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Income Tax Appellate Tribunal, ‘B’ BENCH,
Before: Shri M.Balaganesh, & Shri S.S.Viswanethra Ravi
Shri S.S. Viswanethra Ravi, JM :-
This appeal by the assessee is directed against the order dated 21-08-2013 of the Commissioner of Income Tax(Appeals), VI, Kolkata for the assessment year 1999-2000.
In this appeal, the Assessee has raised the following effective ground:-
The Commissioner of Income Tax (Appeals)-VI(CIT(A) erred on facts of the case and in law in not allowing the Appellant’s claim of debenture issue expenses of Rs.2,40,88,946 as revenue expenditure. On proper appreciation of facts of the case and correct construction of law, the CIT(A) should not have held that the debenture issue expenses are capital in nature.
ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 1
The assessee is a company and is in the business of manufacturing of motor cars and filed its return of income showing a loss of Rs.7,73,20,750 on 21.12.99. The return was processed and thereafter, a revised return was filed on 27-3- 2001, wherein, the assessee revised the total loss to Rs.6,61,71,840/- and it was accepted. Where after, it was reopened by a notice u/s.147 of the Act and in response the assessee filed the return of income showing the total loss at Rs.6,61,71,840 on 04.04.06 and a Notice u/s. 143(2) was also issued, wherein the assessee contended that it issued 18% fully convertible debentures of Rs.100 each during the year aggregating value of Rs.53.42 crores and incurred a sum of Rs.2,40,88,946 as expenditure and shown such expenses in the accounts under the head Reserves and Surplus by deducting the same from share premium account and claimed such expenses as revenue expenses in the computation of income. According to the AO, the assessee made such claim on the basis of law laid down in the case of CIT vs. India Cements Ltd reported in 60 ITR 52 and the AO held that law laid down above case supra is not applicable to the assessee which resulted an addition of Rs.2,40,88,946/- and the same was added to the total income of the assessee.
In challenge, the Assessee contended before the CIT-A as under:-
The Appellant had used the proceeds of debentures for the purpose of the business. The Appellant relies on the CBDT Circular No. 56 dated 19.03.1971 which clearly state that expenditure on issue of debentures is admissible as a deduction against profits for the year in which it is incurred. The para 45 of CBDT circular is as under:
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It may be noted that the provision for amortisation is not intended to supersede any other provision in the income-tax law under which the expenditure is allowable as a deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures, and such expenditure is admissible as a deduction against profits of the year in which it is incurred by virtue of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966J 60 ITR 52 section 35D will not have the effect of bringing that expenditure within the scope of the expenditure to be amortised against profits over a 10-year period. As a corollary to this, where any expenditure has been included for the purpose of amortisation under section 350 on a claim being made by the assessee in that behalf, such expenditure will not qualify for deduction under any other provision of the Act for the same or any other assessment year vide sub-section (6) of section 35D. Supreme Court and various High Courts have held that Debenture issue expenditure is revenue expenditure and such expenditure is admissible as a deduction against profits of the year as under :- (i) India Cements Ltd Vs. CIT - 60 ITR 52 ( SC) (ii) CIT Vs East India Hotels Ltd - 252 ITR 860 ( Cal) (iii) CIT Vs. South India Corpn. ( Agencies) Ltd - 290 ITR 217 ( Mad) (iv) CIT Vs. First Leasing Co. of India Ltd - 304 ITR 67 ( Mad) (v) CIT Vs. Thirani Chemicals Ltd - 290 ITR 196 ( Del) (vi) CIT Vs. Office of the Official Liquidator- 3161TR 181 (Guj). (vii) CIT vs. Mahindra Ugine & Steel Co. Ltd - 250 ITR 696 ( Mum). It is respectfully submitted that action of the AO in disallowing the debenture issue expenditure of Rs. 2,40,88,9641- should be deleted.
