2016 (9) TMI 1271 - HC - Income Tax

Allowable revenue expenditure - expenditure pertaining to convertible debentures to be converted into shares issued for raising capital for unit which has not started production and was in the process of installation - Held that - Admittedly the debentures when issued is a loan, and therefore, whether it is convertible, or nonconvertible, does not militate against the nature of the debenture, being loan, and therefore, the expenditure incurred would be admissible as revenue expenditure. See case of Secure Meters Ltd 2008 (11) TMI 66 - HIGH COURT RAJASTHAN - Decided in favour of assessee

Summary

Issues:
1. Tribunal's decision on revenue deduction for issue of fully convertible debenture.
2. Tribunal's ruling on interest and financial expenses as revenue expenditures.

Analysis:
1. The case involved the Department appealing against the Tribunal's decision regarding revenue deduction for the issue of fully convertible debentures by a public limited company engaged in the manufacturing and sale of Denim Fabric. The Assessing Officer (AO) disallowed the claim, considering it as capital expenditure related to the issue of share capital. However, the CIT (A) allowed the claim, stating that the expenditure was incurred on debentures and their convertibility into shares did not affect deductibility. The CIT (A) disallowed a small portion of the expenses but allowed the majority. The High Court framed substantial questions of law regarding the justification of the Tribunal and CIT (A) in allowing the expenditure as revenue deductions under Section 37(1) for a unit not yet in production. The Court, considering various precedents, held in favor of the assessee, emphasizing that the nature of the debenture as a loan makes the expenditure admissible as revenue expenditure, irrespective of convertibility into shares.

2. The second issue revolved around the Tribunal's decision on interest and financial expenses as revenue expenditures. The Department contended that the Tribunal's view contradicted the Supreme Court's decision. However, the respondent's counsel cited several judgments supporting their position. The High Court referred to a previous judgment in Secure Meters Ltd., which highlighted the nature of debentures as loans, making the expenditure admissible as revenue expenditure. Since the Supreme Court had excluded the purpose of obtaining the loan as relevant, the Court found in favor of the assessee based on the binding precedent. Consequently, all appeals were dismissed in favor of the assessee, upholding the Tribunal's decision on both issues.