DCIT(CC)-8(3), MUMBAI, MUMBAI vs. 63 MOONS TECHNOLOGIES LIMITED, MUMBAI

Whether on the facts and under the circumstances of the case and in Law, the Hon'ble ITAT, Mumbai has erred in deleting the disallowance u/s 14A of the Income Tax Act, 1961 thereby overlooking the computational procedure laid down in Rule 8D of the IT Rules, 1962 which has to be necessarily followed whenever a disallowance u/s 14A was to be made?"

Whether on the facts and under the circumstances of the case and in Law, the Hon'ble ITAT, Mumbai has erred in deleting the disallowance u/s 14A of the Income Tax Act, 1961 from total income on the ground of non-application of mind as a quasi-judicial authority while recording the dissatisfaction as required envisaged u/s.14A of the Act without appreciating the fact that while invoking the provisions of Rule 8D r.w.s 14A in the assessment order the assessing officer has given a detailed reasoning in para 5.4 and also not appreciating the fact that the Hon'ble Supreme Court in the case of MAK Data [(2013) 38 taxmann.com 448 (SC)] has categorically mentioned that the A.O. need not to document his satisfaction in a particular manner and not even in writing form"?

Grounds No. 1 to 4: The assessee company is engaged in the business of application products, software development services and software consultant etc. The return of income declaring total income of Rs. 21,92,10,943/- was filed on 31.10.2007. Consequent to search action u/s 132 of the Act and in response to notice issued u/s 153A of the Act on 10.12.2007 the assessee filed return of income declaring total income of Rs. 21,92,10,943/- which was revised to Rs. 20,37,42,526/- on 30.01.2009. The assessment u/s 153A r.w.s. 143(3) of the Act was completed on 09.04.2009 and the total income of the assessee was determined at Rs. 46,94,22,687/- after making addition mainly on account of disallowance of accrued interest expenses claimed on Zero Coupon Convertible Bond (ZCCB) and disallowance made u/s 14A r.w. Rule 8D of I.T. Rules. Further facts of the case are discussed while adjudicating the ground of appeal filed by the Revenue.

Upon careful consideration, we note that in this case, the assessee has claimed premium/interest payable at maturity of Zero Coupon Convertible Bonds(ZCCB) in the revised return of income. In the accounts of the assessee the said amount was debited to the share premium account. But, in the computation of income assesseo claimed the said amourit as deduction from income. For admissibility of this claim the assessee submission is that the claim is for each financial year although payment of premium amount shall be paid at the end of the period. That as per mercantile method of accounting incomo/expense has to be accounted for in the respective accounting period. That the income tax Act does not recognize the concept of deferred income or deferred expenses. That the Assessee is following mercantile methods of accounting. Assessee has also referred to CBDT notifications which confirms that expenses incurred for raising issue of debentures is allowable as revenue expenditure. Further Page No. 45 of CBDT circular No. 56 has been referred for proposition that the provision for amortization is not intended to supersede any other provision in the income tax law under which the expenditure is allowable as a 63 Moons Technologies Limited deduction against profits. Certain case laws have been referred for the proposition that interest/premium can be claimed in the respective year on pro-rata basis. The decision relied upon are as under:-

Madras Industrial Investment Corporation Ltd. vs CIT 225 ITR802(SC)

National Engineering Industries Ltd. vs. CIT 12361 TR577(Cal)

CIT vs Tungabhadra Industries Ltd. 207 ITR553

Taparia Tools, 260 ITR 102(Bom)

Madras Industrial Investment Corporation Ltd(supra) 2. National Engineering Industries Ltd. (supra) 3. CIT vs Tungabhadra Industries Ltd. (supra) 4. Taparia Tools(supra)

The argument of revenue that the amount has not been debited in account is also not sustainable as the assessee has very much been debited in the account to the debit of share premium account. The Companies Act duly permits the same. Hence, the plea that amount is contingent and not debited is not correct, when revenue itself has accepted the debit in this regard of the amount to the share premium account. Revenue authorities cannot take a shifting stand that the amount is correctly accrued and debit to share premium account is correct, but the same is still a contingent amount. The assessee could have very well debited the amount to the profit and loss account, but it has chosen to debit the amount to share premium account in the books, which is also permitted as per Companies Act. No infraction of law in this regard was pointed out. Since revenue has accepted the debit of the premium to share premium account, it is clear that revenue has accepted that redemption premium amount has been accepted as accrued. Nevertheless, the case law in this regard duly support the proposition. In this regard, we may refer to the decision of Hon'ble Bombay High Court in the case of S.M. Holding & Finance (P) Ltd. 264 ITR 370 as under:-

