The Chennai Bench of Income Tax Appellate Tribunal (ITAT) ruled that the factoring charges could not be termed as ‘Interest’ under section 2(28A) of Income Tax Act, 1961 and allowed for deduction under section 40(a)(ia) Income Tax Act.
This appeal for A.Y. 2007-08 was against the order of learned Commissioner of Income Tax (Appeals) [CIT(A)] in the matter of an assessment framed by Assessing Officer (AO) under section 143(3) read with section 147 of Income Tax Act.
The assessee M/s V.S.Net Limited was later known as M/s SVL Technologies & Network Limited which has finally merged with M/s Siva Industries and Holdings Limited w.e.f. 01.04.2011 vide order dated 22.08.2013 of High Court of Madras.
The assessee stated that they are engaged in making strategic investments in real estate space and having an objective to invest in large projects both in commercial and residential space.
The assessee claimed factoring charges of Rs.782.68 Lakhs in the Profit & Loss Account.
Furthermore, it transpired that the assessee took an unsecured loan from its holding company M/s Siva Ventures Ltd. (SVL) and advanced the same to its subsidiary company M/s Vantage Realty Pvt. Ltd. (VRPL).
The assessee also obtained a loan of Rs.100 Crores from M/s Easy Access financial Services Ltd. (EAFSL) and paid factoring charges of Rs.782.68 Lacs by pledging receivables from M/s VRPL.
The AO held that factoring charges was nothing but interest and therefore, the deduction of which would not be allowed to the assessee in terms of Section 40(a)(ia) of Income Tax Act, inter-alia, for want of deduction of tax at source.
The decision of the AO was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. Thus, the assessee appealed before the ITAT.
The bench of Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant Member) observed the facts that the assessee has availed factoring facility from EAFSL against receivables and paid factoring charges. We find that factoring charges could not be termed as interest under section 2(28A) of Income Tax Act.
The tribunal stated that the assessee’s interest income would qualify as “business income” and that there is a complete connection between the factoring fees and the funds that were lent by the assessee, making the factoring fees an allowed deduction for the assessee.
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