2020 (6) TMI 413 - HC - Income Tax

Allowable revenue expenditure - expenditure on conversion of interest payable to financial institutions, banks into 10% redeemable preference shares - HELD THAT - Substantial question of law No.1 is covered by decisions of this court as well as Delhi High Court in case of KIRLOSKAR ELECTRIC CO. LTD VS. CIT 1997 (7) TMI 109 - KARNATAKA HIGH COURT , COMMISSIONER OF INCOME TAX V. RATHI GRAPHICS TECHNOLOGIES LTD. 2015 (8) TMI 376 - DELHI HIGH COURT and answered against the revenue. Allowable as expenditure when the interest had been written off - HELD THAT - Question framed in this appeal is squarely covered by a decision in JINDAL VIJAYANAGAR STEEL LIMITED. 2011 (8) TMI 1334 - SC ORDER which is answered against the revenue. The aforesaid statement could not be disputed by learned counsel for the revenue.

Summary

Issues:
1. Allowability of conversion of interest payable to financial institutions into redeemable preference shares.
2. Allowability of interest written off as expenditure.

Analysis:

Issue 1: Allowability of conversion of interest payable to financial institutions into redeemable preference shares
The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961, concerning the Assessment year 2003-04. The primary contention was whether converting a sum of ?211,57,21,643/- interest payable to financial institutions and banks into 10% redeemable preference shares should be considered allowable revenue expenditure when the actual payment was not made. The assessing officer disallowed this claim for deduction, stating that if the interest component was written off, then allowing the deduction of the principal as an expenditure was not justified. The Commissioner of Income Tax (Appeals) partly allowed the appeal, leading to the revenue's further appeal. The tribunal, however, dismissed the revenue's appeal. The court considered the arguments presented by both parties and noted that the substantial questions of law were answered against the revenue based on previous judgments. Consequently, the court upheld the tribunal's decision and dismissed the appeal.

Issue 2: Allowability of interest written off as expenditure
The second issue revolved around the claim of ?1,89,40,966/- as interest written off by the assessee. The assessing officer had disallowed this claim, similar to the restructuring package deduction, on the grounds that if the interest component was written off, the deduction of the principal as an expenditure was not warranted. The Commissioner of Income Tax (Appeals) partly allowed the appeal, leading to the revenue's further appeal. The tribunal, however, dismissed the revenue's appeal. During the hearing, the court noted that the substantial questions of law framed by the bench were answered against the revenue based on previous judgments. Consequently, the court upheld the tribunal's decision and dismissed the appeal.

In conclusion, the High Court of Karnataka, comprising Hon'ble Mr. Justice Alok Aradhe and Hon'ble Mr. Justice Hemant Chandangoudar, dismissed the appeal filed by the revenue, upholding the decisions of the tribunal on both issues related to the conversion of interest payable into redeemable preference shares and the allowance of interest written off as expenditure for the Assessment year 2003-04.