DCIT CORPORATE CIRCLE 1, COIMBATORE vs. SAKTHI SUGARS LIMITED, COIMBATORE

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

1. “In the facts and circumstances of the case, whether it is right on the CIT(A) to allow the assesse's claim as Revenue expenditure, when the assessee Company itself chooses to treat. the Premium on Redemption of FCCB as Capital Expenditure by charging it to Premium a/c in accordance with the Accounting Standards ? 2. In the facts and circumstances of the case, whether it is right on the CIT(A) to allow the assessee's claim to reverse the expense, when the assessee Company itself admits that "the reversal of the same in the P&L A/c (Rs. 26,78,77,675l-) has not been brought to tax based on judicial pronouncement" in para 1.4 in its paper book presented before the CIT(A). 3. Whether in the facts and circumstances of the case, the Ld CIT (A) erred in allowing the Premium expenses as Revenue in nature applying the case laws quoted by the assessee when they mostly pertained to issue expenses of FCCB and not the issue of Premium involved? 4. Whether in the facts and circumstances of the case, the CIT(A) erred in allowing the Premium paid of Rs. 13,55,82,338/- in the AY 2012-13, which was disallowed by a subsequent order u/s 147 dt 30/12/2Ol7 for violation of Sec 40a(i)a and the said latter order has merged into the 143(3) order ? 5. In the facts of the case, whether the CIT(A) failed to consider the question of allowability of the Premium expenses even on grounds of payment u/s 43B, which is primarily a Capital expenditure ? 6. In the facts of the case, when the assessee itself opts not to make a charge to the P&L a/c, whether it has a rightful claim under the Income Tax Act on payment basis?”

and presented the case on the lines of grounds of appeal , supra, and pleaded that the order of the AO may be restored.

4. Per contra, the Ld. AR submitted that during the financial year ended 31.03.2011, the assessee has made a provision of Rs. 26,78,77,675/- representing premium on FCCB. Out of those provisions, the assessee claimed expenditure at Rs. 15,24,84,215/- only, ie the actual payment of FCCB premium , and disallowed Rs. 11,53,93,460/- applying the provision of section 43(B). During the assessment year 2012-13, the treatment of FCCB Premium was reconsidered in the light of accounting standard 29 and section 78 of the Companies Act, 1956 and the Board of Director decided that the premium on FCCB should be charged against security premium account. Therefore, the P&L account was credited with Rs. 26,78,77,675/-, which is actually a reversal of previous year’s charge. Since, the premium amount relating to assessment year 2011-12 has already been claimed as an expenditure and which is an allowable expenses, the reversal of the same in the profit and loss account has not been brought to tax. Out of the disallowed amount of Rs. 11,53,93,460/-, by applying the provisions of section 43B in assessment year 2011-12 , Rs. 10,30,29,875/- has been paid during the financial year 2011-12 ie in ay 2012-13 has been claimed as an expenditure u/s. 43B. The actual payment of premium relating to assessment year 2012-13 is of Rs. 3,25,52,465/-, on redemption of FCCB made during the year ended 31.03.2012, has been directly charged against the securities premium account in the balance sheet and the same has been claimed as expenses. However, for the IT purposes, while computing the total income of the previous year, the actual payment of FCCB premium have been claimed u/s. 43B.

Therefore, it was submitted that the claim is correct and accordingly be allowed. In this regard, the Ld. AR relied on the decision of the ld CIT(A) in which the ld CIT(A) inter alia, relied the decision of the ITAT Mumbai Bench in the case of Mahindra & Mahindra Ltd vs DCIT-2(2) for assessment year 2006-07 dated 06.06.2012 reported in 24 taxmann.com 267 (Mumbai) and invited our attention to the relevant portion of the head note is extracted as under:

“V. Section 37(1) of the Income Tax Act, 1961- Business expenditure – Allowability of – Assessment year 2006-07 – Assessee paid premium of Rs. 5.39 crores on redemption of ‘foreign currency convertible bonds’ – Assessing Officer disallowed payment of said premium on ground that FCCBs were convertible into shares and therefore, could not be construed as borrowing; that they increased capital base of company and, therefore, expenditure incurred thereupon was capital in nature – Whether following judgments of ‘Crane Software International Ltd. [IT Appeal Nos. 741 and 742 (Bang.) of 2010, CIT vs Secure Meters Ltd. [2010] 321 ITR 611/[2008] 175 Taxman 567 (Raj.) and CIT vs. ITC Hotels Ltd. [2011] 334 ITR 109/[2010] 190 Taxman 430 (Kar.) expenditures incurred in connection with FCCBs were to be treated as revenue in nature – Held, yeas [in favour of assessee]. ” and supported the order of the ld CIT(A).

a) Modakkurichi Sugar and Co-gen Project, b) Sivaganga co-gen Projeet. c) Saldhinagar Co-gen II Project, d) Expanslon of Sugar unit at Sal<thinagar-6000 TCD to 9000TCD. e) Expansion of Distillery at Sakthinagar.

