Our securitisation trust pays excess interest spread to the originator, who met its retention requirement by cash collateral rather than by buying PTCs. Were we obliged to deduct under section 194LBC?
No, on the Mumbai Tribunal's reasoning. Section 194LBC applies only where income is payable to an 'investor' in respect of an investment in the securitisation trust, and 'investor' is defined in clause (a) of the Explanation after section 115TCA as a holder of a securitised debt instrument, securities or a security receipt ISSUED BY the trust — a deed of assignment, by which the trust acquires the receivables, is not such an instrument. The originator here had subscribed to no pass-through certificates and had met its Minimum Retention Requirement by cash collateral and by collateralising excess receivables, so neither condition in the section was satisfied, and the demands of Rs. 4,21,30,230 under section 201(1) and Rs. 47,22,191 under section 201(1A) were deleted.
Decided by the ITAT (Shri Amarjit Singh, Accountant Member and Shri Rahul Chaudhary, Judicial Member) on 2024-02-21, reported as ITA Nos. 341/Mum/2023 and 342/Mum/2023, Income Tax Appellate Tribunal, 'G' Bench, Mumbai; assessment years 2017-18 and 2018-19; hearing concluded 27 December 2023, pronounced 21 February 2024. It bears on section 194LBC, section 115TCA, section 201, section 201(1), section 201(1A) of the Income Tax Act 1961, in TDS Defaults, Charitable Trusts & Exemption, How Tax Law Is Read and Demand, Recovery & Stay matters.
Excess interest spread is the residual that flows back to the originator in almost every Indian securitisation, and after the survey on the Sansar Trust group the department raised section 201 demands across the market on exactly this basis. The Tribunal's two-condition analysis is the answer, and both limbs are worth carrying. On the first, the definition of 'investor' is a HOLDING test, and the Tribunal's key move was structural: securitisation under regulation 2(1)(r) of the 2008 Regulations involves both the acquisition of receivables by the special purpose distinct entity and the issuance of securitised debt instruments to investors, and the deed of assignment deals only with the first part — it is not an instrument issued by the entity, so it cannot be the securitised debt instrument the definition requires. On the second, even treating the originator as an investor, excess interest spread is the residual flowing through the waterfall and is not paid in respect of any investment in the trust; it is a reward for creating an assignable pool of loan receivables, which the Tribunal supported by noting that excess interest spread was paid to originators before the Minimum Retention Requirement existed at all. The corollary for the other side is equally clear and should be told to clients: an originator who DOES subscribe to pass-through certificates or other securities issued by the trust is an investor, and the Tribunal said so expressly. Note also that the rate has since changed — for credits or payments on or after 1 April 2025, section 194LBC(1) carries a flat ten per cent.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The appellant is a securitisation trust which acquired a portfolio of financial assets from Equitas Finance Limited, the originator, under a Deed of Assignment of Receivables in the Process of Securitization dated 30 August 2016. In a securitisation the special purpose vehicle acquires the pool from the originator, issues divisible securities or pass-through certificates against it, and services those securities from the cash flow; because the income from the pool generally exceeds what is needed to service the certificates, the excess is paid back to the originator as Excess Interest Spread. Following a survey and enquiry in the case of the Sansar Trust group of securitisation trusts managed by IDBI Trusteeship Services Limited, it was found that the appellant had paid Rs. 14,04,34,102 as Excess Interest Spread in financial year 2016-17 without deducting tax under section 194LBC. By order dated 25 February 2019 under section 201/201(1A) the Assessing Officer raised a demand of Rs. 4,21,30,230 for failure to deduct and Rs. 47,22,191 as interest. The Commissioner (Appeals), National Faceless Appeal Centre, dismissed the appeal on 19 October 2022, holding that after the Reserve Bank of India's 2012 guidelines the originator must maintain the Minimum Retention Requirement throughout, so the Excess Interest Spread is linked to the originator's investment, and that the deed of assignment is itself an instrument acknowledging the originator's beneficial interest. It was common ground that the originator had not subscribed to any pass-through certificates and had met the Minimum Retention Requirement to the extent of Rs. 18.94 crore by way of credit collateral.
