1997 (5) TMI 69 - AT - Income Tax

Assessment Year Business Expenditure Capital Expenditure Equity Shares Revenue Expenditure

Summary

Issues Involved:
1. Whether Public Issue expenses incurred on the issue of Partly Convertible Debentures is allowable as revenue expenditure.
2. Disallowance of 1/5th of the motor car expenses and depreciation thereon.

Summary:

Issue 1: Public Issue Expenses on Partly Convertible Debentures
The primary issue raised was whether the expenses incurred on the issue of Partly Convertible Debentures (PCDs) could be allowed as revenue expenditure u/s 37(1) of the Income-tax Act. The assessee company issued equity shares and PCDs, incurring an aggregate expenditure of Rs. 8,00,132, which was bifurcated in the ratio of 77:23 for debentures and shares respectively. The expenditure relating to debentures amounting to Rs. 3,78,233 was claimed as a deduction. The Assessing Officer disallowed this expenditure, stating it was incurred to increase the share capital of the company.

On appeal, the CIT(Appeals) held that the expenditure on the convertible portion of the debentures was capital in nature, as it would augment the share capital. The assessee contended that the borrowed funds remained borrowings until conversion and should be considered as such until the end of the year, relying on the Supreme Court's decision in India Cements Ltd. v. CIT. The learned DR argued that the terms of the debenture issue mandated conversion into equity shares, making the funds identifiable as equity capital from the beginning.

The Tribunal held that the convertible portion of the debentures could not be termed as a debt, as they had characteristics of equity shares, leading to the augmentation of the equity base of the company. The Tribunal concluded that the proportionate expenditure on the convertible part of the debentures was capital expenditure and upheld the CIT(Appeals)'s findings.

Issue 2: Disallowance of Motor Car Expenses
The second issue was the disallowance of 1/5th of the motor car expenses amounting to Rs. 26,472 and depreciation of Rs. 10,635 thereon for possible personal use by the Directors and Executives. The Assessing Officer and CIT(Appeals) confirmed the disallowance.

The Tribunal found the approach of the authorities below legally untenable, citing decisions from the Madras and Delhi Benches of the Tribunal. The Tribunal reversed the findings of the authorities below and deleted the impugned additions.

Conclusion:
The appeal was allowed in part, with the Tribunal upholding the capital nature of the expenditure on the convertible part of the debentures and reversing the disallowance of motor car expenses and depreciation.