The above note submitted would show that the Foreign Currency Convertible Bonds raised have been used for the purpose of its business only and any expenditure byway of premium paid on redemption of FCCB would also be revenue expenditure andnot capital expenditure as held by the assessing officer. The above view is supported by the judicial decision in the case of Mahindra & Mahindra Limited Vs. DCIT (2012)24 taxmann.com 267 (Mumbai). Another decision in CIT Vs. Secure Meiers Limited (321 ITR 611)(Raj) (confirmed in CIT Vs, Secure Meters Limited 2009 -TICL-93-SCIT)also supports the above view, in these decisions it 'was held that as the debenture when issued, is a loan, whether it is convertible or non-convertible, it does not militate against the nature of the debenture being loan. Therefore, the expenditure incurred would be admissible as revenue expenditure.” The relevant portion of the order of Mahindra & Mahindra Limited Vs. DCIT (2012)24 taxmann.com 267 (Mumbai) is extracted as under :

5. Next ground of appeal

is about disallowance of pro rata premium of Rs. 5.39 crores payable on redemption of 'Foreign Currency Convertible Bonds' (FCCB).As per the AO the bonds were convertible into shares and, therefore, could not be construed as a borrowing, that they increased capital base of the company and that the expenditure incurred was capital in nature. The AR submitted that FCCB were a form of borrowing that they were shown in the balance-sheet under loans that premium payable on redemption was cost of borrowing, that option of conversion of bonds into shares was only with the bond holders, that conversion was a subsequent event which did not change the initial character of the bonds of a debt, that in the event of redemption payment of premium was mandatory, that premium being a cost of borrowing was allowable on time, that premium was neither capital nor contingent in nature, that issue of FCCB had been held to be revenue in appellant is own case for the assessment year 1997

98. (ITA/78451M12004).DR supported the order of the AO. The matter of Crane Software International Ltd. [IT Appeal Nos. 741 andl4lBangalore/2010] issue of FCCB have been discussed as under "...the expenses were incurred in connection with the issue of FCCB. As the bonds were convertible, the assessing authority treated the bond proceeds as increased to capital. Accordingly, he treated the expenditure of Rs. 6.63 crores. As capital in nature is, it was incurred for raising the capital of the assessee company. The said expenditure was disallowed. Assessee claimed the expenses is deductible as the expenses were incurred to raise loan finance. The assessing authority held that the bond holders at the option to convert the bonds to equity shares, and therefore-, the collection of funds for the issue of bonds needs to be treated as to increase the capital and, therefore, the connected expenses would be capital in nature and hands disallowed. We agree with the view of the CIT (A)that the expenses are not capital in nature. As on 31.03.2006, the previous year ending for the assessment year 2006- 07,thefunds collected by the assessee company through the issue of the foreign currency convertible bonds, were in the nature of liability. The assessee company was bound to discharge is the bonds new dates. The assessee was paying interest is to bond holders. It is clear that the bond finance was in the nature of loan finance. It becomes the capital of the company on leave in the bond holders. and exercise their option at the appropriate time in future. That conversion is only a future event, that may or may not happen, depending on the option exercised by the bond holders. Therefore, the possible equity character of the funds was contingent on the assessed whether bonds would be converted or not, in a future date. The nature of a present-day loan fund cannot be held equity fund on the basis of such contingency. As far as the nature of the funds for the assessment year 2006-07 is concerned, it was a liability in the nature of loan, that too interest-bearing loan. If the funds are dated as equity capital for the assessment year 2006-07 how the payment of bond interest would be justified in law, is law does not permit payment of interest on a company's equity capital." In the case of CIT v. Secure Meters Ltd.[2010J 321 ITR 611/[2008] 175 Taxman 567 Hon'ble Rajasthan HC has held -"Admittedly, the debentures, when a shoot is a loan, and, therefore, whether it is convertible, or nonconvertible, does not militate against the nature of the debenture, being loan, and, therefore, the expenditure incurred would be admissible as revenue expenditure." Following the above decision of the Rajasthan High Court, the Hon'ble Karnataka High Court in the case of CIT v. ITC Hotels lrd [201 1] 334 ITR 109 /120101 190 Taxman a30 held that even if the debenture is to be converted into a share at a later date, the expenditure so incurred for collection of debenture is to be treated as an expenditure of revenue nature. 5.1 Respectfully following the decisions of the above referred Hon’ble courts we hold that expenses incurred in connection with the issue of FCCB were revenue in nature.”

6. It is clear from the above that the expenditure incurred by the assessee by way of premium paid on redemption of FCCB would be of revenue expenditure only and hence the assessee would be entitled to claim the same in accordance with the law. It is also clear from the above that the AO has not examined this issue properly and he merely disallowed the sum stating that the assessee’s claim is of capital nature. The description given as regards to various entries and as explained by the ld AR, supra, and its corresponding implications were neither examined by the AO nor by the ld CIT(A).

:-9-: In the facts and circumstances, we deem it fit to remit this issue back to the A O for a fresh examination and allow the assessee’s claim in accordance with law. The assessee shall place all materials in support of its contention and shall comply with the requirements of the AO in accordance with law. The AO is free to conduct appropriate enquiry as deemed fit. However, he shall furnish adequate opportunity to the assessee on the material etc, if any, to be used against it and then decide the matter in accordance with law.

Order pronounced on Wednesday, the 19th February, 2020 at Chennai.