2012 (11) TMI 1168 - HC - Income Tax

Summary

Issues involved:
1. Disallowance of interest paid on loans for setting up a new unit and modernization of plant.
2. Deductibility of expenditure on partly convertible debentures.

Disallowed Interest on Loans:
The Revenue raised a question regarding the deletion of disallowance of interest paid on loans for setting up a new unit and modernization of the plant. The Income Tax Appellate Tribunal allowed the interest under Section 36(1)(iii) as the borrowed capital was used in connection with the existing business of the assessee. The Tribunal's decision was supported by the Supreme Court ruling in Dy. Commissioner of Income tax v/s. Core Health Care Limited, which clarified that Explanation 8 to Section 43 of the Act would not apply in such cases. Therefore, the Tribunal's decision to allow the claim of the assessee was upheld, and the first question raised by the Revenue was not entertained.

Expenditure on Partly Convertible Debentures:
The second question raised by the Revenue concerned the deductibility of expenditure incurred on partly convertible debentures. The Revenue argued that such expenses are capital in nature and should be disallowed. However, the Rajasthan High Court, in the case of Commissioner of Incometax v/s. Secure Meters Limited, held that debentures, whether convertible or nonconvertible, represent a loan and are allowable as revenue expenditure. This decision was supported by the Apex Court's dismissal of the Revenue's Special Leave Petition against the High Court's ruling. Therefore, the second question raised by the Revenue was not entertained.

The High Court of Bombay dismissed the appeal with no order as to costs.