Madras High Court
Viswapriya Financial Services & ... vs Commissioner Of Income Tax on 9 October, 2002
Equivalent citations: (2003)179CTR(MAD)334, [2002]258ITR496(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu, K. Raviraja Pandian
JUDGMENT R. Jayasimha Babu, J.
1. The question requiring our consideration in these references is as to whether the payment made by the assessee which is a company engaged in retail finance services, corporate advisory services, securities trading and assets securitisation to the persons who had invested in a scheme floated by the assessee under which the investor was guaranteed a minimum return of 1.5 per cent a month, is "interest" as it is defined in Section 2(28A) of the IT Act, 1961. The assessment years are 1993-94 and 1994-95.
That definition reads as under :
"'interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised."
2. The Tribunal has held that the moneys received by the assessee from the investors create an obligation and that the return on that investment at the guaranteed minimum payment of 1.5 per cent per month is covered by this definition and, therefore, the assessee was liable to deduct under Section 194A, tax at source on the payments made to the investors. The Tribunal has upheld the order that has been made by the authorities under Section 201 and has remanded to the AO, the matter concerning the levy of interest under Section 201(1A) with a direction to the AO to find out the actual liability of tax to be deducted by the assessee after taking into consideration the payment of tax already made by different investors on the amount of interest received by them from the assessee.
3. At the instance of the assessee, five questions are referred. They relate to the liability of the applicant to deduct tax at source under Section 194A; the correctness of the Tribunal holding that Section 2(28A) applies to the facts of this case; the correctness of the Tribunal's finding with regard to the applicability of Section 194A in the context of the assessee's claim that it is only managing the investors' funds and had only undertaken a performance obligation; as to whether the Tribunal was right in holding that the applicant was liable to pay tax under Section 201(1) of the Act, and last as to whether the Tribunal was right in holding that the applicant is liable to pay interest under Section 201(1A) of the Act.
4. Mr. Vaish, learned senior counsel submitted that the assessee, for the first time in the country, had brought to the retail investors the concept of securitisation of investments and by this innovative scheme it had enabled individual investors to entrust their funds for management by the assessee with a guarantee from the assessee that it would so manage the funds as to ensure a minimum return of 1.5 per cent per month to the investor even while ensuring that the investments made in the course of the management are fully securitised and are backed by bank guarantees. Counsel also submitted that the investors' moneys are not made part of the funds of the assessee-company's accounts, but are kept in a separate account termed "Viswapriya Funds Management Account--Bank Guaranteed Investments" and that a firm of chartered accountants has been appointed to function as fiduciary and custodian of the scheme and the accounts of that fund are also separately audited. The assessee, it was submitted, was only the fund manager which received a management fee at 6 per cent per annum from all the funds invested on behalf of the investors and that it has agreed to forgo a part of that management fee if the returns on the investment are insufficient to ensure the stipulated distribution at the rate of 1.5 per cent per month to the investors. If the return from the investments is in excess of the amount of management fee and the minimum guaranteed return for the investor, the assessee would become entitled to a performance incentive of 10 per cent of such excess. The cost of deployment of the funds was borne by the assessee out of its management fee. The fund provided by the investors, it was submitted, were employed in a bank guaranteed land deal and in discounting of bills which had been co-accepted by banks or were covered under bank letters of credit.
The income so received by the assessee from such investments did not attract the liability for deduction of tax at source and, therefore, when the amounts were distributed among the investors, no tax was deducted at source as the returns on the investments made from the fund were received by the fiduciary and the custodian. Counsel also submitted that the opinion of counsel had been obtained before devising the scheme and deciding not to withhold any tax on the payments made to the investors who had invested the money in the fund organised by the assessee-company. Counsel submitted that there was no provision for obtaining advance rulings when the scheme was commenced, which could have been resorted to by the assessee to ascertain the precise extent of its liability for tax and its obligation with regard to the deduction of tax at source on the amount distributed to the investors. That the action taken by the assessee was bona fide and its bona fides have also been accepted by the Tribunal.
Counsel further submitted that what was in issue before the Tribunal was not the levy of tax on income, but the alleged failure on the part of the assessee to deduct the tax, which, the person who received the amount distributed by the assessee was liable to pay on such receipt. The person who received the income was, at all times, liable to pay the tax and notwithstanding that the assessee had not deducted the tax, the recipient of the income was liable to tax and therefore, the Revenue had not incurred any loss by reason of the fact that the assessee had not deducted tax at source.
5. The offer memorandum issued by the assessee when it invited investors to contribute to entrust their moneys to the assessee for what has been referred to as funds management, sets out that the offer memorandum will form the contract between the investors and the assessee for the management on the investors' behalf of the funds provided by the investors under the memorandum for deployment in any investment, where all the investments are covered by bank guarantee and yield at least 1.5 per cent every month. The investor, under that memorandum, was to pay the amount to the assessee by cheques or drafts drawn in the name of "Viswapriya Funds Management Account-Bank Guaranteed Investments". That fund, it is stated in the memorandum, will be operated by the fiduciary of the scheme and/or the constituted attorneys. It further provides that the funds of the investor will be invested either singly or jointly with the funds of others, that the investment shall be redeemable within a maximum period of three years, that the named firm of chartered accountants will function as fiduciary and custodian who will be responsible for the safe custody of documents and for ensuring that the funds collected are deployed in accordance with the condition stipulated in the memorandum, ensuring that the bank guarantees are invoked in cases of default by the borrowers from the fund; that monthly payments are collected and distributed to the investors, the payment of management time of redemption/termination and to record transfers of interest in the investment certificate as and when notified by the investors.
