2024 (11) TMI 1386 - HC - Income Tax

Taxpayer's accounting for broken-period interest and rights-issue debenture expenses upheld as revenue deductions, Revenue's claims rejected

HC upheld the taxpayer's accounting treatment for broken-period interest, finding the method did not cause revenue loss and therefore required no ... Deduction in respect of the broken period interest paid - method of accounting followed by the appellant in respect of broken period interest - Tribunal in rejecting the assessee’s contention was of the view that when the securities are purchased by the appellant along with interest thereon, the price paid becomes the cost of the asset which is to be debited to Profit & Loss Account - HELD THAT:- As in American Express International Banking Corporation [2002 (9) TMI 96 - BOMBAY HIGH COURT] question was answered in favour of the assessee wherein as find that the assessee's method of accounting does not result in loss of tax/revenue for the Department. That, there was no need to interfere with the method of accounting adopted by the assessee-bank. Our attention is also drawn to a recent decision of the Supreme Court in Bank of Rajasthan Ltd. [2024 (10) TMI 875 - SUPREME COURT] wherein the Supreme Court affirmed the view taken by this Court in CitiBank NA [2008 (8) TMI 766 - SUPREME COURT], American Express International Banking Corporation [2002 (9) TMI 96 - BOMBAY HIGH COURT] as also in HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] question answered in affirmative in favour of the assessee and against the Revenue. Deduction in respect of the expenditure incurred by the assessee on the issue of Fully Convertible Debentures - assessee had made a ‘rights issue’ of Fully Convertible Debentures (FCDs) and in such connection, had incurred expenditure on account of printing expenses, advertisement, professional fees, stamp duty and filing fees, bank charges, packages, etc. - deduction was rejected by AO on the ground that the real intention of the assessee was to increase its capital and not to raise borrowed capital - HELD THAT:- In answering such issue in favour of the assessee and against the Revenue, observed that the said question would stand covered by the decision of Havells India Ltd. [2012 (5) TMI 449 - DELHI HIGH COURT] which followed the decision of the Supreme Court in India Cements Ltd. [1965 (12) TMI 22 - SUPREME COURT] and the decision in Commissioner of Income Tax vs. Secure Meters Ltd. [2008 (11) TMI 66 - RAJASTHAN HIGH COURT] held that the expenditure incurred thereon was revenue in nature. Decided in favour of the assessee and against the revenue. Issues Involved:1. Entitlement to deduction for broken period interest paid by the appellant.2. Observations regarding the method of accounting for broken period interest.3. Deduction for expenditure incurred on the issue of Fully Convertible Debentures (FCDs).Detailed Analysis:Issue 1 & 2: Deduction for Broken Period Interest and Accounting MethodThe appellant, engaged in long-term finance, purchased securities that included a component of broken period interest. The appellant claimed a deduction for this interest, arguing that the entire interest income accrues after the end of the previous year, thus offering the interest income in the subsequent year. The Assessing Officer disallowed the deduction, reasoning that broken period interest was part of the asset's purchase price already debited to the Profit & Loss Account, citing the Supreme Court's decision in Vijaya Bank Ltd. vs. Additional Commissioner of Income-tax.The Tribunal upheld this view, noting that the price paid for securities, including interest, becomes the asset's cost, which is debited to the Profit & Loss Account. The Tribunal emphasized that unsold securities should be shown in closing stock at cost or market price, whichever is lower, based on the Supreme Court's decision in Chainrup Sampatram vs. Commissioner of Income-tax.However, the appellant referenced the Division Bench decision in American Express International Banking Corporation vs. Commissioner of Income-tax, where similar issues were resolved in favor of the assessee, allowing for broken period interest to be treated as revenue expenditure. This decision was upheld by the Supreme Court, which found no application of the Vijaya Bank Ltd. case to the facts at hand. The Supreme Court reiterated this view in the case of CitiBank N.A. vs. Commissioner of Income Tax, affirming that the tax effect was neutral and the assessee's method of accounting was acceptable.Given these precedents, the High Court concluded that the Tribunal erred in its judgment, and questions of law nos. 1 and 2 were answered in favor of the appellant, allowing the deduction for broken period interest and validating the appellant's accounting method.Issue 3: Deduction for Expenditure on FCDsThe appellant's claim for deduction of expenses incurred on the issue of Fully Convertible Debentures (FCDs) was rejected by the Assessing Officer, who argued that the intention was to increase capital rather than raise borrowed capital. The Tribunal confirmed this view, applying the Supreme Court's decision in Brooke Bond India Ltd. vs. CIT, which treated such expenditure as capital in nature.In challenging this decision, the appellant cited the Delhi High Court's ruling in Commissioner of Income Tax vs. Ranbaxy Laboratories Ltd., which allowed debenture issue expenses as revenue expenditure. This view was supported by several other High Court decisions, including those in CIT vs. Havells India Ltd. and CIT vs. Secure Meters Ltd., which followed the Supreme Court's decision in India Cements Ltd. v. CIT.The Bombay High Court, in similar cases such as The Commissioner of Income Tax-6 vs. M/s. Faze Three Ltd., adopted the position that expenditure on convertible debentures should be treated as revenue expenditure. This consistent judicial approach, including the Supreme Court's dismissal of the Revenue's appeal in Principal Commissioner of Income-tax vs. Reliance Natural Resource Ltd., led the High Court to conclude that the Tribunal's decision was incorrect.Thus, question no. 3 was also resolved in favor of the appellant, allowing the deduction for expenditure on the issue of FCDs. The appeal was allowed, with no costs awarded.