2025 (4) TMI 143 - AT - Income Tax

Premium paid on redemption of optionally convertible debentures constitutes deductible revenue expenditure under tax law

M/s. Skyline Mansions Private Limited Versus ACIT, Central Circle-8 (2), Mumbai And Deputy Commissioner of Income Tax Versus M/s. Skyline Mansions Private Limited, Mumbai

ITAT Mumbai held that premium paid on redemption of optionally fully convertible debentures (OFCDs) constitutes revenue expenditure and is deductible. The ... Disallowance of premium paid on redemption of debentures - HELD THAT:- From a perusal of the assessment order, we notice that the AO has taken the view that the OFCDs were not converted into equity shares by the promoters of the assessee company only for the reason that they will lose the controlling interest over the assessee company upon such conversion. AO has not properly understood the facts surrounding the issue. The leasehold rights and possession of land were with SGH and the assessee was holding reversionary rights. Under JDA, the assessee took up the responsibility to develop the land. As observed by the AO, the developer is liable to pay money to the owner of the land. Since possession of land was given to the assessee by SGH, the assessee was liable to pay security deposit to SGH. The above table extracted above would show the funds received by the assessee by issuing OFCD to UIVCF were used for paying security deposit to SGH and also for development of land. Hence, it is not correct on the part of the AO to hold that the assessee has not used the funds received by issuing OFCDs for the purpose of business of the assessee. So far as the assessee is concerned, it will have not have any say over the usage of funds so given to SGH, i.e.,it is prerogative of the recipient of funds to decide the manner of its usage. We noticed earlier that the amount so given by the assessee to SGH was for the purposes of business of the assessee only, since it was paid for obtaining possession of land for the purposes of development. Hence, we hold that the assessee has used the funds obtained from UIVCF for the purpose of business only. In our view, manner of usage of funds by SGH is not relevant for deciding the deductibility of premium paid by the assessee on OFCD. The foregoing discussions would show that all the reasons given by the AO to disallow the claim for deduction of premium paid on OFCD would fail. Whether such kind of premium paid on redemption of optionally fully convertible debentures falls under the category of 'revenue expenditure' or not was answered in the case of CIT vs. Raymond Ltd [2012 (4) TMI 128 - BOMBAY HIGH COURT] additional liability equivalent to a discount represents revenue expenditure must, by analogy of reasoning, apply to the premium which is paid by the assessee at the time of redemption of the debentures. In that view of the matter, the question which has been framed by the Revenue would have to be answered in the affirmative, in favour of the assessee. The actual premium paid upon the redemption of the debentures would have to be classified as revenue expenditure, in terms of the decision of the Supreme Court in Madras Industrial Investment Corpn. Ltd.[1997 (4) TMI 5 - SUPREME COURT]. We are of the view that the AO was not justified in disallowing the claim of premium paid on OFCDs in both the years under consideration. Accordingly, we are of the view that the CIT(A) was justified in deleting the disallowances made in both the years under consideration. Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. The validity of the disallowance of premium paid on the redemption of Optionally Fully Convertible Debentures (OFCDs) by the Assessing Officer (AO) for the assessment years 2017-18 and 2019-20.2. The challenge against the validity of assessment proceedings completed under section 153A of the Income Tax Act for the assessment year 2017-18.3. The challenge against the disallowance of Education Cess and disallowance made under section 40(a)(ii) of the Income Tax Act for the assessment year 2019-20.ISSUE-WISE DETAILED ANALYSIS1. Disallowance of Premium Paid on Redemption of OFCDsRelevant Legal Framework and Precedents: The key legal question was whether the premium paid on the redemption of OFCDs qualifies as a revenue expenditure. The court referred to the precedent set by the Hon'ble Bombay High Court in CIT vs. Raymond Ltd, which held that such premium is a liability incurred for business purposes and should be considered revenue expenditure.Court's Interpretation and Reasoning: The Tribunal noted that the AO's reasoning was flawed. The AO assumed the premium would not be payable if OFCDs were converted into equity shares, which was incorrect. The conversion option was at the discretion of UIVCL, not the assessee. The Tribunal found that the premium was payable regardless of conversion or redemption, and the AO's presumption was unfounded.Key Evidence and Findings: The Tribunal examined the Joint Development Agreement (JDA) and the financial transactions between the assessee and SGH. It found that the funds received from UIVCF were used for business purposes, including paying a security deposit to SGH and developing the land.Application of Law to Facts: The Tribunal applied the legal principles from the Raymond Ltd case to conclude that the premium paid on OFCDs was a revenue expenditure. It found that the funds were used for business purposes, and the AO's disallowance was unjustified.Treatment of Competing Arguments: The Tribunal considered the AO's argument that the funds were not used for business purposes and found it to be based on a misunderstanding of the facts. The Tribunal also dismissed the AO's view that the premium was paid to maintain the promoters' controlling interest.Conclusions: The Tribunal concluded that the premium paid on OFCDs was a legitimate business expenditure and should not be disallowed.2. Validity of Assessment Proceedings under Section 153ARelevant Legal Framework and Precedents: Section 153A of the Income Tax Act deals with assessment proceedings following a search or requisition.Court's Interpretation and Reasoning: The Tribunal did not provide a detailed analysis of this issue in the judgment, as it primarily focused on the disallowance of the premium on OFCDs.Key Evidence and Findings: Not specifically addressed in the judgment.Application of Law to Facts: Not specifically addressed in the judgment.Treatment of Competing Arguments: Not specifically addressed in the judgment.Conclusions: The Tribunal did not make a specific determination on this issue in the judgment.3. Disallowance of Education Cess and Section 40(a)(ii) DisallowanceRelevant Legal Framework and Precedents: Section 40(a)(ii) of the Income Tax Act disallows certain taxes paid as deductions.Court's Interpretation and Reasoning: The Tribunal did not provide a detailed analysis of this issue in the judgment, as it primarily focused on the disallowance of the premium on OFCDs.Key Evidence and Findings: Not specifically addressed in the judgment.Application of Law to Facts: Not specifically addressed in the judgment.Treatment of Competing Arguments: Not specifically addressed in the judgment.Conclusions: The Tribunal did not make a specific determination on this issue in the judgment.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal cited the Bombay High Court's decision in CIT vs. Raymond Ltd, stating: 'The actual premium paid upon the redemption of the debentures would have to be classified as revenue expenditure, in terms of the decision of the Supreme Court in Madras Industrial Investment Corpn. Ltd.'Core Principles Established: The Tribunal reinforced the principle that premiums paid on the redemption of debentures are revenue expenditures if incurred for business purposes.Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decision to allow the premium on OFCDs as a business expenditure. The Tribunal did not address the other issues in detail, focusing primarily on the disallowance of the premium.