ITAT Allows Deduction To ICICI Bank On Interest Expense On Perpetual Bonds

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has allowed ICICI Bank the deduction on interest expense on perpetual bonds.

The two-member bench of Kavitha Rajagopal (Judicial Member) and Amarjit Singh (Accountant Member) has observed that merely that RBI recognises treating 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.

During the course of assessment, the A.O also noticed that the assessee has claimed interest expenditure under section 36(1)(iii)of the Income Tax Act in respect of perpetual bonds issued by the assessee bank.

On query, the assessee/respondent explained that the bonds have been issued to various insurance companies, mutual fund provident funds, and individuals. The bonds were in the nature of debentures and had a superior claim over equity and cumulative preference shares of the bank. They have fixed the interest rate, and interest is paid out of distributable profits of previous or current years. The bank has the discretion to exercise the call option for the bonds as per the applicable guidelines.

It was also submitted that the bank had exercised the call option in October 2016 in respect of the bonds. The bank has paid interest to the bond holders after deducting the tax at the source where applicable at the rate prescribed. The interest paid on the bonds has been claimed as interest expense under section 36(1)(iii). Since the interest paid to the bondholders, unlike dividend income, is not exempt as per the provision of the Income Tax Act. The bondholders would have accordingly offered it as income in their respective returns. Disallowance of the interest would result in double taxation of the income.

The AO was of the view that perpetual bonds were equity and they had equity-like features, i.e., perpetual in nature; high loss absorption capacity; provision for write-down of principal or conversion to equity on the trigger; discretionary pay-out with the existence of full coupon discretion.

The AO stated that in the case of perpetual bonds, where the lender does not have authority to claim a refund of the amount given, the amount cannot be held as borrowing and hence the interest on bonds was not admissible as a deduction under section 36(1)(iii).

The assessee filed the appeal before the CIT(A). The CIT(A) has allowed the appeal of the assessee.

The department submitted that the perpetual bond issued by the assessee was of the kind of equity share rather than debt, and the interest paid on bonds could not be charged to the profit and loss account.

The assessee contended that it was the statutory requirement that the corporation pays interest on the capital borrowed from the central and state governments at such rates as may be fixed by the government. In that case, the capital of the corporation was to be provided by the Central and State Governments, whereas in the case of the assessee, there was no statutory requirement and the assessee issued debt instruments without any compulsory requirement of contribution.

The Tribunal held that AO has failed to controvert the undisputed fact that the assessee has issued innovative perpetual debt instruments (IPDI) which carry a fixed rate of interest. The holder of the instruments had no right to management of the assessee bank. The assessee had paid interest to the bondholder after deducting tax at the source.

The tribunal dismissed the appeal of the department and noted that the payment of interest was not made to the corporation but was the payment made to third parties.

Case Title: The ACIT Versus ICICI Bank

Citation: ITA No.3215/Mum/2019

Date: 22.08.2022

Counsel For Appellant: R.A. Dhyani & Dham Veer Singh

Counsel For Respondent: Aarti Visanji

Click Here To Read Order