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2015 (1) TMI 706 - HC - Income TaxExpenditure on the issue of convertible debentures - Revenue v/s capital expenditure - Held that - Facts of the case clearly indicate that portion of the convertible debenture was converted into equity shares and assessee company had got enduring benefits and therefore, the expenditure incurred by the assessee on conversion of convertible debentures into equity shares has to be treated as capital expenditure. It may be noted that the Assessing Authority disallowed expenditure only to the extent pertaining to the convertible portion of the expenditure which formed part of the capital. As such disallowance made by the Income Tax Officer, which was confirmed by the Commissioner (Appeals) has to be sustained. The question of law raised by the Revenue, though not happily framed, is accordingly answered in the negative. Appeal dismissed. Decided in favour of revenue.
Issues Involved:
1. Whether the expenditure on the issue of convertible debentures is a capital expenditure. Detailed Analysis: Background: The appellant assessee challenged the order of the ITAT, Ahmedabad Bench 'C', which partly allowed the appeals filed by the assessee for the A.Y. 1994-95. The assessee filed its return declaring an income of Rs. 7,36,21,130/-, but the Revenue assessed it at Rs. 21,18,68,970/-. The assessee's appeal to the CIT(A) was partly allowed, leading to further appeals to the Tribunal, resulting in the current appeal. Legal Question: The core legal question framed was whether the expenditure on the issue of convertible debentures is a capital expenditure. Arguments by the Appellant: The appellant's counsel, Mr. Soparkar, cited various High Court decisions supporting the view that such expenditure is revenue expenditure: 1. Madras High Court in "COMMISSIONER OF INCOME-TAX VS. SOUTH INDIA CORPN. (AGENCIES) LTD." held that expenditure on the issue of debentures, which may or may not convert into shares, is revenue expenditure. 2. Madras High Court in "COMMISSIONER OF INCOME-TAX VS. FIRST LEASING CO. OF INDIA LTD." held that expenses on the issue of debentures are allowable. 3. Rajasthan High Court in "COMMISSIONER OF INCOME-TAX, UDAIPUR VS. SECURE METERS LTD." held that expenses related to the issue of debentures are allowable as revenue expenditure. 4. Punjab & Haryana High Court in "COMMISSIONER OF INCOME-TAX VS. SUKHJIT STARCH & CHEMICALS LTD." held that such expenditure is allowable as it is necessary for running the business. 5. Karnataka High Court in "COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD." held that expenditure on convertible debentures is revenue expenditure. 6. Delhi High Court in "COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD." held that the source of income, not the source of receipt, should be situated outside India for exceptions in section 9(1)(vii)(b). Respondent's Argument: Mr. Mehta, representing the Revenue, cited the Division Bench judgment of the Gujarat High Court in "INCOME TAX OFFICER VS. VXL LTD." which held that expenditure on the issue of shares to increase share capital is capital expenditure, even if it incidentally helps the business. Court's Analysis: The court noted the divergence in views among different High Courts but found the Gujarat High Court's earlier decision in "INCOME TAX OFFICER VS. VXL LTD." compelling. The court emphasized that: 1. Issuing convertible debentures, which are later converted into equity shares, provides an enduring benefit to the company. 2. The expenditure on converting debentures into equity shares should be treated as capital expenditure. 3. The Supreme Court in "India Cements Ltd. Vs. CIT, Madras" and "Brooke Bond India Ltd. Vs. CIT" distinguished between obtaining capital by issuing shares and obtaining a loan by debentures, affirming that increasing share capital is capital expenditure. Conclusion: The court dismissed the appeal, aligning with the Gujarat High Court's precedent that expenditure on convertible debentures is capital expenditure. However, acknowledging the differing views among High Courts, the court granted a certificate of fitness to the assessee to appeal to the Apex Court. Final Judgment: The appeal was dismissed, but the assessee was granted the certificate to approach the Supreme Court. No order as to costs was made.
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