions. The same was confirmed by Ld. CIT(A). Aggrieved, the assessee is in further appeal before us.
1.2 The grounds raised by the assessee read as under:
The order passed by the Commissioner of Income-tax Appeals [“CIT(A)”] under section 250(6) of the Income-tax Act, 1961 (” the Act”) confirming the order of the Assessing Officer (“AO”) passed is not in accordance with law, contrary to the facts and circumstances of the present case and is in violation of principles of equity and natural justice.
Treatment of compensation as interest income
2.1 The learned CIT(A) and AO failed to appreciate that the real intent of the agreement entered by the appellant with Sahara India Commercial Corporation Limited (“SICCL”) was to derive value by execution of larger project, which on completion would have reflected on the appellant’s ability to complete mega projects.
2.2 The learned CIT(A) and AO failed to appreciate the fact that the 400 crores advanced to SICCL has been disclosed as ‘Advance for purchase of land’ in the audited financial statements and not as loan.
2.3 The learned CIT(A) and AO failed to appreciate the relevant clauses, clause 13.4.2 and clause 3.2 of the Facility agreement demonstrate the fact that the intent of the appellant was to enter into a development agreement.
2.4 The claim of the learned CIT(A) and AO that the appellant had intentionally entered into such agreements to treat the receipt of compensation as capital is factually incorrect and baseless.
2.5 The learned CIT(A) and AO have failed to appreciate that the appellant is not in the business of strategic investments in realty market and therefore the intention of advancing money to SICCL was with a view to acquire the land for development for business purpose and not to earn interest
2.6 The learned CIT(A) and AO have erred in not considering the fact that the nature of the compensation received was towards relinquishment of profit earning apparatus. Therefore, any amount received on extinction of source of income and profit earning apparatus, would partake the character of capital receipt.
2.7 The learned CLT(A) and AO have erred in concluding the nature of the receipt as revenue based on the fact that Tax Deducted under Source (“TDS”) under section 194 of the Act, was deducted by SICCL. The learned CIT(A) and AO have failed to appreciate the fact that deduction of tax from payment under the Chapter-XVII of the Act, would not change the character of the receipt in the hands of the appellant.
Treatment of Interest earned as income from other sources
3.1 The learned CIT(A) and the AO have erred in treating the interest earned including proportionate compensation under the head income from other sources instead of treating the same as business income as claimed by the appellant.
3.2 The learned CIT(A) and AO have failed to appreciate the fact that the interest of Rs.1.69 crores was earned from inter- corporate deposits made to Indus Cityscapes Constructions Pvt. Ltd, ignoring the decisions of appellate authorities which held that interest should be treated as business income.
3.3 The learned CIT(A) and AO have erred in not considering the matching concept where in order to earn an income, certain amount of expenses need to be spent, thereby, erred in not allowing any expense against the income determined.
As is evident, the grievance of the assessee is two-fold i.e., (i) Treatment of compensation as interest income; (ii) Head of income under which interest earned by the assessee would be assessable.
1.3 The Ld. AR advanced arguments assailing the findings rendered in impugned order which has been controverted by Ld. CIT-DR. Having heard rival submissions and after perusal of case records, the appeal is disposed-off as under.
2. Assessment Proceedings
2.1 The original return of income filed by the assessee at Rs.218.71 Lacs was processed u/s 143(1). However, the case was reopened pursuant to survey action u/s 133A on 22.07.2010 and accordingly, an assessment was framed u/s 143(3) r.w.s. 147 on 22.12.2011 determining the income of Rs.3228.71 Lacs.
2.2 The survey findings revealed that the assessee entered into a transaction with M/s Sahara India Commercial Corporation Ltd. (SICCL) and received compensation of Rs.35 Crores in AY 2008-09 which has been treated by the assessee as capital receipt and not offered to tax. The same is the subject matter of this appeal before us.
2.3 It was noted by Ld. AO that the assessee entered into a facility agreement with SICCL on 26.12.2006 to acquire rights in land held by SICCL and its associated concerns. A financial participation to the extent of Rs.400 Crores was made by the assessee to acquire rights in 196.97 acres of land held by the group. Since SICCL could not get necessary approval for conversion of the above land from agricultural use to commercial use, the assessee settled sum of Rs.35 Crores as a compensation for breach of specific performance of the agreement. SICCL agreed to compensate the assessee for the loss of opportunity to execute the project in the proposed land acquisition. The assessee pleaded that such amount of Rs.35 Crores was on account of loss of business opportunity and thus a capital receipt for the assessee during financial year 2007-08 which was recognized in the books on 09.04.2007.
2.4 The Ld. AO, after scrutinizing the terms of agreement dated 26.12.2006, made following observations: –
