2016 (9) TMI 1187 - HC - Income Tax

Expenditure on the issue of convertible debentures - nature of expenditure - revenue or capital expenditure - Held that - In the present case, a part of the convertible debentures has been converted into equity shares, for which the assessee has incurred expenses. According to the assessee, the expenses incurred were in respect of issuance of convertible debentures. The facts indicate that a portion of the convertible debentures was converted into equity shares and thereby, the assessee company got enduring benefits. Since capital can be raised by converting debentures into equity shares, we are of the view that expenditure incurred by the assessee on conversion of convertible debentures into equity shares would have to be treated as capital expenditure. - Decided in favour of the Revenue

Summary

Issues:

1. Whether expenditure on the issue of convertible debentures is a capital expenditure?

Analysis:

The Tax Appeal under Section 260A of the Income-tax Act, 1961 was filed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench. The substantial question of law raised was whether the expenditure on the issue of convertible debentures should be treated as capital expenditure. The assessee offered convertible debentures to the public in two parts, incurring a significant sum for their issuance. The Assessing Officer disallowed the claim of the assessee, leading to appeals before the CIT(A) and eventually the Tribunal, which dismissed the appeal.

The learned counsel for the assessee referred to a Division Bench judgment of the Court, stating that where enduring benefits are received from the conversion of debentures into equity shares, the expenditure should be considered as capital expenditure. In this case, as a portion of the debentures was converted into equity shares, the assessee incurred expenses for the conversion. The Court agreed that since the company received enduring benefits from the conversion, the expenditure on the conversion of debentures into equity shares should indeed be treated as capital expenditure.

The Court, after considering the arguments and facts presented, dismissed the appeal and ruled in favor of the Revenue. Due to differing views on the matter, a certificate of fitness was granted to the assessee for approaching the Apex Court. The judgment answered the question against the assessee and in favor of the Revenue, ultimately disposing of the appeal.