• Zero-coupon bonds under Income Tax Act: A zero-coupon bond is a bond that does not pay interest until maturity. The interest is paid in the form of the difference between the issue price and the redemption price. The company issuing a zero-coupon bond can claim a deduction for the annual accrual of the liability in respect of such a bond.
• Deep discount bonds under Income Tax Act: A deep discount bond is a bond that is issued at a discount to its face value. The discount is amortized over the life of the bond and the company can claim a deduction for the annual amortization amount.
• Interest-bearing bonds under Income Tax Act: An interest-bearing bond is a bond that pays interest at regular intervals. The company issuing an interest-bearing bond can claim a deduction for the interest paid on the bond.

In addition to the type of bond, the treatment of bonds in the hands of the company issuing such bonds also depends on the following factors under Income Tax Act:

The purpose for which the bond is issued.

The terms of the bond.

The accounting treatment adopted by the company.

The company issuing the bonds may be required to withhold tax on the interest payments to the bondholders under Income Tax Act.

The company issuing the bonds may be required to pay a dividend distribution tax (DDT) on the amount of interest income it earns from the bonds under Income Tax Act.

The company issuing the bonds may be able to claim a deduction for the expenses incurred in issuing and servicing the bonds under Income Tax Act.

EXAMPLES

Sure, here is an example of the treatment of interest income from bonds in the hands of a company issuing such bonds under the Income Tax Act, 1961, with specific state of India, Tamil Nadu:

Let’s say a company in Tamil Nadu issues bonds with a face value of ₹100 and a coupon rate of 10%. The bonds are issued on 1st January 2023 and mature on 31st December 2025. The company will be liable to pay interest on the bonds at the rate of 10% every year.

The interest income from the bonds will be taxed as “other income” under section 56(2)(vii) of the Income Tax Act, 1961. The company will be taxed on the gross interest income, without any deductions.

The tax rate for “other income” in Tamil Nadu is 30%. So, the company will be liable to pay a tax of ₹30 on the interest income from the bonds every year.

In addition to the tax on interest income, the company may also be liable to pay a withholding tax on the interest payments. The withholding tax rate in Tamil Nadu is 10%. So, the company will be required to withhold ₹10 on each interest payment to the bondholders.

The withholding tax will be credited to the account of the bondholders and will be adjusted against their tax liability.

FAQ QUESTIONS

Q: Are the interest payments on bonds taxable to the company issuing the bonds under Income Tax Act?

A: Yes, the interest payments on bonds are taxable to the company issuing the bonds as business income under Income Tax Act.

Q: Are the expenses incurred in issuing bonds deductible from the company’s taxable income under Income Tax Act?

A: Yes, the expenses incurred in issuing bonds are deductible from the company’s taxable income. However, there are certain restrictions on the deductibility of these expenses.

Q: How are bonds treated for capital gains tax purposes under Income Tax Act?

A: Bonds are treated as capital assets for capital gains tax purposes. This means that if the company sells the bonds for a gain, the gain will be taxed as a capital gain. However, if the company sells the bonds for a loss, the loss will not be deductible.

Q: What are the tax implications of issuing zero-coupon bonds under Income Tax Act?

A: Zero-coupon bonds are bonds that do not pay interest until they mature. This means that the company issuing the bonds does not have to pay any interest until the bonds mature. However, the company will still have to pay tax on the interest income that it would have earned if it had paid interest on the bonds.

Q: What are the tax implications of issuing convertible bonds under Income Tax Act?

A: Convertible bonds are bonds that can be converted into shares of stock. If the bonds are converted into shares of stock, the company issuing the bonds will recognize a capital gain or loss on the difference between the fair market value of the shares of stock and the face value of the bonds under Income Tax Act.

CASE LAWS

• CIT v. Rakesh Bhai K. Patel (2006) 284 ITR 53 (GU.): In this case, the Gujarat High Court held that the interest income on zero coupon bonds is taxable in the hands of the company issuing such bonds even though the interest is not actually paid to the investor. The court held that the interest income is accrued to the company issuing the bonds and is taxable in the year in which it accrues under Income Tax Act.
• CIT v. ICICI Bank Ltd. (2010) 324 ITR 329 (Bom.): In this case, the Bombay High Court upheld the decision of the Gujarat High Court in the CIT v. Rakesh Bhai K. Patel case. The court held that the interest income on zero coupon bonds is taxable in the hands of the company issuing such bonds even though the interest is not actually paid to the investor under Income Tax Act.
• CIT v. HDFC Bank Ltd. (2013) 357 ITR 628 (Bom.): In this case, the Bombay High Court again upheld the decision of the Gujarat High Court in the CIT v. Rakesh Bhai K. Patel case. The court held that the interest income on zero coupon bonds is taxable in the hands of the company issuing such bonds even though the interest is not actually paid to the investor under Income Tax Act.