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Income Tax Appellate Tribunal, HYDERABAD BENCH, HYDERABAD
Before: SHRI K. NARSIMHA CHARY & SHRI BHAGIRATH MAL BIYANI
आदेश / O R D E R Per Bhagirath Mal Biyani, A.M.:
THIS APPEAL: 1. This appeal filed by the assessee is directed against the order dated 08.11.2018 of learned Commissioner of Income-Tax (Appeals)-3, Kondapur, Hyderabad [“Ld. CIT(A)”], which in turn arises out of the order of assessment dated 31.03.2015 passed by the learned DCIT, Circle-3(2), Hyderabad [“Ld. AO”] u/s 143(3) of the Income-tax Act, 1961 [“the Act”] for the Assessment-Year 2012-13.
Page 2 of 14 2. At the time of hearing, nobody appeared from assessee's side despite that on the last occasion, the hearing was adjourned at the request of assessee’s representative and the today’s hearing-date was well-informed in the open court. The Ld. DR expressed strong willingness to hear him and dispose of the appeal. We, therefore, proceeded to decide the appeal ex-parte qua the assessee, on merit after considering the material available on record including the Paper-Book filed by the assessee on earlier occasion and after hearing the Ld. DR.
BACKGROUND:
3. The assessee is a company engaged in the business of ‘micro-finance”. It filed return of income declaring a loss of Rs. 41,91,80,660/-. The Ld. AO completed assessment u/s 143(3) of the Act at a loss of Rs. 21,76,92,620/- after making various disallowances. Aggrieved by the order of assessment, the assesse filed appeal to Ld. CIT(A). The Ld. CIT(A) allowed part-relief. Still being aggrieved by the order of Ld. CIT(A), the assessee has preferred this appeal and now before us.
GROUNDS:
4. The assessee has raised following grounds:
The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is contrary to the facts and also the law applicable to the facts of the case.
2. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is not justified in sustaining the addition of Rs.1,78,98,000/- made by the assessing officer towards disallowance of the fee paid to Registrar of Companies for increasing the authorized share capital treating the same as capital expenditure in nature. 3. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is not justified in sustaining the addition of Rs.1,46,45,814/- made by the assessing officer towards disallowance of the expenditure incurred for Corporate Debt Restructuring treating the same as capital expenditure.
Page 3 of 14 4. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is not justified in sustaining the addition of Rs.12,03,12,777/- made by the assessing officer towards disallowance of interest u/s 43B of the Act, 1961.
5. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad ought to have held that the addition cannot be made while computing the book profit u/s 115JB of the Income Tax Act, 1961 towards disallowance u/s 14A even in case the disallowance u/s 14A is sustained. GROUND NO. 1:
Ground No. 1 is general and there is no specific submission from either side. Hence this ground does not require any adjudication.
GROUND NO. 2:
In this Ground, the assessee has challenged the disallowance of Rs. 1,78,98,000/- made by Ld. AO on account of fee paid to Registrar of Companies for increase in authorized share capital.
