2016 (10) TMI 168 - HC - Income Tax

Revision u/s 263 - ITAT setting aside the order passed by the Commissioner under Section 263 - whether the Foreign Currency Convertible Bonds (FCCB) expenses of ₹ 2,35,78,000/not allowable as revenue expenditure as these FCCBs are convertible into equity shares at the option of the bond holders at a future date and hence the said expenses ought to have been treated as capital expenditure by the Assessing Officer in original assessment proceedings? - Held that - the impugned order of the Tribunal has followed its order in Mahindra & Mahindra (2013 (9) TMI 522 - ITAT, MUMBAI) which on merits held that the claim as made by the Respondent is allowable. Therefore, it concludes that the order of the Assessing Officer was not erroneous or prejudicial to the interest of the Revenue. The order of the Tribunal in Mahindra & Mahindra (supra) is not shown to be challenged before a higher forum. In the above view, it must follow that the order of the Tribunal in Mahindra & Mahindra (supra) has been accepted by the Revenue. Therefore, as no reasons are forthcoming from the Revenue about distinguishing features in this case from that in Mahindra & Mahindra (supra), which had been accepted by the Revenue, we see no reason to entertain this appeal.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of Income Tax Act for Assessment Year 2006-07. Interpretation of whether expenses related to Foreign Currency Convertible Bonds (FCCBs) are allowable as revenue expenditure or capital expenditure.

Analysis:
The appeal before the High Court challenges the order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2006-07 under Section 260A of the Income Tax Act, 1961. The main issue revolves around the nature of expenses incurred for Foreign Currency Convertible Bonds (FCCBs) by the Respondent assessee. The Revenue contends that the expenses of &8377; 2.35 crores related to FCCBs should be treated as capital expenditure since these bonds are convertible into equity shares at a future date. On the other hand, the Respondent assessee claimed the expenses as allowable revenue expenditure under Section 37(1) of the Act.

The Commissioner of Income Tax (CIT) found the order allowing the expenditure under Section 37(1) by the Assessing Officer to be erroneous and prejudicial to the Revenue's interest. Consequently, the CIT exercised his powers of Revision under Section 263 of the Act and directed the Assessing Officer to pass a fresh assessment order treating the &8377; 2.35 crores expenditure under Section 35D of the Act over a period of time. The Respondent assessee appealed this decision to the Tribunal, which relied on a previous decision in Mahindra & Mahindra v. DCIT to hold that the expenses related to FCCBs are revenue in nature and deductible in full in the year incurred. The Tribunal concluded that the Assessing Officer's order was not erroneous or prejudicial to the Revenue's interest, as the issue was debatable based on the differing views in the Mahindra & Mahindra case.

The High Court, in its analysis, found that the Tribunal's decision in Mahindra & Mahindra had been accepted by the Revenue and not challenged before a higher forum. Therefore, without any distinguishing features presented by the Revenue in the current case from the accepted precedent, the Court saw no reason to entertain the appeal. Consequently, the High Court dismissed the appeal, stating that the proposed question did not raise any substantial question of law. The judgment concluded with the dismissal of the appeal, with no order as to costs.