2012 (12) TMI 822 - HC - Income Tax

Court Upheld Business Income Classification Over Interest Income for Discounting Charges

The Court upheld the Tribunal's decision categorizing discounting charges earned by an assessee from Indian parties as business income, not interest ... Interest u/s 2(28A) - Discounting charges earned by Singapore Company from Indian parties by discounting bills of exchange and promissory note - Taxability and TDS u/s 195 - Held that:- Confirming the previous ruling of the Tribunal [2009 (10) TMI 70 - ITAT DELHI-B] reported in CIT v. Cargill Global Trading Ltd. [2011 (2) TMI 209 - DELHI HIGH COURT] the definition of 'interest' under section 2(28A) and analyzing the contents of two circulars issued by the CBDT No. 65 dated 02.09.1971 and subsequent one dated 22.03.1993 (Circular No. 647)(sic) that discounting charges did not amount to interest and was not subject to tax - deletion of disallowance u/s 40(a)(i) of the Income-tax Act - no substantial question of law arises. Issues:1. Whether discounting charges earned by the assessee from Indian parties amount to interest as defined under section 2(28A) of the Income-tax ActRs.2. Taxability of discounting charges as interest income under sec. 234B of the Act.Analysis:Issue 1:The present appeals challenge three orders of the Income Tax Appellate Tribunal (ITAT) regarding the Assessment Years 2005-06, 2006-07, and 2007-08. The main question of law raised by the Revenue is whether the discounting charges earned by the assessee from Indian parties through discounting bills of exchange and promissory notes constitute interest as defined under section 2(28A) of the Income-tax Act. The assessee, incorporated in Singapore and a tax resident of that State, provided financial services during the relevant period. The Assessing Officer (AO) treated the discounting charges earned by the assessee as interest income on loans extended to customers, a decision upheld by the CIT (Appeal). However, the Tribunal, considering its previous rulings and the nature of discounting services provided by the assessee, allowed the assessee's appeal, categorizing the discounting charges as business income. The Tribunal's decision was influenced by its previous order for Assessment Years 2004-05, which was confirmed by the Court. The Court concurred with the Tribunal's reasoning, emphasizing that discounting charges do not amount to interest as per the Act's definition, leading to the dismissal of the appeals.Issue 2:Regarding the taxability of discounting charges as interest income under sec. 234B of the Act, the Tribunal's decision to treat the discounting charges as business income resulted in the deletion of the main addition related to taxability of discounting charges as interest income. As a consequence, the issue of charging interest under sec. 234B would require re-adjudication based on the Tribunal's observations. The Court, in alignment with the Tribunal's reasoning and previous rulings, dismissed the appeals, emphasizing that discounting charges are not to be considered as interest, thereby upholding the decision to treat them as business income. The Court's decision was further supported by the analysis of the definition of 'interest' under section 2(28A) of the Act and circulars issued by the CBDT, ultimately leading to the dismissal of the appeals due to the absence of any substantial question of law arising from the case.