ICDS-IV does not apply to ‘Excess Interest Spread’ receivable on securitization transactions: ITAT

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  • Last Updated on 3 October, 2022

ICDS; securitization transactions

Case Details: Poonawalla Fincorp Ltd. v. PCIT - [2022] 142 taxmann.com 530 (Kolkata-Trib.)

Judiciary and Counsel Details

    • Sanjay Garg, Judicial Member & Girish Agrawal, Accountant Member
    • S.K. Tulsiyan, Adv. & Ms Puja Somani, CA for the Appellant.
    • Amitava Bhattacharya, CIT DR for the Respondent.

Facts of the Case

Assessee was an Asset Finance Company (AFC) registered as a Non-Banking Finance Company (NBFC) with the Reserve Bank of India. During the year, it entered into a securitization transaction. The assessee sold its loan portfolio to a Special Purpose Vehicle (SPV) for immediate cash payment.

SPV sold security interests to third-party investors. The assessee filed its return of income showing Excess Interest Spread (EIS) on securitization transactions in the subsequent years in which such income was received.

Later, the Pr. CIT exercised the powers under section 263 and contended that such receipt was in the nature of interest that should be disclosed on an accrual basis as per ICDS-IV. Aggrieved-assessee filed the instant appeal before the Kolkata Tribunal.


The Kolkata Tribunal held that the Reserve Bank of India (RBI) vide circular dated, 21-09-2012, has clarified that recognition of EIS shall be done only when the same is redeemed in cash.

Assessee being an NBFC is governed by the RBI instructions which are binding on it and override the provisions of the Income-tax Act. Accordingly, it had offered its income to taxation as per the regulations formulated under the special Act.

Further, ICDS-IV does not apply to EIS receivable on securitization transactions as it is not “interest” under section 2(28). As per the definition in section 2(28), “Interest” is in respect of any money borrowed or debt incurred.

However, in the present case, the loan portfolio was sold by the assessee to the SPV and therefore is no longer a lender for the customers. The loan ceases to exist in the audited accounts of the assessee on the date when the securitization agreement was entered into by the assessee. Accordingly, once EIS was held as not in the nature of “interest” as defined under section 2(28), ICDS-IV has no application.

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