Tribunal allows deduction for interest on CCDs until conversion, citing relevant law.

The Tribunal allowed the appeal by the assessee, permitting the deduction for interest expenditure on Compulsorily Convertible Debentures (CCDs) until conversion into equity, contrary to the revenue authorities' disallowance. The decision distinguished expenses on issuing debentures from interest on CCDs, citing relevant jurisprudence and emphasizing the tax treatment of CCD interest. The Ashima Syntex Ltd. ruling was deemed inapplicable. The assessee's claim was upheld, and the interest deduction was allowed under Section 36(1)(iii) until conversion, with the judgment pronounced on June 19, 2020.

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Issues Involved:
1. Whether the revenue authorities were justified in disallowing the claim of the assessee for deduction of interest expenditure on Compulsorily Convertible Debentures (CCDs).

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure on CCDs:
The primary issue in this appeal concerns the disallowance of Rs. 2,56,17,280 as interest expenditure on CCDs by the revenue authorities. The assessee, engaged in knowledge process outsourcing, issued 4,92,640 CCDs at Rs. 1,000 each to IQVIA AG, Switzerland, with an interest rate of 5.2% p.a. The interest paid on these CCDs was claimed as a deduction under Section 36(1)(iii) of the Income Tax Act, which pertains to interest paid on capital borrowed for business purposes.

The Assessing Officer (AO) disallowed this claim, arguing that since CCDs are fully convertible into equity shares, the related expenditure is capital in nature. The AO relied on the Special Bench (SB) ITAT decision in Ashima Syntex Ltd. v. ACIT, where it was held that expenses on issuing wholly convertible debentures are not revenue expenditure.

2. Appeal to CIT(Appeals):
The assessee appealed to the CIT(Appeals), citing the ITAT Mumbai Bench decision in Ganesh Benzoplast Ltd. v. ACIT, which allowed debenture issue expenses as a deduction. The assessee also referenced the AAR decision in LMN India Ltd. However, the CIT(A) upheld the AO's decision, distinguishing the cited cases and affirming the applicability of the Ashima Syntex Ltd. decision.

3. Tribunal's Consideration:
The Tribunal considered the assessee's argument that the Ashima Syntex Ltd. case involved expenses on issuing CCDs, not interest paid on CCDs, making it distinguishable. The assessee cited the ITAT Bangalore Bench decision in ACIT v. M/s. CAE Flight Training (I) Pvt. Ltd., which held that interest on CCDs should be allowed as a deduction until conversion into equity, as CCDs are considered loans until conversion.

The Tribunal noted that the Thin Capitalisation principle, which was not applicable for the relevant assessment year, was not invoked by the AO or CIT(A). The Tribunal emphasized that RBI policies on FDI, which treat CCDs as equity for controlling future repayment obligations, do not affect the tax treatment of interest on CCDs before conversion.

4. Supporting Jurisprudence:
The Tribunal also considered the Rajasthan High Court decision in CIT v. Secure Meters Ltd., which treated debenture issue expenses as revenue expenditure under Section 37(1). Additionally, the Karnataka High Court in CIT v. ITC Hotels held that expenses on issuing convertible debentures are allowable as revenue expenditure under Section 37(1).

Conclusion:
The Tribunal concluded that the interest paid on CCDs should be allowed as a deduction under Section 36(1)(iii) until the date of conversion into equity. The decision in Ashima Syntex Ltd. was deemed inapplicable as it pertained to expenses on issuing debentures, not interest on CCDs. The appeal by the assessee was allowed, and the deduction claimed was upheld.

Result:
The appeal by the assessee is allowed, and the deduction for interest expenditure on CCDs is permitted.

Pronouncement:
The judgment was pronounced in the open court on June 19, 2020.

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