Both appeals were allowed. The provisions of section 194LBC are not attracted in the facts and circumstances of the case, the appellant was under no obligation to withhold tax from the payment of Excess Interest Spread to the originator, and the demands of Rs. 4,21,30,230 under section 201(1) and Rs. 47,22,191 under section 201(1A), aggregating Rs. 4,68,52,422, were deleted (paragraph 22). The without-prejudice contentions were left unadjudicated as academic. The findings were applied mutatis mutandis to assessment year 2018-19 (paragraph 25), and both appeals were allowed (paragraph 26).
The Tribunal identified the two conditions in section 194LBC — that the income be payable to an investor, and that it be in respect of an investment in the securitisation trust — and worked through the definitions. 'Investor' in section 194LBC takes its meaning from clause (a) of the Explanation to section 115TCA, namely a person who is the holder of any securitised debt instrument, securities or security receipt issued by the securitisation trust; 'securitised debt instrument' takes its meaning from regulation 2(1)(s) of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations 2008, which refers to section 2(h)(ie) of the Securities Contracts (Regulation) Act 1956, under which such an instrument is one issued to an investor by a special purpose distinct entity possessing debt or receivables assigned to it and acknowledging the investor's beneficial interest in that debt or receivable. From those provisions the Tribunal derived three requirements: a certificate or instrument issued by the special purpose distinct entity, an entity that possesses the debt or receivable, and an instrument acknowledging the holder's beneficial interest in it. It rejected the Revenue's case that the Deed of Assignment is such an instrument: securitisation as defined in regulation 2(1)(r) of the 2008 Regulations involves both the acquisition of the debt or receivables by the special purpose distinct entity and the issuance of securitised debt instruments to investors based on them, and the Deed of Assignment deals only with the first limb and does not deal with issuance, so it cannot be regarded as an instrument issued by the entity. Turning to the Minimum Retention Requirement guidelines of 21 August 2012, the Tribunal noted that the Reserve Bank of India permits the originator to meet the requirement by investment in the securities of the trust or by providing credit enhancement, cash collateral or balance sheet support, and held that where the commitment is met by any alternative other than subscription, the originator holds no investment in the trust and cannot be regarded as an investor — while accepting expressly that an originator who does subscribe to pass-through certificates or other securities of the trust can be an investor. Following its own earlier decision in Vivriti Cibus on identical facts, it concurred in the further conclusion that even if the originator were an investor, the Excess Interest Spread is the residual amount flowing through the trustee's waterfall mechanism, is not pursuant to or a return of any investment in the trust, and represents a reward for the effort of creating an assignable pool of loan receivables — a conclusion corroborated by the fact that Excess Interest Spread was paid to originators before the Minimum Retention Requirement was introduced in 2012.
we hold that the provisions of Section 194LBC of the Act would not be attracted in the facts and circumstances of the present case.
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Handle my notice → Ask a CA on WhatsAppNo, on the Mumbai Tribunal's reasoning. Section 194LBC applies only where income is payable to an 'investor' in respect of an investment in the securitisation trust, and 'investor' is defined in clause (a) of the Explanation after section 115TCA as a holder of a securitised debt instrument, securities or a security receipt ISSUED BY the trust — a deed of assignment, by which the trust acquires the receivables, is not such an instrument. The originator here had subscribed to no pass-through certificates and had met its Minimum Retention Requirement by cash collateral and by collateralising excess receivables, so neither condition in the section was satisfied, and the demands of Rs. 4,21,30,230 under section 201(1) and Rs. 47,22,191 under section 201(1A) were deleted. This was decided by the ITAT (Shri Amarjit Singh, Accountant Member and Shri Rahul Chaudhary, Judicial Member) and bears on section 194LBC, section 115TCA, section 201, section 201(1), section 201(1A) of the