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2020 (6) TMI 505 - AT - Income TaxInterest expenditure on Compulsorily Convertible Debentures CCDs - claimed as revenue expenditure - principle of capitalization - HELD THAT - We are of the view that the decision of the ITAT Bangalore Bench in the case of CAE Flight Training (I) Pvt. Ltd . 2019 (8) TMI 554 - ITAT BANGALORE supports the plea of the assessee for allowing deduction on interest paid on CCDs held that the fact that the RBI under its Foreign Direct Investment Policy mandates conversion of debentures into equity and such mandate will not make any difference to the allowability of interest on debentures u/s. 36(1)(iii) Till date of conversion, CCDs are in the nature of debt and interest paid on CCDs cannot be disallowed on the ground that CCDs will later on be converted into equity. The Tribunal examined the decision rendered in Ashima Syntex Ltd. 2006 (3) TMI 188 - ITAT AHMEDABAD-B and concluded that the issue therein was regarding expenses incurred on issue of convertible debentures and not interest paid on CCDs for the period before conversion and therefore the decision of Special Bench will not be of any application to the facts of the cases where deduction u/s. 36(1)(iii) of the Act is claimed. The Tribunal also discussed the RBI Master Circular on Foreign Investments in India dated 2.7.2007 and 1.7.2008 and held that those circulars will have no effect and the debentures till its conversion will retain its character as loan or borrowings. We are of the view that the deduction claimed by the assessee has to be allowed. We may also clarify that the Thin Capitalisation principle was neither invoked by the AO or the CIT(Appeals) in the present case nor were those rules part of the statute for the relevant AY in this appeal. We allow the appeal of the assessee and hold that deduction claimed by the assessee should be allowed.
Issues Involved:
1. Whether the revenue authorities were justified in disallowing the claim of the assessee for deduction of interest expenditure on Compulsorily Convertible Debentures (CCDs). Issue-wise Detailed Analysis: 1. Disallowance of Interest Expenditure on CCDs: The primary issue in this appeal concerns the disallowance of ?2,56,17,280 as interest expenditure on CCDs by the revenue authorities. The assessee, engaged in knowledge process outsourcing, issued 4,92,640 CCDs at ?1,000 each to IQVIA AG, Switzerland, with an interest rate of 5.2% p.a. The interest paid on these CCDs was claimed as a deduction under Section 36(1)(iii) of the Income Tax Act, which pertains to interest paid on capital borrowed for business purposes. The Assessing Officer (AO) disallowed this claim, arguing that since CCDs are fully convertible into equity shares, the related expenditure is capital in nature. The AO relied on the Special Bench (SB) ITAT decision in Ashima Syntex Ltd. v. ACIT, where it was held that expenses on issuing wholly convertible debentures are not revenue expenditure. 2. Appeal to CIT(Appeals): The assessee appealed to the CIT(Appeals), citing the ITAT Mumbai Bench decision in Ganesh Benzoplast Ltd. v. ACIT, which allowed debenture issue expenses as a deduction. The assessee also referenced the AAR decision in LMN India Ltd. However, the CIT(A) upheld the AO's decision, distinguishing the cited cases and affirming the applicability of the Ashima Syntex Ltd. decision. 3. Tribunal's Consideration: The Tribunal considered the assessee's argument that the Ashima Syntex Ltd. case involved expenses on issuing CCDs, not interest paid on CCDs, making it distinguishable. The assessee cited the ITAT Bangalore Bench decision in ACIT v. M/s. CAE Flight Training (I) Pvt. Ltd., which held that interest on CCDs should be allowed as a deduction until conversion into equity, as CCDs are considered loans until conversion. The Tribunal noted that the Thin Capitalisation principle, which was not applicable for the relevant assessment year, was not invoked by the AO or CIT(A). The Tribunal emphasized that RBI policies on FDI, which treat CCDs as equity for controlling future repayment obligations, do not affect the tax treatment of interest on CCDs before conversion. 4. Supporting Jurisprudence: The Tribunal also considered the Rajasthan High Court decision in CIT v. Secure Meters Ltd., which treated debenture issue expenses as revenue expenditure under Section 37(1). Additionally, the Karnataka High Court in CIT v. ITC Hotels held that expenses on issuing convertible debentures are allowable as revenue expenditure under Section 37(1). Conclusion: The Tribunal concluded that the interest paid on CCDs should be allowed as a deduction under Section 36(1)(iii) until the date of conversion into equity. The decision in Ashima Syntex Ltd. was deemed inapplicable as it pertained to expenses on issuing debentures, not interest on CCDs. The appeal by the assessee was allowed, and the deduction claimed was upheld. Result: The appeal by the assessee is allowed, and the deduction for interest expenditure on CCDs is permitted. Pronouncement: The judgment was pronounced in the open court on June 19, 2020.
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