2013 (11) TMI 63 - AT - Income Tax

Allowance of discount on issue of debenture as expenditure Held that - Reliance has been placed on the decision of Hon ble Rajasthan High Court in case of CIT Vs Secure Meters Ltd. 2008 (11) TMI 66 - HIGH COURT RAJASTHAN , which has been upheld by Hon ble Supreme Court - Discount on issue of debenture is expenditure for raising loan and therefore the same is allowable as business expenditure. As per the decisions of the Hon ble Rajasthan High Court and Supreme Court (supra) it is irrelevant to consider the object with which the loan was obtained however in the case of the assessee the loan was obtained to invest in the Zero Coupon Convertible Loan advance to the sister concerns which are in the same line of business therefore, in view of the decision of Hon ble Supreme Court in case of S. A. Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT the same is for the business/commercial expediency and hence is allowable expenditure. Disallowance u/s 14A read with rule 8D of the Income Tax Act Held that - Rule 8D is not applicable for the assessment year under consideration in view of Hon ble Jurisdiction High Court in case of Godrej and Boyce Mfg. Co. Ltd. v. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . The authorities below have invoked section 14A on the ground that the assessee invested this money in the Zero Coupon Convertible Loans therefore the intention of the assessee was to earn dividend income. It has been brought on record by the assessee that the loans were received back by the assessee and there was no conversion of loan into shares. Even otherwise section 14A cannot be invoked on the presumption that the particular investment would be convertible into shares and in future after such conversion the assessee is going to earn dividend income No justification in invoking section 14A for disallowance of the expenditure when the assessee has invested in the form of giving Zero Coupon Optionally Convertible Loan Decided in favor of Assessee.

Summary

Issues Involved:
1. Disallowance of discount on debentures.
2. Disallowance under section 14A by applying rule 8D.

Issue-Wise Detailed Analysis:

1. Disallowance of Discount on Debentures:

The assessee issued Zero Coupon secured optionally fully convertible redeemable debentures at a discount during the year 2006-07. The difference between the face value and the issue price was amortized over the period until redemption. The Assessing Officer (AO) disallowed the claimed discount, treating it as capital expenditure and invoking section 41(1) of the Income Tax Act, arguing that the discount was adjusted against the share premium account. The AO also contended that the amount should be disallowed under section 14A r.w.r. 8D, as the funds were invested in sister concerns.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, stating that the interest-free advances to sister concerns were not wholly and exclusively for business purposes, thus disallowing the interest expenditure under sections 36(1)(iii) and 37 of the Income Tax Act. However, the CIT(A) disagreed with the AO on applying section 41(1).

The assessee argued that the investment in sister concerns was part of its business activities, supported by object clause 27 of its memorandum of association, and cited several judicial precedents, including the Supreme Court's decision in CIT Vs Distributors (Baroda) (P.) Ltd. and S. A. Builders Ltd. Vs CIT, to assert that the advances were for business expediency.

The Tribunal noted that the investment was indeed part of the assessee's business activities and that the sister concerns were in the same line of business. It referenced the Supreme Court's decision in Madras Investment Corporation Vs CIT, which established that issuing debentures at a discount incurs a liability spread over the debenture period, and such expenditure is allowable as revenue expenditure. The Tribunal also cited the Rajasthan High Court's decision in CIT Vs Secure Meters Ltd., upheld by the Supreme Court, which confirmed that debenture issuance costs are revenue expenditure, irrespective of the debenture's convertibility.

The Tribunal concluded that the discount on debentures is an allowable business expenditure, as the funds were used for business/commercial expediency.

2. Disallowance under Section 14A by Applying Rule 8D:

The authorities below invoked section 14A to disallow expenditure on the grounds that the investment in Zero Coupon Convertible Loans indicated an intention to earn dividend income. However, the Tribunal noted that Rule 8D is not applicable for the assessment year in question, as per the jurisdictional High Court's decision in Godrej and Boyce Mfg. Co. Ltd. v. DCIT.

The Tribunal found that the loans were received back by the assessee without conversion into shares, and section 14A cannot be invoked based on a presumption of future dividend income. The Tribunal emphasized that the nature of debentures as loans does not change with their convertibility status, thus no disallowance under section 14A was justified.

Conclusion:

The Tribunal allowed the appeal, setting aside the orders of the authorities below, and held that the discount on debentures is an allowable business expenditure and no disallowance under section 14A is warranted.