2009 (7) TMI 714 - HC - Income Tax

Capital or Revenue- The assessee a public limited company issued secured convertible debenture and had taken permission from the Controller of capital issue to convert a part of the debentures into equity capital. The Assessing Officer disallowed the claim of the assessee with respect to the expenditure incurred in the process of issuing the debentures as capital expenditure on the ground that the debentures would be later converted into shares. The Commissioner (Appeals) and Tribunal upheld the assessee claim. Held that- the expenditure with respect to issue of debentures was incurred in the process of carrying on of business since raising of funds itself was necessary for running of business. The department had failed to show as to why the expenditure could not be allowed merely because the debenture may be converted to share and become part of share capital.

Summary

Issues:
Allowability of expenditure incurred on the issue of debentures under section 37 of the Income-tax Act, 1961.

Analysis:
The case involved a question of law referred to the High Court by the Income-tax Appellate Tribunal regarding the allowability of expenditure incurred on the issue of debentures under section 37 of the Income-tax Act, 1961. The assessee, a public limited company, had issued secured convertible debentures with a provision to convert a part of the debentures into equity capital. The Assessing Officer initially disallowed the expenditure claimed by the assessee, treating it as capital expenditure due to the future conversion of debentures into shares. However, the Commissioner of Income-tax (Appeals) and the Tribunal upheld the claim, considering the expenditure as incidental to the business. The Tribunal relied on the judgment of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, emphasizing that the purpose of obtaining a loan through debentures was irrelevant.

The counsel for the assessee referred to the decision of the Rajasthan High Court in CIT v. Secure Meters Ltd. [2009] 221 CTR 405; [2010] 321 ITR 611, which followed the Calcutta High Court judgment in CIT v. East India Hotels Ltd. [2001] 252 ITR 860, stating that expenditure for raising loans through convertible debentures was admissible. It was argued that the conversion of debentures into shares should be considered in the year of conversion and not affect the expenditure incurred in the current year. The counsel highlighted that the issuance of convertible debentures was a mode of repayment through share issuance, as noted in the judgment of the Rajasthan High Court.

The High Court, after hearing arguments from both sides, concluded that the expenditure on the issue of debentures was essential for business operations, as raising funds was a necessary aspect of running a business. The Revenue failed to present any valid reason why the expenditure should not be allowed merely because debentures might be converted into shares in the future. Consequently, the High Court ruled in favor of the assessee, answering the question referred against the Revenue and in favor of the assessee. The reference was disposed of accordingly.