Income Tax Act 1961. It is reported as ITA Nos. 341/Mum/2023 and 342/Mum/2023, Income Tax Appellate Tribunal, 'G' Bench, Mumbai; assessment years 2017-18 and 2018-19; hearing concluded 27 December 2023, pronounced 21 February 2024. Excess interest spread is the residual that flows back to the originator in almost every Indian securitisation, and after the survey on the Sansar Trust group the department raised section 201 demands across the market on exactly this basis. The Tribunal's two-condition analysis is the answer, and both limbs are worth carrying. On the first, the definition of 'investor' is a HOLDING test, and the Tribunal's key move was structural: securitisation under regulation 2(1)(r) of the 2008 Regulations involves both the acquisition of receivables by the special purpose distinct entity and the issuance of securitised debt instruments to investors, and the deed of assignment deals only with the first part — it is not an instrument issued by the entity, so it cannot be the securitised debt instrument the definition requires. On the second, even treating the originator as an investor, excess interest spread is the residual flowing through the waterfall and is not paid in respect of any investment in the trust; it is a reward for creating an assignable pool of loan receivables, which the Tribunal supported by noting that excess interest spread was paid to originators before the Minimum Retention Requirement existed at all. The corollary for the other side is equally clear and should be told to clients: an originator who DOES subscribe to pass-through certificates or other securities issued by the trust is an investor, and the Tribunal said so expressly. Note also that the rate has since changed — for credits or payments on or after 1 April 2025, section 194LBC(1) carries a flat ten per cent. If it applies to you, the first step is this: Establish from the transaction documents exactly how the originator met its Minimum Retention Requirement. Subscription to pass-through certificates or other securities issued by the trust makes it an investor; cash collateral, credit enhancement or collateralising excess receivables does not.
The appellant is a securitisation trust which acquired a portfolio of financial assets from Equitas Finance Limited, the originator, under a Deed of Assignment of Receivables in the Process of Securitization dated 30 August 2016. In a securitisation the special purpose vehicle acquires the pool from the originator, issues divisible securities or pass-through certificates against it, and services those securities from the cash flow; because the income from the pool generally exceeds what is needed to service the certificates, the excess is paid back to the originator as Excess Interest Spread. Following a survey and enquiry in the case of the Sansar Trust group of securitisation trusts managed by IDBI Trusteeship Services Limited, it was found that the appellant had paid Rs. 14,04,34,102 as Excess Interest Spread in financial year 2016-17 without deducting tax under section 194LBC. By order dated 25 February 2019 under section 201/201(1A) the Assessing Officer raised a demand of Rs. 4,21,30,230 for failure to deduct and Rs. 47,22,191 as interest. The Commissioner (Appeals), National Faceless Appeal Centre, dismissed the appeal on 19 October 2022, holding that after the Reserve Bank of India's 2012 guidelines the originator must maintain the Minimum Retention Requirement throughout, so the Excess Interest Spread is linked to the originator's investment, and that the deed of assignment is itself an instrument acknowledging the originator's beneficial interest. It was common ground that the originator had not subscribed to any pass-through certificates and had met the Minimum Retention Requirement to the extent of Rs. 18.94 crore by way of credit collateral. The matter was decided on 2024-02-21 by the ITAT (Shri Amarjit Singh, Accountant Member and Shri Rahul Chaudhary, Judicial Member). On those facts the ITAT held as follows. Both appeals were allowed. The provisions of section 194LBC are not attracted in the facts and circumstances of the case, the appellant was under no obligation to withhold tax from the payment of Excess Interest Spread to the originator, and the demands of Rs. 4,21,30,230 under section 201(1) and Rs. 47,22,191 under section 201(1A), aggregating Rs. 4,68,52,422, were deleted (paragraph 22). The without-prejudice contentions were left unadjudicated as academic. The findings were applied mutatis mutandis to assessment year 2018-19 (paragraph 25), and both appeals were allowed (paragraph 26).
