The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that broken-period interest received by a Singapore-based investor on the sale of non-convertible debentures (NCDs) retains the character of interest income and cannot be treated as short-term capital gains merely because it was received from the purchaser rather than the issuer.
The bench of Shri Vikas Awasthy (Judicial Member) and Renu Jauhari (Accountant Member) has observed that the source of payment does not determine the nature of the receipt. Simply because the broken-period interest was paid by the buyer of the debentures rather than by the issuer, the character of the income did not change from interest to capital gains.
The assessee, a Singapore-incorporated company and a SEBI-registered Foreign Venture Capital Investor (FVCI), had invested in Non-Convertible Debentures issued by GMR Airports Limited (GAL). The company held a valid Singapore Tax Residency Certificate and claimed benefits under the India-Singapore Double Taxation Avoidance Agreement (DTAA).
During the relevant assessment year, the assessee earned income from the redemption and sale of NCDs issued by GAL. While redemption premium received directly from GAL was offered to tax as interest income, a dispute arose regarding an amount of ₹6.35 crore representing interest accrued for a five-day period before the sale of debentures to JP Morgan Securities Asia Pte. Ltd. (JPMSA).
The assessee contended that this amount constituted short-term capital gains arising from the transfer of NCDs and was exempt from taxation in India under Article 13(5) of the India-Singapore DTAA. The tax department, however, treated the amount as interest income taxable in India.
The taxpayer argued that the disputed sum of ₹6.35 crore was not paid by the issuer of the debentures, GAL, but by the purchaser JPMSA when the NCDs were transferred on a cum-interest basis. According to the assessee, since there was no lender-borrower relationship between the assessee and JPMSA, the payment could not be characterized as interest.
The company further maintained that the amount represented capital gains arising from the transfer of capital assets and therefore fell within the scope of Article 13(5) of the India-Singapore DTAA, making it non-taxable in India.
The argued that the disputed amount represented accrued interest for the broken period immediately preceding the sale of the debentures. Merely because the payment was received from the purchaser instead of the issuer did not alter its fundamental nature.
The department relied on judicial precedents dealing with debentures and redemption premiums, contending that returns linked to debt instruments remain interest income notwithstanding the manner or route through which they are received.
The ITAT agreed with the Revenue’s position and observed that interest up to 30 June 2019 had been paid by GAL and declared by the assessee as interest income. The disputed amount represented interest for the subsequent five-day period before the NCDs were sold on 5 July 2019.
The Tribunal emphasized that the payment was intrinsically linked to the interest accrued on the debt instrument and therefore remained taxable as interest income under the head “Income from Other Sources.”
Upholding the assessment order, the Tribunal concluded that the amount of ₹6.35 crore received by the assessee from JPMSA represented interest for the broken period and was chargeable to tax as interest income. Consequently, the claim for exemption under the capital gains provisions of the India-Singapore DTAA was rejected.
The appeal filed by the assessee was accordingly dismissed on 15 June 2026.
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