2016 (6) TMI 1040 - HC - Income Tax

Court affirms deduction of interest on debentures as necessary business expenditure under Income Tax Act

The court upheld the deletion of additions of interest paid on nonconvertible debentures for the assessment years 1996-97 and 1997-98, citing that the ... Interest paid on the nonconvertible debentures portion disallowed - ITAT deleted the addition - Held that:- the issue involved in these two matters is squarely covered by a decision of this Hon'ble Court in case of Deputy CIT V. Core Health Care Ltd., [2001 (4) TMI 46 - GUJARAT High Court ] which has been confirmed by the Hon'ble Apex Court as reported in case of Deputy Commissioner of Income Tax v. Core Health Care Ltd., [2008 (2) TMI 8 - SUPREME COURT OF INDIA ] wherein the interest paid on the nonconvertible debentures portion has considered to be an expenditure and therefore the deletion made by the tribunal is just and proper. - Decided in favour of assessee Issues Involved:1. Whether the Appellate Tribunal is right in law and on facts in upholding the order passed by the CIT(A) in deleting the addition of Rs. 2,97,65,150/- out of interest paid on nonconvertible portion of debentures for the assessment year 1997-98.2. Whether the Appellate Tribunal is right in law and on facts in upholding the order passed by CIT(A) in deleting the addition of Rs. 6,41,29,925/- out of interest paid on nonconvertible portion of debentures for the assessment year 1996-97.Detailed Analysis:1. Deletion of Addition of Rs. 2,97,65,150/- for the Assessment Year 1997-98:The appellant-revenue challenged the ITAT's order, which upheld the CIT(A)'s decision to delete the addition of Rs. 2,97,65,150/- out of interest paid on the nonconvertible portion of debentures. The Assessing Officer had argued that this interest gave an enduring benefit to the assessee and should be capitalized. The respondent's counsel contended that the issue was covered by the decision in Deputy CIT v. Core Health Care Ltd., which was confirmed by the Supreme Court. The court referred to Section 36(1)(iii) and Explanation 8 to Section 43(1) of the Income Tax Act, 1961, emphasizing that interest on borrowed capital for business purposes is deductible. The court concluded that the borrowing was for business purposes, and the interest paid was a necessary expenditure, thus upholding the deletion of the addition.2. Deletion of Addition of Rs. 6,41,29,925/- for the Assessment Year 1996-97:Similarly, for the assessment year 1996-97, the appellant-revenue contested the ITAT's order, which upheld the CIT(A)'s decision to delete the addition of Rs. 6,41,29,925/- out of interest paid on the nonconvertible portion of debentures. The same arguments and legal provisions were considered. The court reiterated that the interest on borrowed capital for business purposes is deductible under Section 36(1)(iii) and that Explanation 8 to Section 43(1) does not apply to this section. The court held that the interest paid on the nonconvertible debentures was an allowable expenditure, thus upholding the deletion of the addition.Conclusion:The court found that the issues were covered by the decision in Deputy CIT v. Core Health Care Ltd., confirmed by the Supreme Court. The interest paid on the nonconvertible portion of debentures was considered a deductible expenditure under Section 36(1)(iii). Consequently, the court dismissed both appeals, answering the issues in favor of the assessee and against the Department.