GUJARAT AMBUJA COTSPIN LTD. vs. A.C.I.T.

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TAXAP/73/2002HC GujaratGJHC24020525200203 December 2014Author: HONOURABLE MR. JUSTICE KS JHAVERI,HONOURABLE MR. JUSTICE K.J.THAKER14 pages
AI SummaryDismissed

What did the High Court hold?

The High Court, perusing the judgment of a previous Division Bench of the same court in Income Tax Officer vs. VXL Ltd. (Tax Appeal Nos. 481 & 482 of 1999), found no reason to deviate from that decision. The previous judgment held that expenditure incurred by a company in connection with the issue of shares with a view to increase its share capital is directly related to the expansion of the company's capital base and is capital expenditure, even if it incidentally helps the business. The court noted that the Supreme Court in India Cements Ltd. vs. CIT and Brooke Bond India Ltd. vs. CIT had taken a similar view regarding expenditure on issuing shares. The previous judgment concluded that when convertible debentures are converted into equity shares, the company obtains an enduring benefit, making the expenditure capital in nature. The Assessing Authority had disallowed expenditure only to the extent pertaining to the convertible portion. The High Court agreed with the previous Division Bench's reasoning and found that the matter did not require reference to a Larger Bench. Consequently, the appeal was dismissed. However, acknowledging the differing views of various High Courts, the court granted a certificate of fitness to the assessee to carry the matter before the Apex Court.

What were the facts?

The assessee, Gujarat Ambuja Cotspin Ltd., filed its return of income for Assessment Year 1992-93 declaring an income of Rs. 54,25,570/-. The Revenue assessed the income at Rs. 1,13,28,240/-. The assessee appealed to the CIT(A), which partly allowed the appeal. Both the assessee and the Revenue filed appeals before the ITAT. The ITAT passed an order on July 6, 2001, allowing the appeals filed by both parties for statistical purposes. The present appeal is filed by the assessee challenging the ITAT's order. The High Court framed two questions of law.

What were the issues?

The Tribunal had to decide the following questions of law: 1. Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that expenditure on the issue of convertible debentures is a capital expenditure? 2. Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that expenditure on the issue of non-convertible debentures should be allowed proportionately in each year over the period of redemption of the debentures? The assessee, through its senior advocate Mr. Soparkar, argued that various High Courts, including Madras, Rajasthan, Punjab & Haryana, and Karnataka, have held that expenditure on the issue of debentures (both convertible and non-convertible) is revenue expenditure. The assessee relied on decisions such as CIT vs. South India Corpn. (Agencies) Ltd., CIT vs. First Leasing Co. of India Ltd., CIT, Udaipur vs. Secure Meters Ltd., CIT vs. Sukhjit Starch & Chemicals Ltd., and CIT vs. ITC Hotels Ltd. The assessee requested a reference to a Larger Bench due to differing views among High Courts, or alternatively, a certificate of fitness to appeal to the Supreme Court. The Revenue, through its senior advocate Mr. Bhatt, argued that a Division Bench of the Gujarat High Court in the case of Income Tax Officer vs. VXL Ltd. held that expenditure incurred in connection with the issue of shares to increase share capital is capital expenditure. The Revenue contended that this appeal should be dismissed as being without merit.

Which sections of the Income-tax Act were involved?

Section 9(1)(vii)(b)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
O/TAXAP/73/2002 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 73 of 2002 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ GUJARAT AMBUJA COTSPIN LTD.....Appellant(s) Versus A.C.I.T.....Opponent(s) ================================================================ Appearance: MR SN SOPARKAR, SR. ADVOCATE, MRS SWATI SOPARKAR, ADVOCATE for the Appellant(s) No. 1 MR MR BHATT, SR. ADVOCATE, MRS MAUNA M BHATT, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 03/12/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI)

1.

This is an appeal by the appellant- assessee, challenging the order of the learned ITAT, Ahmedabad Bench, Ahmedabad (‘the Tribunal, for short), Dated : 06.07.2001, rendered in ITA Nos. 4118 & 5261/Ahd/1995 for the A.Y.1992-93, whereby, the Tribunal allowed the appeals filed by the assessee as well as the respondent-Revenue for the statistical purposes.

2.