The Tribunal identified the two conditions in section 194LBC — that the income be payable to an investor, and that it be in respect of an investment in the securitisation trust — and worked through the definitions. 'Investor' in section 194LBC takes its meaning from clause (a) of the Explanation to section 115TCA, namely a person who is the holder of any securitised debt instrument, securities or security receipt issued by the securitisation trust; 'securitised debt instrument' takes its meaning from regulation 2(1)(s) of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations 2008, which refers to section 2(h)(ie) of the Securities Contracts (Regulation) Act 1956, under which such an instrument is one issued to an investor by a special purpose distinct entity possessing debt or receivables assigned to it and acknowledging the investor's beneficial interest in that debt or receivable. From those provisions the Tribunal derived three requirements: a certificate or instrument issued by the special purpose distinct entity, an entity that possesses the debt or receivable, and an instrument acknowledging the holder's beneficial interest in it. It rejected the Revenue's case that the Deed of Assignment is such an instrument: securitisation as defined in regulation 2(1)(r) of the 2008 Regulations involves both the acquisition of the debt or receivables by the special purpose distinct entity and the issuance of securitised debt instruments to investors based on them, and the Deed of Assignment deals only with the first limb and does not deal with issuance, so it cannot be regarded as an instrument issued by the entity. Turning to the Minimum Retention Requirement guidelines of 21 August 2012, the Tribunal noted that the Reserve Bank of India permits the originator to meet the requirement by investment in the securities of the trust or by providing credit enhancement, cash collateral or balance sheet support, and held that where the commitment is met by any alternative other than subscription, the originator holds no investment in the trust and cannot be regarded as an investor — while accepting expressly that an originator who does subscribe to pass-through certificates or other securities of the trust can be an investor. Following its own earlier decision in Vivriti Cibus on identical facts, it concurred in the further conclusion that even if the originator were an investor, the Excess Interest Spread is the residual amount flowing through the trustee's waterfall mechanism, is not pursuant to or a return of any investment in the trust, and represents a reward for the effort of creating an assignable pool of loan receivables — a conclusion corroborated by the fact that Excess Interest Spread was paid to originators before the Minimum Retention Requirement was introduced in 2012. In the words reproduced by the source cited on this page: "we hold that the provisions of Section 194LBC of the Act would not be attracted in the facts and circumstances of the present case." The decision followed or applied M/s Vivriti Cibus 013 2017 v. Income Tax Officer (TDS)-2(3)(3), Mumbai, ITA No. 3171/Mum/2022, order dated 30 November 2023 (assessment year 2018-19) — followed on identical facts.
It was decided by the ITAT on 2024-02-21 and is reported as ITA Nos. 341/Mum/2023 and 342/Mum/2023, Income Tax Appellate Tribunal, 'G' Bench, Mumbai; assessment years 2017-18 and 2018-19; hearing concluded 27 December 2023, pronounced 21 February 2024. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 194LBC, section 115TCA, section 201, section 201(1), section 201(1A), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were allowed. The provisions of section 194LBC are not attracted in the facts and circumstances of the case, the appellant was under no obligation to withhold tax from the payment of Excess Interest Spread to the originator, and the demands of Rs. 4,21,30,230 under section 201(1) and Rs. 47,22,191 under section 201(1A), aggregating Rs. 4,68,52,422, were deleted (paragraph 22). The without-prejudice contentions were left unadjudicated as academic. The findings were applied mutatis mutandis to assessment year 2018-19 (paragraph 25), and both appeals were allowed (paragraph 26). It arises in TDS Defaults, Charitable Trusts & Exemption, How Tax Law Is Read and Demand, Recovery & Stay matters, on section 194LBC, section 115TCA, section 201, section 201(1), section 201(1A) of the Income Tax Act 1961, and was decided by Shri Amarjit Singh, Accountant Member and Shri Rahul Chaudhary, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Take the point that the deed of assignment is not a securitised debt instrument, because securitisation under regulation 2(1)(r) of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations 2008 has two limbs and the assignment deed deals only with acquisition, not with issuance by the special purpose distinct entity. Run the second condition as an independent answer: excess interest spread is the residual in the waterfall and is not paid in respect of any investment in the trust, so even an originator who is an investor attracts no deduction on that payment. Use the historical point the Tribunal accepted — excess interest spread was paid to originators before the Reserve Bank of India introduced the Minimum Retention Requirement in 2012 — to show that the payment is not a return on any retained interest. Where the payee has already offered the excess interest spread and paid tax, keep the first proviso to section 201(1) and Form 26A in reserve, but do not let the absence of Form 26A concede the primary point; the Tribunal treated the without-prejudice contentions as academic once the section did not apply. Cite the Tribunal's earlier order in M/s Vivriti Cibus 013 2017 v. ITO (TDS)-2(3)(3), Mumbai (ITA No. 3171/Mum/2022, order dated 30 November 2023), which this order follows on identical facts. For credits or payments on or after 1 April 2025, note that the rate in section 194LBC(1) is now a flat ten per cent, so old orders reciting twenty-five or thirty per cent are computing on a superseded rate.
