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Liquidated damages to finance co. is ‘interest’ income eligible to section 10(23G) exemption.

The assessee was a public limited company incorporated with the main object of providing long-term finance to enterprises engaged in developing, maintaining and operating infrastructure projects and facilities.
It claimed exemption under section 10(23G) with respect to the liquidated damages received from the borrowers on account of default on their part in making payments as per the terms of the loan agreements entered into by them with the assessee.
Assessing Officer held that the assessee wasn’t entitled to exemption under section 10(23G) since the amounts earned by it did not constitute ‘interest’ defined under section 2(28A).
The Madras High Court held as per the agreement which assessee had entered into with its borrowers, in the case of default in payment of interest and all other monies (except liquidated damages) on their respective due dates, liquidated damage at the rate of 2.10 per cent per annum was to be levied and was payable by the borrowers for the period of default.
It was also seen that arrears of liquidated damages would carry interest at the rate of 2.5 per cent. Though the term liquidated damages was used in the agreement, yet it actually signified interest claimed by the assessee. This term ‘interest’ would come within the word ‘charge’ as provided under the definition of ‘interest’ in the Act and would be eligible for exemption under section 10(23G).

Prakhar Kalaniauthor

Prakhar Kalani (B.Com, ACA, DISA), Partner at Kalani Gattani & Co. Prakhar Kalani is a Qualified Chartered Accountant . contact him @ pkalani@kgcmail.com

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