2022 (5) TMI 777 - AT - Income Tax

Revenue expenditure or capital expenditure - Disallowance on account of fee paid to Registrar of Companies for increase in authorized share capital - HELD THAT - It is on record that the increase in authorized capital was necessitated due to CDR and under the CDR, there was no fresh inflow of funds, only the existing debts were restructured whereby the OCCRPS were issued. Being so, we observe that the situation is governed by the decision in General Insurance Corporation 2006 (9) TMI 116 - SUPREME COURT and not by Brooke Bond India Ltd 1997 (2) TMI 11 - SUPREME COURT Therefore, we are of the view that the assessee has rightly treated the impugned expenditure as a revenue expenditure and claimed deduction and the lower authorities are wrong in disallowing deduction. Accordingly, we accept this Ground of assessee. Disallowance on account of expenditure incurred for CDR - HELD THAT - CDR is nothing but re-conditioning of the existing loans and debts. The expenditure claimed by the assessee under the title of CDR charges are various expenses for implementing the activities of the CDR. In fact, the major component of Rs. 1,46,45,814/- is a sum of Rs. 1,00,00,000/- paid to the ICICI bank by way of remuneration since the ICICI Bank had acted as a Monitoring Institution . Thus there is neither acquisition of any kind of enduring advantage nor the expenditure could be termed as capital. At this stage, for the sake of completeness, we would like to address a pertinent concern of the revenue which the Ld. AO has mentioned in the order of assessment. According to the Ld. AO, by virtue of CDR, the debt was converted into equity (i.e. OCCRPS) and hence there is a benefit of enduring nature. In this regard, firstly we would like mention that the CDR contains several waivers and modifications granted by the lenders and the conversion of debt into OCCRPS is just a part of the whole package. Moreover, the conversion of debt into OCCRPS is also well-addressed in our earlier discussion where we have observed that by issue of OCCRPS, there was no fresh inflow of the capital or increase in capital employed. Hence there is no benefit of enduring nature even by converting debt into OCCRPS, as per the ratio laid down in General Insurance Corporation 2006 (9) TMI 116 - SUPREME COURT Thus, we are of the considered view that the expenditure incurred by the assessee is a revenue expenditure and deserves deduction. We therefore, accept the claim of the assessee. Disallowance on account of interest u/s 43B - HELD THAT - After a careful consideration we find adequate strength in the findings of Ld. AO noted earlier. For the sake of brevity, we do not repeat the same. However, we agree with the Ld. AO that the interest payable to those three banks attracted section 43B(e). Hence the Ld. AO has made a proper disallowance, which we uphold. Therefore, this Ground of assessee is dismissed. Addition u/s 115JB towards disallowance u/s 14A even if the disallowance u/s 14A is sustained in normal computation - HELD THAT - This issue is squarely covered by the decision of Special Bench in ACIT Vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI where it was held that the disallowance computed u/s 14A of the Act cannot be added while computing book-profit u/s 115JB. Respectfully following the decision of Hon ble Special Bench, we accept this ground.

Summary

Issues Involved:
1. Disallowance of fee paid to Registrar of Companies for increasing authorized share capital.
2. Disallowance of expenditure incurred for Corporate Debt Restructuring (CDR).
3. Disallowance of interest under section 43B of the Income-tax Act, 1961.
4. Addition to book profit under section 115JB towards disallowance under section 14A.

Issue-wise Detailed Analysis:

GROUND NO. 1:
This ground is general and does not require adjudication as there were no specific submissions from either side.

GROUND NO. 2:
The assessee challenged the disallowance of Rs. 1,78,98,000/- made by the Assessing Officer (AO) on account of the fee paid to the Registrar of Companies (ROC) for increasing authorized share capital. The assessee argued that the increase in authorized capital was necessitated due to the Corporate Debt Restructuring (CDR) and hence the fee incurred is revenue in nature. The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the expenditure as capital in nature, relying on the decisions of the Supreme Court in Brooke Bond India Ltd. and the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. However, the Tribunal observed that the facts of the present case are different and referred to the Supreme Court's decision in CIT vs. General Insurance Corporation, which allowed such expenditure as revenue. Since the increase in authorized capital was due to CDR with no fresh inflow of funds, the Tribunal accepted the assessee's claim, treating the expenditure as revenue in nature.

GROUND NO. 3:
The assessee challenged the disallowance of Rs. 1,46,45,814/- incurred for CDR. The AO disallowed the deduction, treating the expenditure as capital in nature because it resulted in an enduring benefit by converting debt into equity. The CIT(A) upheld this view. The Tribunal, however, noted that the CDR was a reconditioning of existing loans and debts, with no acquisition of enduring advantage. The major component of the expenditure was a remuneration paid to ICICI Bank for acting as a Monitoring Institution. The Tribunal concluded that the expenditure was revenue in nature and allowed the deduction.

GROUND NO. 4:
The assessee challenged the disallowance of Rs. 12,03,12,777/- on account of interest under section 43B of the Act. The interest was payable to HSBC, Standard Chartered Bank, and Citi Bank, which were not paid up to the due date for filing the return. The AO invoked section 43B(e), which mandates that interest on loans from scheduled banks is allowable only when actually paid. The assessee contended that these banks were not scheduled banks and that payments to non-CDR lenders required approval from the Monitoring Committee. The AO rejected these contentions, noting that the banks were included in the Second Schedule to the RBI Act, 1934, and therefore were scheduled banks. The CIT(A) upheld the AO's decision. The Tribunal agreed with the lower authorities, confirming the disallowance under section 43B(e).

GROUND NO. 5:
The assessee claimed that the addition cannot be made to the book profit under section 115JB towards disallowance under section 14A. The Tribunal noted that this issue is covered by the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., which held that disallowance under section 14A cannot be added while computing book profit under section 115JB. The Tribunal accepted this ground, following the Special Bench decision.

DISPOSITION:
The appeal of the assessee was partly allowed. The Tribunal accepted the grounds related to the fee paid to ROC and CDR expenditure, while dismissing the ground related to disallowance of interest under section 43B. The ground related to addition under section 115JB was accepted based on the Special Bench decision.

Order Pronounced:
The order was pronounced in the Court on 13th May, 2022.