PRIME FOCUS LTD..,MUMBAI vs. D.C.I.T. (ODS) C. RG. 7, MUMBAI

In the first appellate proceedings, the CIT (A) considered the submission of the assessee and held in his order dated 26.9.2011 that this expenditure since incurred in connection with the FCCBs meant for equity constitutes capital expenditure. He ignored the fact that the said bonds never converted to the equity and the bonds were finally redeemed to the bond holders with premium. Aggrieved with the above finding of the CIT (A), assessee is in appeal before us with Ground no.1 mentioned above.

Before us, Ld Counsel for the assessee narrated the above facts of the issue and explained that the FCCBs in this case are only issued by the company as a debt raising instrument. The bond holders never had any voting rights as the same were never converted into equity shares of the company. The bonds eventually were redeemed with premium at the option of the bond holders. In such circumstances, in substance, the said bonds are to be deemed as debentures issued by the assessee for the business purposes. Further, he relied on various decisions to demonstrate that the said bonds were deemed as debentures and the expenses incurred in issuing such debt instruments were allowed as a revenue expenditure u/s 37(1) of the Act. Some of the decisions relied upon by the Ld Counsel for the assessee are enlisted in para 2.15 of the note furnished by the Ld Counsel for the assessee. The contents of para 2.15 and 2.16 are extracted as under:- “2.15. In this regard, reliance is placed on the following decisions wherein it has been held that expenses incurred on FCCB‟s are allowable as revenue expenditure even after considering the special Bench ruling in the case of Ashima Syntex (supra):  Secure Meters Ltd (321 ITR 611) (Rajasthan High Court) – Supreme court has dismissed department‟s SLP vide appeal (Civil) 10548) of 2008 dated 11th August, 2009.  Sukhjit Starch & Chemicals Ltd (326 ITR 29) (P & H) High Court  ITC Hotels Ltd (334 ITR 109) (Karnataka High Court)  Mahindra and Mahindra Limited (36 SOT 348) (Mumbai Tribunal) Dolphin Offshore Enterprises (I) Ltd (ITA No. 4273/M/2011) dated 28th June, 2013  (Mumbai Tribunal) Faze Three Limited (ITA No.5449/M/2011) dated 16th August, 2013 (Mumbai  Tribunal)  Crane Software International Limited (ITA Nos. 741 & 741/Bang/2010 and & 775/Bang/2010) dated 8th February, 2011.  Aurobindo Pharma Limited (62 SOT 214) (Hyderabad Tribunal) 2.16. In the view of the above, it is respectfully submitted that expenses incurred on FCCB issue should be allowed as revenue expenditure u/s 37(1) of the Act.”

On the other hand, Ld DR for the Revenue heavily relied on the order of the Tribunal in the case of Zee Telefilms Limited (33 taxmann.com 413), wherein it was held that such expenses should be considered as per the provisions of section 35D of the Act.

In this regard, Ld Counsel for the assessee argued vehemently stating that the issue before the Revenue Authorities revolve around if the expenses allowable u/s 37(1) of the Act or otherwise ie capital or revenue and the Ld DR‟s attempt to rope in the provisions of section 35D of the Act constitutes creating a new case / issue by the Ld DR, which is not permissible as per the ratio laid down by the Special Bench in the case of Mahindra and Mahindra (122 TTJ 577), dated 9.4.2009 and also the decision of the ITAT, Mumbai in the case of Prakash L. Shah (115 ITD 167) dated 22nd August, 2008. In addition, Ld Counsel for the assessee relied on various other decisions to demonstrate that similar kind of expenses were allowed as revenue expenditure u/s 37(1) of the Act. The decisions in the case of Ashima syntax Ltd (100 ITD 247) and Secure Meters Limited (321 ITR 611) (Rajasthan High Court) are some of them. He vehemently demonstrated that this is the case where the bond holders never exercised the option of converting the bonds into equity shares. Therefore, the bonds remained as the debt instrument like debentures, which were eventually redeemed. In such circumstances, the same cannot be treated as a capital expenditure. He further submitted that the accounting treating does not decide the character and nature of the expenditure. It is the duty of the Assessing Officer to assess correct income. The AO cannot treat the same as a capital in nature solely on the ground that they were written off in the security premium account, a balance sheet entry. Relying on the judgment of the Hon‟ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Limited (82 ITR 363), Ld Counsel for the assessee submitted that the accounting entries do not impact tax implications. Further, relying on the recent decision of the ITAT, Hyderabad in the case of Bhagyanagar India Limited (ITA No. 99 and 1345/2012), Ld Counsel for the assessee submitted that the assessee‟s option to write off FCCB issue expenses against the security premium account does not preclude the assessee from claiming such expenditure u/s 37(1) of the Act if the same otherwise allowable. The FCCBs constitute a method of raising loans for the assessee and the expenses incurred in this regard are statutorily allowable u/s 37(1) of the Act. The same has the sanctity of judicial ruling in the case of Secure Meters Limited (321 ITR 611) and in the case of Sukhjit Starch and Chemicals Ltd (326 ITR 29). Thus, Ld Counsel for the assessee summed up by stating that the revenue expenditure incurred in connection with the FCCBs constitutes an allowable revenue expenditure u/s 37(1) of the Act and relied heavily on the judgment of the Hon‟ble Bombay High Court in the case of Grindwell Nortion India Limited (ITA No.694 of 2012) dated 24th December, 2014. Further, it is the case of the Ld Counsel for the assessee that the Ld DR cannot make a new case before the Tribunal, which was not raised during the assessment / first appellate proceedings. For this, he relied on the Special Bench decision in the case of Mahindra and Mahindra (supra).