The CIT-A was of the view that the ratio laid down by the Hon’ble Supreme Court in the case of India Cements Ltd Vs. CIT - 60 ITR 52 ( SC) does not apply to the case on hand for the reason, the Hon’ble Supreme Court dealt the issue therein involving expenses claimed as deduction incurred in connection with loan and accordingly, the CIT-A confirmed the order of AO. The relevant portion of which is reproduced herein below:
ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 3
I have considered the facts of the case. Expenses under consideration were incurred in respect of issue of fully convertible debentures. The appellant, in the accounts, had itself treated the same as capital expenditure by deducting them from the share premium account. However, the claim for deduction was made on the basis of decision of Supreme Court in the case of CIT vs India Cements Ltd. 60 ITR 52.However, as pointed out over the assessing officer, in the said case, expenses were incurred in connection with loan, whereas the expenses in the appellant's case related to issue of non-convertible debentures. It may be mentioned that though the debenture normally is a kind of debt, convertible debenture is different in the sense that after certain period of time the debt gets converted into equity shares. Therefore, the company does not have to return the debt. Rather, it obtains equity capital. Therefore, the expenditure incurred on issue of fully convertible debentures cannot be termed as in connection with debt, rather the same relate to increase in capital of the company. Other decisions cited by the appellant also do not assist the appellant. Majority of the cited decisions relate to expenses in connection with debts. Some of the cases are related to debenture issue expenses, but the debentures issued in those cases were non- convertible. Though in the case of East India Hotels Ltd. (supra), the debenture was partly convertible, the overwhelmingly major portion of debenture was non-convertible and the finding of facts given was that only a small part had been made convertible to make debenture more attractive to the investors and that did not change the character of debenture. Similarly, in the case of South India Corporation (Agencies) Ltd. (supra), the appellate authority had given a finding on facts of that case that issue of shares against partly convertible debenture might or might not take place. In the appellant's case, on the other hand, the debentures were fully convertible and as a matter of fact eventually got converted into shares. The other decisions cited by the appellant pertain to loans or non-convertible debentures. Thus, the ratio of the cited decisions does not assist the appellant. As mentioned earlier, a convertible debenture is different, in a significant way, from ordinary non-convertible debenture and expenses on the same related to increase in capital. So far as Board's Circular no. 56 of 1971, relied upon by the appellant is concerned, the same merely clarifies that section 35D is not supposed to cover the debenture expenses, which are allowable in light of Supreme Court's decision in the case of India Cements Ltd. (supra). However, as discussed earlier, the ratio of the decision in the case of India Cements Ltd. (supra) is not applicable on facts of the appellant's case. 8. In this regard, the decision in the case of Banco Products India Ltd vs DCIT 63 ITD 370 (Ahd.) cited by the assessing officer is, in my opinion, more appropriate. In that case, ITAT, Ahmedabad had, after analysing the issue in depth, held that in case of partly convertible debenture, expenses pertaining to convertible portion are to be considered as capital expenditure. Applying the same ratio in the appellant's case, the entire share debenture issue expenses are capital in nature. It has been confirmed in course of hearing that the debenture issued during the year were ultimately converted into equity shares in FY 2000-01. Thus the entire money received ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 4
from issue of debentures ultimately related in enhanced capital for the company. It is well settled that any expenditure in connection with increased capital has to be considered as capital expenditure which cannot be allowed as deduction. Therefore, the appellant's claim for deduction of debenture issue expenses is rejected.
Assailing the action of the CIT-A, the Assessee is in appeal before us. The Ld.AR contends that the debentures are converted into equity shares and CIT-A held that value of equity shares are capital in nature. Further, submitted that the issue is squarely covered by the decision of the Hon’ble High Court of Delhi in the case of CIT vs HAVELLS India Ltd reported in 352 ITR 376. The Ld. DR relied on the orders of the lower authorities.
Heard rival submissions and perused the material evidence on the record. It is relevant to be noted again that the Assessee claimed the expenses as incurred in issuance of debentures as revenue expenses specifically on the basis of principle laid down by the Honourable Supreme Court in the case of India cements Ltd. But, however, the AO did not accept contention of the assessee on the ground that the Honourable Supreme Court in the case of supra treated the expenses said to have incurred towards Stamp duty and registration fee is in nature of the revenue expenditure. The CIT-A was in the agreement of view taken by the AO. Therefore, both the authorities below held that the law laid down by the Honourable Supreme Court supra does not apply to the assessee to claim expenses incurred towards issuance of debentures as revenue expenditure.
