IDFC Limited Vs ACIT (Madras High Court)
The Madras High Court considered a Tax Case Appeal filed by the assessee against the ITAT order dated 28 September 2012 concerning A.Y. 2006-07. The principal issues concerned exemption under Section 10(23G) of the Income Tax Act, 1961 in respect of liquidated damages, underwriting commission and structuring fees, and deductions under Sections 36(1)(viii) and 36(1)(viia)(c).
The first two substantial questions concerned whether liquidated damages, underwriting commission and structuring fees qualified for exemption under Section 10(23G), including whether such receipts fell within the definition of “interest” under Section 2(28A). Both parties agreed that the issue concerning liquidated damages was covered in favour of the assessee by the Court’s decision in T.C.(A) Nos.1288 and 1290 of 2007 dated 8 September 2015.
Regarding underwriting commission, the Court held that it was directly covered by Clause (f) of the Explanation to Section 10(23G), which refers to commission received by a financial institution for extending a guarantee or enhancing credit. The Court also considered structuring fees, which were charged when modifications were made to financial assistance through additional or enhanced assistance, a new loan or otherwise. Referring to the inclusive definition of “interest” under Section 2(28A), the Court held that service fees or other charges concerning money borrowed, debt incurred or credit facilities were included. It therefore held that fees charged for restructuring credit facilities fell within the definition of “interest”.
The Court relied upon Viswapriya Financial Services and Securities v. Commissioner of Income Tax, which had construed the definition of “interest” under Section 2(28A) broadly. The Court concurred with its earlier decision concerning liquidated damages and held that the eligibility of underwriting commission and structuring fees was also covered. Substantial Questions Nos.1 and 2 were answered in favour of the assessee and against the Revenue.
The third substantial question concerned whether the receipts were alternatively eligible for deduction under Section 36(1)(viii). Since the assessee succeeded on the first two questions, its counsel did not press the third question but sought liberty to revive it if the conclusions on Questions Nos.1 and 2 were subsequently reversed. The Court granted the liberty and returned Question No.3 unanswered.
Substantial Questions Nos.4 and 5 concerned the computation of deductions under Sections 36(1)(viia)(c) and 36(1)(viii). The Court noted that the same issue concerning the assessee for A.Y. 2007-08 had already been decided in its favour in T.C.(A) No.169 of 2013 dated 20 January 2026. That decision had relied upon earlier decisions in the assessee’s own cases, including T.C.(A) Nos.1288 and 1290 of 2009 dated 8 September 2015 and T.C.(A) No.939 of 2008 dated 1 March 2019. Following the earlier reasoning, the Court answered Questions Nos.4 and 5 in favour of the assessee.
The sixth substantial question concerned reversal of suo motu disallowance of interest expenditure incurred for earning income exempt under Section 10(34), amounting to Rs.4,38,30,225/-. The assessee’s counsel did not press this question, and it was therefore returned unanswered.
The Tax Case Appeal was disposed of accordingly, with no order as to costs.
Cases Discussed
- IDFC Limited’s own case for assessment year 2007-08 (Madras High Court), T.C.(A)No.169 of 2013 dated 20.01.2026
- Viswapriya Financial Services and Securities V.Commissioner of Income Tax (Madras High Court), 258 ITR 496
- CIT v. Ballarpur Industries Ltd. (Madras High Court), T.C.(A) Nos.1288 and 1290 of 2007 dated 08.09.2015
- IDFC Limited’s own case (Madras High Court), T.C.(A) No.939 of 2008 dated 01.03.2019
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This Tax Case (Appeal) relating to assessment year 2006-07 has been filed at the instance of the assessee assailing order dated 28.09.2012 passed by the Income Tax Appellate Tribunal (in short ‘ITAT”/’Tribunal’).
2. We have heard the detailed submissions of Mr.Niraj Sheth, learned counsel appearing for Mr.O.R.Santhanakrishnan, learned counsel on record for the appellant/assessee and Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the respondent/revenue.
3. The substantial questions of law that had been admitted on 19.06.2013 are taken up for consideration in seriatim. The first and second substantial questions of law read as follows:
‘1. Whether the Income Tax Appellate Tribunal erred in holding that the appellant was not entitled to the exemption under Section 10(23G) of the Act in respect of Liquidated Damages, Underwriting Commission and Structuring Fees?
