2022 (9) TMI 1114 - AT - Income Tax

Expenses of FCCB - allowable capital or revenue expenditure - As regards the submissions before the CIT(A), the assessee stated that the issue of FCCB is a Foreign Currency Bond issue and it is basically a debt instrument in the nature of loan and all issue expenses related to that are allowable as revenue expenses - HELD THAT - After perusal of the records, it can be seen that the assessee though issued foreign currency convertible bonds the same are basically debt instrument and though the decision in case of Secure Meters was related to the issue of fully convertible debentures, the same cannot be totally differentiated as the conditions in regard to FCCB about conversion price, conversion price reset, adjustment to conversion price, redemption of bonds in the event of de-listing and etc. will have very limited bearing while opting for conversion into ordinary equity shares as per the records. The assessee has given details as regards to computation of income for expenses on issue of FCCB, security premium on redemption of FCCB and interest booked under FCCB expenses and initial conversion price of Rs.130/- per share from the issue date and until 14.10.2012 was defined by the assessee. Mere reference on the decision by the CIT(A) cannot be called as not deciding the case on merit. CIT(A) has taken proper cognisance related to various terms offered for raising funds though FCCB into convertible bond of ordinary equity shares and thus ratio of Secure Meters 2008 (11) TMI 66 - HIGH COURT RAJASTHAN squarely applied in assessee s case by the CIT(A). Appeal of the Revenue is dismissed.

Summary

Issues:
- Addition of expenses of Foreign Currency Convertible Bonds (FCCB) as capital expenditure.
- Application of decisions in assessing FCCB expenses.
- Allowability of FCCB expenses as revenue expenditure.
- Non-appearance of assessee during appeal proceedings.

Analysis:

1. Addition of FCCB expenses as capital expenditure:
The Revenue contested the deletion of the addition of Rs.3,30,36,346/- as expenses of FCCB held as capital expenditure by the Assessing Officer. The CIT(A) relied on decisions cited by the assessee without deciding the issue on merits. The Revenue argued that the terms offered for raising funds through FCCB in this case differed from previous cases, making the application of precedent questionable. However, the CIT(A) found that the expenses related to FCCB issuance were allowable as revenue expenditure, considering it a debt instrument akin to a loan. The CIT(A) referenced the decision in the case of Secure Meters Limited, where it was held that expenses incurred for fully convertible debentures are allowable as revenue expenditure. The CIT(A) concluded that the expenses on FCCB issuance were revenue expenses and not capital in nature, dismissing the Revenue's appeal.

2. Application of decisions in assessing FCCB expenses:
The assessee argued that the decision in the case of Mahindra & Mahindra Limited vs. JCIT was relevant to the present case. The CIT(A) considered various submissions, including the nature of FCCB as a debt instrument and the option for conversion into equity shares. The CIT(A) noted that previous decisions on fully convertible debentures supported the allowability of expenses as revenue expenditure. The CIT(A) distinguished the terms of FCCB issuance from other cases and applied the ratio of Secure Meters Limited to the assessee's situation, emphasizing the convertibility aspect and the limited impact of certain conditions on conversion into equity shares.

3. Allowability of FCCB expenses as revenue expenditure:
The assessee contended that expenses related to FCCB issuance should be treated as revenue expenses since FCCB is essentially a debt instrument. The CIT(A) analyzed the details provided by the assessee, such as computation of income for FCCB expenses, security premium on redemption, and interest booked under FCCB expenses. The CIT(A) found that the conditions for conversion into equity shares did not significantly affect the nature of the expenses, ultimately allowing the ground of the assessee and dismissing the Revenue's appeal.

4. Non-appearance of assessee during appeal proceedings:
During the appeal proceedings, the assessee did not appear despite notices served by both the Department and the Registry. The Ld. DR represented the Revenue's position, and the CIT(A) proceeded based on the submissions made. The absence of the assessee did not hinder the adjudication of the case, as the CIT(A) thoroughly examined the relevant facts and arguments presented by the Revenue.

In conclusion, the appeal filed by the Revenue against the order of the CIT(A) was dismissed, affirming the allowability of expenses related to FCCB issuance as revenue expenditure based on the specific circumstances and legal precedents cited in the judgment.