M/S.SHANDERS PROPERTY DEVELOPERS PVT. LTD.,,BANGALORE vs. INCOME TAX OFFICER, BANGALORE

This appeal is preferred by the assessee against the order of CIT(Appeals) inter alia on the following grounds:-

“Ground 1: General 1.1 The order of the learned CIT(A)is erroneous and bad in law as it confirmed the order of the learned Assessing Officer. Further the order is erroneous as it routinely and incorrectly upheld the Assessing Officer's ground to disallow the expenses. Ground 2: Stamp duty on Convertible debentures 2.1 The learned CIT(A) has erred in facts and in law in confirming the disallowance of expenditure incurred in relation to issue of debentures amounting to Rs 19,38,800 (only 2 items), as capital expenditure. 2.2 The learned CIT(A) has erred in facts and in law to appreciate that where the stamp duty is incurred by the Appellant towards issue of debentures, the same is an allowable expenditure under section 37 of the Act. 2.3 The learned CIT(A) has erred in facts and in law to appreciate that the stamp duty for issue of debenture, is an allowable expenditure under the provisions of the Act, as the said stamp duty is compulsory levy under the Companies Act. 2.4 The learned CIT(A) has failed to appreciate that the money raised by issue of convertible debentures is in the nature of borrowing and not in the nature of share capital. 2.5 The learned CIT(A) has erred in not considering the written submissions made by the Appellant, in this regard. 2.6 The learned CIT(A) has erred in not considering the judicial precedents relied on by the Appellant including that of the jurisdictional High Court . 2.7 The learned CIT(A) has erred in not directing the learned Assessing Officer to verify whether an amount of RS 29,419 was disallowed by the Company as the said amount was incurred towards charges to ROC, as the Company in its Return of Income itself had voluntarily disallowed the said amount. Ground 3: Sponsorship charges 3.1 The learned CIT(A) has erred in confirming the order of the AO in relation to sponsorship charges incurred by the Appellant. 3.2 The learned CIT(A) erroneously proceeded to uphold the contentions of the AO and erred in concluding that the sponsorship fee needs to be disallowed. 3.3 The learned CIT(A) and AO have erred in facts and in law to appreciate that the Company is engaged in the business of real estate development and to project its brand it is required to incur the advertisements through sponsorship of events. 3.4 The learned CIT(A) and AO have failed to appreciate that sponsorship of events are incidental to the business of the assessee to promote its product and therefore is an allowable expenditure as per the provisions of the Act. 3.5 The learned CIT(A) has erred in not considering the written submissions made by the Appellant, in this regard 3.6 The learned CIT(A) has erred in not considering the judicial precedents relied on by the assessee.” The Appellant submits that each of the above grounds is independent and without prejudice to one another.”

“6. Coming to the second question, the learned Tribunal in this regard has held that the decision of the Hon'ble Supreme Court in Brooke Bond India Ltd. v. CIT reported in [1997] 225 ITR 798 is not applicable to the facts of the instant case because that was a situation in which expenditure on issue of shares was held to be ineligible for deduction, while the assessee has issued debentures for which Rs. 44 lakhs was claimed as deduction and it was considered that this aspect is settled by several decisions of various High Courts and it has been held by the Hon’ble Supreme Court in India Cements Ltd. v. CIT reported in [1966] 60 ITR 52, that a loan is not an asset or advance of enduring nature and the purpose of taking loan is totally an irrelevant consideration and hence the deduction on account of interest on loans cannot be denied. Then, the learned Tribunal also proceeded to rely upon another judgment of the Jaipur Bench of the Tribunal in the case of Rajasthan Financial Corporation v. Deputy CIT [1997] TW- 501, holding that the expenditure incurred for raising capital through bonds in business was revenue in nature and it was held that since in the present case the assessee had incurred expenses of Rs. 44 lakhs on issuance of debentures being a loan, in our considered opinion, there is no basis for not allowing deduction for the entire sum and thus this addition was deleted.

8. 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 of the character of capital and in that event the expenditure 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 learned counsel for the assessee argued relying upon the judgment of the Calcutta High Court in CIT v. East India Hotels Ltd. reported in [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 in 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 Cements' case [1966] 60 ITR 52 has clearly excluded this aspect from consideration by holding that it is irrelevant to consider the object with which the loan was obtained.

9. 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.”

“5. After hearing the learned counsel for the parties, we have come across a judgment of the Rajasthan High Court in CIT v. Secure Meters Ltd. [2010] 321 ITR 611 (Raj) (Income-tax Appeal No. 8 of 2007—Jodhpur Bench of the Rajasthan High Court) considering the various aspects has come to the conclusion that even if the debenture were to be converted into share at a later date, the expenditure incurred on such convertible debenture has to be treated as a revenue expenditure. The order of the Jodhpur Bench was taken up before the Hon’ble Supreme Court in Special

Leave Appeal CC 10548 of 2009. The Hon’ble apex court has dismissed the special leave petition. 6. Therefore, we are of the view that the point raised in this appeal has been decided in view of the dismissal of the special leave petition by the Hon’ble apex court. 7. 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.”

7. In the light of these judgments, I find that the impugned issue is squarely covered in favour of the assessee. Therefore, I set aside the order of CIT(Appeals) and direct the AO to allow the expenditure incurred in relation to issuance of debentures as revenue expenditure.