TORRENT PHARMACETICALS LIMITED vs. ASSISTANT COMMISSIONER OF INCOME TAX

Facts

The assessee, Torrent Pharmaceuticals Limited, filed its return of income for Assessment Year 1994-95 declaring a total income of Rs. 7,36,21,130. The Revenue assessed the income at Rs. 21,18,68,970. The assessee appealed to the CIT(A), which partly allowed the appeal. Dissatisfied, the assessee filed appeals before the ITAT, Ahmedabad Bench 'C'. The ITAT partly allowed the assessee's appeals in its order dated 29.12.2006. The present appeal is filed by the assessee before the High Court of Gujarat challenging the ITAT's order. The dispute pertains to the deductibility of expenditure incurred on the issue of convertible debentures.

Held

The High Court held that the expenditure incurred on the issue of convertible debentures, where a portion was converted into equity shares, constitutes capital expenditure. The Court found that the conversion of debentures into equity shares provides an enduring benefit to the company, as equity shareholders are the ultimate owners who share in profits and losses and control management. The Court relied on the Supreme Court's decisions in India Cements Ltd. vs. CIT and Brooke Bond India Ltd. vs. CIT, which held that expenditure incurred in connection with the issue of shares to increase share capital is directly related to the expansion of the company's capital base and is capital in nature. The Court found that the decisions cited by the assessee were not applicable to the facts of the case. Consequently, the disallowance made by the Assessing Authority, which was confirmed by the Commissioner (Appeals), was sustained. The Court dismissed the appeal, agreeing with the Gujarat High Court's view in the VXL Ltd. case and finding no need to refer the matter to a Larger Bench. However, acknowledging the differing views of other High Courts, the Court granted a certificate of fitness to the assessee to appeal to the Apex Court.

Key Issues

1. Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that expenditure on the issue of convertible debentures is a capital expenditure? Assessee's Contentions: The assessee argued that various High Courts, including Madras, Rajasthan, Punjab & Haryana, and Karnataka, have consistently held that expenditure incurred on the issue of debentures is revenue expenditure. Specific decisions cited include CIT vs. South India Corpn. (Agencies) Ltd. (Madras), CIT vs. First Leasing Co. of India Ltd. (Madras), CIT, Udaipur vs. Secure Meters Ltd. (Rajasthan), CIT vs. Sukhjit Starch & Chemicals Ltd. (Punjab & Haryana), and CIT vs. ITC Hotels Ltd. (Karnataka). The assessee contended that there is a lack of unanimity among High Courts, except for the Gujarat High Court, and requested a reference to a Larger Bench or a certificate of fitness to appeal to the Supreme Court. Revenue's Contentions: The Revenue relied on a Division Bench decision of the Gujarat High Court in Income Tax Officer vs. VXL Ltd. (Tax Appeal Nos. 481 & 482 of 1999), which held that expenditure incurred in connection with the issue of shares to increase share capital is capital expenditure, even if it incidentally helps the business. The Revenue argued that the present appeal should be dismissed as without merit.