During the assessment year in question, the assessee-company had issued zero interest unsecured redeemable convertible debentures of Rs. 100 each redeemable after 10 years at a premium of 100 per cent. These debentures are redeemable after 10 years from the date of allotment at a premium of 100 per cent. Assessee claimed before the AO a spread over, Assessee claimed that the premium payable by it was Rs. 5,47,50,000 after expiry of 10 years. However, the assesses claimed deduction of Rs. 54,75,000 per annum. The said amount was debited to the P&L a/c for the accounting year ending 31st March, 1995. In the annual report, a footnote was added that premium on zero interest unsecured redeemable debentures of Rs. 100 each was redeemable after 10 years at a premium of 100 per cent. The AO disallowed the asses500's claim for deduction of Rs. 54,75,000. He added back that figure to the income of the assessee on the ground that the liability was not ascertainable during the accounting year ending 31st March, 1995. That, it was a contingent liability. This decision was confirmed by the CIT(A). However, the Tribunal overruled the case of the Department in view of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT. Being aggrieved, the Department has come by way of the appeal to this Court.

None appears for respondent though served.

Mr. R.V. Desai, learned counsel appearing for the Department/appellant. submitted that the ratio of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation (supra) as also the judgment of this Court in the case of Tapatia Tools Ltd. v. Jt CIT(2003) 126 Taxman 544 (Bom) was not applicable as in this case the AO found alteration in the terms of issue of debentures during the life of the issued debentures. Ho submitted that originally the debentures were issued at 2 per cent. which was changed to 0 per cent during the life of issued debentures. That, originally the issued debenture was for 5 years which was changed to 10 years during the 63 Moons Technologies Limited existence of the issued debentures. He submitted that in the case of Madras Industrial Investment Corporation (supra) as also in the case of Taparia Tools Ltd. (supra), there was no discretion vested in the assessee to alter the terms of the issued debentures during the subsistence of the issued debentures whereas in the present case the borrower had the discretion to change the terms of the issued convertible debentures. He, therefore, submitted that during the assessment year in question, there was no ascertainment of liability to the tune of Rs. 54,75,000 and, therefore, the AO was right in disallowing the claim for deduction.

We do not find any merit in the above arguments advanced on behalf of the Department. Firstly, we have gone through the records and proceedings (R & P). In the entire R & P, there is nothing to indicate alterations of terms and conditions during the subsistence of the issued convertible debentures during the assessment year in question. Secondly, in the annual reports of the company and also in the audit reports given by the auditors, it has been certified that zero interest unsecured redeemable convertible debentures of Rs. 100 each redeemable after 10 years at a premium of 100 per cent had been issued during the assessment year in question. There is no reason for us to discard this note of the auditor. Even in the assessment order, no reasons have been given by the AO for discarding this note of the auditors. Lastly, we may point out that even assuming for the sake of argument that the borrower had a discretion to change the terms of the issued debentures, there is nothing in the record to show that during the assessment year in question the borrower had exercised such a discretion. In the absence of factual matrix; we have no option but to confirm the judgment of the Tribunal. In our view, the judgment of this Court in the case of Taparia Tools Ltd. v. Jt CIT(supra) is applicable to this case. In our view, the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation v. CIT(supra) is also applicable.

Accordingly, both the above appeals are disposed of with no order as to costs."

From the above, it is clear that the amount of debenture redemption premium is accrued and liable to be deducted. Hence, in the background of aforesaid discussion and precedents, we set aside the orders of the authorities below, and decide the issue in favour of the assessee.

The learned CIT(A) vide impugned order allowed the appeal filed by the assessee on this issue by following the decision of the coordinate bench of the Tribunal in assessee's own case for the preceding assessment year. Being aggrieved, the Revenue is in appeal before us.

The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and low was alleged in the 63 Moons Technologies Limited relevant assessment year. Thus, respectfully following the order passed by the coordinate bench of the Tribunal in assessee's own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground No. 2 raised in Revenue's appeal is dismissed."

