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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
आदेश / O R D E R
PER AMARJIT SINGH, AM:
All these appeals filed by the assessee are based on similar issue on identical facts challenging the order u/s 263 of the Act passed by the ld. Pr. CIT-2, Mumbai, therefore, these appeals are adjudicated together by taking as lead case and its finding will be applicable to the other appeals:
“1. The learned Pr. CIT has erred in law and in facts by initiating proceedings u/s 263 of the Act on a mere change of opinion and subsequently passing the Order u/s 263 of the Act without considering the fact that the Order u/s 143(3) r.w.s 144C(13) of the Act was completed by assessing officer after the due process of scrutiny and examination of the records.
2. The Learned Pr. CIT has erred in law and in facts by holding perpetual bonds akin to equity ignoring the fact that basic nature of perpetual bonds is debt instrument/loan.
3. The Learned Pr. CIT has erred in law and in facts by disallowing interest qualify as capital borrowed for the business or profession as it is perpetual and it does not have fixed redemption date.
4. The Learned Pr. CIT has erred in law and in facts by holding perpetual bonds are not a borrowing capital. He has ignored that though perpetual bonds are perpetual in tenure, but it would not change the basic character of borrowing into equity instrument.
5. The Learned Pr. CIT has erred in law and in facts by disallowing the interest expenditure of Rs.1,71,19,58,455/- as it was not debited to profit and loss account. The Pr. CIT has ignored the fact that accounting treatment will not be determining factor for allowability / dis-allowability of the expenses.
6. The Learned Pr. CIT has erred in law and in facts by passing the Order u/s 263 of the Act despite the fact that the assessment was done of the aforesaid year u/s 143(3) r.w.s 144C(13) of the Act by assessing officer after considering the directions received u/s 144C(5) of the Act from Dispute Redressa! Penal which is a collegium of three Principal Commissioner or Commissioner of Income Tax.
7. The appellant craves its leave to add, alter, amend any ground or grounds of appeal.”
Fact in brief is that return of income declaring total income of Rs.9,17,49,52,310/- was filed on 30.11.2013. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 29.09.2014. Assessment u/s 143(3) r.w.s 144C(13) of the Act was finalized on 30.06.2017. Subsequently, the ld. Pr.CIT has initiated proceedings u/s 263 of the Act by issuing of show cause on 06.03.2018. The relevant part of show cause notice is reproduced as under:
“i. Rs. 171,19,58,455/- has been reduced from taxable income in ‘Statement of Computation of Total Income’ on account of interest on perpetual bonds although the said amount was not debited in profit and loss account. The Assessing Officer allowed this amount which was prima facie not allowable due to the following reasons:- a. The expenditure were not of revenue nature as it was not debited in profit and loss account, b. Perpetual bonds are akin to equity and therefore, any expense on account of interest on this account is appropriation of profit. Perpetual bonds are not debts or "borrowing" as the option to call is not c. available to holders of the bonds and therefore, interest payable/paid on these bonds are not allowable under section 36(1)(iii) of the Act. Reliance is placed on the decision of Hon’ble Haryana High Court in the case of Pepsu Road Transport Corpn. V CIT 130 ITR 18 (P&H) wherein it has been held that an element of refund or repayment is a must in the concept of borrowing. If there is no obligation to refund the capital provided, interest on such capital is not deductible. d. The Hon’ble DRP has sustained an identical disallowance in the case of Tata Steel Ltd. for A. Y. 2013-14.” In response the assessee has made written submission which is reproduced as under:
“i. The Company issued 11.40% Unsecured Perpetual Securities for Rs.1500 Cr. during FY 2011-12 relevant to the assessment year 2012-13. The perpetual securities were raised for general business purpose. The interest on the aforesaid bonds was payable @ 11.40% on the borrowing of Rs. 1500 Cr. This works out to Rs. 171.20 Crs. for the year under assessment. ii In line with accounting standards, said perpetual securities have been classified as a separate line item between 'shareholders funds' and 'other non-current liabilities' captioned as "unsecured perpetual securities”. iii. Interest to the holder of the perpetual securities has been treated as 'distribution to bond holders and was presented as a reduction in the 'Reserves and surplus" and not in statement of 'profit and loss account' However, the legal nature of aforesaid bonds was borrowed capital and the interest thereon was deductible as allowable expenses under section 36 of the Act, Accordingly, this amount has been claimed as allowable business expenditure, while computing income for the captioned assessment year. iv. Amount of Rs. 1500 owes was borrowed during FY 2011-12 on which Interest is payable @ 11.40% p. a. which works out to Rs. 171.20 crores for the year. The aforesaid amount has been used by the company for its business purpose. Thus, the Interest of Rs, 171.20 crores is allowable u/s 36 of the Act as interest on borrowed capital. v. The accounting treatment will not be determining factor for allowability/disallowability of the expenses as held by Hon'ble Supreme Court in number of cases.
