ACIT Vs Rustomjee Realty Private Limited (ITAT Mumbai)
Introduction: The Income Tax Appellate Tribunal (ITAT) Mumbai recently ruled on a crucial case involving Rustomjee Realty Private Limited’s challenge against the disallowance of expenses and deduction under Section 80G for CSR activities. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi.
Detailed Analysis: The Revenue raised multiple grounds, including challenges to the disallowance of interest expenses on non-convertible debentures and the denial of Section 80G deduction for CSR expenses. The tribunal focused on grounds 1 and 2, examining the disallowance of interest expenses. The Assessing Officer (AO) had restricted the interest expenses claimed on debentures to 14.1% instead of the claimed 21.3%, resulting in a disallowance of Rs. 26,53,85,916.
The tribunal observed that the AO’s comparison of interest rates on secured loans with those on unsecured non-convertible debentures was erroneous. Various risk factors associated with unsecured debentures, such as credit risk and liquidity risk, make such a comparison invalid. The tribunal directed the AO to determine the arm’s length interest rate for unsecured debentures and reconsider the disallowance proportionately.
Moving on to ground 3, the tribunal addressed the disallowance of Section 80G deduction for CSR expenses. The AO disallowed the deduction, arguing that the expenditure was mandatory under the Companies Act, lacking the voluntary nature required for Section 80G. However, the tribunal referred to precedents and upheld the deduction, stating that the nature of CSR expenses under the Companies Act did not preclude eligibility for Section 80G.
Conclusion: In conclusion, the ITAT Mumbai partially allowed the Revenue’s appeal for statistical purposes, directing a reconsideration of the interest expense disallowance. The tribunal upheld the allowance of Section 80G deduction on CSR expenses for Rustomjee Realty Private Limited. This decision sets a precedent regarding the eligibility of CSR expenses for Section 80G deduction, emphasizing the voluntary nature required for the deduction.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the Revenue challenging the impugned order dated 10/03/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2020-21.
2. In its appeal, the Revenue has raised the following grounds:–
“1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of expenses of Rs.26,53,85,916/- when the rate of interest for secured loan at the time of issuance of debentures was 14.1% which was also reflected in the sanction order submitted by the assessee while the assessee had issued debentures at the rate of 21.3% which was much more than the market.
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting disallowance of interest of Rs.26,53,85,916/- paid on Non-Convertible Debentures (NCDs) by merely relying on the submissions of the assessee. The Ld.CIT(A) ought to have examined the terms contained in Debentures Subscription Agreement and the purpose for which such high interest bearing funds have been utilised particularly when huge interest of Rs.46.46 crores has been debited to Profit & Loss Account.
3. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in disallowance of 80G deduction in respect of donations made towards CSR activities without appreciating the fact that these are not voluntary donations, rather they were paid to comply with statutory requirement of CSR and the amount spent towards CSR activities was nothing but appropriation of profits.
4. The Appellant craves leave to add, amend and/or vary the grounds of Appeal/ before or during the course of hearing.”
3. The issue arising in grounds no. 1 and 2, raised in Revenue’s appeal, pertains to the deletion of disallowance of interest paid on non-convertible debentures.