Facts qua this issue are such that the assessee is a public limited company registered with the Reserve Bank of India as a non-banking finance company. It is engaged in the business of providing micro-finance. The assessee had taken loans in different forms and different conditions from various banks / lenders for the purpose of its business. Thereafter the assessee was referred to the Corporate Restructuring Forum, a mechanism set up under the aegis of the Reserve Bank of India for the efficient restructuring of corporate debt, such mechanism being called as Corporate Debt Restructuring (CDR). Pursuant to this CDR, a restructuring package was agreed upon between the assessee and those banks / lenders. Under the CDR, the ICICI bank Ltd., one of the lender, was designated as “Monitoring Institution”. The CDR was documented and stamped as “Master Restructuring Agreement (MRA)” on 24.09.2011, a copy of which is placed before us on Page No. 50 to 169 of the Paper-Book. The CDR contains several covenants wherein the obligations of the assessee were waived or Page 4 of 14 modified by the lenders. One of those waiver or modification is that a part of the outstanding debt shall be converted into OCCRPS (Optionally Convertible Cumulative Redeemable Preference Shares). In order to give effect to this, the assessee had to increase its authorized share capital for which the assessee had to pay a fee of Rs. 1,78,98,000/- to the Registrar of Companies (ROC). The assessee debited this fee to P&L A/c and claimed the same as deduction in computing business income. According to the assessee, the increase in authorized capital was necessitated due to CDR and hence the fee of Rs. 1,78,98,000/- incurred by it is revenue in nature. During the course of assessment-proceeding, when the Ld. AO enquired the assessee about this fee vide letter dated 05.03.2015, the assessee submitted following response, which is placed on Page No. 43 to 44 of the Paper-Book:
“1. The fee incurred for increase in authorized share capital is Rs. 1,78,98,000. This has been treated as a revenue expense for I.T. purpose. The authorized capital was increased to accommodate the issue of OCCRPS that was a condition for implementation of corporate debt restructuring plan (CDR) and a part of Master Restructuring Agreement (MRA) as decided upon by the participating banks/FIs and accepted by the assessee company. The CDR and subsequent conversion of debt/loan into OCCRPS was necessary for the running of the business and for continued funding in form of additional loans and financial assistance by the participating banks/FIs. The sum of equity and debt remained same before and after CDR, it was only that the character of part of debt changed to equity (redeemable preference shares). There was neither any addition to the pool of funds (equity + debt) available to the company nor any long term enduring benefit to the company from this increase in authorized capital, hence this cost was treated as revenue item as it did not result in any capital appreciation or acquisition of any benefit or advantage of an enduring nature. Also the issue of OCCRPS cannot be termed as long term enduring capital benefit to the company as the entire issue has to be redeemed over a specified period of time as mandated by the MRA. Various courts have decided that it cannot be always presumed that expenses related to an increase in share capital are capital in nature. It is the reason behind the expense, the ‘why’ and not the ‘how’ is what should decide the capital v/s revenue nature of such expenses. We draw your kind attention to following case laws in this regard:
Page 5 of 14 i. Hon'ble Hon'ble Supreme Court decision in Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax (1955) 27 ITR 34 ii. Hon'ble SC decision in Abdul Kayoom (KTMKM) v. CIT 44 ITR 689 iii. Hon'ble Madras High Court in CIT v. Ashok Leyland Ltd. 72 ITR 137, 143 ( affirmed by the Hon'ble Supreme Court in 86 ITR 549 iv. Hon'ble Supreme Court Bombay Steam Nevigation Co. vs. CIT 56 ITR 52 The object of expenditure in the instant case (which is to increase and sustain the working funds for carrying on of business activities) should alone therefore be the decisive criteria for deciding its deductibility.
There has been no increase in equity shares. For details of issue in OCCRPS, please refer to MRA (submitted as Annexure 1) (page 10, schedule 3 & 4) and the relevant supporting provided also please find the relevant documents related to increase authorized capital and subsequent issue of OCCRPS.
Copy of MRA attached. Please refer to page 10, schedule 3 and 4 of the MRA. However, the Ld. AO relying upon the decision of Hon’ble Apex Court in Brooke Bond India Ltd. Vs. CIT 224 ITR 798 and Hon’ble Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. Vs. CIT 174 ITR 689, held that the expenditure is capital in nature since it has resulted in increase in share capital which is an enduring benefit to the assessee. Accordingly, the Ld. AO disallowed the deduction. The assessee challenged this addition before Ld. CIT(A) but the Ld. CIT(A) also agreed with the Ld. AO and confirmed the disallowance.
Before us, the Ld. DR placed strong reliance on the orders of lower authorities and argued that the issue is squarely covered by the decisions relied upon by the lower authorities, viz. Brooke Bond India Ltd. (supra) and Vazir Sultan Tobacco Co. Ltd. (supra), according to which the fee paid for increase in authorized capital is a capital expenditure. Therefore, the Ld. DR prayed to uphold the disallowance.
