2012 (9) TMI 764 - AT - Income Tax

Interest paid on optionally convertible debenture - CIT(A) deleted the disallowance - Held that - There was no contingency involved in the accrual of liability with reference to the interest on the debentures. CIT (A) has rightly observed that debentures, whether fully or partly or optionally convertible, are nothing but debt till the date of conversion and any interest paid on these debentures is allowable as normal business expenditure. The only uncertainty in the optionally convertible debentures issued by the assessee is whether the debenture holder will go for conversion into shares or will continue to hold them as debentures. CIT (A) has rightly held that this uncertainty in no way impacts the assessee company s liability to pay interest till the date of conversion - in favour of assessee.

Summary

Issues:
Disallowance of interest on optionally convertible debentures as a contingent liability.

Analysis:
The Revenue appealed against the Ld. Commissioner of Income Tax (A)'s order deleting the disallowance of interest paid on optionally convertible debentures. The Assessing Officer disallowed the amount as he considered it a contingent liability. The Assessing Officer requested details of the debentures and justification for the interest expenses. The assessee argued that the interest was not a contingent liability, as it was provided in the P&L account, books of accounts, and TDS was deducted. The debentures were converted into equity shares, but the Assessing Officer still treated it as a contingent liability based on conversion. The Revenue challenged this decision.

Before the Ld. Commissioner of Income Tax (A), the assessee provided complete details of the debentures, interest paid, TDS details, and conversion evidence. The assessee argued that the interest was not a contingent liability, supported by the absence of contingent liability in the Tax Audit Report. The Ld. Commissioner of Income Tax (A) analyzed the nature of debentures, stating that interest on debentures is allowable business expenditure until conversion. The uncertainty of conversion does not affect the liability to pay interest. The Ld. Commissioner of Income Tax (A) disagreed with the Assessing Officer's interpretation of contingent liability and allowed the appeal, deleting the disallowance.

The Appellate Tribunal upheld the Ld. Commissioner of Income Tax (A)'s decision, stating that no contingency was involved in the interest accrual on the debentures. Debentures are considered debt until conversion, and interest paid is a normal business expenditure. The uncertainty of conversion does not impact the liability to pay interest. The Tribunal agreed that the case laws cited by the Assessing Officer were not relevant to the present case. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the Ld. Commissioner of Income Tax (A)'s order.