2016 (5) TMI 360 - AT - Income Tax

Foreign Currency Convertible Bonds (FCCBs) - allowability of the claim of expenses - capital expenditure or revenue expenditure - Held that - In the instant case, Ld AR for Assessee demonstrated that the Assessee earned substantial business from abroad after acquiring the foreign companies with the said FCC Bonds. The impugned expenditure incurred were incurred undisputedly by the Assessee in connection with FCCBs which were applied for acquiring the foreign companies which brought more business for the Assessee. Thus, there is nexus to the business of the Assessee. - Decided in favour of assessee We have held that the expenses in question are in principle of revenue nature. It is the trite law such expenses incurred 9n connection with raising of debts / FCC Bonds constitute allowable expenditure of the Assessee. We dismiss the revenue s finding that the said expenditure is expended in connection with issue of equity shares as the said Bond subscription 5.5 million was ultimately refunded with Interest after the lock in period. - Decided in favour of assessee Disallowance u/s 14A - Held that - Assessee has an additional ground mentioning that some investments made in the subsidiaries yielded dividends chargeable to tax in India. Such investments should be kept outside the scope of the provisions of Rule 8D of the IT Rules, 1962 while determining the quantity to be disallowed u/s 14A of the Act. In this regard, Ld Counsel for the assessee cited various decisions and various arguments in support of his claim. One of such judgment is pronounced by the Hon‟ble Delhi High Court in the case of Joint Investments Private Limited 2015 (3) TMI 155 - DELHI HIGH COURT which is relevant for the proposition that the disallowable amount u/s 14A must not mean that the entire exempt income should be disallowed. Various decisions have come up on this issue involving the disallowance u/s 14A r.w. Rule 8D of the Act. This issue requires reconsideration and fresh decision by the AO in the light of the said decisions on the issue. - Decided in favour of assessee for statistical purposes Disallowance of deduction of bad debts - Held that - AO has not been able to point out an instance of bad debts where the action of the appellant was mala fide. An assessee is entitled to re-evaluate and revalue its debtors from time to time failing which he will have unrealistic realizable figures in his books of accounts and the appellant has exactly done the same in this case. In view of the above facts, the disallowance on account of bad debts is directed to be deleted - Decided in favour of assessee

Issues Involved:
1. Treatment of expenses incurred on issuing Foreign Currency Convertible Bonds (FCCBs)
2. Disallowance of expenditure under Section 14A of the Income Tax Act
3. Levy of interest under Section 234D of the Income Tax Act
4. Allowability of bad debts under Section 36(1)(vii) read with Section 36(2)(i) of the Income Tax Act

Detailed Analysis:

1. Treatment of Expenses Incurred on Issuing FCCBs:
The core issue is whether the expenses of Rs. 5,82,40,318/- incurred on issuing FCCBs should be treated as capital or revenue expenditure. The assessee argued that these expenses should be considered as revenue expenditure under Section 37(1) of the Income Tax Act, as the FCCBs were never converted into equity and remained as debt instruments. The CIT (A) had treated these expenses as capital expenditure, ignoring that the bonds were eventually redeemed with a premium. The Tribunal, after considering various judicial precedents and the nature of the FCCBs, concluded that the expenses were of a revenue nature and should be allowed as a deduction under Section 37(1). The Tribunal emphasized that the accounting treatment does not determine the nature of the expenditure and relied on the Supreme Court's judgment in the case of Kedarnath Jute Manufacturing Company Limited.

2. Disallowance of Expenditure under Section 14A:
The assessee contested the disallowance of Rs. 35,53,568/- under Section 14A, arguing that it should not exceed the exempt income of Rs. 20,17,860/-. The Tribunal noted that various judicial decisions suggest that disallowance under Section 14A should not exceed the exempt income. The Tribunal remanded this issue back to the Assessing Officer (AO) for reconsideration in light of these judicial decisions, ensuring a fresh decision after granting a reasonable opportunity to the assessee.

3. Levy of Interest under Section 234D:
The interest levied under Section 234D is related to the outcome of the disallowance under Section 14A. Since the Tribunal remanded the issue of disallowance under Section 14A back to the AO, the issue of interest under Section 234D was also remanded for reconsideration.

4. Allowability of Bad Debts:
The Revenue's appeal and the assessee's cross-objection both addressed the allowability of bad debts amounting to Rs. 24,88,85,442/-. The AO had disallowed the claim, arguing that the assessee did not fulfill the conditions under Section 36(1)(vii) read with Section 36(2)(i). The CIT (A) allowed the deduction, noting that the assessee had written off the bad debts in the Profit & Loss Account and met the conditions specified in the Act. The Tribunal upheld the CIT (A)'s decision, stating that the AO had not demonstrated any mala fide action by the assessee and that the revaluation of debtors was justified.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with the issues of disallowance under Section 14A and interest under Section 234D remanded for reconsideration. The Revenue's appeal and the assessee's cross-objection regarding the allowability of bad debts were dismissed. The Tribunal's decision emphasized the importance of judicial precedents and the factual context in determining the nature of expenses and the allowability of deductions under the Income Tax Act.

← Previous Next →