We have heard both the parties and perused the orders of the Revenue Authorities as well as the citations by the Ld Representatives of both the parties. Our adjudication on the core issue is given in the following paragraphs: 9. Assessee spent Rs. 5,82,40,318/- by way of payments to (i) fee paid to the lead managers to the issue; (ii) fees paid to the legal advisors to the issue and (iii) listing fees paid. The same was paid to those parties who contributed for the success of the issue of FCCB amounting to US $5.5 millions. In principle, the payments of this nature in our opinion falls in revenue zone. But the fact is that they'd were incurred in connection with issue of FCCBs. Assessee raised these Foreign Currency Bonds of Rs 1 lakh Each. Details of such expenditure is given on page 42 of the APB. In this contest, assessee paid Rs. 5.82 Crs (rounded off) to lead managers / legal advisors and listing fees. AO treated the same as „capital expenditure‟. Will such revenue expenditure when incurred in connection FCCB makes it of capital nature? We shall examine the nature of FCCBs.

Assessee issued the FCCBs for the purpose of Acquisition of the companies in similar lines abroad for expanding the business presence abroad. Whereas the relevant agreements and issue documents suggest that they were issued for equity purposes. It is a fact that the proceeds of the FCCBs were spent on acquiring the companies abroad. Being optionally convertible, the bond holders have the option to convert into equity. But the assessee did not issue shares to the Bond holders as they did not exercise that option. Rather, assessee refunded the Bond money with premium to the Bond Holders. Considering the fact of REFUND of entire FCCBond money, we are of the opinion that FFCB issue exercise of the assessee amounts to one raising debt for the intended purpose and it is unconnected to the issue of shares. As such the difference between Bond and Debenture is very thin as they both are two different types of Debt Instruments. Further, we find that there is nexus between the expenditure and the purpose of the bonds of the assessee. In such case, the claim is allowable in view of the decision of the Hon‟ble Apex Court in the case of Hero Cycles P Ltd (supra). Relevant para from the said judgment is extracted as under:- "Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of „S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another‟ [2007 (288) ITR 1 (SC)]. Once it is established that thereso is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman."

Legal propositions : Scope of Ld DR - Making out a new case of applicability of Section 35D: Ld DR for the revenue filed written note stating that that the claim of such expenses is to be considered within the meaning of the provisions of section 35D of the Act. In this regard, Ld AR for the sssssee traced the way AO dealt with this issue and submitted that AO's case is if the said expenses constitutes Revenue or Capital with in the meaning of section 37 of the Act. Applicability of the provisions of Section 35D of the Act was never the issue before either the AO or before the CIT(A). At the second appeal, Ld CIT DR cannot make a new case by invoking section 35 D of the Act even if it is correctly invokable. For this proposition, he relied on various binding judgment in the case of Mahendra and Mahendra Ltd (Supra). Therefore, we dismiss the Ld DR‟s argument on the issue.

