2014 (12) TMI 807 - HC - Income Tax

Allowability of entire expenses on issue of partly convertible debentures into equity shares Revenue expenses or not Held that - Following the order in INCOME TAX OFFICER Versus VXL INDIA LIMITED 2009 (7) TMI 1205 - GUJARAT HIGH COURT wherein it has been held that when the debentures are converted into equity shares the assessing company has already got enduring benefit and the expenditure incurred by the conversion of equity shares has to be treated as capital expenditure - 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 - the Assessing Authority disallowed expenditure only to the extent pertaining to the convertible portion of the expenditure which formed part of the capital Decided against revenue.

Summary

Issues:
Appeal against ITAT order allowing partial expenditure on convertible debentures as revenue expenditure.

Analysis:
The appeal under section 260A of the Income Tax Act, 1961 was filed against the ITAT order partially allowing the appeal of the assessee. The assessee, engaged in cement manufacturing, initially declared a loss of Rs. 14,25,77,366, which was later revised twice to Rs. 14,58,02,276 and then to Rs. 5,22,99,863. The Assessing Officer passed the assessment order under section 143(3) on 31.03.1997. The CIT(A) partly allowed the appeal, and further appeals were filed before the Appellate Tribunal, which partly allowed the appeal on 13.01.2005, leading to the current appeal. The substantial question of law admitted was regarding the treatment of expenditure on the issue of partly convertible debentures into equity shares as revenue expenditure.

The Court referred to a previous decision in Tax Appeal No.481/1999 & 482/1999, where it was established that the expenditure on converting debentures into equity shares should be treated as capital expenditure due to the enduring benefit received by the company. The Court highlighted the distinction between obtaining capital through shares versus loans, emphasizing that the expenditure related to expanding the capital base of the company is considered capital expenditure, even if it incidentally aids in the company's business and profit-making. The Court concluded that the expenditure incurred by the assessee on converting debentures into equity shares should be treated as capital expenditure, as the company had obtained enduring benefits from the conversion.

The Court noted that the decision had not been appealed before the Apex Court and that the Revenue did not dispute the legal proposition laid down in the previous judgment. Consequently, the Court concurred with the view taken in the earlier decision, answering the question in favor of the assessee and against the Revenue. As the Court aligned with the previous decision, it did not provide detailed reasons for the disposal of the appeal, ultimately setting aside the ITAT order.