Singapore Investor Claimed Rs. 6.35 Crore Non-Convertible Debentures Gain as Tax-Free Capital Gain; ITAT Holds Broken-Period Interest Taxable as Interest Income

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the appeal filed by Macquarie SBI Infrastructure Investments Pte Ltd and held that the amount received towards broken-period interest on transfer of Non-Convertible Debentures (NCDs) is taxable as interest income and cannot be treated as exempt capital gains under the India–Singapore DTAA.

The assessee, a Singapore-resident Foreign Venture Capital Investor, had invested in NCDs issued by GMR Airports Limited. During AY 2020-21, it sold a portion of the NCDs to JP Morgan Securities Asia Pte. Ltd. on a cum-interest basis. While interest accrued up to 30 June 2019 was offered to tax as interest income, the assessee claimed that the amount of Rs.6.35 crore received for the five-day period from 1 July to 5 July 2019 represented short-term capital gains exempt under Article 13(5) of the India–Singapore tax treaty.

Before the Tribunal, the assessee argued that the disputed amount had been received from the purchaser of the debentures and not from the issuer. Therefore, according to it, the receipt formed part of the consideration for transfer of the NCDs and should be treated as capital gains. It also contended that a larger amount of Rs.107.85 crore, which had been shown as interest income in the return, was inadvertently offered to tax and should similarly be treated as exempt capital gains.

The Revenue, however, maintained that the disputed receipt represented nothing but accrued interest for the broken holding period and that merely receiving it from the buyer instead of the issuer could not alter its character. Reliance was placed on judicial precedents holding that premiums and similar receipts arising from debenture investments retain the character of interest income.

Accepting the Revenue’s stand, the Tribunal observed that the amount of ₹6.35 crore exactly represented interest accrued for the five-day broken period. The Bench held that the source from which the payment was received was irrelevant for determining its nature. Since the amount represented accrued interest on the debentures, it remained taxable as interest income even though it was paid by the purchaser as part of a cum-interest transaction.

The Tribunal therefore upheld the assessment order treating Rs.6.35 crore as income chargeable under the head “Income from Other Sources” and rejected the assessee’s claim for exemption as capital gains under the India–Singapore DTAA. Consequently, the appeal of the assessee was dismissed in full.

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