N V Projects Private Limited Vs DCIT (ITAT Mumbai)
Interest on Borrowings for Capital Reduction Allowed -Buyback Tax u/s 115QA Inapplicable to Pre-01.06.2016: ITAT Mumbai
Assessee, engaged in operation & maintenance of an IT Park, had pursuant to approval of the Bombay High Court reduced its capital by cancelling 1,65,433 redeemable optionally convertible preference shares of Rs. 100 each, returning capital of Rs. 67 crore to preference shareholders at Rs. 4,050 per share. For this purpose, Assessee borrowed funds & incurred interest of Rs. 11.56 crore which was claimed as deduction u/s 36(1)(iii). AO disallowed the claim holding that interest on borrowings used for capital reduction is not for business purpose.
CIT(A) confirmed the disallowance. On further appeal, the Tribunal held that s.36(1)(iii) is a self-contained provision & once borrowing is for business purpose, the fact that it is applied for capital reduction does not alter its nature. Relying on Core Healthcare Ltd. (SC) & Eastern Investments Ltd. (SC), the Tribunal held that interest paid on borrowed funds used to facilitate legitimate business decisions like capital restructuring is allowable as business expenditure. Accordingly, disallowance of Rs. 11.56 crore was deleted.
In Revenue’s appeal, AO had invoked s.115QA to levy buyback tax on the distributed amount of Rs. 65.34 crore, treating capital reduction as a form of buyback. Assessee contended that the transaction occurred on 16.04.2016 & payment was made on 31.05.2016, prior to the amendment to s.115QA effective from 01.06.2016, which expanded scope of buyback to cover capital reduction. Tribunal noted that since payment to shareholders was made before 01.06.2016, the amended provisions could not apply. It upheld CIT(A)’s decision deleting buyback tax & consequential interest u/s 115QB.
