SPECTRUM POWER GENERATION LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-3(2), HYDERABAD

Brief facts of the case are that the assessee is a company engaged in power generation. They have filed their return of income for the

Assessee submitted before the learned Assessing Officer that the assessee company filed an application before the Hon’ble High Court of Andhra Pradesh seeking approval of the Scheme of Arrangement (SOA) entered between the assessee and it secured creditors proposal to restructure the debts as well as the capital and Hon’ble High Court approved the same by order dated 5/10/2007. According to such SOA, from the date of conversion of the CDs into equity till the date of IPO, the assessee shall pay to the secured creditors pro rata inter se, an additional amount calculated at the rate of 5% per annum on an amount of Rs. 3.25 crores, which was to be paid by issuance of compulsorily convertible debentures (CCDs) to the secured creditors (pro rata inter se), and will carry a coupon rate of 5% per annum payable half yearly to be converted into equity of the company at such price. Assessee further submitted that there was a stipulation that the IPO had to be materialised within five years from 12/12/2006, in default the secured creditors shall have the put option on the bidder for selling equity stake/CCD of the secured creditors for a total value of Rs. 3.25 crores together with accrued interest at the above-mentioned rate. On this premise, assessee submitted before the learned Assessing Officer that these payment of additional amount at 5%

Learned Assessing Officer, however, did not agree with the assessee on the ground that the language of the court clearly referred to the percentage as interest only and what is payable to secured creditors is a predetermined interest as per the scheme of arrangement entered into by the assessee company with them and the same scheme was approved by the Hon'ble High Court, and such additional amount was paid to the secured creditors only on the directions of the Hon’ble Apex Court. According to the learned Assessing Officer the mode of payment of debts by issuing debentures or equity shares, instead of paying in cash, does not change the legal character of that and the payment associated with the debt is nothing but interest only as per the provisions of the Act; that even if it is a redemption premium on CCDs, the redemption premium on the convertible debentures has all the characters of interest defined under section 2(28) of the Act and, therefore, the payment is undoubtedly covered under section 194A of the Act making the provisions under section 40(a)(ia) of the Act applicable to this expenditure.

In appeal, Ld. CIT(A) agreed with the opinion of the learned Assessing Officer that the mode of repayment of debts by issuing debentures or equity shares, instead of giving in cash, does not change the legal character of that and the payment associated with that is nothing but interest under the provisions of the Act and it is so even if there is a reduction of premium on CCDs, redemption premium on the convertible debentures has all the characteristics of interest defined in section 2 (28A)

Aggrieved by such an action of the Ld. CIT(A), assessee preferred this appeal before us contending that the amount paid to the equity holders is not covered under the definition of interest under section 2(28A) of the Act and the authorities below failed to indicate the link between the definition of interest and payment made by the assessee. It is argued on behalf of the assessee that the payment made by the assessee could not be equated with ‘interest‘ in any manner in order to attract the disallowance under section 40(a)(ia) of the Act, and interest presupposes the existence of a debt and the relationship of debtor and creditor and in the case of the assessee there is no such debt. Nor did the assessee make any payment as interest to the creditors. Ld. AR submitted that the decision in Palam Gas Services vs. CIT 394 ITR 300 (SC) has no application to the facts of the case and any reliance on such a decision is a misplaced one. In the alternative, Ld. CIT(A) has no power to set aside an issue for verification at the end of the learned Assessing Officer. He also placed reliance on the decisions reported in ITO vs. Parag Mahasukhlal Shah (2011) 12 taxmann.com 37 (Ahmedabad Trib), PCIT vs. West Bengal Housing Infrastructure Development Corporation Ltd. 413 ITR 82 (Calcutta) and Cauvery Spg. & Wvg. Mills Ltd. vs. DCIT 340 ITR 550 (Madras).

Per contra, Ld. DR while placing reliance on the orders of the authorities below submitted that whatever may be the name with which the payment is called, so long as it relates to the debt originally contracted

We have gone through the record in the light of the submissions made on either side. It is an admitted fact that the assessee entered into an SOA with its secured creditors and members proposing to restructure the debts as well as the capital and filed an application before the Hon’ble High Court of Andhra Pradesh. Such an application was allowed approving the SOA by way of order dated 5/10/2007. One of the classes of SOA reads that,-

Case of assessee is that there is a failure on the part of the assessee to go for IPO within 5 years from 12/12/2006 and, therefore, on such default the assessee has been making an additional payment equivalent to 5% per annum to the equity shareholders. Such payment is to the tune of Rs. 13.75 crores during the previous year relevant for the assessment year 2012-13.