In the instant case, Ld AR for Assessee demonstrated that the Assessee earned substantial business from abroad after acquiring the foreign companies with the said FCCBonds. The impugned expenditure incurred were incurred undisputedly by the Assessee in connection with FCCBs which were applied for acquiring the foreign companies which brought more business for the Assessee. Thus, there is nexus to the business of the Assessee. Considering all the facts of the present case we are of the opinion, that the order of the CIT(A) is required to be reversed. Accordingly, the relevant grounds of the assessee are allowed.

Ground nos.2 and 3 relates to the disallowance u/s 14A of the Act. Relevant facts in this regard are that the assessee earned exempt income of Rs. 20,17,860/-. Against this, AO quantified disallowable sum of Rs. 35,53,568/- u/s 14A of the Act. As per the assessee if the citations referred above are considered, the disallowable sum will work out to Rs. 12,40,240/-. It is the claim of the assessee that the disallowance should not exceed Rs. 20,17,860/- and relied on the cited judgment of the Hon‟ble Delhi High Court judgment in the case of Joint Investments Private Ltd (supra). Further, assessee also an additional ground in support of the above grounds mentioning that some investments made in the subsidiaries yielded dividends chargeable to tax in India. Such investments should be kept outside the scope of the provisions of Rule 8D of the IT Rules, 1962 while determining the quantity to be disallowed u/s 14A of the Act. In this regard, Ld Counsel for the assessee cited various decisions and various arguments in support of his claim. One of such judgment is pronounced by the Hon‟ble Delhi High Court in the case of Joint Investments Private Limited, dated 25.2.2015, which is relevant for the proposition that the disallowable amount u/s 14A must not mean that the entire exempt income should be disallowed. Various decisions have come up on this issue involving the disallowance u/s 14A r.w. Rule 8D of the Act. Ld Representatives of both the parties suggested that this issue requires reconsideration and fresh decision by the AO in the light of the said decisions on the issue.

After hearing both the parties and on perusal of the cited decisions, we remand Ground nos. 2 and 3 filed by the assessee to the file of the AO for deciding the issue afresh after granting a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Accordingly, Ground nos. 2 and 3 are allowed for statistical purposes. Ground no.4 which relates to the interest u/s 234D of the Act, since related to the outcome of Ground no.2 and 3, this ground also remanded. Accordingly, Ground nos.2, 3 and 4 are allowed for statistical purposes. 16. In the result, appeal of the assessee is allowed for statistical purposes. (By Revenue) C.O.No.233/M/2012 (By assessee) 17. The captioned appeal is filed by the Revenue and the Cross objection is filed by the assessee for the AY 2008-2009. “Ground raised in Revneue‟s appeal is as under:-

In the above Revenue‟s appeal as well as the assessee‟s Cross Objection, the common issue raised relates to the allowability of the bad debts. Relevant facts in this regard are that the assessee claimed an amount of Rs. 24,88,85,442/- as amounts written off as bad debts. This debt arose in connection with the amalgamation between the assessee and its subsidiary of Storemedia Technologies Private Limited (Storemedia). As per the assessee, in consonance with the scheme of amalgamation, it withdrew an amount of Rs. 17,90,74,480/- being excess between the assets of Storemedia taken over by the assessee over the value of the assessee‟s investment / loans and advances in Storemedia. Assessee utilized the balance in the business restructuring reserve account to align the value of debtors and advance to the suppliers to fair value. The balance in the business restructuring reserve was thereafter transferred to the Profit & Loss Account and the same was utilised to write off the bad debts and advances to the suppliers (para5.3 and 5.4 of the written submissions are relevant in this regard). These facts were not properly under stood and appreciated by the AO in the assessment proceedings. AO erroneously came to the conclusion that the assessee failed to write off the bad debts in the Profit & Loss Account. However, assessee demonstrated the same during the first appellate proceedings and submitted that as per the conditions laid down in section 36(1)(vii) and 36(2) of the Act, the assessee is eligible for deduction on account of bad debts. Assessee also relied on the judgment of the Hon‟ble Supreme Court in the case of TRF Limited (323 ITR 397) (SC) apart from many other decisions mentioned in para 5.11 of the note furnished by the assessee. On appreciating the submissions of the assessee, CIT (A) granted relief to the assessee as per the discussion given in paras 5 to 5.7 of his order. For the sake of completeness of this order, relevant para 5.7 is extracted as under:-