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2021 (10) TMI 1156 - HC - Income TaxDeduction u/s 35D - foreign currency convertible bonds FCCBs as debentures and considered it to be part of capital employed for allowing deduction - whether FCCB convertible bonds are debentures or no? - HELD THAT - As in terms of the Companies Act, 1956 debenture includes debenture shares and the bonds being interest bearing instruments which represent a loan, FCCB bonds, the instruments issued to investors for raising funds which is repayable after certain period is nothing but a debt instrument. This view is supported by the judgment of the High Court of Madras in case of PVP Ventures Ltd. 2012 (7) TMI 696 - MADRAS HIGH COURT confirmed by the Hon ble Apex Court 2014 (3) TMI 1127 - SC ORDER by the Revenue. For the reasons aforesaid, the finding of the Tribunal that the increase or decrease in liability on account of fluctuation in foreign exchange as on the date of the balance sheet would increase or decrease the liability of the assessee and such liability would be on capital account as such, the gain or loss would be on capital account and not taxable cannot be faulted with. Hence, the challenge made by the Revenue on this issue is answered against the Revenue and in favour of the assessee.
Issues:
- Whether FCCBs are considered debentures for deduction under Section 35D of the Income Tax Act, 1961? - Whether foreign exchange gain on FCCBs is taxable? Analysis: 1. The appeal was filed by the Revenue challenging the Tribunal's order regarding the deduction under Section 35D of the Income Tax Act, 1961 for the assessment year 2008-09. The Tribunal had allowed the deduction, considering FCCBs as debt instruments. The Revenue contended that the gain or loss on FCCBs should be taxable. The CIT exercised revisional powers under Section 263, leading to the appeal. 2. The Tribunal reversed the CIT's decision, holding that FCCBs are debt instruments issued to raise funds repayable after a period, making them part of 'capital account.' The Tribunal relied on the Companies Act, 1956, and various regulations to support its decision. The Tribunal found that the increase or decrease in liability due to foreign exchange fluctuations would be on capital account and not taxable. 3. The Commissioner observed contradictory claims by the assessee regarding foreign currency loss, leading to a direction for the Assessing Officer to examine and tax the gain accordingly. The Tribunal emphasized that the exchange fluctuation was due to restatement of FCCBs, which were issued for acquiring a new industrial undertaking. 4. Various legal judgments were cited to support the classification of FCCBs as debt instruments, including the distinction between bonds, debentures, and preference share capital. The judgments highlighted that debentures represent debt obligations by a company and are distinct from shares in the share capital. 5. The High Court analyzed the term 'debenture' under the Companies Act, 1956, and concluded that FCCBs are debt instruments, confirming the Tribunal's decision. The judgment emphasized that the gain or loss on FCCBs due to foreign exchange fluctuations should be treated as part of the capital account and not taxable. 6. Considering the legal precedents and regulatory definitions, the High Court dismissed the Revenue's appeal, ruling in favor of the assessee. The decision upheld the Tribunal's findings that FCCBs are debt instruments and any gain or loss on them is on the capital account, thus not subject to taxation. 7. Ultimately, the High Court answered the questions of law in favor of the assessee and against the Revenue, leading to the dismissal of the appeal. The judgment affirmed the treatment of FCCBs as debt instruments and the non-taxability of gains or losses arising from foreign exchange fluctuations on FCCBs.
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