ITAT rules comparing secured loan rates with unsecured debentures erroneous, CSR expenses qualify for section 80G deduction despite section 37 disallowance

The ITAT Mumbai held that comparing interest rates on secured loans with unsecured non-convertible debentures is erroneous due to different risk factors. The matter was remanded to AO for determining arm's length interest rate on unsecured debentures, with directions that any disallowance should be proportionate to interest debited to profit and loss account only. Regarding CSR expenses, the Tribunal upheld CIT(A)'s decision allowing deduction under section 80G despite disallowance under section 37, following consistent precedent that CSR expenses qualify for 80G deduction.

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Issues Involved:
1. Deletion of disallowance of interest paid on non-convertible debentures.
2. Deletion of disallowance of deduction claimed under section 80G for Corporate Social Responsibility (CSR) expenses.

Summary:

1. Deletion of Disallowance of Interest Paid on Non-Convertible Debentures:
The Revenue challenged the deletion of disallowance of Rs. 26,53,85,916/- interest expenses on non-convertible debentures (NCDs) by the learned Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee had issued unsecured redeemable cumulative NCDs at an interest rate of 21.3%, which was higher than the market rate for secured loans (14.1%). The Assessing Officer (AO) restricted the interest expense to 14.1%, disallowing the excess interest claimed. The CIT(A) held that the interest rate on secured loans cannot be compared with unsecured NCDs due to various factors like risk, credit, and security. The Tribunal restored the issue to the AO for de novo adjudication to determine the arm's length interest rate for unsecured NCDs and to make proportionate disallowance if the interest rate was found higher than the arm's length rate. The Tribunal also directed the AO to examine the aspect of tax evasion as per CBDT Circular No. 6P dated 07/06/1968.

2. Deletion of Disallowance of Deduction Claimed under Section 80G for CSR Expenses:
The Revenue also challenged the deletion of disallowance of deduction under section 80G of the Income Tax Act for CSR expenses. The AO disallowed the deduction on the grounds that CSR expenses are mandatory under section 135 of the Companies Act, 2013, and not voluntary donations. The CIT(A) allowed the deduction, following judicial precedents that CSR expenses, although not allowed under section 37, are allowable under section 80G. The Tribunal upheld the CIT(A)'s decision, noting that there is no specific restriction for claiming deduction under section 80G for CSR expenses and that the coordinate benches of the Tribunal have consistently ruled in favor of allowing such deductions.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, restoring the issue of interest disallowance on NCDs to the AO for fresh adjudication and upholding the CIT(A)'s decision on allowing the deduction under section 80G for CSR expenses.

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