Thus, the question to be decided in this appeal is as to whether the assessee entitled to claim such expenditure as
ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 5
discussed above as revenue expenditure. In this regard, we may refer to the decision relied in the case of CIT vs HAVELLS India Ltd on by the Assessee reported in 352 ITR 0376. It is pertinent to note that the facts in the case above are that the assessee therein issued 4% fully convertible debentures amounting to Rs. 2350 lakhs comprising of 235 debentures of the face value of Rs. 10 lakhs to another company and incurred expenditure of Rs.64,60,718/- in connection with the issuance of above debentures and claimed the same as revenue expenditure. The AO disallowed the same and CIT-A allowed the same by taking into consideration the dismissal of SLP filed by the revenue against the judgement of Honourable High Court of Rajasthan in the case of CIT Vs. Secure Meters Ltd reported in 321 ITR 611 (Raj.). The Tribunal having jurisdiction affirmed the finding of the CIT-A. The Honourable High Court of Delhi was pleased to observe that the debentures may strengthen the capital base on the company by converting the same into the shares, but, however, found the expenditure incurred in the process of the issuance of debentures shall be allowed as revenue expenditure by taking into consideration the factual intention having at the time of issuance of such debentures. The relevant portion of which is reproduced herein below:
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, (1966) 60 ITR 52. The question before us however, is whether it is a debenture issue or an issue of share capitalinvolving 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 strengthening of the assessee's 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 ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 6
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: -
(i) CIT v. East India Hotels Ltd., (2001) 252 ITR 860 (Cal.)
(ii) CIT v. ITC Hotels Ltd., (2011) 334 ITR 109 (Kar.)
(iii) CIT v. South India Corporation (Agencies) Ltd., (2007) 290 ITR 217 (Mad.)
(iv) CIT v. First Leasing Co. of India Ltd., (2008) 304 ITR 67(Mad.)
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 (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.
The Honourable High Court of Delhi supra referred the leading judgement in the case of India cements Ltd and found the view taken in the judgements as mentioned in para 26 is a predominant view that the expenditure incurred towards issuance of debentures is revenue in nature and also referred to the dismissal of the SLP which was preferred by revenue against the judgement of Honourable High Court of Rajasthan in the case of CIT Vs. Secure Meters Ltd reported in (2010) 321 ITR 611(Raj).
In this connection, we deem it necessary to refer the observations of Honourable High Court of Rajasthan in the case of CIT Vs. Secure Meters Ltd the relevant portion at para 9 is reproduced herein below:
“ At this stage it was contended by the learned counsel for the Revenue, that a distinction should be drawn between the convertible and nonconvertible debentures, inasmuch as if the debenture is converted into shares, then it partakes the character of capital, and ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 7
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 Calcutta High Court in CIT Vs. . East India Hotels Ltd. (2001) 171 CTR (Cal) 614 : (2001) 252 ITR 860 (Cal), 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 Cements case 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.
In the aforesaid decision, the Honourable High Court of Rajasthan opined that whatever may be the nature of debentures whether it is convertible or non convertible the expenditure incurred in connection with the issuance of debentures is revenue expenditure. In view of the discussion above, we hold that the expenditure incurred in connection with the issuance of debentures is revenue expenditure and the Assessee is entitled to claim the same as revenue expenditure and the impugned order dt:21-08-2013 passed by the CIT-A is not justified, accordingly, it is set aside and therefore, ground no-1 raised by the Assessee is allowed.
Ground no-2 is general, requires no adjudication and it is, accordingly, dismissed.
ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 8
In the result, the appeal filed by the assessee is allowed
Order Pronounced in the Open Court on 21st September,2016
Sd/- Sd/- M.BALAGANESH S.S.VISWANETHRA RAVI ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated:21 /09/2016
Copy of the order forwarded to:- 1. The Appellant/Assessee: M/s.Hindustan Motors Ltd 9/1 R.N. Mukherjee Road, 14th Floor, Kol-1. 2. The Respondent/Department: The DCIT, Cir-6, Aaykar Bhawan P-7 Chowringhee Square, Kol-69. 3. CIT 4. CIT(A) 5. The Departmental Representative 6. Guard File True Copy By order Assistant Registrar ** PRADIP SPS Income Tax Appellate Tribunal
Kolkata benches, Kolkata
ITA No. 2644/Kol/13 M/s. Hindustan Motors Ltd 9