The Income Tax Appellate Tribunal (ITAT), Mumbai Bench ruled that Interest expenses on perpetual bonds, allowable as deduction under Section 36(1)(iii) of the Income Tax Act, 1961 thereby granting relief to ICICI Bank.
During the course of assessment, the A.O also noticed that assessee has claimed interest expenditure u/s 36(1)(iii)of the Act in respect of perpetual bonds issued by the assessee bank. The assessee explained that these bonds have been issued to various insurance companies, mutual fund provident fund and individuals. It is also explained that these bonds were in the nature of debentures and have superior claim over equity and cumulative preference shares of the bank.
The Bank have fixed the interest rate and interest is paid out of distributable profits of previous years or current years. The bank has discretion to exercise the call option for the said bonds as per the applicable guidelines. It was also submitted that the bank has exercised the call option in October, 2016 in respect of the said bonds. The bank has paid interest to the bond holders after deducting the tax at source where applicable at the rate prescribed. The said interest paid on these bonds has been claimed as interest expenses u/s 36(1)(iii) of the Act.
The AO was of the view that perpetual bonds was equity and they have equity like features i.e (a) perpetual in nature; (b) high loss absorption capacity, Provision for write down of principal or conversion to equity on trigger; (c) Discretionary pay-out with existence of full coupon discretion and that where the lender does not have authority to claim refund of the amount given, the said amount cannot be held as borrowing and hence the interest on such bonds was not admissible as deduction u/s 36(1)(iii) of the Act.
The Bench consisting of Amarjit Singh, Accountant Member and Kavitha Rajagopal, Judicial Member observed that “The A.O has failed to controvert the undisputed fact that assessee has issued innovative perpetual debt instruments (IPDI) which carry a fixed rate of interest. The holder of these instruments had no right in management of the assessee bank.”
Merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates; therefore, this ground of appeal of the revenue is dismissed” the Tribunal added.
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