Still good law. The citator returns nothing for this doc id, but a name search shows the order has in fact been taken up. In Venus Trust March 2015 v ITO (TDS), ITAT Mumbai, 9 September 2024 (ITA No. 2387/Mum/2022), the Bench, in its own findings from paragraph 17, listed this order among the decisions taking the same view - 'In SME Pool Series V August 2016 v. Income Tax Officer (TDS) - 2 (2) (1) Mumbai, ITAT No. 341/Mum/2023 & 342/Mum/2023 this Hon'ble Tribunal held that ...' - set out its reasoning that excess interest spread is not income in respect of investment in the securitisation trust, and at paragraph 20 reached the same conclusion on its own account: once the income is not in respect of investment in the trust, 'the twin conditions mentioned in Section 194LBC have not been met and hence the liability to deduct TDS does not trigger'. A later Bench in Hebros AHL IFMR Capital 2014 v ITO (TDS), ITAT Mumbai, 9 February 2026, reached the same result but did so on the authority of Vivriti Cibus; there this order appears only in counsel's submissions, so it is not counted as an application. Nothing overruling or doubting it was found, and no High Court or Supreme Court decision on section 194LBC and EIS was traced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read the paragraph numbering of this order with care, because it contains a long quotation that carries its own numbering. Paragraph 10 reproduces the Departmental Representative's written submissions in full, and those submissions themselves run to internally numbered points 2 to 14 which include a complete reproduction of section 115TCA and its Explanation; paragraph 21 (which opens "Our aforesaid finding is based on interpretation of the language provided in the statute…") then reproduces paragraphs of the Tribunal's earlier order in Vivriti Cibus — the print view gives the reproduced range as paragraphs 16 to 18 and an earlier pass read it as 16 to 19, so the upper end is not settled. Either way, passages numbered 17 and 18, and possibly 19, that appear after paragraph 21 are the Vivriti order's paragraphs and not this Tribunal's, and none of them may be cited as a locator in this order. Citing any of them as a locator in this order would be a fabricated reference. Only paragraphs 1 to 9 (including 9.1 to 9.5), 11 to 14 and 20 to 26 are this Tribunal speaking, and the operative disposal is at paragraphs 22, 25 and 26. Paragraphs 23 and 24 have since been read on the plain document URL: paragraph 23 takes up the appeal for assessment year 2018-19 ("We would now take up appeal for the Assessment Year 2018-19…") and paragraph 24 sets out the grounds of appeal raised for that year. Neither deals with the condonation of the fifty-day delay, and how that application was disposed of was still not read on any route. The order also records that the appeal was accompanied by an application to condone a delay of fifty days; whether and how that was allowed was not read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were allowed. The provisions of section 194LBC are not attracted in the facts and circumstances of the case, the appellant was under no obligation to withhold tax from the payment of Excess Interest Spread to the originator, and the demands of Rs. 4,21,30,230 under section 201(1) and Rs. 47,22,191 under section 201(1A), aggregating Rs. 4,68,52,422, were deleted (paragraph 22). The without-prejudice contentions were left unadjudicated as academic. The findings were applied mutatis mutandis to assessment year 2018-19 (paragraph 25), and both appeals were allowed (paragraph 26).
TaxSphere, “SME Pool Series V August 2016 v ITO (TDS) — no section 194LBC deduction on excess interest spread where the originator holds no pass-through certificates”, https://taxnotice.vittsphere.com/caselaw/case/sme-pool-series-v-excess-interest-spread-to-an-originator-is-outside-section-194lbc/ (validity last checked 2026-09-08)
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