2022 (4) TMI 1566 - AT - Income Tax

Revision u/s 263 - As per CIT AO was not correct in allowing the interest on perpetual debt instruments without examining and verifying the allowability of such expenditure - HELD THAT - As demonstrated from the detailed submission and copies of documents placed in the paper book that assessing officer has made detailed inquiry/verification during the course of assessment proceedings that assessee has borrowed funds for business use by issue of debentures. The borrowed fund were payable on call option exercising by company after the 10th year or any at the end of every year thereafter. It was also explained that the lenders were not entitled to share any surplus or bear any loss like shareholders. Debentures trustee were appointed to safeguard interest of the lenders. The assessee company had also stated on the basis of aforesaid discussion that it had borrowed fund for the purpose of its business and the interest on debenture was deductible in computing the income from profit and gains from business and profession. Thus after considering the detailed material furnished by the assessee during the course of assessment proceedings before the assessing officer we observe that the assessee has categorically explained to the assessing officer with relevant supporting material that it has issued unsecured perpetual non-convertible debentures and such lenders were not entitled to share any surplus or bear any loss like shareholders. These debentures were entitled for fixed interest @ 11.40% along with redemption after the 10th year. These facts and submission were also brought to the notice of the ld. Pr.CIT during the course of proceedings u/s 263 however, CIT without controverting these undisputed fact held that assessment order was erroneous so far it was prejudicial to the interest of Revenue. Therefore, we consider that the order passed by the ld. Pr.CIT u/s 263 is unjustified and we quash the same. Therefore, we allow the ground of appeal of the assessee.

Summary

Issues Involved:
1. Initiation of proceedings under Section 263 of the Income Tax Act.
2. Classification of perpetual bonds as equity or debt.
3. Disallowance of interest on perpetual bonds as capital borrowed for business.
4. Characterization of perpetual bonds as borrowing capital.
5. Disallowance of interest expenditure not debited to the profit and loss account.
6. Validity of the order passed under Section 263 despite assessment under Section 143(3) read with Section 144C(13).

Issue-wise Detailed Analysis:

1. Initiation of Proceedings under Section 263 of the Income Tax Act:
The assessee challenged the initiation of proceedings under Section 263, arguing that the original assessment under Section 143(3) read with Section 144C(13) was completed after thorough scrutiny and examination. The Tribunal found that the Assessing Officer (AO) had indeed conducted a detailed inquiry during the original assessment, which included examining the nature and treatment of interest on perpetual bonds. Therefore, the initiation of proceedings under Section 263 was deemed unjustified.

2. Classification of Perpetual Bonds as Equity or Debt:
The Principal Commissioner of Income Tax (Pr. CIT) classified perpetual bonds as equity, thereby disallowing the interest. The assessee argued that perpetual bonds are debt instruments, as evidenced by their listing on the Debt Market Segment of the National Stock Exchange and the fact that the principal amount is repayable at redemption. The Tribunal agreed with the assessee, noting that the AO had already scrutinized this aspect and accepted the bonds as debt instruments during the original assessment.

3. Disallowance of Interest on Perpetual Bonds as Capital Borrowed for Business:
The Pr. CIT disallowed the interest, arguing that perpetual bonds do not qualify as borrowed capital due to their perpetual nature. The assessee contended that the interest on these bonds was a business expense under Section 36 of the Act. The Tribunal found that the AO had already verified the business purpose of the borrowed funds and allowed the interest as a deductible expense. Therefore, the disallowance by the Pr. CIT was not warranted.

4. Characterization of Perpetual Bonds as Borrowing Capital:
The Pr. CIT held that perpetual bonds are not borrowing capital, which was contested by the assessee. The Tribunal observed that the AO had examined the terms and conditions of the bonds, confirming their nature as borrowing capital. The Tribunal concluded that the Pr. CIT's recharacterization of the bonds was incorrect, as the AO had already made a reasoned decision based on the facts and documents provided.

5. Disallowance of Interest Expenditure Not Debited to the Profit and Loss Account:
The Pr. CIT disallowed the interest expenditure because it was not debited to the profit and loss account but was instead reduced from taxable income in the computation statement. The assessee argued that accounting treatment should not determine the allowability of expenses, citing Supreme Court rulings. The Tribunal agreed, noting that the AO had accepted the accounting treatment and allowed the interest expenditure during the original assessment.

6. Validity of the Order Passed under Section 263 Despite Assessment under Section 143(3) Read with Section 144C(13):
The assessee argued that the assessment was completed under Section 143(3) read with Section 144C(13) after considering directions from the Dispute Redressal Panel (DRP), which is a collegium of three Principal Commissioners or Commissioners of Income Tax. The Tribunal found that the AO had followed due process and the directions of the DRP, making the order under Section 263 invalid.

Conclusion:
The Tribunal quashed the order passed by the Pr. CIT under Section 263, finding it unjustified and without merit. The original assessment order was upheld, and the appeals filed by the assessee were allowed. The additional grounds of appeal were dismissed as they became academic due to the quashing of the Section 263 order. The Tribunal's decision was pronounced in the open court on April 25, 2022.