Court-approved capital reduction remains distinct from buy-back, excluding buy-back tax and preserving related business-interest deductions.

Court-approved capital reduction through direct cancellation of shares is distinct from a buy-back and is not taxable under the buy-back tax regime; treating it as both capital reduction and buy-back would create impermissible double taxation. Interest on borrowings used in commercially expedient capital restructuring was characterised as revenue expenditure deductible for business purposes. Interest on compulsorily convertible debentures remained deductible because the instruments retained their debt character until conversion and the foreign subscription was adequately substantiated. Property management fees and customer advances were supported by contractual and documentary evidence, so the related disallowances lacked an evidentiary basis.

---

---

Issues: (i) Whether a court-approved reduction of share capital could be treated as a buy-back taxable under section 115QA of the Income-tax Act, 1961; (ii) whether interest on borrowings used for the capital reduction was allowable as a business deduction; (iii) whether interest on compulsorily convertible debentures issued to a foreign investor was deductible; and (iv) whether disallowances relating to property management fees and advances from customers were sustainable.

Issue (i): Whether the court-approved reduction of share capital was a buy-back taxable under section 115QA of the Income-tax Act, 1961.

Analysis: Capital reduction under sections 100 to 104 of the Companies Act, 1956 and buy-back are distinct statutory mechanisms. Capital reduction involved direct cancellation of shares pursuant to a High Court-approved scheme, whereas a buy-back involved purchase of the company's own shares. The statutory treatment of capital reduction as dividend under section 2(22)(d) read with section 115-O, and the separate treatment of buy-back under section 115QA, confirmed that the two transactions could not be conflated. The amendment to section 115QA extended the provision to buy-backs undertaken under different company-law provisions, but did not convert a capital reduction into a buy-back. Taxing the same distribution under both regimes would also result in impermissible double taxation.

Conclusion: The capital reduction was not a buy-back taxable under section 115QA, and the consequential tax and interest liability was quashed.

Issue (ii): Whether interest on borrowings used for the capital reduction was allowable under section 36(1)(iii) of the Income-tax Act, 1961.

Analysis: The borrowing represented securitisation or discounting of future lease rentals and was undertaken as part of a commercial restructuring of the capital structure. The capital reduction was commercially expedient and connected with the assessee's business. Interest incurred for this purpose did not create an enduring capital asset or enhance the capital structure and was revenue in nature.

Conclusion: The interest expenditure incurred on borrowings used for the capital reduction was allowable as a business deduction.

Issue (iii): Whether interest on compulsorily convertible debentures issued to a foreign investor was deductible.

Analysis: Documentary evidence established the identity, creditworthiness and genuineness of the foreign investor and the subscription transaction. Compulsorily convertible debentures retain the character of debt until conversion and interest paid on them is not converted into dividend or capital expenditure merely because of their convertible feature. The extended source-of-source requirement under section 68 did not apply to the foreign investor's subscription to the debentures in the circumstances considered.

Conclusion: The disallowance of interest on the compulsorily convertible debentures was deleted.

Issue (iv): Whether the disallowances of property management fees and advances from customers were sustainable.

Analysis: The property management services were supported by agreements and other documentary material, were commercially connected with the business and were not shown to be non-genuine or covered by the related-party restriction. The amounts classified as advances from customers represented excess common-area-maintenance collections contractually adjustable or refundable after audit and were supported by credit notes. The additions therefore lacked evidentiary basis.

Conclusion: The deletion of the disallowances relating to property management fees and advances from customers was upheld.

Final Conclusion: The assessee succeeded on all substantively adjudicated issues, while the Revenue failed to establish grounds for disturbing the relief granted by the first appellate authority.

Ratio Decidendi: A court-approved capital reduction involving direct cancellation of shares is legally distinct from a buy-back and cannot be subjected to the buy-back tax merely by deeming the transaction to be a purchase of own shares.

---