Reference to the decision of Supreme Court in Sutlej Cotton Mills (1979) 116ITR 1 and Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363, have been made. vi. The perpetual bond is not in the nature of equity, rather it is in the nature of debt. That is why these bonds are listed on wholesale Debt Market Segment of National Stock Exchange which deals only with the securities related to borrowing of capital. On the other hand equity is listed, on equity segment of the stock exchanges. This is the practice followed by all the Stock Exchanges in India as well as Globally. vii. In case of equity, the money is not payable back to the shareholders whereas in case of aforesaid perpetual bonds, the principal amount is to- be refunded to the bond holders' as per the terms of issue at the time of redemption of these bonds. viii. The facts of the decision of Hon’ble Haryana High Court in the case of Pepsu Road Transport Corprn V. CIT 130 ITR 18 (P&H) are different from the facts of issue of Perpetual Bonds by the company. In this case, the question, that came up for consideration was whether interest paid to the Northern Railway and the Punjab Government In respect of the capital borrowed for purposes of the assessee's business was allowable u/s. 36(l)(iii) of the Act and In that connection, the term 'borrowing' was explained. The aforesaid decision clearly distinguishes the terms "capita! provided" and "capital borrowed". It has been held that the "capital provided" by State or Central Government to the assessee cannot be regarded as "capital borrowed" as contemplated u/s. 36(l)(iii) of the Act. ix. Further, the Hon'ble Bombay High Court in the case of CIT v. Shree Nirmal Commercial Ltd. [1995]213 ITR 361, (BOM.) (EB) while considering an issue as to whether interest paid by assessee on non-refundable deposits would be claimed as deduction, in case the non-refundable deposits held that even if the non-refundable deposits were held by the department as revenue receipts or trading receipts for the purposes of tax, their basic nature of being deposits could not be lost or forgotten, and they continued to be non-refundable deposits on which under contractual obligation the assessee had to pay interest as per terms of the contract and hence the same must be allowed as deduction permissible under section 28. Alternatively, the interest payable being a payment for business or trade in any case would be required to be allowed as deduction under section 37. X. The Company has paid interest as per the terms of issue of Perpetual Bonds which was a contractual obligation for the Company irrespective of the nature of the instrument issued, keeping in mind that basic nature of Perpetual Bonds being loan cannot be lost or forgotten. Hence, interest is allowable as deduction permissible under section 36 or otherwise under section 37. xi. The distribution costs which are in the nature of Interest expenses payable on the Perpetual Bonds, issued by the Company do not depend upon the operational performance of the Company. In other words, neither the return of the instrument, by any means, is linked to the Company's profitability nor the debenture holders have a right to participate in the profits of the Company. xii. The mere fact that the NCDs are perpetual in nature would not render the same to be in the nature of equity Instruments. Therefore, for the purpose of section 36(l)(iii), it would be appropriate to classify the NCDs as debt instruments, thereby, considering the same as borrowings. xiii. The assessment order was passed by the AO after considering the direction of Dispute Redressal Panel u/s 144C of The Act. The DRP is also has power to enhance taxable income wherever, they feel it is required in such situation. It is to submit that the order passed by assessing officer as per direction of DRP should not be revised u/s 263 of The Act.”