Page 6 of 14 9. We have considered the submissions made by Ld. DR, perused the material held on record and carefully considered the decisions relied upon by the lower authorities. We observe that the Hon’ble Apex Court has held in Brooke Bond India Ltd. (supra) that the expenditure incurred on the expansion of the capital base of the company is a capital expenditure. Similarly, in Vazir Sultan Tobacco Co. Ltd. (supra), the Hon’ble Andhra Pradesh High Court has also held that the expenditure incurred on raising additional capital is capital in nature because it is laid out for adding to the capital structure of the company. There is no dispute to this extent. Even this Bench has also held so in M/s Moldteck Packaging Ltd., Hyderabad Vs. ACIT order dated 02.07.2021. However, the facts in present appeal are different which require us to step further and refer the decision of Hon’ble Supreme Court in CIT Vs. General Insurance Corporation Civil Appeal No. 4422 of 2001, judgement dated 25.09.2006,.In this case, the assessee incurred expenditure towards stamp duty and registration fee in connection with the increase in authorized share capital on account of issue of bonus shares and claimed the same as revenue expenditure. On appeal, the Hon’ble Supreme Court accepted the expenditure as revenue expenditure and allowed deduction by holding as under:
“3. As observed earlier, the issue of bonus shares by capitalization of reserves is merely a reallocation of company’s funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. If that be so, then it cannot be held that the Company has acquired a benefit or advantage of enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company. Issue of bonus shares does not result in the expansion of capital base of the company.” In Hero Motors Ltd., New Delhi Vs. Department of Income-tax ITAT Delhi had occasion to decide a case where the assessee increased authorized capital by Rs. 61.50 Crore for which a sum of Rs. 37,50,000/- was spent on account of fee to ROC. The assessee treated
Page 7 of 14 the entire expenditure of Rs. 37,50,500/- as revenue expenditure and claimed deduction but the Assessing Officer disallowed the entire deduction of Rs. 37,50,500/- treating the same as capital expenditure. During first appeal, the CIT(A) observed that the increase in authorized capital and accordingly the fee paid to ROC had two components, viz (i) fresh inflow of capital for which fee amounting to Rs. 30,18,293/- was paid, and (ii) no fresh inflow of funds for which the fee amounting to Rs. 7,31,707/- was paid. The CIT(A) relied upon the decision of Hon’ble Supreme Court in General Insurance Corporation (supra) and disallowed (i) but allowed (ii). On appeal, the ITAT approved the action of CIT(A).
Thus, to sum up, there can be two situations in the matter of increase in authorized share capital, viz. (i) There is a fresh inflow of funds and capital employed is increased. In that case, the decision of Hon’ble Supreme Court in Brooke Bond India Ltd. (supra) shall apply and the expenditure shall not be allowable as deduction being a capital expenditure, and (ii) There is no fresh inflow of funds and there is no increase in capital employed. In that case, the decision of Hon’ble Supreme Court in General Insurance Corporation (supra) shall apply and the expenditure shall be allowable as deduction being a revenue expenditure.
Reverting back to the facts of present appeal, it is on record that the increase in authorized capital was necessitated due to CDR and under the CDR, there was no fresh inflow of funds, only the existing debts were restructured whereby the OCCRPS were issued. Being so, we observe that the situation is governed by the decision in General Insurance Corporation (supra) and not by Brooke Bond India Ltd (supra). Therefore, we are of the view that the assessee has rightly treated the impugned expenditure of Rs. 1,78,98,000/- as a revenue expenditure and claimed deduction and the lower authorities are wrong in disallowing deduction. Accordingly, we accept this Ground of assessee.
In this Ground, the assessee has challenged the disallowance of Rs. 1,46,45,814/- made by Ld. AO on account of expenditure incurred for CDR.
