ITAT Mumbai: Redemption of unlisted NCDs will not result in cap gains, but interest income

By: Admin
May 08, 2024
Categories: Income Tax|Income Tax News
4 Min Read

The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) recently ruled that the difference between the proceeds received from redeeming unlisted non-convertible debentures (NCDs) and their purchase cost will be considered as ‘Interest income’ and taxed under ‘Income from other sources’ in the investor’s hands. Consequently, the ITAT also rejected tax benefits available for investing long-term capital gains proceeds in specified assets.

In a scenario involving corporate insolvency resolution, two private companies issued NCDs to banks against outstanding loans, sanctioned under a rehabilitation scheme by the Board for Industrial and Financial Reconstruction. Subsequently, the banks sought recovery of the NCDs from the companies’ directors.

One such director, KC Thackersey, purchased the NCDs from nationalized banks. In the financial year 2009-10, he declared long-term capital gains on redeeming these NCDs. Thackersey claimed deductions under sections 54F and 54EC of the Income-tax (I-T) Act, as he had invested the proceeds in a house property and capital gains bonds, respectively. However, the Mumbai ITAT denied these deductions, deeming the surplus received upon redemption as interest income, not capital gains.

Chartered accountants advise taxpayers to understand the tax implications of their investments upfront to avoid unwelcome surprises later. According to experts, the core nature of unlisted debt instruments like zero-coupon bonds or deep discount bonds is to earn interest income, unlike listed securities where income is typically in the form of capital gains upon redemption. The ITAT’s decision emphasizes the importance of substance over form in determining tax treatment, particularly highlighting that redemption of debentures represents debt realization rather than extinguishment of rights. Additionally, the ITAT clarified that capital gains can arise if such instruments are transferred to a third party before maturity, underscoring the need for taxpayers to consider such distinctions when assessing tax treatment.