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of construction and development of real estate. For the year under consideration, the assessee filed its return of income on 14/01/2021 declaring a total income of Rs. 71,49,06,790. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, from the details of the borrowing cost claimed by the assessee, it was noted that the assessee has claimed interest expense @21.3% on debentures, i.e. Rs. 7851 lakh. Accordingly, the assessee was asked to show cause as to why the interest expense be not restricted to 10% on the money borrowed by issuing debentures as per the secured loan rate of interest. In response thereto, the assessee submitted that it had issued 14,00,00,000 unsecured redeemable cumulative non-convertible debentures of Rs. 10 each for a period of 6 years amounting to Rs. 140,00,00,000 to Kapstone Construction Pvt. Ltd. It was further submitted that the debentures were issued at the interest rate of 21.3% after considering various factors such as quantum of loan, risk factor, credit, security, pledge, etc. during the period of 2014 to 2020. It was further submitted that the market situation differs from time to time and therefore there is no comparison of the interest rate of secured term loan taken on 25/02/2020 and unsecured redeemable cumulative non-convertible debentures issued on 08/03/2014. The assessee submitted that during a period of 2014, the interest rate against the secured term loan was in the range of 14%-16.5% and the assessee has itself borrowed a loan on 19/09/2013 at the rate of 14.10%. The Assessing Officer (“AO”) vide order dated 26/09/2022 passed under section 143(3) read with section 144B of the Act did not agree with the submissions of the assessee and held that the rate of interest for secured loan at the time of issuance of debentures was 14.10%, however, the assessee has issued debentures at the rate of 21.3% which is much more than the market rate of interest. Accordingly, the AO restricted the interest expenses claimed on debentures to 14.1% instead of 21.3% and disallowed the excess interest claim of Rs. 26,53,85,916.
5. The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and held that the interest rate on a secured loan cannot be compared with interest on unsecured non-convertible debentures, as for determining the interest rate on different instruments, various factors comes into consideration. The relevant findings of the learned CIT(A), with respect to this issue, are reproduced as under:-
“Ground No.2
As per this Ground of appeal, the appellant has agitated the disallowance of excess interest expenses amounting to Rs. 26,53,85,916/-. On perusal of the submissions of the appellant, it has been found that the A.O. has disallowed the excess interest expenses amounting to Rs. 26,53,85,916/- by holding that the interest expenses claimed for debentures issued is restricted to 14.10% i.e. interest rate on secured loan, instead of interest rate of 21.30%. The appellant has contended that the comparison of interest rate of secured loan taken at 14.1% and on unsecured redeemable cumulative non-convertible debentures issued on 18.03.2014 at 21.3% cannot be compared as both are totally different in nature. As per appellant, the comparison of secured instrument with unsecured instruments is not logical as one of the instruments is backed by assets which are not the case in case of unsecured one of the instruments is backed by assets which are not the case in case of unsecured one which is redeemable cumulative non-convertible debentures.
The submission of appellant has been considered. It is common market practice that determining the interest rate on different instruments, various factors comes into consideration such as quantum of loan, term of loan, risk, credit, security, pledge, etc. As per the unsecured non-convertible debentures instrument Agreement clause No. 8.13.1 (vi), it is categorically mentioned that the interest at the rate of 21.30% cumulative quarterly per annum is payable only on availability of distributable cash flow. Further there are various risks such as credit risk, liquidity risk; etc. which is factored with unsecured debentures and therefore, the same cannot be compared with secured interest rate. Therefore, the appellant has justified the claim of interest on debentures @ 21.30% which is higher than the secured loan interest rate.
The Appellant has also submitted the requisite details of interest expenses to support its claim u/s 36(1) (ii) of the Act. The appellant has offered Rs.281,44,08,394/- as revenue from operations during the year against which the interest of Rs. 46,45,48,508/- has been claimed in profit and loss account. The appellant has contended that the entire funds borrowed are utilized for the project undertaken by it during the year under consideration. It has also been observed that the borrowings were actually made in AY 2014-15 and the interest on debentures @ 21.30% were claimed from AY 2014-15 till AY 202021 and the said interest rate on debentures was duly accepted in earlier assessment years. The disallowance of excess interest of Rs. 26,53,85,916/-has been made without any logical reasoning in the year under consideration.”
Being aggrieved, the Revenue is in appeal before us.
6. We have considered the submissions of both sides and perused the material available on record. The assessee has undertaken a name and style of “Rustomjee Elements”. During the year under consideration, the assessee recognised an amount of Rs. 8033 lakh as the borrowing cost. The breakup of the total finance cost of Rs. 8033 lakh is as under:-
