The main legal point established in the judgment is that Liquidated Damages can be considered as interest under Section 10(23G) of the Income Tax Act, and deductions under different clauses of Section 36 should be independently allowed without reducing the total income by specific deductions.

C.V. KARTHIKEYAN, J.

(Prayer: Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras 'A' Bench, Chennai, dated 30.11.2007 made in ITA No.795/Mds/2006.)

1. The Assessee has filed the present Appeal calling into question the order of the Income Tax Appellate Tribunal dated 30.11.2007. The Substantial questions on which the Appeal had been admitted on 08.07.2008 are as follows:-

“(i) Whether the Income Tax Appellate Tribunal erred in holding that the appellant was not entitled to the exemption under Section 10(23G) of the Income Tax Act in respect of the liquidated damages?; and

(ii) Whether the Income Tax Appellate Tribunal erred in holding that the deduction to which the appellant was entitled under Section 36(1)(viia)(c) of the Act was not to be granted after reducing from the appellant's income, the deduction to which the appellant was entitled under Section 36(1)(viii) of the Act.”

2. The appellant is a Public Limited Company incorporated on 30.01.1997 with the main object of providing Long Term Finance to enterprises engaged in developing, maintaining and operating infrastructure projects and facilities.

3. In the Assessment Year 2002-2003, matters surrounding which this appeal is concerned about, the appellant claimed exemption under Section 10(23G) of the Income Tax Act, 1961 (“the Act”) in respect of interest income earned by it from long term finance provided to enterprises undertaking developing, maintaining and operating infrastructure facilities. The Appellant claimed entitled for exemption with respect to the Liquidated Damages which had been 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 appellant.

4. The appellant in the Assessment Year 2002-2003 also claimed deductions under Section 36(1)(viia)(c) and independently under Section 36(1)(viii) of the Act in respect of provisions made for bad and doubtful debts.

5. The Assessing Officer, by order dated 28.03.2005, held that the appellant was not entitled for exemption under Section 10(23G) of the Act since, he opined that the amounts earned by the Appellant did not constitute 'interest' as defined under Section 2(28A) of the Act. The Assessing Officer also held that the claim for deduction under Section 36(1)(viia)(c) can be allowed only after reducing from the appellant's income, the deduction allowable under Section 36(1)(viii) of the Act and that deductions cannot be granted independent of each provision.

6. The Commissioner of Income Tax (Appeals) by order dated 22.02.2006 affirmed the decision of the Assessing Officer, and rejected the contentions of the appellant. Before the Commissioner of Income Tax, the Appellant had put forth an argument that the receipts by way of Liquidated Damages came within the definition of 'interest' as defined under Section 2 (28A) of the Act and had also insisted that it was entitled to a deduction under Section 36(1)(viia)(c) of the Act to the extent of 5% of the total income before reducing therefrom, the deduction to which the appellant was entitled under Section 36(i)(viii) of the Act.

7. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the Appellant had preferred a further Appeal before the Income Tax Appellate Tribunal. The Tribunal by its order dated 30.11.2007, which order is under challenge before us, followed its earlier consolidated order dated 29.03.2007 in the appellant's own case for the Assessment Years 1999-2000 to 2000-2001 and upheld the order of the Commissioner of Income Tax (Appeals) both with respect to denial of the claim for exemption under Section 10(23G) of the Act in respect of Liquidated Damages earned and with respect to the claim to entitlement for deduction under Section 36(i)(viiia)(c) of the Act before reducing therefrom the deduction under Section 36(i)(viii) of the Act.

8. Heard Mr.Farook Irani, lear