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I.T.A No.210/2017
1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2ND DAY OF AUGUST, 2022 PRESENT THE HON'BLE MR. JUSTICE P.S.DINESH KUMAR
AND
THE HON'BLE MRS. JUSTICE M.G. UMA
I.T.A No.210 OF 2017
BETWEEN :
M/S. NITESH HOUSING DEVELOPERS PVT. LTD. REP. BY ITS MANAGING DIRECTOR SRI.L.S. VAIDYANATHAN #8, 7TH FLOOR, NITESH TIMESQUARE M.G.ROAD, BANGALORE-560 001 PAN AACCN6510F ... APPELLANT
(BY SHRI. A. SHANKAR, SENIOR ADVOCATE FOR SHRI. M. LAVA, ADVOCATE)
AND :
THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12(2), PRESENTLY CIRCLE -5(1)(1) BMTC BUILDING, 80 FEET ROAD KORAMANGALA, 6TH BLOCK BANGALORE-560 095 ... RESPONDENT
(BY SHRI. K.V. ARAVIND, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 13.01.2017 PASSED IN ITA NO.60/BANG/2016, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ETC.,
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2 THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 26.07.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR J, PRONOUNCED THE FOLLOWING:-
JUDGMENT
This appeal by the assessee has been admitted to consider the following questions of law: i) Whether the Tribunal was justified in law in upholding the disallowance of Rs.28,83,17,552/- being deduction claimed on interest/redemption premium on debentures on the facts and circumstances of the case.
ii) Whether the Tribunal was justified in law in holding that the liability to pay interest/redemption premium of Rs.28,83,17,552/- has not crystallized during the year and consequently passed a perverse order on the facts and circumstances of the case.
iii) Whether the Tribunal is justified in law in holding that the genuineness of the Transaction has not been proved beyond doubt without passing a speaking order and ignoring the irrefutable evidence placed before it and consequently passed a perverse order on the facts and circumstance of the case.
iv) Whether the Tribunal was justified in law in not adjudicating the issue of levy of interest under section 234A, 234B and 234C of the Act, 1961 on the facts and circumstance of the case.
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Heard Shri. A. Shankar, learned Senior Advocate for appellant and Shri. K.V. Aravind, learned Standing Counsel for the Revenue.
Brief facts of the case are, assessee is a Private Limited Company in the business of development of Real estate and execution of engineering Contracts. Assessee filed its returns for A.Y1 2011-12 on 30.09.2011 declaring an income of Rs.12,83,66,760/- and filed revised return on 29.09.2012 claiming loss of Rs.15,71,45,958/-; and the same was processed under Section 143(1) of the Income Tax Act, 1961 ('Act' for short). The case was taken up for scrutiny. The Assessing Officer sought for explanation with regard to difference between the tax liability arising between original return and the revised return. Assessee replied stating that the deduction of premium on redemption of debentures to the tune of
1 Assessment Year
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4 Rs.28,82,17,552/- had not been claimed in the original return. The Assessing Officer disallowed the deduction on redemption of debentures. On appeal, the learned CIT2(A) allowed the deduction of premium on redemption of debentures as revenue expenditure, which would be spread over to three assessment years namely, 2011-12, 2012-13 and 2013-14. Revenue challenged CIT(A)'s order before ITAT and the ITAT reversed the order of CIT(A) and restored the order of Assessing Officer. Hence, this appeal.
Shri. A. Shankar submitted that: • the appellant had entered into a Debenture Subscription Agreement dated 25.09.2009 with HDFC Asset Management Company Ltd., whereunder, HDFC had agreed to subscribe to optionally convertible debentures for a sum
2 Commissioner of Income-Tax (Appeals)
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5 of Rs.62 Crores and the same were redeemable on 20.9.2012; • the appellant had undertaken to redeem the debenture at a price, which would entitle HDFC to post tax IRR3 of 25%. In case, promoter's IPO4 was not completed by the debenture redemption date, then debentures were redeemable at pre-tax IRR of 18% on the subscription amount; • the original agreement was modified under first Addendum Agreement dated 15.05.2010 whereunder, the option of HDFC to convert debentures to preferential shares at the time of redemption was deleted and parties agreed that debentures shall be compulsorily converted into preference shares entitling HDFC to post IRR of 25% of the subscription amount;
3 internal rate of return 4 Initial public offer
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6 • that a second addendum agreement dated 12.11.2012 was entered into between the parties where under, HDFC once again resumed the right to exercise the option of converting the debentures to preferential shares; • the appellant claimed for deduction of debenture premium in the revised returns. The Assessing Officer took the view that debenture premium claimed as deduction was 'a contingent liability', as it was dependent upon completion of the IPO; • the revised returns were filed prior to the date of second addendum. Therefore, the Tribunal was not justified in upholding the disallowance of premium on redemption of debentures; • under the Act, Revenue expenditure is allowed as deduction in respect of specific
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7 categories of expenditure and the revenue expenditure for the purpose of business has to be allowed in the year in which it occurs on the principle of debitum in praesenti solvendum in futuro.
With the above submissions, Shri. Shankar submitted that the order passed by the ITAT is unsustainable in law and prayed for allowing this appeal.
Opposing the appeal, Shri. Aravind, for the Revenue submitted that assessee has not claimed deduction for the A.Y 2010-11. As an after thought, revised returns have been filed and therefore, the Tribunal has rightly held that it is a make-believe story to claim deduction. He further submitted that the deduction proportionate to the amount of premium on redemption of shares, cannot be allowed as the liability had not
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8 crystallized. With these submissions, he prayed for dismissal of the appeal.
