Mumbai ITAT in case of TMF Holdings Ltd (‘Assessee’)[1], has held that the interest paid on perpetual debentures with call option qualifies as a debt/capital borrowed under Section 36(1)(iii) of the Income Tax Act, 1961 (‘Act’), hence interest paid on it is an allowable expenditure under sec 36(1)(iii) of the Act.
Assessee is a NBFC and it had issued 11.35% non-convertible subordinate perpetual debentures amounting to approximately INR 375.30 cr. Assessee had a call option after 10 years from the date of issue, and there was also a step-up option of 50 basis points (0.5%) in the event that the call option were not exercised by the Assessee.
During FY15, Assessee had incurred an interest expenditure of INR 39,86,33,662 which was claimed as a deductible expenditure under section 36(1)(iii) of the Act.
Assessing officer disallowed such claim on the basis that the perpetual debenture issued neither had any fixed maturity date nor provided the investor with rights to enforce the repayment of the principal amount, which suggested that the it is an equity instrument and any return on equity instrument is not permitted as an expenditure under sec 36(1)(iii) of the Act.
CIT(A) upheld the order of the tax officer and on further appeal, Mumbai ITAT permitted the claim/deduction of interest expenditure under sec 36(1)(iii) of the Act, basis the below:
- Company law recognizes perpetual debentures as a ‘debt’. Holders were not reflected in the register of members/shareholders but instead in the register of debenture holders.
- Perpetual Debentures were listed on the wholesale debt market and are governed by SEBI (Issue and Listing of Debt Securities) Regulations, 2008. This indicated it is in the nature of debt.
- As per the RBI circular, the return on investment in perpetual bond is referred to as ‘interest’ and issue of such bonds are treated as debt raised.
- The debt holder did not get any right in management or voting rights, no right to participate in the profits, interest were fixed and regular unlike payment of dividends which were variable and irregular.
- The assessee had utilized such funds for business (i.e. financing activities, repay existing loans, business expenditure including capital expenditure).
[1] TMF Holdings Ltd vs CIT [ITA No. 2031/Mum/2024]
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