Heard both the sides and perused the material on record. During the course of appellate proceedings, the ld. Counsel submitted that identical issue on similar fact has been adjudicated by the ITAT for A.Y. 2009-10 and 2010-11 vide & 4776/M/2016 dated 16.12.2021, vide ITA No. 1515/M/2022 dated 21.11.2022 and ITA No. 1509/M/2022 dated 06.01.2023 in favour of the assessee. We find that the claim of interest expenses on Zero Coupon Convertible Bonds is recurring issue and same has been adjudicated in the case of the assessee itself by the ITAT as per findings reproduced in the order of the ld. CIT(A) as discussed supra in this order. The ld. CIT(A) has also referred the decision relied upon by the assessee in the case of Madras Industrial Investment Corporation vs CIT 225 ITR 822 (SC), Taparia Tools 260 ITR 102 (Bom) and other decisions on the proposition that liability on account of debenture redemption premium is liable to be 63 Moons Technologies Limited deducted from the income and cannot be treated as contingent liability as reproduced above in this order. Since there is no change in the facts or law on this issue during the year under consideration, therefore following the decision of ITAT, we do not find any infirmity in the decision of ld. CIT(A). Accordingly, ground nos. 1 to 4 of the appeal of the Revenue are dismissed.

Ground No. 5 to 6: Erred in deleting disallowance u/s 14A of the Income Tax Act, 1961: The assessee earned exempt income in the nature of dividend of Rs. 63,60,27,766/-. The assessee had disallowed indirect expenditure to the amount of Rs. 7,33,953/-. However, the assessing officer has computed disallowance @ 0.5% of average value of investment being Rs. 81,19,171/- in accordance with Rule 8D of the I.T. Rule and made total disallowance of Rs. 88,51,124/-.

The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the disallowance made by the assessing officer holding that provision of Rule 8D is not applicable for the A.Y. 2007-08. The relevant extract of decision of ld. CIT(A) is reproduced as under:

We note that assessee has given the reasons for expenditure, which as per the assessee is disallowable u/s 14A Assessee has provided the basis of working of disallowance, however, the same has been rejected by the authorities below without cogent reasoning. The AO and Ld. CIT(A) are mentioning that "it is difficult to accept that assessee has incurred only that much of expenditure." This is no reason at all. It is settled law that proper satisfaction is necessary in this regard in rejecting assessee's contentions. In this regard, wo note that Hon'ble Bombay High court in the case of Bombay Stock Exchange 113 taxmann.com 303 has held as under- "Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper.

We find that facts in the present case are identical and following the precedent, we set aside the order of authorities below. This ground is allowed."

Having heard both the parties and after perusal of the records, we note that the assessee has earned exempt income to the tune of Rs. 41,32,13,283/- and Rs. 8,93,02,757/-: and has made suo-moto disallowance of Rs. 48,79,103/- for earning the exempt income. Taking 63 Moons Technologies Limited note of these facts, the AO show caused the assessee as to why disallowance may not be made by applying Rule 8D. Pursuant to which, the assessee brought to his notice that assessee has invested its own funds for earning the exempt income. Therefore, the AO did not made any disallowance under Rule BD(2)(ii) of the Rules. Even large on the face of it because irrelevant facts not pertaining to of some other cases; and secondly, there is contradiction all though the assessee brought to the notice of the AO the break-up of suo moto disallowance of Rs.48,79,103/-, the AO applied Rule 8D(2) (ii) of the Rules. On perusal of the assessment order on this issue, according to us, firstly there is non-application of mind writ assessee's case has been cut and pasted, which we presume to be that throughout his dissatisfaction recorded from para no. 5.4 to 5.13. Therefore, we are of the considered opinion that the AO has not applied his mind as a quasi-judicial authority while recording dissatisfaction as required envisaged u/s 14A of the Act, before applying methodology as prescribed under Rule 8D of the Rules. Therefore, we cannot uphold the action of AO to have applied Rule 8D(2)(iii) of the Rules without recording satisfaction as required by law and it is settled position of law that before proceeding to apply the methodology prescribed under Rule 8D of the Rules, AO has to record his dissatisfaction about the correctness of the expenditure incurred to earn the exempt income as envisaged under sub-section (2) of section 14 of the Act. Therefore, we note that Ld. CIT(A) has followed the decision of this Tribunal in assessee's own case of AY.2009-10 & AY.2010-11 and has deleted the disallowance made by the AO. In such a scenario, we do not find any infirmity in the order of the Ld. CIT (A) which requires any interference from our side. Therefore, wo dismiss the grounds of appeal of the revenue.

