Treatment of Interest and Professional Charges for Issuing Non Convertible Debentures

M/s. Bagadia Properties Private Limited Vs. ITO

(Pronounced in the open court on May 31, 2022)

The assessee is in the business of real estate development and builders. The assessee filed its return of income for AY 2014-15 declaring a total income of Rs. 3,52,160. The AO disallowed part of interest expenses amounting to Rs. 1,50,73,571. The assessee is following the “Project completion method” for disclosing income from the sale of flats. During the year under consideration, the assessee had completed three projects named Alta Vista, Soring Dale, and Villa Grande. One project named “Splendour” was under construction. The assessee had issued “Non-convertible Debentures” (NCD) amounting to Rs. 20.00 crores during the year under consideration. Funds borrowed through the issue of NCDs have been utilized for general business purposes. The AO made out a disallowance to be made out of interest & professional charges on NCD at Rs. 1,50,73,751.

Appeal before CIT(A): The Ld. CIT(A) granted marginal relief and The Ld. CIT(A) rejected all other contentions raised by the assessee. Aggrieved, the assessee filed appeal before the tribunal.

Appeal before ITAT: The main grounds that were before the tribunal were whether the interest on NCD and Professional charges for issuing NCD required to be aggregated for computing disallowance. It was held that interest expenses are allowed u/s 36(1)(iii) and the professional charges are allowed as deduction u/s 37(1) of the Act. The tribunal held that the AO was not correct in aggregating the professional charges incurred on issuing NCDs as part of interest expenditure and thus disallowing proportionate expenses. The order passed by Ld. CIT(A) was set aside on this issue and the AO was directed to delete the disallowance of interest expenditure pertaining to advances.

In the case of S.A Builders Ltd vs. CIT (284 ITR 1), the Hon’ble Supreme Court held that it cannot be always presumed that the loans given to subsidiary companies are for business purposes. It is required to be proved that the subsidiary company has used the interest-free loans for some business purposes. As the assessee has not furnished the details of utilization of impugned interest-free loans by the respective subsidiary companies. Therefore, the tribunal restored this along with other issues to AO for examination. Hence the appeal of the assessee is partly allowed.

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