2. Whether the Income Tax Appellate Tribunal ought to have held that Liquidated Damages, Underwriting Commission and Structuring Fees were entitled to the exemption under Section 10(23G) of the Act inter alia as such receipts fell within the definition of “interest” in Section 2(28A) of the Act?
4. The aforesaid questions of law relate to entitlement to exemption under Section 10(23G) of the Income Tax Act, 1961 (in short ‘Act’) in respect of Liquidated Damages, Underwriting Commission and Structuring Fees.
5. Both Mr.Niraj Sheth, learned counsel for the appellant and Mr.T.Ravikumar, learned Senior Standing Counsel for the revenue would accede to the position that the entitlement qua Liquidated Damages has been considered by this Court in T.C.(A)Nos.1288 and 1290 of 2007 by decision dated 08.09.2015 and hence that issue stands squarely covered by the said decision in favour of the appellant.
6. As far as Underwriting Commission and Structuring Fees are concerned, they were not part of the substantial question of law in the aforesaid Tax Case (Appeals). However, we have been taken in detail by both learned counsel to the provisions of Section 10(23G), in particular the definition of ‘interest’ in the Explanation to the aforesaid clause as well as the definition of ‘interest’ in Section 2(28A) of the Act and have carefully perused both the definitions.
7. As far as Underwriting Commission is concerned, we are of the view that the same would be directly encompassed by the definition of ‘interest’ under Clause (f) of Explanation to Section 10(23G), as that clause itself refers to commission received by a financial institution for extending a guarantee or enhancing credit.
8. As far as Structuring fees is concerned, the Assessing Authority has taken note of the nature of payment which is for the purpose of conversion of the financial assistance, for meeting the financial requirements.
9. Learned counsel for the appellant would explain further by stating that structuring fees are fees that are charged from the borrower when there are modifications sought to the mode of financial assistance granted by the appellant either by additional/enhanced financial assistance or by opening a new loan, or otherwise.
10. We find that Section 2(28A) which defines ‘interest’ would itself encompass such a fee. The definition, which is inclusive defines ‘interest’ to say that interest payable in any manner, in respect of monies borrowed or debts incurred including deposit, claim and other right or obligation, and includes service fee or other charge in respect of the monies borrowed or debt incurred in respect of credit facilities that have not been utilised. Fee charged for re- structuring of the credit facilities would thus come fully within the ambit of ‘other charges’ in respect of monies borrowed or debts incurred, and hence we accept the entitlement of the appellant in this regard as well.
11. In the discussion in T.C.(A) Nos.1288 and 1290 of 2007, the Division Bench of this Court has referred to the earlier decision of this Court in Viswapriya Financial Services and Securities V.Commissioner of Income Tax 1 . That decision was rendered in the context of classification of certain payments made in respect of investments by persons in a scheme floated by that assessee, under which the investor was guaranteed minimum return of 1.5% per month. In brief, the question was, whether the return of 1.5% would constitute ‘interest’ as defined under Section 2(28A) of the Act, warranting deduction of tax under Section 194A of the Act.
12. After a detailed discussion on the scope of the term ‘interest’ under Section 2(28A), the Division Bench has stated as follows:
11. The definition of the expression “interest” has been construed by this Court in Viswapriya Financial Services and Securities v. Commissioner of Income Tax, 258 ITR 496 to be more exhaustive. The Court held in the said case as follows:-
“The definition of interest, after referring to the interest payable in any manner in respect of any moneys borrowed or debt incurred proceeds to include in the terms money borrowed or debt incurred, deposits, claims and “other similar right or obligation” and further includes any service fee or other charge in respect of the moneys borrowed or debt incurred which would include deposit, claim or other similar right or obligation, as also in respect of any credit facility which has not been utilised. This statutory definition regards amounts which may not otherwise be regarded as interest as interest for the purpose of the statute. Even amounts payable in transactions where money has not been borrowed and debt has not been incurred are brought within the scope of the definition as in the case of a service fee paid in respect of a credit facility which has not been utilised. Even in cases where there is no relationship of debtor and creditor or borrower and lender, if payment is made in any manner in respect of any moneys received as deposits or on money claims or rights or obligations incurred in relation to money, such payment is, by this statutory definition, regarded as interest.”