The brief facts of the case are that the assessee filed its return of income for the A.Y.- 1992-93 on 01.02.1993, declaring his total income at Rs.54,25,570/-. However, the respondent- Revenue assessed the income of the assessee at Rs.1,13,28,240/- vide its order dated 23.03.1995. The assessee challenged the same before the learned CIT(A), which, partly allowed the same. Since, both the assessee as well as the Revenue were not satisfied with the same, they carried the matter before the Tribunal by filing separate appeals, wherein, the Tribunal passed the impugned order.

3.

At the time of admitting this matter, following questions were framed; “(1) Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that expenditure

on the issue

of convertible debentures is a capital expenditure? (2) Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that expenditure on the issue of non- convertible debentures should be allowed proportionately in each year over the period of redemption of the debentures?”

4.

In connection with the questions of law framed in this Tax Appeal, Mr. Soparkar, learned Sr. Advocate for the appellant-assessee, invited our attention to the decisions of different High Courts, wherein, the questions of laws are answered in favour of the appellant, herein, which are as under; (1) “COMMISSIONER OF INCOME-TAX VS. SOUTH INDIA CORPN. (AGENCIES) LTD.”, [2007] 290 ITR 217 (Madras High Court); (2) “COMMISSIONER OF INCOME-TAX VS. FIRST LEASING CO. OF INDIA LTD.”, [2008] 304 ITR 67 (Madras High Court); (3) “COMMISSIONER OF INCOME-TAX, UDAIPUR VS. SECURE METERS LTD.”, [2010] 321 ITR 611 (Rajasthan High Court); (4) “COMMISSIONER OF INCOME-TAX VS. SUKHJIT STARCH & CHEMICALS LTD.”, [2010] 326 ITR 29 (Punjab & Haryana High Court); (5) “COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD.”, [2011] 334 ITR 109 (Karnataka High Court) ; (6) “COMMISSIONER OF INCOME-TAX VS. SOUTH INDIA CORPN. (AGENCIES) LTD.”, [2013] 352 ITR 376 (Delhi High Court) ;

5.

Mr. Soparkar submitted that in all the aforesaid matters different Courts have take different views, viz. (i) the Madras High Court in “COMMISSIONER OF INCOME-TAX VS. SOUTH INDIA CORPN. (AGENCIES) LTD.” (Supra) held that the Tribunal was justified in holding that the issue of shares was a future event which may or may not happen, and as in instant case, expenditure incurred was on issue of debenture only, such expenditure was revenue expenditure. (ii) The Madras High Court “COMMISSIONER OF INCOME-TAX VS. FIRST LEASING CO. OF INDIA LTD.”(Supra), held that expenses of issue of debentures are allowable. (iii) The Rajasthan High Court in “COMMISSIONER OF INCOME-TAX, UDAIPUR VS. SECURE METERS LTD.” (Supra), held that expenses incurred in relation to issue of debentures are allowable as revenue expenditure. (iv) The Punjab & Haryana High Court in “COMMISSIONER OF INCOME-TAX VS. SUKHJIT STARCH & CHEMICALS LTD.”(Supra) that expenditure on issue of debentures was incurred in process of carrying on business, as raising of funds, itself, is necessary for running the business, and therefore, it is allowable. (v) In “COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD.”, the Karnataka High Court took a view that expenditure incurred on issue of convertible debentures is liable to be allowed as a revenue expenditure. (vi) The Delhi High Court in “COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD.” (Supra) held that in order to fall within second exception provided in section 9(1)(vii)(b), source of income, and not source of receipt, should be situated outside India.

6.

Mr. Soparkar, therefore, submitted that there is unanimity in the views expressed by the different High Courts on the aforesaid aspect, except, the view of this High Court, which takes contrary view to that of the aforesaid High Court decisions. He, therefore, requested that this matter be referred to the Larger Bench.

7.

Mr. Soparkar, in the alternative, prayed that if the Court is inclined to follow judgment of this Court, then, he may be given the certificate of fitness so as to enable him to carry the matter before the Hon’ble Apex Court.

8.

As against this, Mr. Bhatt, learned Sr. Advocate, for the revenue submitted that in Tax Appeal Nos. 481 & 482 of 1999 in the case of “INCOME TAX OFFICER VS. VXL LTD.”, the Division Bench of this Court (Coram : Hon’ble the Chief Justice K.S. Radhakrishnan, as His Lordship then was, and Hon’ble Mr. Justice, Akil Kureshi) answered the aforesaid question in favour of the Revenue, observing and holding that expenditure incurred by the company in connection with issue of shares with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit- making, and therefore, the present appeal be dismissed as being without merit.