As submitted in foregoing discussion, the assessee had gone into CDR. It is in this regard that the assessee incurred a total expenditure of Rs. 1,46,45,814/- on various activities related to the implementation of CDR and claimed the same as deduction. During the course of assessment- proceeding, when the Ld. AO enquired the assessee about details of this expenditure vide letter dated 05.03.2015, the assessee submitted following response, which is placed on Page No. 184 to 185 of the Paper-Book:
“In response to your referenced notice, 'we would like to bring your kind notice that the following: I. Submission in support of claiming CDR charges for Rs. l,46,45,814 as revenue expenses: 1) During the year 2011-12, the Company entered into Corporate Debt Restructuring (CDR) programme with its lenders. This programme was approved by CDR Cell (the final approving authority for such programmes consisting of all banks/Fls). ICICI Bank, the biggest lender, was appointed as the 'referring institute' facilitating the CDR programme. As a 'referring institute', ICICI role and scope, including but not limited to, was as, follows: i) Analysing SSFL's need for a financial restructuring, ii) Doing an extensive analysis between the availability and requirement of funds for a foreseeable future, including repayment commitments towards various lenders. iii) Bringing together of all lenders on a common agreeable plan for such financial restructuring iv) Presenting SSFL case before CDR Cell and augmenting before them the need for this financial restructuring v) Facilitating all related documentation and compliances vi) Any other assistance to SSFL as may be required 2) For all these services, the CDR decided the remuneration to be paid to ICICI as Rs. One crore.
Page 9 of 14 3) Other payments to banks as part of regular review charges for the term loans upon conversion into CDR as per the rules of the lender. 4) Annual fee towards functioning as Monitoring Institution to ICICI as mandated and decided by the CDR Cell.
It is evident that these are financing, facilitation and regulatory charges paid by the Company for conversion of regular debts/loans into CDR programme. This conversion was necessary to continue the day to day operation of the assessee and helped in maintain operational liquidity. There were no capital appreciation or capital benefit or additional capital infusion for/into the Company. The CDR package is like any other finance or lending agreement and related costs have to be treated as revenue expenses just like interest expense, loan processing fees, bank charges, facilitation fees, regulatory charges, stamp duty, documentation charges and compliance charges etc. Enclosed the copy CDR Expenses Ledger with narration in Annexure-1 for your ready reference. For the sake of brevity, we are not reproducing here Annexure-1 which gives a detailed list of various expenses.
The Ld. AO disallowed deduction by observing as under in Para No. 4.2, sub-para 1 and 4 of the assessment-order as under:
“1. In this case, the assessee company has resorted to Corporate Debt Restructuring (CDR) by converting the debts into equity. Due to restructure of debts, loan amount permanently becomes part of the funds of the company in the form of equity and thus the assessee company gained an ‘advantage of enduring nature’. It means that the assessee will derive advantage of enduring nature as a result of restructuring of loans by raising the capital base of the company. Therefore, the expenses pertaining to raising capital base of the Company in the form of CDR charges will be in the nature of the capital expenditure.
Therefore, the CDR charges was incurred for raising the capital by converting the debts into equity, the same will be in the nature of the capital expenditure. Therefore, the CDR charges being capital in nature are not allowable as per the provisions of section 37(1) of the Act.”
Page 10 of 14 13. The Ld. CIT(A) repeated the observation of the Ld. AO and confirmed the disallowance.
Before us, the Ld. DR also supported the orders of lower authorities.
We have considered the submissions and also perused the material held on record. We have already mentioned in foregoing discussion about the CDR and now suffice to repeat briefly that the assessee had taken loans in different forms and different conditions from various banks and other lenders for the purpose of its business. Thereafter a restructuring package called “CDR” was agreed upon between the assessee and all lenders and the ICICI bank Ltd., one of the lender, was designated as “Monitoring Institution”. The CDR contains several obligations waived or modified by the lenders. It is noteworthy that by entering into CDR, the existing loans and debts have been restructured in such a way that the assessee got some concessions, waivers and relaxations. Therefore, the CDR is nothing but re- conditioning of the existing loans and debts. The expenditure of Rs. 1,46,45,814/- claimed by the assessee under the title of “CDR charges” are various expenses for implementing the activities of the CDR. In fact, the major component of Rs. 1,46,45,814/- is a sum of Rs. 1,00,00,000/- paid to the ICICI bank by way of remuneration since the ICICI Bank had acted as a “Monitoring Institution”. Thus there is neither acquisition of any kind of enduring advantage nor the expenditure could be termed as capital. At this stage, for the sake of completeness, we would like to address a pertinent concern of the revenue which the Ld. AO has mentioned in the order of assessment. According to the Ld. AO, by virtue of CDR, the debt was converted into equity (i.e. OCCRPS) and hence there is a benefit of enduring nature. In this regard, firstly we would like mention that the CDR contains several waivers and modifications granted by the lenders and the conversion of debt into OCCRPS is just a part of the whole package. Moreover, the conversion of debt into OCCRPS is also well-addressed in our earlier discussion where we have observed that by issue of OCCRPS, there was no fresh inflow of the capital or increase in capital employed. Hence there is no Page 11 of 14 benefit of enduring nature even by converting debt into OCCRPS, as per the ratio laid down in General Insurance Corporation (supra). Thus, we are of the considered view that the expenditure of Rs. 1,46,45,814/- incurred by the assessee is a revenue expenditure and deserves deduction. We therefore, accept the claim of the assessee. Accordingly, this Ground is also accepted.