In the result, the appeal of the revenue is dismissed."

During the course of appellate proceedings before us, the ld. Counsel also submitted that assessing officer has not recorded any satisfaction on the disallowance made by the assessee itself. Further he submitted that ITAT in A.Y. 2009-10 to 2012-13 on similar facts has deleted the addition in the case of assessee that AO has not applied his mind while recording dissatisfaction as required u/s 14A of the Act.

Ground No. 7 & 8: Disallowance on account of claim of Zero Coupon Convertible Bonds: The assessee company incurred expenditure to the amount of Rs. 15,75,36,929/- for issuing of ZCCB the details of which are reproduced as under: Sl. No. Particulars Amount (Rs.) 1 Underwriting commission 5,97,87,450 2 Legal and professional fees 2,68,11,521 3 Brokerage 6,61,39,950 4 Audit fees 35,50,000 5 Printing and stationery expenses 2,07,263 6 Miscellaneous expenses 10,40,745 Total 15,75,36,929

The AO noticed that assessee had not debited such expenses in the books of account and disallowed such expenses from the 63 Moons Technologies Limited computation of income for income-tax purpose. He further observed that amount of expenses has been appropriated from the security premium account therefore same was of the nature of capital expenditure. Accordingly, claim of deduction was not allowed.

Assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant extract of ld. CIT(A) is reproduced as under: “8.5 I have considered the Assessment order, Submission of the appellant and facts available on record.

Honb'le Rajasthan High court in case of Commissioner of Income-tax, Udaipur v. Secure Meters Ltd. (175 Taxman 567) has held as under- "7. We have gone through the judgment in Brooke Bond India Ltd.'s case (supra), and find, that that was a case where the registration fee to the tune of Rs. 1,50,000 was paid to the Registrar of Companies for increasing share capital of the company, while in the case of India Cement Ltd. (supra), the matter related to the borrowing of Rs. 40 lakhs from a financial institution, which loan was secured by a charge on the fixed assets of the company The Hon'ble Supreme Court in this judgment 63 Moons Technologies Limited considered various aspects of the matter, including the previous English judgments, and couple of judgments of English Courts, based on English income-tax Act, and proceeded to draw distinction between the Income- tax Law in England, and India, Not only this, the Hon'ble Supreme Court further proceeded to examine number of cases decided by various High Courts like Kerala, Andhra Pradesh, Calcutta, Bombay etc., and had gone to the extent of holding, that some of the judgments were wrongly decided. Then, the Hon'ble Supreme Court proceeded to hold as under-

To summarize this part of the case, we are of the opinion that: (a) the loan obtained is not an asset or advantage of an enduring nature: (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained."

Thus it was held, that the expenditure incurred in procuring the loan was revenue expenditure within section 10(2)(xv) of the old Income-tax Act, which corresponds to section 37 of the present Act. By going through the said judgment it further transpires, that the Hon'ble Supreme Court also proceeded to examine the aspect of purpose of raising loan, and its immediate or subsequent utilization for different purpose, and examined, that even if a loan is raised for purchasing raw material, and after raising the loan the company finds it unnecessary to buy raw material and spends the amount on capital asset, still it cannot be said to be capital expenditure, as it was held, that purpose for which the now loan was required was irrelevant to the question as to whether the expenditure for obtaining loan was revenue or capital expenditure. We are told, that relying on this judgment, many of the High Courts of the country have consistently taken the view, that the expenditure incurred in issuing any debentures, and raising loan on debentures, is admissible, obviously because the debenture is also a loan.

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 would not be revenue expenditure, and would be capital expenditure. Learned counsel for the assassee 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 leamed counsel for the assessee argued, relying upon the judgment of Calcutta High Court, in CIT v. East 63 Moons Technologies Limited India Hotels Ltd. [2001] 252 ITR 860, 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 loan, 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 India Cement Ltd.'s 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."

The Revenue is in appeal. The main contention on its behalf is that the position should be seen not only with reference to time at which the debentures are issued but the fact that at a future point of time they were to be converted in shares should also be taken note of in order to judge the allowability of the expenditure incurred in connection with the debenture issue. It was submitted that on the facts of the present case, the debentures were to be converted within a period of 15 months, that is on or before 12.6.2006, and that the assessee company had even fixed the price at which the shares would be issued upon conversion of the debentures, and that oven the issue of bonus shares had been finalized at the time of the debenture issue and all these facts clearly showed that the issue was in truth and effect only an issue of share capital It was accordingly contended that the judgments of the Supreme Court cited supra were squarely applicable.

