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TMI Blog2008 (7) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (Bom.). Respectfully following the same we reject the ground of the assessee. 5. The next issue in the appeal pertains to disallowance of expenses incurred by foreign citizens travelling in India by Rs. 11,195 under rule 6D. Following the precedents for assessment years 1992-93 and 1993-94 in ITA Nos. 3503/Mum./1997 & 3792/Mum./1997, this year also the assessee has been fair enough to concede the ground. As such, ground No. 2 is rejected. 6. The third issue in the appeal pertains to disallowance of expenses incurred on guest house being Rs. 17,05,666. This issue stands settled against the assessee by the judgment of the Hon'ble Apex Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 . This ground is accordingly rejected. 7. The fourth ground pertains to disallowance of Rs. 19,27,271 being expenditure incurred on employees treating the same as entertainment expenditure. We find that identical issue has been decided by the Tribunal in assessee's own case for assessment years 1992-93 and 1993-94. The Mumbai Bench "I" of the Tribunal in its order dated 22-2-2008 in ITA Nos. 3503/Mum./1997 & 3792/Mum./1997 for the assessment year 1993-94, while following their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on pro rata basis, nor to be allowed in assessment year 1994-95, the appellant claims that the expenditure be capitalized to the actual cost of fixed assets and depreciation be allowed on the same accordingly. The learned DCIT be directed to allow the depreciation on such expenditure and to reduce the total income accordingly. Further without prejudice to the above, if it is held that the said expenditure is neither a revenue expenditure nor an expenditure to be allowed on pro rata basis, nor an expenditure to be allowed in assessment year 1994-95, and is also not a capital expenditure which enhances the actual cost of fixed assets, the appellant claims that the deduction under section 35D be allowed on the said expenditure. The learned DCIT be directed to allow the claim of deduction under section 35D and to reduce the total income accordingly." 11. The brief facts of the case are that the assessee claimed a deduction of Rs. 44,44,444 being proportionate amount of premium on redemption of Non-Convertible Debentures issued during the previous year relevant to assessment year 1988-89. The contention of the assessee was that it had incurred expenditure of Rs. 4 crores as premium on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures. In nutshell, the assessee claimed that the entire expenditure towards premium of Rs. 4 crores be allowed in the impugned assessment year as the amount of premium is paid in this year. This contention of the assessee was not accepted by the learned CIT(A) for the following reasons :- "13.2 I have carefully gone through the above referred ground of appeal. From assessment years 1988-89 to 1992-93, my ld. Predecessors have allowed deduction of Rs. 44,44,444 in the respective years. Hence out of above amount of Rs. 4 crores, Rs. 2,22,22,220 (44,44,444 x 5) has already been allowed to the appellant and therefore, the same cannot be allowed as expenditure during the year 1994-95. I have already held in para 12.3 above that an amount of Rs. 44,44,444 should be allowed as a deduction during the current year. The balance amount, i.e., Rs. 1,33,33,336 represents the amount of Rs. 44,44,444 not allowed by the ld. CIT (Appeals) for earlier assessment year 1993-94 and Rs. 88,88,888 (Rs.44,44,444 x 2) being pro rata premium pertaining to subsequent assessment years 1995-96 & 1996-97 cannot be allowed as a deduction during the current year, in view of the judgment of the Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the same, we allow the ground raised by the assessee. 17. The tenth ground pertains to disallowance under section 40A(9) pertaining to payments made to Indrayon School. This issue is covered in assessee's favour by the order of the Tribunal in assessee's own case for assessment years 1992-93 and 1993-94. Consistent with the earlier decisions of the Tribunal on this issue, we allow the ground taken by the assessee. 18. The eleventh ground in this appeal is with regard to disallowance under section 40A(3) amounting to Rs. 4,03,695 being cash payments in excess of Rs. 10,000. The details are as under :- Name of the division Amount White Cement division 30,380 Jayashree Textiles (Flax) 76,119 Global Export 2,41,044 Midnapur Cotton Mills 1,00,152 Rajashree Cement 13,338 Total 4,61,033 The assessee's case is that cash payments have been made due to circumstances beyond its control. On the payments made to Global Export it is explained that the payment was made to Aeroflot which does not accept payments by cheque or credit card. Similarly payments made to Midnapur Cotton Mills and Jayashree Textiles (Flax) it is explained that these parties insiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which enhances the actual cost of fixed assets, the appellant alternatively claims that deduction under section 35D be allowed on the said debenture issue expenditure. The learned DCIT be directed to allow the claim of deduction under section 35D on debenture issue expenses and to reduce the total income accordingly." 