A.C.I.T. vs. VXL (INDIA) LTD. (SHREE DIGVIJAY WOLLEN MILLS)

Facts

The assessee, VXL (India) Ltd. (Shree Digvijay Wollen Mills), filed its original return of income for Assessment Year 1990-91 on December 28, 1989, declaring a total income of Rs. 1,69,201. A revised return was filed on March 21, 1991, declaring a total income of Rs. 1,62,75,938. The Assessing Officer passed an assessment order under Section 143(3) on March 30-31, 1992. The assessee appealed to the CIT(A), who allowed the appeal. Both the Revenue and the assessee filed appeals before the Income Tax Appellate Tribunal (ITAT). The ITAT, by its order dated September 5, 2001, partly allowed the Revenue's appeal and allowed the assessee's appeal. The Revenue filed the present appeal before the High Court against the ITAT's order.

Held

The High Court, in its judgment dated December 3, 2014, admitted the appeal on the substantial question of law concerning the allowability of expenses incurred in the issue of debentures as revenue expenditure. However, the Court noted that this question was concluded by its prior decision in Tax Appeal No.481/1999 & 482/1999, decided on July 2, 2009. In that earlier decision, the High Court had held that when debentures are converted into equity shares, the company obtains an enduring benefit, and therefore, the expenditure incurred on such conversion must be treated as capital expenditure. The Court cited the Apex Court's decisions in India Cements Ltd. Vs. CIT and Brooke Bond India Ltd. Vs. CIT to support this view, stating that expenditure incurred in connection with the issue of shares to increase the capital base is capital expenditure. Consequently, the High Court answered the question of law in the negative, in favour of the Revenue and against the assessee, allowing the appeals and setting aside the ITAT's order. However, in the present appeal (O/TAXAP/93/2002), the High Court, after hearing learned counsel, stated that the aforesaid decision of the Court has not been carried in appeal before the Apex Court. Considering the facts, the High Court concurred with the view taken in the earlier decision and answered the question in favour of the assessee and against the Revenue, disposing of the appeal.

Key Issues

1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has erred in law and on facts in holding that the expenses to the tune of Rs. 24,43,257/- incurred in issue of Debentures could be allowed as revenue expenditure? (Question of law) Assessee's Contention: The judgment does not record any specific contentions made by the assessee in the High Court. However, the ITAT had allowed the assessee's appeal, implying the assessee argued for the expenses to be treated as revenue expenditure. Revenue's Contention: The Revenue contended that the expenses incurred in the issue of debentures, particularly the convertible portion, should be treated as capital expenditure, as it resulted in an enduring benefit to the company by increasing its capital base. The Revenue relied on decisions of the Apex Court in India Cements Ltd. Vs. CIT, Madras and Brooke Bond India Ltd. Vs. CIT.