Thin capitalisation limits on interest disallowance were unavailable absent a governing Indian rule, favouring the assessee.

In the absence of any specific thin capitalisation rule in India, interest on borrowings could not be disallowed merely by re-characterising debt as equity. The revenue treated the assessee's borrowings as capital in substance because of the high debt-equity ratio, but the Tribunal found no governing provision at the relevant time authorising such reclassification. The Bombay High Court agreed that, without an applicable statutory thin capitalisation framework, the interest paid on debt capital remained deductible and could not be denied on that basis. The issue was therefore decided in favour of the assessee and against the revenue.

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Issues: Whether, in the absence of any specific thin capitalisation rules in India, interest on borrowings could be disallowed by re-characterising debt as equity.

Analysis: The assessee's borrowings were treated by the revenue as capital in substance because of the high debt-equity ratio. The Tribunal found that, at the relevant time, Indian law contained no thin capitalisation rules permitting such re-characterisation. The Court agreed that, in the absence of any governing provision, the interest paid on debt capital could not be disallowed on that basis.

Conclusion: The issue was decided in favour of the assessee and against the revenue.

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