2023 (11) TMI 1194 - AT - Income Tax

Allowability of Interest expenses on non-convertible unsecured debentures - Interest rate on a secured loan comparison with interest on unsecured non-convertible debentures for determining the interest rate on different instruments - rate of interest for secured loan at the time of issuance of debentures was 14.10%, however, the assessee has issued debentures at the rate of 21.3% which is much more than the market rate of interest - assessee submitted that during a period of 2014, the interest rate against the secured term loan was in the range of 14%-16.5% and the assessee has itself borrowed a loan on 19/09/2013 at the rate of 14.10% - CIT(A) allowed the ground raised by the assessee on this issue and held that the interest rate on a secured loan cannot be compared with interest on unsecured non-convertible debentures, as for determining the interest rate on different instruments, various factors comes into consideration - HELD THAT - On the basis of the documents submitted by the assessee, it is sufficiently evident that the interest expenditure on non-convertible debentures was either not debited to the profit and loss account or not claimed to be for the purpose of the project in earlier years unlike in the year under consideration. Thus, we are of the considered view that the issue of allowability of interest on non-convertible debentures, which arose in the present case, did not come up for consideration before the lower authorities in earlier years and therefore, we find no merits in the plea of the assessee that the interest paid on non-convertible debentures has been allowed in the preceding years and following the principle of consistency should be allowed in the year under consideration. We find that the AO has compared the rate of interest paid on unsecured redeemable cumulative non-convertible debentures with the rate of interest at which the secured loan was borrowed by the assessee, which in our considered view is wholly erroneous as various risks factors associated with unsecured debentures such as credit risk, liquidity risk, etc. cannot be compared with secured interest rate. Therefore, in order to decide whether the assessee has paid a higher interest rate on non-convertible debentures it is necessary to determine the interest rate on unsecured non-convertible debentures at the relevant time in an arm s length situation. Accordingly, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication after determining the arm s length interest rate during the relevant period in case of issuance of unsecured redeemable cumulative non-convertible debentures. We further find that while making the disallowance AO considered the entire interest at the rate of 21.30%. However, it is to be noted that out of the total finance cost which comprises interest expenses on debentures of Rs. 7851 lakh the assessee has only debited Rs. 4646 lakh to the profit and loss account and the balance amount of Rs. 3387 lakh has been allocated to the capital work in progress. Thus, while adjudicating this issue if it is found that the assessee has paid higher interest than the arm s length rate of interest then the disallowance of excess interest paid on non-convertible debentures be made proportionate to the interest debited to the profit and loss account and not the entire interest at the rate of 21.30% on non-convertible debentures. During the hearing, the assessee also placed reliance upon CBDT Circular No. 6P dated 07/06/1968 to submit that there is no tax evasion as Kapstone Construction Pvt. Ltd. is also taxed at a maximum rate of tax. We direct the AO to examine this aspect while conducting the de novo assessment on this issue. With the above directions, this issue is restored to the file of the AO, and the impugned order passed by the learned CIT(A) is set aside to this extent. Accordingly, grounds no. 1 and 2 raised in Revenue s appeal are allowed for statistical purposes. Disallowance of deduction claimed u/s 80G - Corporate Social Responsibility ( CSR ) expenses not allowed u/s 37 - AO held that the amount has not been paid by the assessee voluntarily to become eligible for entity specified u/s 80G - HELD THAT - We find that the coordinate benches of the Tribunal have consistently taken the view in favour of the taxpayer and held that the CSR expenses even though not allowed under section 37 of the Act pursuant to insertion of Explanation-2 to section 37 vide Finance Act, 2014 with effect from 01/04/2015. However, the said expenditure is allowable under section 80G of the Act. No infirmity in the impugned order passed by the learned CIT(A) in allowing the claim of deduction under section 80G of the Act on CSR expenses incurred by the assessee

Summary

Issues Involved:
1. Deletion of disallowance of interest paid on non-convertible debentures.
2. Deletion of disallowance of deduction claimed under section 80G for Corporate Social Responsibility (CSR) expenses.

Summary:

1. Deletion of Disallowance of Interest Paid on Non-Convertible Debentures:
The Revenue challenged the deletion of disallowance of Rs. 26,53,85,916/- interest expenses on non-convertible debentures (NCDs) by the learned Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee had issued unsecured redeemable cumulative NCDs at an interest rate of 21.3%, which was higher than the market rate for secured loans (14.1%). The Assessing Officer (AO) restricted the interest expense to 14.1%, disallowing the excess interest claimed. The CIT(A) held that the interest rate on secured loans cannot be compared with unsecured NCDs due to various factors like risk, credit, and security. The Tribunal restored the issue to the AO for de novo adjudication to determine the arm's length interest rate for unsecured NCDs and to make proportionate disallowance if the interest rate was found higher than the arm's length rate. The Tribunal also directed the AO to examine the aspect of tax evasion as per CBDT Circular No. 6P dated 07/06/1968.

2. Deletion of Disallowance of Deduction Claimed under Section 80G for CSR Expenses:
The Revenue also challenged the deletion of disallowance of deduction under section 80G of the Income Tax Act for CSR expenses. The AO disallowed the deduction on the grounds that CSR expenses are mandatory under section 135 of the Companies Act, 2013, and not voluntary donations. The CIT(A) allowed the deduction, following judicial precedents that CSR expenses, although not allowed under section 37, are allowable under section 80G. The Tribunal upheld the CIT(A)'s decision, noting that there is no specific restriction for claiming deduction under section 80G for CSR expenses and that the coordinate benches of the Tribunal have consistently ruled in favor of allowing such deductions.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, restoring the issue of interest disallowance on NCDs to the AO for fresh adjudication and upholding the CIT(A)'s decision on allowing the deduction under section 80G for CSR expenses.