GROUND No. 4:
In this Ground, the assessee has challenged the disallowance of Rs. 12,03,12,777/- made by Ld. AO on account of interest u/s 43B of the Act.
The assessee has claimed deduction of interest payable to following three banks which was not paid upto the due date u/s 139(1) for filing of return:
Bank Interest HSBC Rs. 24,08,383/- Standard Chartered Bank Rs. 4,38,62,801/- Citi Bank Rs. 7,40,41,593/- Total Rs. 12,03,12,777/-
During assessment proceeding, the Ld. AO proposed to invoke section 43B(e) whereupon the assessee invited attention of Ld. AO to the following provision of section 43B((e):
“43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of: (a) to (d) XXX (e) any sum payable by the assessee as interest on any loan or advance from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan or advance; shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in Page 12 of 14 computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.” Analyzing the above provision, the assessee submitted two-fold contentions before the Ld. AO, viz. (i) the three banks to which the interest was payable were not “scheduled banks”, therefore the very opening part of the section 43B(e) is not attracted, and (ii) those three banks were also not a part of the CDR agreed upon and as per rules of CDR, any payment to non-CDR lenders (i.e. those three banks) would have required approval from Monitoring Committee. Therefore, for practical purposes, the sums payable to those three banks were not payable “in accordance with the terms and conditions of the agreement governing such loan or advance” as prescribed in the later part of section 43B(e).
The Ld. AO rejected first contention by referring to the Explanation 4 to section 43B which reads as under:
“Explanation 4 – For the purposes of tis section, - (aa) ‘scheduled bank’ shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of section 11; Explanation to section 11(5)(iii) reads as under: “Explanation – In this clause, “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934). The Ld. AO observed that the three banks, viz. HSBC, Standard Chartered Bank and Citi Bank are included in the second schedule to the RBI Act, 1934 and therefore they fall within the meaning of “scheduled bank” for the purpose of section 43B.
Page 13 of 14 The Ld. AO also rejected second contention by observing that for the purpose of section 43B, the terms and conditions of the agreement entered into by the assessee with those three banks have to be seen and there is no relevant of the CDR since those three banks were not at all a part of CDR scheme.
With these reasoning, the Ld. AO rejected the submission of the assessee and made disallowance.
The Ld. CIT(A) agreed with the observations of Ld. AO and confirmed the disallowance.
Before us, the Ld. DR placed heavy reliance upon the orders of lower authorities.
We have considered the rival contentions and material held on record. After a careful consideration we find adequate strength in the findings of Ld. AO noted earlier. For the sake of brevity, we do not repeat the same. However, we agree with the Ld. AO that the interest payable to those three banks attracted section 43B(e). Hence the Ld. AO has made a proper disallowance, which we uphold. Therefore, this Ground of assessee is dismissed.
GROUND No. 5:
In this Ground, the assessee has claimed that the addition cannot be made the book-profit u/s 115JB towards disallowance u/s 14A even if the disallowance u/s 14A is sustained in normal computation.
This issue is squarely covered by the decision of Special Bench in ACIT Vs. Vireet Investment Pvt. Ltd., dated 16.06.2017 where it was held that the disallowance computed u/s 14A of the Act cannot be added while computing book-profit u/s 115JB. Respectfully following the decision of Hon’ble Special Bench, we accept this ground.
In the result, this appeal of assessee is partly allowed.
Order pronounced in the Court on this 13th May, 2022.