Madras High Court Remands Matter To AO To Determine Whether IL&FS Is Public Financial Institution

The division bench of Justice R.Mahadevan and Justice J.Satyanarayana Prasad set aside the order of the ITAT and remanded to the AO to examine, whether IL&FS is a public financial institution; and if it is in affirmative, then, section 43B(d) read with explanation 3C will be applicable; and pass orders afresh, after providing due opportunity of hearing to all the parties, within a period of eight weeks.

The assessee/respondent is an investment company, was promoted jointly by the Government of Tamil Nadu and IL&FS, with a view to implement a project under Tirupur Area Development Program. A shareholders agreement was entered into between the Government of Tamil Nadu and IL&FS as per which, apart from equity, the promoters agreed to provide the assessee company (TWICL) unsecured loan of Rs.40 crores in the proposition of Rs.25 crores by the Government of Tamil Nadu and Rs.15 crores by IL&FS for implementing the project.

While so, the assessee filed its returns for the assessment years in question. After scrutiny the Assessing officer was of the view that as per the loan agreement, the liability to pay interest on the unsecured loan arises only after five years from the operation date; the assessee was not required to pay the interest until the moratorium period; and they can claim interest after the moratorium period when the liability crystalizes.

Therefore, the assessing officer disallowed the claim for interest payable to the Tamil Nadu Government and IL&FS and completed the assessment for the years in question.

The Income Tax Appellate Tribunal allowed the assessee's appeal and dismissed the appeals filed by the Revenue, after having observed that the Government of Tamil Nadu and ILFS were not covered by the definition of Public Financial Institution as per Explanation 4 to sec. 43B read with sec.4A of the Companies Act, 1956 and hence, the provisions of section 43B(d) read with Explanation 3C would not be attracted to the case of the assessee.

Counsel for the Department contended that the Tamil Nadu Government may not be a Public Financial Institution but M/s.Infrastructure Leasing and Financial Services limited is a Public Financial Institution and therefore, the interest payment not paid by the assessee company to the promoters is hit by explanation 3C to Section 43B (d) of Income Tax Act. Whereas, the authorities below did not consider this aspect and they erroneously concluded that the promoters were not covered by the definition of Public Financial Institution as per Explanation 4 to Section 43B read with section 4A of the Companies Act, 1956.

On the other hand, the counsel for the assessee submitted that the Tribunal after analysing the entire materials placed before it, concluded that the promoters were not public financial institutions and hence, rightly dismissed the department's appeals, by the orders, which do not require any interference by this court.

The court noted that the interest payable to the Government of Tamil Nadu is not hit by the provisions of section 43B of the Act. However, in the present case, the assessee was provided with loan not only by the Government of Tamil Nadu, but also by M/s.Infrastructure Leasing and Financial Services Limited, and the interest liability, which accrued during the relevant assessment years, was not actually paid by the assessee, was sought to be deducted. In such circumstances, it has to be examined as to whether IL&FS is a public interest institution. Without verifying the same, the Tribunal simply held that the promoters were not covered under the definition of Public Financial Institution as per Explanation 4 to section 43B r/w section 4A of the Companies Act and hence, the provisions of section 43B(d) r/w Explanation 3C would not be applicable to the case of the assessee.

Case Title: Commissioner of Income Tax Versus M/s.Tamil Nadu Water Investment Co.Ltd

Citation: T.C.A.Nos. 1406 of 2008, 1382 & 1383 of 2009, 87 & 483 of 2011, 619 of 2014 and 928, 929 & 941 of 2015

Counsel for Appellant: Advocate M.Swaminathan assisted by Mrs.V.Pushpa

Counsel for Respondent: Advocate G.Baskar

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