The investor is promised under that memorandum, a monthly payment of 1.5 per cent of the amount invested if option is exercised for monthly payments. For those who opt for re-investment scheme, that sum is to be credited to their account and is deemed to be re-invested from the date of credit. The memorandum sets out that the assessee will be entitled to a management fee of 6 per cent of the funds invested on behalf of the investor and also 10 per cent of the amount in excess of the 1.5 per cent return to the investors and 6 per cent management fee.
If the returns from the invested funds are insufficient to ensure payment of 1.5 per cent return to the investors, the assessee is to forgo its management fee to the extent required to make up the shortfall. The investor has been promised the return of his investment at the end of the agreed period of three years. The memorandum states "VFSS shall on redemption of investment arrange to repay the investor the funds under management unless VFSS receives specific instruction regarding continuation of funds management under any other schemes." The investment made by the investor is transferable. It may be assigned or pledged with prior intimation to VFSS. In the event of the death of the investor, the amount is to be transferred to his nominee if any, and in the absence of nomination, to his legal heirs. The memorandum also sets out that investments that are proposed to be made from the fund will be investments which do not attract the provision regarding tax deduction at source, that in case tax is deducted at source, the same would be deducted from the gross income earned by the investor.
In this scheme, an invitation is extended to the prospective investor to entrust his or her moneys to the assessee with the assurance that the moneys would be returned to the assessee (sic) at the end of the period of three years when the certificate of investment issued by the assessee is to be redeemed by the assessee and that during the tenure of that scheme, the investor is to receive a return of 1.5 per cent per month. The moneys entrusted under the scheme are to be managed by the assessee and the investor is not required to be informed as to the specific investments made from the fund and the particular investment in which the investor's amount is utilised. The investor in the scheme is assured of his return irrespective of the amounts realised from out of the investments made from the fund, the obligation to ensure such a return being on the assessee.
6. The claim made by the assessee that this scheme does not bring about a relationship of debtor and creditor or borrower and lender and, therefore, Sections 194A, 201(1), 201(1A) r/w Section 2(28A) of the Act are not attracted has to be tested with reference to the definition of "interest" in Section 2(28A). If the payment made by the assessee to the investors falls within the definition, the other sections are necessarily attracted.
7. The definition of interest, after referring to the interest payable in any manner in respect of any moneys borrowed or debt incurred proceeds to include in the terms money borrowed or debt incurred, deposits, claims and "other similar right or obligation" and further includes any service fee or other charge in respect of the moneys borrowed or debt incurred which would include deposit, claim or other similar right or obligation, as also in respect of any credit facility which has not been utilised. This statutory definition regards amounts which may not otherwise be regarded as interest for the purpose of the statute. Even amounts payable in transactions where money has not been borrowed and debt has not been incurred, are brought within the scope of the definition as in the case of a service fee paid in respect of a credit facility which has not been utilised, Even in cases where there is no relationship of debtor and creditor or borrower and lender, if payment is made in any manner in respect of any moneys received as deposits or on money claims or rights or obligations incurred in relation to money, such payment is, by this statutory definition, regarded as interest.
8. The scheme under which the assessee induced investors to entrust their moneys to the assessee, under the very terms of the scheme, imposed an obligation on the assessee to repay the investor at the end of the period of 36 months, and also to ensure a monthly payment of 1.5 per cent to the investor during that period. The mere fact that the assessee did not choose to characterise such payment as interest will not take such payment out of the ambit of the definition of "interest". The payment made by the assessee being a payment made in respect of an obligation incurred under the terms of the offer/memorandum, is an amount which we have to regard as interest falling within the scope of Section 2(28A). So far as the investor is concerned, the investor is to look to the assessee for repayment of the moneys. The obligation to repay is clearly an obligation which is akin to a claim or a deposit to which reference is made in the definition of interest. The amount paid to the investors therefore was clearly in the nature of interest and the assessee was required to comply with Section 194A of the Act. Section 201 would clearly apply by reason of the assessee's admitted failure to comply with Section 194A. Section 201(1A) being mandatory, that provision also would apply.
9. Learned counsel for the assessee submitted that under the Act while an obligation is cast upon a person paying interest to deduct tax, there is no incentive at all to the person on whom that obligation is imposed for acting as the agent of the State for the purpose of collection of tax and remitting the same to the State's coffers. Counsel submitted that in some countries in the West, the Revenue offers some kind of a concession to the taxpayers for rendering that service either by way of reduction in the tax bill of the taxpayer or letting the taxpayer avail of the benefit from cash flow by retaining the sums deducted for a few months or by giving a rebate on the taxes collected, etc. Counsel stated that some countries are happy to send a "thank you" letter and even that is missing in the scheme of the Act. These are matters "for the Legislature and the executive.
10. The questions referred to us, having regard to the foregoing discussion have to be and are answered in favour of the Revenue and against the assessee.