Interest on CCDs allowable as revenue Expenditure u/s 36(1)(iii) [Read ITAT Order]

The Income Tax Appellate Tribunal (ITAT Delhi) in the matter of Religare Finvest Ltd. vs. Deputy Commissioner of Income-Tax, has held that CCDs are in the nature of borrowed fund and continued to be debt till conversion thereof into shares and consequently interest on CCDs is allowable as revenue deduction u/s 36(1)(iii) of the Act.

The ITA No. 4796/Del/2017 (A.Y 2012-13), ITA No. 547/Del/2018 (AY 2013-14), ITA No. 7856/Del/2017 (A.Y 2014-15), and ITA No.6116/Del/2018 (A.Y 2015-16) filed by the assessee challenging the order passed by the Commissioner of Income Tax Appeals dated 19/05/2017, 29/11/2017, 29/09/2017 and 09/07/2018 respectively. The Appeals in ITA No. 5202/Del/2017 (A.Y 2012-13), ITA No. 1005/Del/2018 (A.Y 2013-14), ITA No. 133/Del/2018 (A.Y 2014-15) and ITA No. 7553/Del/2018 (A.Y 2015-16) dated 19/05/2017, 29/11/2017, 29/09/2017 and 09/07/2018 respectively filed by the Revenue.

Since the issues involved in the present appeals filed by the assessee and the Department are identical, for the sake of convenience, brief facts of the case for the Assessment Year 2012-13 are considered. The Assessee filed its return of income for AY 2012-13 on 27/09/2012 declaring income of Rs. 227,96,32,660/- which was subsequently revised on 26/03/2014 at Rs.218,31,32,540/-. The case was selected for scrutiny. Order u/s 143(3) of the Act was passed on 31/03/2015 assessing the income at Rs. 307,17,44,697/- after disallowance of Rs.16,72,58,935/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962 (‘Rules’ for short), Rs. 9,65,00,120/- on account of depreciation arising out of change in method of accounting of financial lease, addition of Rs. 21,67,50,189/- on accounts of bad debts write off, Rs. 13,75,19,178/- on account of disallowance of interest on Compulsory Convertible debentures (CCDs) and disallowing of Rs. 27,05,83,732/- from support services and reimbursement expenses claimed, aggregating to total disallowances of Rs.88,86,12,175/-.

The Co-ordinate Bench of the Tribunal in the case of DCIT Vs. UAG Builders Pvt. Ltd. 53 SOT 370 dealing with the issue of allow-ability of deduction of interest paid on OCDs observed as under:-

“We have heard the rival contentions in light of the material produced and precedent relied upon. We find ourselves in agreement with the Ld Commissioner of Income Tax (A)’s finding that there was no contingency involved in the accrual of liability with reference to the interest on the debentures. Ld. Commissioner of Income Tax (A) 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. Ld. Commissioner of Income Tax (A) rightly held that this uncertainty in no way impacts the assessee company’s liability to pay interest till the date of conversion. Ld. Commissioner of Income Tax (A) has rightly held that the case laws referred by the Assessing Officer were not applicable on the facts of the present case, Accordingly, in the background of the aforesaid discussion, we do not find any infirmity in the order of the Ld Commissioner of Income Tax (A) and accordingly, we uphold the same. “(emphasis supplied).”

The above said judicial pronouncements clearly laid down the law in favour of the Assessee holding that Compulsory Convertible Debentures are in the nature of borrowed fund and continued to be debt till conversion thereof into shares and consequently interest on CCDs is allowable as revenue deduction u/s 36(1)(iii) of the Act.

In view of the discussions and the aforesaid legal position, we hold that CCDs are in the nature of borrowed fund and continued to be debt till conversion thereof into shares and consequently interest on CCDs is allowable as revenue deduction u/s 36(1)(iii) of the Act. Accordingly, the Ground No. 2 of the assessee in ITA No. 7856/Del/2017 for A.Y 2014-15 is allowed and Ground No. 3 in ITA No. 5202/Del/2017 for A.Y 2012-13, ITA No. 1005/Del/2018 for A.Y 2013-14, ITA No. 7553/Del/2018 for A.Y 2015-16 of the Revenue are dismissed.

In the result:

1. Appeal in ITA No. 4796/Del/2017 for A.Y 2012-13 filed by the assessee is partly allowed for statistical purpose.

2. Appeals in ITA No. 547/Del/2018 for A.Y 2013-14, ITA No. 7856/Del/2017 for A.Y 2014-15 and ITA No. 6116/Del/2018 for A.Y 2015-16 filed by the assessee are allowed.

3. Appeals in ITA No. 5202/Del/2017 for A.Y 2012-13, ITA No.1005/Del/2018 for A.Y 2013-14, ITA No. 133/Del/2018 for A.Y 2014-15 and ITA No. 7553/Del/2018 for A.Y 2015-16 filed by the Department are dismissed.

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