Funds raised by FCCB Buy Back at Discounting Rate is Not Business Income

IN THE INCOME TAX APPELLATE TRIBUNAL

The Relevant Text of the Order as follows :

3.11 In the instant case, the benefit has been received in the shape of the money and thus, the said benefit cannot be held as taxable even under section 28(iv) of the Act.

3.12 In view of the discussion above, we set aside the finding of the Ld. CIT(A) on the issue in dispute and hold that the discount received on FCCB is not taxable in the hands of the assessee. The Ground No. 1 of the appeal of the assessee is accordingly allowed.

4. The ground No. 2 of the appeal relates to disallowance under section 40(a)(ia) of the Act for non-deduction of tax at source on certain payments made.

Funds raised by FCCB Buy Back at Discounting Rate is Not Business Income

4.1 Out of the disallowances made by the Assessing Officer on this account, the ld. CIT(A) upheld disallowance of ₹ 98,41,570/- for payment to Indian overseas Bank (IOB) Hong Kong and payment Rs.2,28,370/- to HSIIDC Ltd. According to the Assessing Officer, the payment made to IOB Hong Kong in India or through any branch of IOB in India, was liable for tax at source in India under section 195 of the Act. Regarding payment to HSIIDC, the Assessing Officer held that payment was for services and HSIIDC is not a financial company/corporation established by the state and was not exempt from TDS under section 194A of the Act. The ld. CIT(A) upheld the disallowances observing as under:

“7.2 I have considered each and every disallowance above in the light of contention in respect of each expense as under:-

a) Payment to Indian Overseas Bank Hong Kong:- The assessing Officer contended that TDS was to be deducted u/s 195 on interest of Rs.58,79,570/- and processing fees payment of Rs.39,62,000/-.

                  The appellant contends that the Learned Assessing Officer has erred in disallowing a sum of Rs. 98,41,570.00 on account of interest and charges paid to Indian Overseas Bank, Hong Kong, on the ground that no tax has been deducted on the same. That it was submitted to him that the payment has been made to the bank and hence is out of the ambit of tax deduction. That however, the Learned Assessing Officer relying on his own interpretation, has observed that the same was covered in the tax deduction. That it is submitted that the payment has been made to a branch of an Indian Bank on which neither the provisions of Section 194 or those of Section 195 are applicable. That in support of the appellants averments, a copy of the confirmation from the bank is also enclosed (page 60 attached) herewith mentioning that the payment is made to a branch of the Indian Bank and hence the provisions of Tax deduction are not applicable. That it is accordingly submitted that the disallowance has been incorrectly made.

                  I have considered the argument above and find that the certificate issued by the bank is dated 19.01.2011 which nowhere mentions the nature of transaction with the bank and the payment made is either interest charges or processing charges paid to an Indian Bank. Even otherwise the expense is in relation to extending External Commercial Borrowing (ECB) facility provided to the appellant for discounting of FCCB which has connotation of service and as such making payment to the bank for any kind of contractual services is liable for deduction at source. The payment made even if it is assumed is to an Indian Bank, still it would be covered under the provisions of TDS. The disallowance is upheld.

b) HSIIDC Limited: The Assessing Officer did not agree that the payment to HSIIDC for loan processing charges is not liable for TDS.

                  The appellant contends that the Learned Assessing Officer has further erred in adding a sum of Rs.2,28,370.00 being amount of interest paid to HSIIDC Limited on the ground that no tax was deducted at source by the aggrieved appellant. That it was submitted during the course of assessments and reiterated now that HSIIDC Limited is a financial corporation which is covered as exempted from Tax Deduction as per Sec 194A (3) (iii) (b) and hence any payment of interest to them can be made without deduction of tax and hence there is no default on the part of the appellant. That it is accordingly submitted that the disallowance be reversed.

                I have given careful consideration and find that appellant has not explained the nature of transaction with HSIIDC because if the same is processing charges paid, then TDS provision would apply and disallowance of expense for non-deduction of TDS was justified.”

4.2 Before us, the Ld. counsel of the assessee submitted that lower authorities has adjudicated the issue without proper appreciation of the facts. He submitted that interest payment has been made to the bank, on which the assessee is not required to deduct payments. He submitted that the matter may be restored to the file of the Assessing Officer and before him the assessee can submit all the necessary documentary evidence to support that the assessee was not liable for deduction of tax at source on those payments.

4.3 On the other hand, Ld DR though relied on the order of the lower authorities, did not object for restoring matter to the Assessing Officer for verification of nature of payment and entities in accordance with the provisions of the Act.

4.4 We have heard the rival submission and perused the relevant metal on record. The issue involved is regarding liability of deduction of tax at source. The contention of the assessee is that the payments are not liable for deduction of tax at source and the lower authorities has decided without verifying the nature of the payment and constitution of the entities. The Ld. counsel submitted before us that in case the matter is restored back to the Assessing Officer, all necessary documentary evidences will be submitted to substantiate its claim that payments are not liable to tax deducted at source. In our opinion, lower authorities have not verified the exact nature of payments and constitution of the entities. In view of the undertaking given by the assessee, we feel it appropriate to restore the issue back to the Assessing Officer for deciding the same afresh. Accordingly, the issue is restored back to the Assessing Officer to decide the issue afresh, after affording adequate opportunity of being heard to the assessee. Thus, this Ground no. 2 of the appeal is allowed for statistical purposes.

5. The ground no. 3 of the appeal was not pressed before us, thus it is dismissed as infructuous.

6. In the result, the appeal is allowed partly for statistical purposes.

Order is pronounced in the open court on 13th January, 2020.