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2020 (12) TMI 747 - AT - Income TaxRecharacterization of the transaction of debt into equity - Treatment of Optionally and Compulsory Convertible Debentures issued by the assessee-company as Equity Share Capital - reversal by the ld. CIT(A) of the view of the AO/TPO in treating the transactions of issue of OCDs and CCDs into Equity capital - HELD THAT:- There is no difference in the form and substance of the transaction. The amount was raised through debentures, reflected in the same way in its accounts and then such debentures also got redeemed by the assessee company. The position would have been different, if the assessee had taken the amount as equity but reflected it only as a debenture and also eventually converted into equity after some time. All the cases relied by the Department fall in such category where the amounts were, in fact, taken as equity but not declared as such and the intention behind the apparent transaction got unearthed due to surrounding circumstances. On the other hand, we are confronted with a situation in which the assessee was in need of funding for its ongoing projects. It took loan through debentures, which were eventually redeemed. So the instant case falls in the general provision of accepting the transaction as such and not in the exception requiring recharacterization of the transaction of debt into equity. De hors the provisions of section 94B and the GAAR in the period anterior to their applicability, the obiter in the case of EKL Appliances [1979 (10) TMI 22 - MADRAS HIGH COURT] also supports the view canvassed by the ld. CIT(A) in not approving the recharacterization of the transaction of debt into equity. Thus, the first issue raised by the Revenue in its appeal is determined against it. Arm’s length rate for determining the ALP of the International/Specified Domestic transactions of payment of interest - HELD THAT:- On examination of the assessee’s Balance sheet for the year under consideration, it emerges that the amount payable to IDBI bank stands at Nil. This shows that the interest rate paid by the assessee to IDBI Bank that was considered as an internal comparable under the CUP method for the earlier year, is no more relevant for the year under consideration. The exercise of ALP determination has to be undertaken each year separately by considering the facts and circumstances that are relevant and germane to the issue for that particular year. Given the fact that the basis for the determination of arm’s length rate of interest for the preceding year 2011-12 does not survive and the ld. AR could not point out the rate of interest at which the assessee made borrowings from bank in the year under consideration, we are satisfied that it would be appropriate if the impugned order on this score is set-aside and the matter is restored to the file of AO. We order accordingly and direct the AO/TPO to find out the rate at which interest was paid by the assessee to its bank in the year under consideration and then apply the same as arm’s length rate for determining the ALP of the International/Specified Domestic transactions of payment of interest. Disallowance u/s.40(a)(ii) - Education cess and secondary and higher education cess - HELD THAT:- Answering the question posed before it in affirmative, their Lordships held that on the facts found by the authorities below, if a question of law arises (though not raised before the authorities) which has bearing on the tax liability of the assessee, the Tribunal has jurisdiction to examine the same. Having gone through the subject matter of the additional ground taken by the assessee, it is discernible that the additional ground raises a pure question of law. We, therefore, admit the additional ground and espouse it for disposal on merits. We find that the issue raised through the additional ground is no more res integra in view of the judgment of Hon’ble jurisdictional High Court in Sesa Goa Lt. Vs. JCIT [2020 (3) TMI 347 - BOMBAY HIGH COURT] and CHAMBAL FERTILISERS AND CHEMICALS LTD., PR. COMMISSIONER OF INCOME TAX, KOTA [2018 (10) TMI 589 - RAJASTHAN HIGH COURT] in which it has been held that Education Cess is not disallowable expenditure u/s.40(a)(ii). Also see - As correctness of the amount has not been disputed by the ld. DR, we direct to allow deduction for such an amount.
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