In CIT v. M/S Virat Investment & Mercantile Co, the Delhi High Court ruled that the assessee was entitled to deduction under section 37 of the Income Tax Act in respect of interest/service charges paid on funds raised from LIC Mutual Fund to subscribe debentures.
The assessee, an investment company had reported for the assessment years 1992-93, a loan transaction to fund its subscription to the tune of `1,50,00,000/- in Shreyans Industries Ltd, in which the assessee was a shareholder, having 28% equity holding in that company and wished to subscribe to certain debentures which had both convertible and non-convertible elements.The LIC Mutual Funds which financed these debentures, through an agreement, required the assessee to ensure that the debentures were subscribed in its name; the advance carried an interest of 19.5% annually. Upon the repayment of the principal and liquidation of all liabilities, the converted shares (being part of the convertible portion) were to be registered and made over to the assessee. For the relevant assessment year, the assessee reported a capital loss on the sale of the shares and claimed deduction on interest/service charges. However, the AO accepted the transaction but disallowed the claim of deduction in respect of interest charges paid to LIC Mutual Funds Corporation on the ground that the assessee had wrongly claimed it and that it was inadmissible by virtue of Section 57 (iii) of the Income Tax Act, 1961.
Both the appellate authorities allowed the plea of the assessee and therefore, the Revenue approached the High Court for relief.
Dismissing the appeal, the bench noted that the assessee suffered a capital loss in the first year, i.e., 1992-93 has gone uncontested; in fact that was given the treatment that it reported. “This meant that the expenditure was treated as capital, even though the debentures were not allotted in the name of the assessee. In this regard, the CIT (A) and the ITAT’s findings that the assessee’s status as the beneficiary or de facto owner of the debentures remains undisputed. Such being the case, the question of the essential nature of the transaction not reflecting as such in the hands of the assessee for later years, does not arise.”
It was further noted that the interest expenditure in the present case is not of the kind that went into capital stream.“in this case, the expenditure clearly is not towards acquisition of the capital nor is it an integral part of it, it is only the service alone. It is of a similar kind that would otherwise have been permitted under Section 37 of the Income Tax Act. Since this expenditure does not pertain to the stream of income covered by Section 37 and is not excluded by Section 57 (3), it had to be and was correctly allowed.”
Read the full text of the Judgment below.