21. The facts of the issue are that during the previous year relevant to the assessment year under consideration the assessee raised funds, by way of issue of Non-Convertible Debentures (NCDs) and Fully Convertible Debentures (FCDs). The total amount raised by the issue of such debentures are a under :- Rs. In lakhs) No. of debentures Total amount received 16.5% fifteenth series secured non- 7227400 21682.20 Convertible debentures of Rs. 300 each Zero interest secured fully convertible Debentures of Rs. 170 each 5447400 9260.58 Zero interest secured fully convertible Debentures of Rs. 200 each 1620000 3240.00 34182.78 In the return of income, the assessee-company claimed the deduction of debenture issue expenses of Rs. 1,52,96,121 for NCD issue and Rs. 94,46,770 for FCD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar principle was accepted by the Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 wherein it was held that, obtaining capital by issue of share is different from obtaining loan by debenture. The loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. The loan is a liability and has to be repaid and, it is erroneous to consider a liability as an asset or an advantage. Thus expenditure incurred on raising a loan is therefore not a capital expenditure but a revenue expenditure. 23. The learned counsel for the assessee argues that FCDs are considered as debt or loan instrument, as all debenture instruments are considered as loans or debts till the time of conversion of FCDs into shares, i.e., till 31-3-1994. That the FCDs were debentures and secured loans in nature even if the terms of the debenture issue provided for conversion of the same into equity capital. The debentures were secured by way of mortgage and charge on immovable and movable property of the company. 24. Adverting our attention once again to the judgment of the Hon'ble Supreme Court in the case of India Cements Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y are often granted by clubs and occasionally by individuals.' In Narendra Kumar Maheshwari v. Union of India AIR 1989 SC 2138, it has been held that a 'debenture' has been defined to mean essentially an acknowledgement of a debt with a commitment to repay the principal with interest. In India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), at page 61, it was held that obtaining capital by issue of shares is different from obtaining a loan by debentures. A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. In Director General of Investigation and Registration v. Deepak Fertilizers and Petrochemicals Corporation Ltd. [1994] 81 Comp. Cas. 342 [MRTPC] [FB], it was held that a "debenture" is simply an acknowledgement of debt by the company whereby it undertakes to repay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture holder. Except where debentures are secured by mortgage of immovable property or hypothecation or pledge of movable property, they constitute actionable claims. It was further held that a debenture is thus like a certificate of loan or a loan bond evidencing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 117B were inserted making it clear that no company shall issue a prospectus or a letter or offer to the public for subscription of its debentures, unless the company has, before such issue, appointed one or more debenture trustees for such debentures and the company has, on the face of the prospectus or the letter of offer, stated that the debenture trustee or trustees have given their consent to the company to be so appointed under section 117B. Section 117A envisages that a trust deed for securing any issue of debentures shall be in such form and shall be executed within such period as may be prescribed. Even before the insertion of sections 117A and 117B, sections 118 and 119 envisaged appointment of debenture trustee or trustees. Section 119 of the Companies Act provided that subject to the provisions of section 119 any provision contained in a trust deed for securing an issue of debentures, or in any contract with the holders of debentures secured by a trust deed, shall be void insofar as it would have the effect of exempting a trustee thereof from, or indemnifying him against liability for breach of trust, where he fails to show the degree of care and diligence required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y cannot be ignored. Our attention was invited to the decision of the Tribunal in the case of