Revision allowed restoring AO's s.24(b) interest deduction for debentures used to repay loans funding building construction

HC allowed revision challenge and restored the Assessing Officer's allowance of interest deduction under s.24(b) for interest on optionally fully convertible debentures used to repay past loans that financed building construction. The court found the assessee had demonstrated a direct correlation between debenture proceeds and repayment of construction-related loans, the AO's view was plausible and aligned with CBDT clarification, and the Commissioner had no basis to overturn that assessment in revision. Decision in favour of the assessee.

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Issues Involved:
1. Validity of the notice issued under Section 263 of the Income Tax Act, 1961.
2. Deduction of interest on Optionally Fully Convertible Debentures (OFCD) under Section 24(b) of the Income Tax Act.

Detailed Analysis:

1. Validity of the notice issued under Section 263 of the Income Tax Act, 1961

The petitioner challenged a notice dated 23.11.2015 issued by the Commissioner of Income Tax under Section 263 of the Income Tax Act, seeking to revise the petitioner’s assessment for the assessment year 2011-2012. The Commissioner’s notice suggested that the assessment order dated 21.03.2014 was erroneous and prejudicial to the interests of the revenue because it allowed a deduction of Rs. 2.68 crores as interest on debentures, which according to the Commissioner, was not allowable under Section 24(b) of the Act.

The Court noted that the Assessing Officer had indeed examined the issue during the original scrutiny assessment. The petitioner had provided a detailed note explaining that the funds raised through debentures were used to repay old loans taken for constructing the building, thus justifying the deduction under Section 24(b). The Assessing Officer reviewed this and allowed the deduction.

The Court referred to precedents, including the Division Bench's decision in Rayon Silk Mills v. Commissioner of Income Tax, which held that if an Assessing Officer has made inquiries and taken a plausible view, the Commissioner cannot substitute his opinion under Section 263. Similarly, in Commissioner of Income Tax v. Nirma Chemicals Works P. Ltd., it was held that an assessment order is not required to detail every inquiry made.

2. Deduction of interest on Optionally Fully Convertible Debentures (OFCD) under Section 24(b) of the Income Tax Act

The petitioner argued that the interest on debentures was deductible under Section 24(b) because the funds raised were used to repay old loans taken for constructing the property. The petitioner cited a CBDT circular from 1969, which clarified that interest on a second loan taken to repay an original loan used for acquiring or constructing property is deductible.

The Commissioner’s notice contended that the debentures were not used directly for the purchase or construction of property, and thus the interest was not deductible. However, the Court found that the Assessing Officer had accepted the petitioner’s explanation that the debentures were used to repay loans originally taken for construction, making the interest deductible under Section 24(b).

The Court concluded that the Assessing Officer’s view was plausible and supported by the CBDT circular. Therefore, the Commissioner’s initiation of revision proceedings under Section 263 was unwarranted.

Conclusion

The Court set aside the notice dated 23.11.2015, concluding that the Assessing Officer had made proper inquiries and taken a plausible view in allowing the interest deduction under Section 24(b). The petition was allowed, and the revision proceedings initiated by the Commissioner were quashed.

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