On examination of the record, the ld. Pr.CIT observed that assessment order passed u/s 143(3) r.w.s 144C(13) was erroneous in so far as it was prejudicial to the interest of revenue on the reason that an amount of Rs.1,71,19,58,455/- has been reduced from taxable income in statement of computation of total income on account of interest expenditure incurred on perpetual bonds although the said amount was not debited in profit and loss account. The assessee explained that it has issued 11.40% unsecured perpetual securities for Rs. 1500 crore during F.Y. 2011-12 on which interest was payable @ 11.40% which worked out to Rs. 171.2 crores for the year under assessment. The perpetual securities were raised for general business purpose. The interest of Rs.171.20 crores was allowable u/s 36 of the Act as interest on borrowed capital. The assessee explained that perpetual bond was not in the nature of equity rather it was in the nature of debt. In case of equity the money is not payable back to the shareholders whereas in the case of perpetual bonds the principle amount is to be refunded to the bond holders as per terms of issue at the time of redemption of these bonds. The assessment order was passed by the A.O after considering the direction of Dispute Redressal Panel u/s 144C of the Act. The ld. Pr.CIT has not agreed with the submission of the assessee stating that amount of interest paid was not debited in the profit and loss account and before allowing interest u/s 36(1)(iii), the Assessing Officer was required to examine as to whether the issue of perpetual bond qualifies as borrowings for the purposes of the said section. The ld. Pr.CIT held that the Assessing Officer was not correct in allowing the interest on perpetual debt instruments without examining and verifying the factual and legal position. Therefore, the ld. Pr.CIT held that assessment made was erroneous insofar as it is prejudicial to the interest of the revenue, and the Assessing Officer was directed to allow the aforesaid claims after due verification and inquiries and recompute the total income accordingly.
During the course of appellate proceedings before us the ld. Counsel has furnished paper book comprising copies of document and details of submission made before the A.O during the course of assessment proceedings. The ld. Counsel has referred notice u/s 142(1), dated 24.11.2016 vide which question no. 14 of the annexure the assessing officer has specifically asked the assessee that what was income tax reversal on distribution on unsecured perpetual securities in respect of earlier years and also asked to submit detailed note on allowability in profit and loss account. The ld. Counsel also referred detailed submission of the assessee made during the course of assessment proceedings vide letter dated 16.12.2016 in response to the query raised by the A.O in respect of income tax reversal on distribution on unsecured perpetual securities. As per para no. 14 of the letter the assessee has specifically explained that assessee company had issued 11.40% unsecuried perpetual securities (Bonds) for the purpose of business use. The interest on such securities was payable @ 11.40% per annum and given the details of payment of interest on the unsecured perpetual securities during the year under consideration. The ld. Counsel has also referred its letter dated 23.12.2016 vide which specific submission was made to the assessing officer pertaining to the interest expenses on debentures issued and also enclosed copies of all the relevant documents pertaining to the offer document of unsecured perpetual securities of Rs.1500 crores.
On the other hand, the ld. D.R has contended that assessee has not debited the interest to the profit and loss account but it has reduced from its total income in the statement of computation of income.