9.

Heard, Mr. Soparkar, learned Sr. Advocate for the assessee, and Mr. Bhatt, learned Sr. Advocate for the Revenue at length on the issue involved in this appeal. Having heard them, two things clearly emerge, i.e. firstly, it is no doubt true that, as recorded herein above, there does not appear to be unanimity in the views expressed by the different High Courts on the issue involved in this appeal, and therefore, the submission made by Mr. Soparkar that the matter be referred to the Larger Bench looks attractive, but, for the reasons we do not think that the matter requires to be referred to the larger Bench, as we held that the view taken by this Court does not call for any interference nor is it diametrically opposite to any Supreme Court decision and the same is plausible view.

10.

However, if, the decision of the Division Bench of this Court in Tax Appeal Nos. 481 & 482 of 1999, which is heavily relied on by Mr. Bhatt, is examined carefully, then, the earlier Division Bench has given careful consideration to matter and after giving detailed findings has answered the issue in favour of the Revenue by observing as under in Paras-7, 8 and 9;

7.

We heard learned Senior Counsel appearing for either side at length. Facts would clearly indicate that assessee

company

had issued convertible debentures of Rs. 125/each of which Rs. 45/each was to be converted into three shares on 1.7.1983 during the assessment year 1984-85 and had incurred expenses to the tune of Rs. 19,00,925/. According to the assessee, the expenses incurred are in respect of issuance of convertible debentures. Facts would further clearly indicate that major portion of the convertible debentures was converted into equity shares, and thereby assessing company had got enduring benefit. Debenture under the Company law means a document which either creates or acknowledges a debt. Debentures, wholly secured or unsecured are also used as convertible debentures with the option of being subsequently converted into shares. Share is a right to a special amount of the Share Capital of a company. Capital can be raised by converting debentures into equity shares. Expenditure incurred by the assessee on conversion

of convertible debentures into equity shares would have to be treated as capital expenditure. Normally, in a company there are two kinds of share capital; preferential share capital and equity share capital. Generally, all share capital not falling within the description of preference capital is equity capital. Equity share capital is that part of share capital which confers a right either to the whole or part of any residue of any profits or to the whole or part of any residue of any assets remaining for distribution after satisfying the claims of any other shareholders whose right to participate therein is limited. Equity shareholders are 7. We heard learned Senior Counsel appearing for either side at length. Facts would clearly indicate that assessee

company

had issued convertible debentures of Rs. 125/each of which Rs. 45/each was to be converted into three shares on 1.7.1983 during the assessment year 1984-85 and had incurred expenses to the tune of Rs. 19,00,925/. According to the assessee, the expenses incurred are in respect of issuance of convertible debentures. Facts would further clearly indicate that major portion of the convertible debentures was converted into equity shares, and thereby assessing company had got enduring benefit. Debenture under the Company law means a document which either creates or acknowledges a debt. Debentures, wholly secured or unsecured are also used as convertible debentures with the option of being subsequently converted into shares. Share is a right to a special amount of the Share Capital of a company. Capital can be raised by converting debentures into equity shares. Expenditure incurred by the assessee on conversion

of convertible debentures into equity shares would have to be treated as capital expenditure. Normally, in a company there are two kinds of share capital; preferential share capital and equity share capital. Generally, all share capital not falling within the description of preference capital is equity capital. Equity share capital is that part of share capital which confers a right either to the whole or part of any residue of any profits or to the whole or part of any residue of any assets remaining for distribution after satisfying the claims of any other shareholders whose right to participate therein is limited. Equity shareholders are owners of the company, sharing its risks, profits, and losses and having a residual claim on the earnings and assets of a company and are paid their share of the company's profit after all other claims are met, and in the event of liquidation of the company, they share whatever is left of the company after all its creditors have been paid. They enjoy limited liability i.e. liability only to the extent of their share holding and they are only entitled to vote at the company's their share of the company's profit after all other claims are met, and in the event of liquidation of the company, they share whatever is left of the company after all its creditors have been paid. They enjoy limited liability i.e. liability only to the extent of their share holding and they are only entitled to vote at the company's different High Courts on the subject-matter of this appeal, we deem it fit to grant certificate of fitness to the assessee to carry the matter before the Apex Court. No order as to costs.

(K.S. JHAVERI, J.) (K.J. THAKER, J) UMESH

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