During the course of scrutiny proceedings, learned Assessing Officer called for the details of 'Other borrowing cost & Financial charges' and the details were submitted. On an examination of the same, learned Assessing Officer found that the assessee has not deducted TDS on such payment to the tune of Rs. 13.75 crores. Learned Assessing Officer extracted the explanation of the assessee, which reads as follows:-

In these circumstances, the only question that falls for our consideration is whether the payment made by the assessee to the secured creditors pro rata inter se, towards additional amount till the date of IPO, amounts to interest under section 2(28A) of the Act, or it is in the nature of compensation?

In Parag Mahasukhlal Shah (supra) there was additional payment of money under an agreement. Under such agreement the assessee was allowed interest free credit period for sixty days and in case of over due payment, the cost of purchase was paddled with a liability to pay a compensatory sum which was termed as ‘additional interest’. According to the learned Assessing Officer such additional amount, which was described as interest, is interest under section 2(28A) of the Act attracting 194A of the Act and consequently section 40(a)(ia) of the Act. A coordinate Bench of this Tribunal after discussing the ambit of the definition of interest under section 2(28A) of the Act held that if the immediate source of receipt of payment is a loan, deposit, etc., then the payment is in the nature of interest but if the immediate source of receipt of payment is trade activity, then the nature of receipt is not ‘interest payment ‘but in the nature of payment of compensation.

In West Bengal Housing infrastructure Development Corporation Ltd (supra) the assessee, who was engaged in the development of land, housing and infrastructural facilities was to make certain payments at a rate equivalent to the SBI interest rate of FDs in case of failure to make plots available to the allottees within a stipulated time. According to the learned Assessing Officer such additional payments are in the nature of interest as defined under section 2(28A) of the Act. When the matter

In Cauvery Spg & Wvg Mills Ltd (supra) a mill belonging to the assessee was holding a public auction, the court granted permission to the builder to pay some amount within six months without interest and to pay the balance in monthly instalments with interest. Assessee pleaded that such amounts received with interest also formed part of the sale consideration and, therefore, in respect of such interest component neither section 194A of the Act nor section 40(a)(ia) of the Act is attracted. The Hon’ble Madras High Court held that in order to answer the description of interest, the amount must have been received as a dew on account of any money either borrowed or debt incurred, and otherwise it cannot be treated as interest as defined under section 2(28A) of the Act.

Now coming to the case on hand, it could be seen from the SOA that as a part of the scheme the debt has to be discharged by issuance of CCDs to the secured creditors (pro rata inter se) and it will carry a coupon rate of 5% per annum payable half yearly to be converted into equity of the company at such price that would convert to 10% equity stake of the fully diluted equity share capital of the company posted the equity infusion for the expansion of the project. It is further stated in the SOA that such conversion shall happen at the time of achievement of financial closure for the expansion project and before any IPO in respect of equity shares of the company. At this juncture it was provided that from the date of conversion

It is, therefore, clear that the debt gets discharged on the secured creditors are issued with the CCDs pro rata inter se and the conversion thereof into equity at a stipulated price mentioned in the SOA. So far as the debt is concerned, it comes to an end by the date of issuance of equities. It has been the case of the assessee all through the proceedings that the amount now in question is not paid on the CCDs, as the CCDs were extinguished by the issue of equity shares of the company to the secured creditors. The additional amount was paid not because of the debt, but because of the delay caused in the assessee going to the IPO. On a careful consideration of the matter in the light of clause (d) extracted above, there is no doubt in our mind that what triggers the payment of additional amount is neither the debt nor in respect of the CCDs, but it is only such event occurs till the assessee goes for IPO. If the assessee goes to the IPO the moment the equity conversion takes place, no liability to pay the additional amount incurs to the assessee. If the assessee delayed the IPO till five years, there arises two consequences. The first consequence is that the assessee has to pay the additional amount calculated at 5% p.a. and the second consequence is that the secured creditors shall have the put

These facts are clear in their indication that the liability to pay the additional amount has nothing to do with the debt or CCDs, inasmuch as the CCDs were extinguished by such date, but it gets triggered only till the assessee goes to the IPO. When the payment has nothing to do with the debt or CCDs, in our considered opinion such payment does not fall under section 2(28A) of the Act. Inasmuch as the liability is not depending upon the debt or CCDs, but contingent upon the happening of the IPO, such payment cannot be called as payment of interest. Consequently, the provisions under section 194A or 40(a)(ia) of the Act are not attracted. Such an amount partakes the character of compensation accrued to the secured creditors because of the default committed by the assessee in going to the IPO and the moment the assessee goes to the IPO such a liability comes to an end.

With this view of the matter, we find it difficult to sustain the addition. We, therefore, direct the learned Assessing Officer to delete the addition made on this account and consequently allow the grounds of appeal relating to this aspect.

In view of our finding on the issue relating to the application of section 40(a)(ia) of the Act, the other amounts relating to the alternative plea of the assessee become academic. Ground No. 4 and 5 in respect of the interest on refund received by the assessee and verification of claim of

In the result, appeal of the assessee is allowed.