2016 (11) TMI 287 - AT - Income Tax

Allowability of bond issue expenses - nature of expenses - assessee has raised an alternative plea of allowing the bond issue expenses under section 35D(1)(ii) - Held that - The bonds have been raised for restructuring or rehabilitation of the sick mills through voluntarily retirement scheme of employees etc., the advantage is definitely of enduring nature to the assessee. The expenditure in the nature of interest on the bond is payable every year, which is an expense of recurring nature whereas the arranger fee paid by the assessee is one-time fee in connection with raising of bonds and thus the expenditure is covered over the maturity life of the bond. The expenditures on bond issue expenses has been incurred in connection with the restructuring of the various units of the company, which are profit-making centers. The expenses are having definite role in reorganizing the company and thus played a role in enhancing the value of the company. In view of the discussion, we hold that the bond issue expenses in the case of the assessee are not allowable u/s 37(1) of the Act as revenue expenditure. We find that under section 35D(1)(ii) of the Act expenditure incurred by the assessee after commencement of business in connection with expansion of his undertaking or in connection with setting up of a new unit are allowed subject to the fulfillment of the conditions laid down in the said section. The expenditure specified under the section include legal charges for drafting of agreement, expenses incurred by company in connection with issue for public subscription, or shares or debentures of the company etc. As this issue has not been examined by the lower authorities, we feel it appropriate to restore the issue to the Assessing Officer for examining the allowability of the bond issue expenses under section 35D of the Act and decide the issue in accordance to the law. The assessee is directed to produce all the details of the expenses alongwith other evidences. Accordingly, the ground of the appeal is allowed for statistical purposes

Summary

Issues Involved:
1. Validity of the order passed by the Commissioner of Income Tax (Appeals).
2. Nature of bond expenses (Capital vs. Revenue).
3. Alternative plea for deduction under Section 35D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the Commissioner of Income Tax (Appeals):
The appellant contended that the order passed by the learned Commissioner of Income Tax (Appeals) was erroneous both in law and on facts. However, this issue was not separately adjudicated upon by the Tribunal, as it was considered general in nature and not requiring specific deliberation.

2. Nature of Bond Expenses (Capital vs. Revenue):
The primary contention revolved around whether the bond expenses amounting to ?1.46 crores should be treated as capital or revenue in nature. The assessee argued that these expenses were incurred for the restructuring, rehabilitation, and renewal of sick units, which is a part of its business activities, and hence should be treated as revenue expenses. The Assessing Officer and the Commissioner of Income Tax (Appeals) held these expenses as capital in nature, citing that they were incurred for restructuring the profit-making structure of the business, which provides an enduring benefit.

The Tribunal analyzed various aspects, including:
- The purpose of issuing bonds for restructuring and rehabilitation.
- The enduring nature of the benefits derived from these expenses.
- Precedents from cases like Premier Automobiles Ltd. Vs. CIT and India Cements Ltd. Vs. CIT, which were distinguished based on the facts.
- The Gujarat High Court’s decision in Commissioner of Income Tax Vs. Official Liquidator of Ahmedabad Manufacturing & Calico Printing Company Limited, which held that expenses incurred for restructuring and issuing bonds are capital in nature.

The Tribunal concluded that the bond issue expenses were indeed capital in nature, providing enduring benefits and not related to the day-to-day business operations. Therefore, these expenses could not be allowed as deductions under Section 37(1) of the Income Tax Act, 1961.

3. Alternative Plea for Deduction under Section 35D of the Income Tax Act, 1961:
The assessee alternatively pleaded that if the bond expenses were considered capital in nature, then 1/5th of the expenses should be allowed as a deduction under Section 35D(ii) of the Act, and the revenue expenses included in the ?1.46 crores should be allowed under Section 37(1).

The Tribunal noted that Section 35D allows certain preliminary expenses to be amortized over a period of five years, provided they are incurred after the commencement of business in connection with the expansion of the undertaking or setting up of a new unit. Since this issue was not examined by the lower authorities, the Tribunal remanded the matter back to the Assessing Officer to examine the allowability of the bond issue expenses under Section 35D and decide accordingly.

Conclusion:
The Tribunal dismissed the appeal regarding the treatment of bond expenses as revenue expenditure but allowed the alternative plea for statistical purposes, remanding the issue to the Assessing Officer for examination under Section 35D. The appeal was thus partly allowed for statistical purposes.