13. Having extracted the same, the Division Bench in T.C(A) Nos.1288 and 1290 of 2007 discusses and concludes the issue as follows:
12. It must be remembered that under the terms of a loan agreement, a borrower is imposed with a primary obligation to repay the principal together with interest. An additional obligation is cast upon a borrower to pay interest on interest or penal interest, in the event of borrower committing a default upto a particular level. In some finance agreements, the finance companies also stipulate the payment of liquidated damages, if the default exceeds a particular tolerance limit. Irrespective of what the finance company itself may choose to term it, such liquidated damages cannot be excluded from the definition of the expression “interest” under Section 2(28A), as the definition is so exhaustive. The definition is so exhaustive as to include even any service fee or other charge that is levied in respect of the monies that remain unutilised.
13. In certain cases, the lenders impose an obligation on the borrowers to pay the commitment charges, if after the sanction of the loan, the borrower could not make use of the funds upto a particular point of time. The definition of the word “interest” under Section 2(28A) includes even such commitment charges. Therefore we are of the considered view that all the three authorities committed a mistake in understanding the scope of the expression “liquidated damages” and in coming to a conclusion that the same would not come within 10 the purview of the word “interest” under Section 2(28A). Hence the questions of law 1 & 2 in T.C.(A) Nos.1288 & 1290 of 2007 are answered in favour of the assessee.
14. We concur with the above decision and find that the eligibility in relation to Underwriting Commission and Structuring fee will be squarely covered by the same. Substantial question of law Nos.1 and 2 are answered in favour of the assessee and against the revenue.
15. The third substantial question of law reads as follows:
3. Without prejudice to above and in the alternative whether on the facts and in the circumstances of the case, the Tribunal ought to have held that the Liquidated Damages (in its entirety), Underwriting Commission and Structuring Fees were eligible for deduction under Section 36(1)(viii) of Act since the above amounts were earned from long term finance provided to infrastructure enterprises and in the event the income derived from such long term finance was not treated as “interest” eligible for exemption under Section 10(23G), the same were “profit” derived from business of long term finance of infrastructure facility and hence eligible for deduction under Section 36(1)(viii)?
16. Since the appellant is successful as far as substantial question of law Nos.1 and 2 are concerned, learned counsel on record for the appellant makes an endorsement not pressing this substantial question of law, but seeking liberty to revive the same if the conclusions in substantial question of law Nos.1 and 2 are reversed at a future point in time. Granting such liberty and recording the endorsement made, this substantial question of law is returned unanswered.
17. Substantial question of law Nos.4 and 5 read as follows:
4. Whether the Income Tax Appellate Tribunal erred in holding that the deduction to which the appellant was entitled under Section 36(1)(viia)(c) of the Act was to be granted after reducing, from the appellant’s income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act?
5. Whether the Income Tax Appellate Tribunal ought to have held that the deduction to which the appellant was entitled under Section 36(viia)(c) of the Act was to be granted to it without reducing, from the appellant’s income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act?
18. We have had occasion to consider the aforesaid issue in respect of the very same asseessee for assessment year 2007-08 in T.C.(A)No.169 of 2013 dated 20.01.2026 and have answered the same in favour of the appellant after referring to the discussion and conclusion in T.C.(A)Nos.1288 and 1290 of 2007. The relevant portion of the judgment reads as follows:
2. The substantial questions of law that had been admitted on 19.06.2013 are as follows:
1. Whether the Income Tax Appellate Tribunal erred in holding that the deduction to which the appellant was entitled under Section 36(1)(viia)(c) of the Act was to be granted after reducing, from the appellant’s income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act?
2. Whether the Income Tax Appellate Tribunal ought to have held that the deduction to which the appellant was entitled under Section 36(viia)(c) of the Act was to be granted to it without reducing, from the appellant’s income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act?
3. We have heard the detailed submissions of Mr.Niraj Sheth, learned counsel appearing for Mr.O.R.Santhanakrishnan, learned counsel on record for the appellant/assessee and Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the respondent/revenue.
4. We find that the issue stands squarely covered by decisions of two different Division Benches of this Court in the assessee’s own case for assessment years 2000-01, 2001-02 and 2002-03 in T.C.(A) Nos.1288 and 1290 of 2009 dated 08.09.2015 and T.C.(A)No.939 of 2008 dated 01.03.2019 respectively.