Voltas Ltd. v. Dy. CIT [1998] 98 Taxman 174 (Mum.) (Mag.) wherein the Tribunal held that expense incurred on issue of partly convertible debentures was a revenue expen-diture and had to be allowed as a deduction. The same cannot be treated as a capital expenditure. Further attention was invited to the unreported decision of the ITAT in the case of FGP Ltd. v. Dy. CIT [1994] 51 ITD 279 (Bom.) wherein it was held that mere fact that a part of the debentures was subsequently converted into equity shares at a premium, will not alter the character of the expenditure at the point of time, when it was actually incurred, which decision was followed by another Bench of the Mumbai Tribunal in the case of Phathalo Colours & Chem (I) Ltd. [IT Appeal No. 7277 (Mum.) of 1998]. It was brought to our notice that before arriving at the above conclusion the Hon'ble Tribunal had considered the following contra decisions : (a) Banco Products (I) Ltd. v. Dy. CIT [1997] 63 ITD 370 (Ahd.). (b) Network Ltd. v. Dy. CIT [2003] 84 ITD 67 (Delhi) (TM). (c) Sona Steering Systems Ltd. v. Dy. CIT [2003] 129 Taxman 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and submitted that the issue as to whether, the expenditure incurred by way of interest on fully convertible debentures is to be allowed as revenue expenditure or not has been considered by the Special Bench of the Tribunal in the case of Ashima Syntex Ltd. (supra). The entire gamut of arguments raised by the assessee in this case were considered by the Special Bench and it was decided that raising of funds by ultimately converting debentures into equity shares without giving an option to the debenture holders to get repayment of debentures in conversion. Thus it was held that the substance of the transaction is issue of equity capital partly on the date of allotment of debentures. Thus the issue was decided against the assessee. On the decision of the Tribunal in the case of Ganesh Banzo Plast Ltd. (supra) he submitted that the Tribunal has found certain distinguishing features between the assessee's case and the case of Ashima Syntex Ltd. (supra) and thus chose to deviate from the Special Bench decision. 32. After hearing rival contentions on this issue we hold as follows : 32.1 The issue whether the expenditure incurred on the issue of fully convertible debentures is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the Special Bench decision. It noted that the Special Bench had recorded that Tribunal has to examine as to which category of cases the claim of the assessee falls. Thereafter on page 19 the Bench had decided to follow the decision in the assessee's own case for the earlier assessment year rather than by the Special Bench decision. In our considered opinion, in the case on hand, the assessee has not brought out any circumstances or fact which is different from the circumstances and facts considered by the Special Bench in the case of Ashima Syntex Ltd. (supra) and followed in the assessee's own case in the earlier assessment year. 32.3 In the impugned case the fully convertible debentures would be converted into shares on 1-4-1994, i.e., immediately on the closure of the financial year. On these facts and circumstances we uphold the order of the first appellate authority and dismiss this limb of argument of the assessee by respectfully following the binding decision of the Special Bench of the Tribunal. 32.4 Alternative grounds have been raised in grounds 13(A) and 13(B). They are dealt with hereinafter. 33. Coming to the first alternative ground that the debenture iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds covered in favour of the assessee by the earlier decision of the Tribunal in assessee's own case for assessment year 1993-94. Respectfully following the same we decide the issue in favour of the assessee and reject the ground taken by the revenue. 41. The fifth ground raised by the assessee pertains to deletion of disallowance of expenditure incurred on issue of non-convertible debentures. This issue also stands decided in favour of the assessee for assessment years 1988-89 and 1989-90 by the Tribunal in assessee's own case. Consistent with the earlier decision taken, we reject the ground of the revenue. Cross Objection 42. The first cross objection of the assessee is against increase in the figure of opening stock by an amount of Rs. 26,81,285 on an account of unutilized Modvat credit disallowed in assessment year 1993-94. This objection of the assessee is infructuous as the addition was deleted in assessment year 1993-94 by the Tribunal. 43. The second cross objection raised by the assessee is the alternative ground to allowance of expenditure incurred on non-convertible deben- tures under section 35D. This issue is also, in our considered opinion, infructuous in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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