TaxTMI 
TaxTMI 
2023 (3) TMI 657
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....allowance under section 40(a)(ia) of the Act. This expenditure was incurred by the assessee under the head "other borrowing cost and financial charges". 3. 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 creditor....
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....l 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 ....
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....he Secured Creditors for a total value of Rs. 325 crore together with accrued interest at the abovementioned rate." 9. 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. 10. 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:- "The company in terms of the Scheme of Arrangement (SOA) as sanctioned by the Hon'ble High Court of Andhra Pradesh, achieved the financial closure, and leading to the conversion of the outstanding amount of Rs.2,75,00,000/- of CCDs was triggered and accordingly a total of 5,2....
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....ntures or equity shares, instead of paying in cash, does not change the legal character of debt and the payments associated with debt is nothing but interest only as per the provisions of the Act, 1961, even, if it is a redemption premium on CCDs, redemption premium on the convertible debenture has all the characters of interest defined under section 2(28A) of the Act. For these reasons the learned Assessing Officer held that the payment is undoubtedly covered u/s.194A of the Act, and therefore, the provisions of section 40(a)(ia) of the Income tax Act are applicable. Ld. CIT(A) also endorsed the same view. 12. 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? 13. 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 ....
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....eme 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 of CCDs into equity till the date of IPO, the company shall pay to the secured creditors pro rata inter se, an additional amount calculated at the rate of 5% per annum (payable half yearly on September 30th and March 30th each year) on the said amount. Further stipulation is that in case of IPO does not materialise within five years from 20/12/2006, the secured creditors shall have the put option on the bidder for selling equity stake/CCDs of the secured creditors for a total value together with accrued interest at the above-mentioned rate. 17....