5. Hence, it would suffice for us to extract the discussion and reasoning in order dated 08.09.2015, which is the first order on this issue, as we concur with the same. The operative portion as aforesaid, reads thus:
26. In short, the question that falls for consideration is as to whether the deduction should first be allowed in terms of Section 36(1)(viii) for the application of the deduction under Section 36(1)(viia) (c).
27. All the three authorities were of the unanimous view that there is a distinction between the two types of deduction. The deduction allowable under Section 36(1)(viii), after its amendment under the Finance Act, 1995, is on the profits derived from business. The deduction allowable under Section 36(1) (viia)(c) is on the total income. Therefore the authorities held that the deduction under clause (viii) will have to be computed first before applying the deduction under clause (viia)(c).
28. But keeping aside the amendment introduced in 1995 for 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 lists out the matters in respect of which deductions can be allowed while computing the income referred to in Section 28. Clauses (i) to (xi) of sub- section (1) of Section 36 did not make any of those matters dependent upon one another. If an assessee is entitled to the benefit under one clause of sub-section (1) of Section 36, the assessee was not deprived of the benefit of the other clause. This is how several clauses in sub-section (1) have been arranged.
29. It is true that before the amendment introduced under the Finance Act, 1995, the deduction to be allowed under clause (viia)(c) and clause (vii) were placed on par. The deduction was only on the total income. But, as rightly contended by the learned counsel for the appellant, the amendment did not change the character of the deduction, but changed merely the method of computation. Instead of directing the assessee to compute it at 40 percent on the total income, the amendment directed the assessee to compute the deduction at 40 percent on the profits derived out of business.
30. Such an interpretation is what appears to be borne out by the memorandum explaining the provisions in the Finance Bill, 1995, whereunder the amendment was introduced. The relevant 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 in providing long-term finance for industrial or agricultural development in India, or an approved public company formed and registered in India with the main object of carrying on business of providing long-term finance for construction or purchase of residential houses, is entitled for a deduction of an amount not exceeding 40 per cent of its total income carried to a special reserve. The deduction is allowed on the “total income” and not with reference to the income from the activities specified in section 36(1)(viii).
These organisations have diversified their activities and are claiming deduction under this section even in respect of their income from activities other than those specified in this section. There is no justification for allowing the deduction with reference to income from other activities or from sources other than business. It is, therefore, proposed to limit the deduction of 40 per cent only to the income derived from providing long-term finance for the activities specified in section 36(1)(viii). It will thus take outside the purview of deduction, income arising from other business activities or from sources other than business.”
31. If each of the clauses under sub-section (1) of Section 36 is independent in its operation and if each one of them does not depend upon the other clause for the extension of the benefit, then the interpretation given by the respondent cannot be accepted.
32. Yet another distinction brought forth by the learned counsel for the appellant, also deserves consideration. While the benefit of deduction under clause (viia)(c) is available to any public financial institution or State financial corporation or State industrial investment corporation, in respect of a provision for bad and doubtful debts, the benefit of the deduction under clause (viii) is available only for the financial corporations engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India. Therefore, if the interpretation as given by the authorities are accepted, the benefit that will accrue to a finance corporation incorporated in India and providing long-term finance for infrastructure development would be lesser than what is received by the foreign banks and foreign financial institutions. This could not have been the purport of the amendment brought forth under the Finance Bill, 1995.
6. We are given to understand that the above decision has not been challenged by the revenue and has attained finality. Based on the above reasoning, this Tax Case (Appeal) is allowed answering the substantial questions of law in favour of the assessee and against the Revenue. No costs.
19. In light of the same, these substantial questions of law are answered in favour of the assessee.
20. Substantial question of law No.6 reads as follows:
6. Whether the Income Tax Appellate Tribunal erred in dismissing the ground in relation to reversal of the suo moto disallowance of interest expense incurred for earning income exempt under Section 10(34) amounting to Rs.4,38,30,225 made by the appellant even though for the earlier years the matter was remitted back to the Assessing Office to determine whether the investments were made by the assessee from own funds or borrowed funds.?
21. Learned counsel for the appellant makes an endorsement not pressing this substantial question of law. Hence, recording the endorsement made, this substantial question of law is returned unanswered.
22. This Tax Case (Appeal) is disposed as above. No costs.
Note:
1 258 ITR 496
