2013 (10) TMI 285 - HC - Income Tax

Nature of expenditure incurred on account of issue of bonds - revenue expenditure or capital expenditure Held that - Funds having been raised precisely with issuance of secured redeemable non-convertible bonds, we find no reason to take any view different than that taken by this Court in Secure Meters Ltd s case 2008 (11) TMI 66 - HIGH COURT RAJASTHAN as also by the Hon ble Delhi High Court in Thirani Chemicals Ltd. 2005 (12) TMI 86 - DELHI High Court , wherein it has been held that expenditure incurred on the issue of debentures will be a permissible deduction notwithstanding the introduction of Section 35D - Issue of debentures for expansion of an existing business, the expenditure incurred on the same must be amortised - Tribunal was, in that view, perfectly justified in holding that the expenditure was a permissible deduction and accordingly deleting the additions made by the Assessing Office Decided against the Revenue. Whether on the facts and in the circumstances of the case, the ITAT was legally justified in reversing the findings of the CIT (A) and deleting the disallowance of Rs.1,05,87,365/- provided for contractual obligation in the return which was not allowable being contingent /unascertainable liability? - Appeal admitted.

Summary

Issues:
1. Disallowance of provision for contractual obligation
2. Treatment of expenditure on issuing bonds as revenue or capital expenditure

Analysis:

Issue 1: Disallowance of provision for contractual obligation
The appellant-revenue challenged the ITAT's order allowing the cross-objections filed by the assessee related to the assessment year 2003-04. The Assessing Officer disallowed a sum of Rs.1,05,87,365/- provided for a contractual obligation, adding it to the assessee's income. The CIT(A) upheld this disallowance, but the ITAT reversed it, citing a previous order in the case of the assessee for an earlier year. The ITAT found the disallowance unjustified and allowed the provision. The key question was whether the provision for the contractual obligation was contingent or unascertainable. The High Court decided to consider this issue, given its relevance to the appeal.

Issue 2: Treatment of expenditure on issuing bonds
Another aspect of the appeal concerned the treatment of expenses incurred by the assessee for issuing bonds amounting to Rs.12,74,949/-. The AO treated this expenditure as capital expenditure and added it to the income of the assessee. However, the ITAT found the expenditure allowable as revenue expenditure based on the decision in the case of CIT v. Secure Meters Ltd. The appellant challenged this finding, arguing that the expenditure should be considered capital in nature. The High Court referred to the decision in Secure Meters Ltd. and a case from the Delhi High Court to support the view that the expenditure on issuing debentures should be treated as revenue expenditure. The Court found no reason to deviate from this position and declined to consider the issue as a substantial question of law in the appeal.

In conclusion, the High Court admitted the appeal to consider whether the disallowance of the provision for contractual obligation was justified. However, it found no substantial question of law regarding the treatment of expenditure on issuing bonds, aligning with previous decisions on the matter. The Court's decision was based on established legal principles and interpretations of relevant case law.