2009 (7) TMI 1205 - HC - Income Tax

Whether the Appellate Tribunal is right in law and on facts in allowing the claim of the assessee for amounts incurred for the issue of convertible debenture? Held that - Facts of the case clearly indicate that portion of the convertible debenture was converted into equity shares and assessee company had got enduring benefits and therefore, the expenditure incurred by the assessee on conversion of convertible debentures into equity shares has to be treated as capital expenditure. It may be noted that the Assessing Authority disallowed expenditure only to the extent pertaining to the convertible portion of the expenditure which formed part of the capital. As such disallowance made by the Income Tax Officer, which was confirmed by the Commissioner (Appeals) has to be sustained. The question of law raised by the Revenue, though not happily framed, is accordingly answered in the negative in favour of the Revenue and against the Assessee. Consequently, appeals are allowed and the order of the Tribunal is set aside.

Summary

Issues:
Whether the Appellate Tribunal is right in allowing the claim of the assessee for amounts incurred for the issue of convertible debenture?

Analysis:
The case involved an assessee company engaged in the manufacture of woolen fabrics and jobwork of woolen tops for Assessment Years 1984-85 and 1985-86. The company had issued convertible debentures and incurred expenses related to them. The Income Tax Officer disallowed a portion of the expenses as capital expenditure, leading to an appeal by the assessee before the Commissioner (Appeals).

The Commissioner (Appeals) upheld the Income Tax Officer's decision, considering the expenditure on convertible debentures as capital expenditure based on the enduring benefits received by the company. The assessee then appealed to the Tribunal, which allowed the appeals for both assessment years, stating that the conversion of debentures into equity shares was a mode of repayment of a loan and thus constituted revenue expenditure.

The Revenue challenged the Tribunal's decision, arguing that the conversion of debentures into equity shares should be treated as capital expenditure. The Revenue relied on legal precedents to support their contention. On the other hand, the assessee argued that the expenses were revenue expenditure as the debentures were treated as a loan until their conversion into equity shares.

After considering the arguments, the High Court observed that the conversion of debentures into equity shares resulted in enduring benefits for the company, thus qualifying the expenditure as capital expenditure. The Court referred to the nature of debentures, shares, and equity capital to support its decision. Citing relevant legal judgments, the Court concluded that the expenditure on converting debentures into equity shares should be treated as capital expenditure.

Therefore, the High Court ruled in favor of the Revenue, upholding the disallowance of the expenditure claimed by the assessee. The Tribunal's order was set aside, and the appeals were allowed in favor of the Revenue.

In summary, the High Court determined that the conversion of debentures into equity shares resulted in enduring benefits for the company, classifying the related expenditure as capital expenditure. The Court's decision was based on the nature of debentures and equity capital, supported by legal precedents, ultimately ruling in favor of the Revenue.