Revenue Expenditure on MLD/NCD Issuance by NBFC – Held as Revenue in Nature

 Mumbai ITAT held that expenditure incurred by a Non-Banking Financial Company (NBFC) on issuance of Market Linked Debentures (MLD) and Non-Convertible Debentures (NCD) is allowable as revenue expenditure and cannot be amortised over five years, as the debentures were issued for onward lending, a core business activity, and not for extension of an undertaking or setting up a new unit.

Background

·       The taxpayer, a RBI-registered NBFC, is engaged in borrowing funds through various instruments and advancing them as loans against security. It is also engaged in trading and investment in shares and securities.

·       The taxpayer issued MLDs and NCDs for the purposes of onward lending, general corporate purposes, and repayment of interest and principal on existing borrowings

·       The Assessing Officer (AO) held that debenture issuance was for extension/expansion of the existing financing portfolio and accordingly allowed only 1/5^th of the total issuance expenditure; the balance was disallowed and added to income.

·       The CIT(A) upheld the AO's order. The taxpayer appealed to the ITAT.

Taxpayer's Contentions

• MLDs and NCDs were issued solely for onward lending and repayment of existing interest-bearing liabilities i.e., for carrying on existing NBFC business and the entire expenditure is therefore allowable as revenue expenditure incurred wholly and exclusively for business purposes.
• Issuance of debentures by an NBFC already in the business of fund-raising and lending is intrinsic to the business itself and cannot be treated as extension or expansion.
• The provision governing amortisation of preliminary and specified expenditures applies only where expenditure is incurred before commencement of business or, after commencement, in connection with extension of an undertaking or setting up a new unit and neither condition is satisfied here.
• One of the circular of Central Board of Direct Taxes (CBDT) dated 19 March 1971 expressly clarifies that the amortisation provision is not intended to supersede other provisions under which expenditure is otherwise allowable as a deduction against profits.

Revenue's Contentions

• The funds raised through debenture issuance were for extension/expansion of the existing financing portfolio, thereby attracting the amortisation provision.
• The amortisation provision specifically governs expenses incurred in connection with debenture subscriptions, being underwriting commission and brokerage charges and mandates their spread over five years; the specific provision must prevail over the general revenue expenditure provision.

ITAT Decision & Key Observations

• The amortisation provision is triggered only where expenditure is incurred in connection with extension of an undertaking or setting up a new unit – neither condition is met in the present case.
• Issuance of MLDs/NCDs for onward lending and repayment of existing borrowings is integral to the core business of an NBFC and not an extension of the undertaking.
• The aforesaid CBDT Circular is binding and it explicitly provides that the amortisation provision does not supersede other provisions under which expenditure is otherwise allowable against profits.
• The nature of debentures whether convertible or non-convertible does not alter their character as a loan instrument; expenditure on their issuance remains revenue expenditure.
• Revenue's reliance on precedents distinguished on facts: those cases involved debentures issued specifically to finance new industrial expansion or a specific project — factually distinct from an NBFC issuing debentures for routine onward lending.
• Entire issuance expenditure allowed as revenue expenditure; disallowance deleted. Appeal allowed.

Key Takeaway
For NBFCs and financial intermediaries, expenditure on issuance of debentures deployed for onward lending or repayment of existing borrowings is deductible as revenue expenditure in the year of incurrence, and five-year amortisation is not attracted. The critical distinction is end-use of proceeds: routine fund-raising integral to an existing financial services business is revenue in nature, whereas issuance linked to genuine business expansion or a new unit attracts amortisation – a position expressly preserved by aforesaid CBDT Circular.