Heard both the sides and perused the material on record. Assessment in the case of the assessee was completed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the I.T. Act, 1961 on 30.06.2017. The ld. Pr.CIT has held vide order u/s 263(3) of the Act, dated 28.03.2018 that assessment order passed u/s 143(3) r.w.s 144C(13) as erroneous insofar as it was prejudicial to the interest of revenue holding that the Assessing Officer was not correct in allowing the interest on perpetual debt instruments without examining and verifying the allowability of such expenditure. With the assistance of ld. representatives we have gone through the copies of documents and detailed submission made before the A.O during the course of assessment proceedings as per page no. 1 to 160 of the paper book filed by the assessee. It is noticed that assessing officer has specifically asked the assessee vide notice dated 24.11.2016 to provide the detail of income tax reversal on distribution of unsecured perpetual securities. In this regard assessee has given detailed submission vide letter dated 16.12.2016 stating that it has issued 11.4% unsecured perpetual securities (bonds) for the purpose of business use. Interest of such securities is payable @ 11.40% per annum. The assessee has also specifically explained in line with accounting standard, the aforesaid interest is charged to reserve and surplus. The gross amount of interest of aforesaid securities was of Rs.142.03 crores for F.Y. 2010-11. But the same was charged to Rs.113.61 crores after netting off taxes [142.03 – 28.42]. The amount of tax impact of Rs.28.42 crores has been charged to reserve and surplus during the year. Thereafter again on 23.12.2016 the assessee has explained to the assessing officer that during the year the company has incurred Rs.18.63 crores on issue of 10.75% debenture of Rs.1500 crores. This amount being expenditure of capital nature has not been claimed by the assessee in its return of income. The assessee has also supplied to the Assessing Officer detailed offer document issued for unsecured perpetual debentures of Rs.1500 crores during the course of assessment proceedings. In the offer document the terms and conditions of issuing perpetual debentures, basis of allotment, creation of debenture redemption reserves along with object of the issue were clearly mentioned. As per the copy of object of the issue placed at page 67 of the paper book, it is mentioned that utilization of funds to be raised through this private placement will be for general business purpose and at page no. 62 issue size was mentioned of 15000 debentures of face value of Rs. 10 lac each aggregating to Rs.1500 crores. It is demonstrated from the detailed submission and copies of documents placed in the paper book that assessing officer has made detailed inquiry/verification during the course of assessment proceedings that assessee has borrowed funds for business use by issue of debentures. The borrowed fund were payable on call option exercising by company after the 10th year or any at the end of every year thereafter. It was also explained that the lenders were not entitled to share any surplus or bear any loss like shareholders. Debentures trustee were appointed to safeguard interest of the lenders. The assessee company had also stated on the basis of aforesaid discussion that it had borrowed fund for the purpose of its business and the interest on debenture was deductible in computing the income from profit and gains from business and profession. In the light of the above facts and after considering the detailed material furnished by the assessee during the course of assessment proceedings before the assessing officer we observe that the assessee has categorically explained to the assessing officer with relevant supporting material that it has issued unsecured perpetual non-convertible debentures and such lenders were not entitled to share any surplus or bear any loss like shareholders. These debentures were entitled for fixed interest @ 11.40% along with redemption after the 10th year. These facts and submission were also brought to the notice of the ld. Pr.CIT during the course of proceedings u/s 263 of the Act, however, the ld. Pr.CIT without controverting these undisputed fact held that assessment order was erroneous so far it was prejudicial to the interest of Revenue. Therefore, we consider that the order passed by the ld. Pr.CIT u/s 263 is unjustified and we quash the same. Therefore, we allow the ground of appeal of the assessee.
This appeal of the assessee is based on the same facts and identical issue as mentioned above in therefore, applying the finding of ITA No.2711/Mum/2018 as mutatis mutandis and allow the appeal of the assessee.
Since, we have quash the proceedings u/s 263 of the Act, therefore, additional ground of appeal filed by the assessee in both these appeals i.e & 2711/Mum/2018 are not required any adjudication, therefore the same stand dismissed.
Since we have quash the order u/s 263 on the basis of which assessment u/s 143(3) r.w.s 263 of the Act were passed by the Assessing Officer pertaining to A.Y. 2011-12 and A.Y. 2012-13. Therefore, these two appeals of the assessee become academic and not required any adjudication.
In the result, all the appeals of the assessee are partly allowed.
Order pronounced in the open court on 25.04.2022