It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. Reference in this connection may be made to the leading judgment of the Supreme Court in India Cements Ltd. v. CIT [1965] 60 ITR 52 The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in 63 Moons Technologies Limited strengthening of the assessee capital base, having regard to the judgments cited on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue, we are not inclined to take a different view. The following cases have been cited on behalf of the assessee in support of the view that even in such a situation the expenditure is allowable as revenue expenditure: - (1) CIT v. East India Hotels Ltd. [2001] 252 ITR 860/119 Taxman 235 (Cal.)

In addition to the above judgments, we also have the judgment of the Rajasthan High Court (supra) against which the Special Leave Petition filed by the Revenue was dismissed. Having regard to the predominant view taken in the above judgments, in which the judgment of the Supreme Court in India Cement Ltd. (supra) has been noticed, we are inclined to uphold the view taken by the Tribunal that the expenditure is revenue in nature. Accordingly, we answer the substantial question of law in favour of the assessee and against the revenue.

Therefore, we are of the view that the point raised in this appeal has been decided in view of the dismissal of the SLP by the Hon'ble Apex Court.

Following the aforesaid decision, we are of the view that even if the debenture has to be converted into a share at a later date, the expenditure so incurred for collection of debenture has to be treated as revenue expenditure.

Accordingly, we do not see any merits in this appeal. The substantial question of law framed has to be answered against the revenue.

On the other hand, ld. DR supported the order of assessing officer.

Heard both the sides and perused the material on record. The Ld. CIT(A) has referred the judicial pronouncement of Hon’ble High Courts as reproduced supra in this order on the proposition that expenditure incurred in connection with the issue of debentures or obtaining loans is revenue expenditure. We have also perused the decision of Hon’ble Supreme Court in the case of Reliance Natural Resources Ltd. (supra) wherein it is held that expenses incurred on issue of Foreign Currency Convertible Bonds was an expense for raising a loan. Following the decision of the Hon’ble Supreme Court and the decision of various Hon’ble High Courts as referred in the findings of Ld. CIT(A) reproduced supra in this order, we do not find any error in the decision of ld. CIT(A). Accordingly, Grounds No.7 and 8 of appeal of revenue are dismissed.

Whether on the facts and under the circumstances the case and in Law, the Hon'ble IT'AT was justified in deleting disallowance without

Whether on the facts and under the circumstances of the case and in Law, the Hon'ble ITAT was justified in deleting the disallowance without appreciating the fact that the assessee treating provision of proportionate premium of Redemption ZCCB as capital expenses.?"

Whether on the facts and under the circumstances of the case and in Law, the Hon'ble ITAT was justified in deleting the disallowance without appreciating the fact that the claim of premium/ interest cannot be allowed. u/s.40(a)(ia) since tax was not deducted at source?

Whether on the facts and under the circumstances of the case and in Law, the Hon'ble ITAT, Mumbai has erred in deleting the disallowance u/s 14A of the Income Tax Act, 1961 thereby overlooking the computational procedure laid down in Rule 8D of the IT Rules, 1962 which has to be necessarily followed whenever a disallowance u/s 14A was to be made?"

Whether on the facts and under the circumstances of the case and in Law, the Hon'ble ITAT, Mumbai has erred in deleting the disallowance u/s 14A of the Income Tax Act, 1961 from total income on the ground of non-application of mind as a quasi-judicial authority while recording the dissatisfaction as required envisaged u/s.14A of the Act without appreciating the fact that while invoking the provisions of Rule 8D r.w.s 14A in the assessment order the assessing officer has given a detailed reasoning in para 5.4 and also not appreciating the fact that the Hon'ble Supreme Court in the case of MAK Data ((2013) 38 taxmann.com 448 (SC)) has categorically mentioned that the A.O. need not to document his satisfaction in a particular manner and not even in writing form?”

Grounds of Appeal Nos.1 to 4: Since on similar issue and on identical facts, we have dismissed the grounds of appeal of Revenue in respect of proportionate claim of the premium on ZCCB vide as adjudicated supra in this order. Applying the findings of the same therefore 1 to 4 grounds of appeal are also dismissed.

In the result, both the appeals of the Revenue are dismissed. Order pronounced in the open court on 11.12.2024 Sd/- Sd/-