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Issues involved:
1. Confirmation of disallowance of debenture issue expenditure amounting to Rs. 5,21,22,533 on the ground that it is capital in nature. Issue-wise Detailed Analysis: Issue 1: Confirmation of disallowance of debenture issue expenditure amounting to Rs. 5,21,22,533 on the ground that it is capital in nature. The assessee, a public limited company, claimed debenture issue expenses of Rs. 5,21,22,533 as an allowable deduction while computing income under the head profit and gains of business/profession. The AO disallowed this claim, treating the expenses as capital in nature, arguing that the debentures were converted into equity shares within one year of their issuance, thus not qualifying as revenue expenditure. Assessee's Arguments: - The debentures, though convertible, were secured loans in nature, carrying a 14% interest rate, which was paid from the date of application. - The assessee relied on the Supreme Court judgment in India Cement Ltd. vs. CIT and the Bombay High Court judgment in Dhrangadhra Chemical Works Ltd., arguing that debentures are debt instruments and expenses on raising funds through them are allowable as revenue expenditure. Revenue's Arguments: - The AO and CIT(A) rejected the assessee's contentions, maintaining that the debenture expenses were capital in nature. - The learned Departmental Representative cited the Special Bench decision in Ashima Syntex Ltd. vs. Asstt. CIT, arguing that the debentures were issued to increase the capital base of the company, making the expenses capital in nature. Tribunal's Analysis: - The Tribunal considered the assessee's reliance on the Supreme Court's observations in India Cement Ltd. vs. CIT, which distinguished between obtaining capital by issuing shares and obtaining loans by debentures. - The Tribunal noted that debentures are acknowledged as debt instruments, and any expenditure on raising funds through them is allowable under s. 36(1)(iii) of the Act. - The Tribunal also referred to the Madras High Court's decision in CIT vs. Laxmi Vilas Bank Ltd., which elaborated on the distinction between debentures and shares, emphasizing that debentures are loans that must be repaid, unlike shares. Precedent and Consistency: - The Tribunal found that in the preceding assessment year (1996-97), a similar issue was decided in favor of the assessee, treating the issuance of convertible debentures as raising a loan and allowing the deduction of interest expenses. - The Tribunal emphasized the importance of consistency, noting that the facts of the current year were identical to those of the previous year. Special Bench Decision Consideration: - The Tribunal examined the Special Bench decision, which categorized cases into three groups: fully in favor of the assessee, partially in favor (allowing expenses for the pre-conversion period), and against the assessee. - The Tribunal highlighted that the Special Bench decision focused on the substance of the transaction, determining whether the expenditure was for raising the capital base. Conclusion: - The Tribunal concluded that the debenture issue expenses related to Part-B of the debentures (convertible after one year) should be allowed as revenue expenses until their conversion into equity shares. - For Part-A of the debentures (convertible on the date of allotment), the expenses were treated as capital in nature, and the Tribunal directed the AO to grant deduction under s. 35D(2) of the Act. Result: - The appeal was partly allowed, granting the assessee deduction for expenses related to Part-B of the debentures and directing the AO to verify and grant deduction under s. 35D(2) for Part-A expenses.
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