We have carefully considered rival contentions and perused the records.
Undisputed facts of the case are, on September 25, 2009, assessee has entered into a Debenture Subscription and Share Purchase Agreement. The relevant clause for the purpose of this case reads as follows: "5. Redemption and Put
5.1 Irrespective of the date of allotment of the Debentures, in the event no Early Redemption Notice has been issued or the Debentures have not been converted in accordance with Clause 6 of this Schedule 3, then the Company shall have the obligation to redeem all the Debentures held by the Investor on September 20, 2012 ("Debenture Redemption Date") at a price that shall entitle the Investor to a pre Tax IRR of 18% on the Subscription Amount if on the Debenture Redemption Date the initial public offer of the Promoter has not been completed and if the initial public offer of the Promoter has been completed on the Debenture
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9 Redemption Date then to a post Tax IRR of 25% on the Subscription Amount.
5.2 The Investor has the right to put the Debentures (along with the Shares) to the Promoter or require the Company to redeem the Debentures (and buy back the Shares) in the manner and at the price specified in Clause 5.2 of the Shareholders Agreement at the price mentioned therein. In the event the Promoter fails to comply with its obligation under Clause 5.2 of the Shareholders Agreement, then the same would constitute an Event of Default under this Agreement. On occurrence of an Event of Default, the Investor shall have the right to cause the Company to redeem the Debentures and/or cause the Promoters to acquire the Debentures from the Investor in accordance with Clause 14 of this Agreement."
The subject matter of A.Y. of this appeal is 2011-12. Assessee filed its original return on 30.09.2011 and revised return on 29.09.2012. The second Addendum Agreement was executed on 12.11.2012, prior to filing the revised returns. Shri. Shankar has taken us through the statement at page 154 of the paper book and contended that TDS has been deducted during the A.Y. in question.
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It is also not in dispute that 62 Lakh convertible Debentures with face value of Rs.100/- have been issued by the assessee in the name of HDFC as per Annexure-K series between September 25, 2009 and January 1, 2010. The Assessing Officer has held that the premium paid or payable on the redemption of Preference shares would be arising out of the reserves and surplus and would constitute Capital expenditure out of the accumulated surplus and therefore, it is not a Revenue expenditure. He has further recorded that the expenditure was contingent upon the issue of IPO and accordingly disallowed the expenditure of Rs.28,83,17,552/-.
CIT(A), accepting assessee's explanation that Debentures were issued on 25.09.2009 and premium was computed for the Financial Year 2009-10 relevant to A.Y.2010-11 could not be
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11 quantified but as per the agreement dated 15.05.2010, the assessee was able to quantify the premium spread over for the financial years 2010- 11, 2011-12 and 2012-13, has held that the premium payable quantified on redemption of debentures as Revenue expenditure. The ITAT has recorded in para 6 of its order that there is no quarrel about the proposition that the premium paid on redemption of debentures is Revenue expenditure and allowable proportionately during the period of debenture. Having so held, the ITAT has further recorded that the terms of Original Purchase Agreement may have been changed to suit the convenience of parties and it is a 'make- believe' story to claim deduction. It has further held that the liability had neither crystallized nor genuineness of transaction was proved beyond doubt.
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As recorded hereinabove, issuance of debentures is not in dispute. Deduction of TDS5 is also not in dispute. The Tribunal has rightly recorded the correct principle of law that premium paid on redemption of debenture is Revenue expenditure. By the second Addendum Agreement dated 12.11.2012, the HDFC's right to exercise the option of converting the debentures into preference shares has been restored in consonance with the original Agreement. The resultant position is, the HDFC, at its option, could cause the assessee to redeem all debentures on September 20, 2012. The CIT(A) has accepted assessee's explanation that it had quantified the premium as per the agreement dated 15.05.2010 spread over for three financial years. It is trite that a borrowing Company, which issues debentures incurs liability to pay larger amount than what it has borrowed. The
5 Tax deducted at source
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13 assessee - Company has made provision for payment of premium and also paid TDS. The adverse finding recorded by the ITAT that the parties had changed the agreement to suit their convenience and that it is a 'make-believe' story is not supported by any cogent reason nor material on record and therefore, untenable.
Shri. Shankar has placed reliance on Bharat Earth Movers Vs. Commissioner of Income-Tax6 wherein, it is held as follows:
"4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the
6 (2000) 245 ITR 428 (SC) (para 4)
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14 future date on which the liability shall have to be discharged is not certain."
The CIT(A), following the decision in CIT Vs. Asea Brown Boveri Ltd.7 and Madras Industrial Investment Corporation Ltd., Vs. Commissioner of Income-Tax8 has rightly held that the premium payable quantified on redemption of debentures as Revenue expenditure.
In view of the above, the impugned order passed by the ITAT is unsustainable and hence, this appeal merits consideration.
In the result, the following: ORDER
(a) Appeal is allowed.
(b) The substantial questions of law recorded hereinabove are held in favour of the assessee and against the Revenue.
7 (2009) 316 ITR 450 8 (1997) 225 ITR 802
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(c) Order dated 13.01.2017 in ITA No.60/Bang/2016 is set-aside and order passed by the CIT(A) dated 05.10.2015 in ITA No.208/207/CIT(A)-5/2014-15 is restored.
No costs.
Sd/- JUDGE
Sd/- JUDGE
SPS