C I T vs. M/S MODERN DENIM LTD

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. JUDGMENT (1) D.B. Income Tax Appeal No. 94/2006. Commissioner of Income Tax, Jaipur-II, Jaipur. ...Appellant Versus M/s Modern Denim Ltd. A-4, Vijay Path, Tilak Nagar, Jaipur. ...Respondent (2) D.B. Income Tax Appeal No. 354/2005. Commissioner of Income Tax, Jaipur-II, Jaipur. ...Appellant Versus M/s Modern Syntex (I) Ltd. A-4, Vijay Path, Tilak Nagar, Jaipur. ...Respondent 3) D.B. Income Tax Appeal No. 87/2006. Commissioner of Income Tax, Jaipur-II, Jaipur. ...Appellant Versus M/s Modern Syntex (I) Ltd. A-4, Vijay Path, Tilak Nagar, Jaipur. ....Respondent 4) D.B. Income Tax Appeal No. 92/2006. Commissioner of Income Tax, Jaipur-II, Jaipur. ...Appellant Versus M/s Modern Denim Ltd. A-4, Vijay Path, Tilak Nagar, Jaipur. Respondent

2 DATE OF Judgment ::: 20.09.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE BANWARI LAL SHARMA Mr. R B Mathur, for the appellant. Mr. Suneel Nath with,} Mr. Shivangshu Naval} for the Respondent. Mr. Archit Bohra} 1. These four appeals are preferred by the Department against the order of the Tribunal whereby the Tribunal has decided the issue against the Department. 2. The brief facts of the case are that the assessee is public limited company engaged in the business of manufacturing and sale of Denim Fabric. The assessee has claimed revenue deduction on issue of fully convertible debenture during the relevant previous assessment year but the AO has not allowed the claim by observing that issue of convertible debenture is a capital expenditure as the same amounts to expenditure incurred for the issue of share capital. In first appeal, CIT (A) allowed the claim of the assessee by observing that provisions of Section 35D of the Act had no application in respect of the aforesaid expenditure as the same was otherwise allowable revenue deduction. The CIT (A) also observed that the said expenditure was incurred on issue of debentures and the fact that the same were convertible into shares after a period of time would not make any difference to deductibility thereof. Finally, the CIT (A) has disallowed Rs.

3 1,02,747/- comprising of the expenses below Rs. 10,000/-. However, he has allowed the claim of Rs. 3,91,79,683/. 2.1. While admitting the appeals, this Court framed the following substantial questions of law vide order dated 25th April, 2007:- (I) Whether in the facts and circumstances of the case the ITAT and CIT (A) were justified in law and have not acted perversely in holding the expenditure of Rs. 3,91,79,683/- as revenue expenditure allowable deductions u/s. 37(1) when the said expenditure were pertaining to convertible debentures to be converted into shares issued for raising capital for unit which has not started production and was in the process of installation? (II) Whether in the facts and circumstances of the case the ITAT and CIT (A) were justified in law and have not acted perversely in holding the expenditure of Rs. 1,27,25,000/- towards interest/financial expenses and bank charges as revenue expenditures when the said expenditures were pertaining to interest and bank charges which were pre-operative in nature and were paid to the financial institutions against loan obtained for installing the unit and were enduring in nature? 3. Counsel for the appellants contended that the view taken by the Tribunal is contrary to the decision of the Supreme Court. 4. However, counsel for the respondents Mr. Sunil Nath has relied upon the following decisions:

4 1) Commissioner of Income Tax Vs. Havells India Ltd. [2013] 352 ITR 376 (Delhi) 2) Commissioner of Income Tax Vs. Secure Meters Ltd. [2010] 321 ITR 611 (Raj) 3) Commissioner of Income Tax, Udaipur Rajasthan Vs. Secure Meters Ltd. [SLP No. 10548/2009] 4) Commissioner of Income Tax Vs. M/s. Instrumentation Ltd. [MANU/RH/0467/2013] 5) Commissioner of Income Tax Vs. Ranbaxy Laboratories Ltd. [MANU/DE/5061/2013] 6) India cements Ltd. Vs. CIT AIR 1996 SC 1053 7) Madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income Tax Tamil Nadu 1, Madras (1997) 4 SCC 666 8) Commissioner of Income Tax Vs. East India Hotels Ltd. [2001] 252 ITR 860 (Cal.) 9) Brooke Bond India Limited Vs. CIT (1997) 225 ITR798 (SC) 10) Commissioner of Income Tax Vs. Thirani Chemicals Ltd. [2007] 290 ITR 196 (Delhi) 11) Commissioner of Income Tax Vs. Hindustan Machine Tools Ltd. [1986] 175 ITR 212 (Kar) 12) Addi. Commissioner of Income Tax, Bombay City I Vs. Aniline Dyestuffs and Pharmaceuticals Pvt. Ltd. [1982] 138 ITR 844 (Bom.) 13) Commissioner of Income Tax Vs. Modi Industries Ltd. [1992] 200 ITR 342 (Del) 14) Commissioner of Income Tax Vs. Mahindhra Ugine and Stell Co. Ltd. [2001] 250 ITR 84 (Bom) 15) Commissioner of Income Tax Vs. Tarai Development Corporation Limited. [1994] 421 ITR 205 (Allahabad) 16) Commissioner of Income Tax Vs. Southern Petrochemical Industries Corporation Ltd. [2009] 311 ITR 202 (Mad) 17) Commissioner of Income Tax Vs. ITC Hotels Ltd. [2010] 190 TAXMAN 430 (Kar) 18) Commissioner of Income Tax Vs. Ganesham Steel Ltd. [2010] 195 TAXMAN 180 (Guj) 19) Commissioner of Income Tax Vs. Sukhjit Starch and Chemical Ltd. [2009] 326 ITR 29 (P&H) 20) Commissioner of Income Tax, Large Tax Payers Unit Vs. Indian Railway Finance Corporation Limited (2014)326ITR548 (Delhi)

5 5. However, in view of the decision of this Court in Secure Meters Ltd. [2010] 321 ITR 611 (Raj) (supra) more particularly holding as under: “At this stage it was contended by the learned Counsel for the Revenue, that a distinction should be drawn between the convertible and non- convertible debentures, inasmuch as if the debenture is converted into shares, then it partakes the character of capital, and in that event, the expenditure, and would not be revenue expenditure, and would be capital expenditure. Learned Counsel for the assessee informs, that though it has not come on record so far, but as a matter of fact the debentures issued were of convertible nature. Then, the argued, relying upon the judgment of Calcutta High Court in CIT v. East India Hotels Ltd. [2001]252ITR860(Cal), that the expenditure incurred, even in raising loan by convertible debenture would also be admissible as revenue expenditure. The Calcutta High Court had adopted the reasoning, that conversion of debentures results into repayment of loadn and issuance of shares. This is one aspect of the matter. In our view, the other more important aspect of the matter is, that the Hon'ble Supreme Court in Inida Cements case (supra) has clearly excluded this aspect from consideration, by holding, that it is irrelevant to consider the object, with which the loan was obtained. Admittedly the debentures when issued is a loan, and therefore, whether it is convertible, or non- convertible, does not militate against the nature of the debenture, being loan, and therefore, the expenditure incurred would be admissible as revenue expenditure.” 6. Since the SLP against the said judgment also stands dismissed, in that view of the matter, the same decision is binding on the parties, therefore, both the questions are answered in favour of assessee and against the Department.

6 7. All the appeals are accordingly dismissed. (Banwari Lal Sharma), J. (K.S. Jhaveri), J. /bm gandhi 93,94,96,97