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TMI Blog2015 (2) TMI 251X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance made by the Assessing Officer of Rs. 14 crores being outstanding interest paid to the !DBI Bank by way of conversion of the same into 1.40 crores equity shares of the face value of Rs. 14 crores under the restructuring package given by !DBI Bank. The Hon'ble CIT(A) erred in not appreciating the fact that conversion of unpaid interest due to a Bank into equity capital amounted to payment of the said amount which was allowable as deduction u/s 43 B of the Income Tax Act. Ground No.3: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the Assessing officer in disallowing the claim on the basis of explanation 3C to Section 43B which applies to conversion of outstanding interest due to the Bank into a loan or borrowing. The Hon'ble CIT(A) erred in holding that the said explanation applies to the facts of the appellant's case wherein the outstanding interest due to Bank was converted into equity capital. 2. The assessee is engaged in the business of manufacturing of various Petro Chemical product. During the course of assessment proceedings, the Assessing Officer noted that the assessee has clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he term actually paid then it would have been specifically mentioned in the Explanation 3C. Therefore, the non inclusion of conversion of interest payable into equity in the Explanation makes it clear that the deeming provision cannot be expanded beyond the specific scope of the provision. In support of this contention, he has relied upon the decision of Hyderabad benches of this Tribunal in the case of Suryalakshmi Cotton Mills Ltd. v. ACIT in ITA no. 1065/Hyd/2005 dated 5.5.2008 and submitted that the Tribunal has accepted the issue of share as discharging one's liability by mode of other than cash which is a common method. He has pointed out that the Tribunal in the said case has observed that the legislature in its wisdom has not included the conversion of interest payable into share capital in Explanation 3C. Therefore, there is no need to go into the intention of the legislature while enacting Explanation 3C and one need not read a further fiction which is not there in a provision which otherwise, is a fictional provision. Thus the Ld. Authorized Representative has contended that a fiction provision has to be strictly construed and there cannot be a fiction in a fiction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying the business and, therefore, the expenditure incurred at the preliminary stage was found not to be allowable. The Ld. Authorized Representative then referred the decision of this Tribunal in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT [39 SOT 17) (URO)] and submitted that the issue before the Tribunal was not discharging the liability of expenditure but less amount of premium on share capital was received from the employees. Therefore, the said decision is not relevant on the issue under consideration. The Ld. Authorized Representative then referred the decision of Bangalore Benches of the Tribunal in the case of JSW Steel Ltd. v. ACIT [2011] 9 ITR (AT)39 and submitted that an identical issue has been considered by the Tribunal and taken the similar view as in the case of Suryalakshmi Cotton Mills Ltd. v. ACIT (supra). The Ld. Authorized Representative then referred the decision of Special Bench of the Tribunal at Bangalore in the case of Biocon Ltd. v. DCIT (144 ITD 21) and submitted that the Special Bench has distinguished the decision in the case of Ranbaxy Laboratories Ltd. v. Addl. CIT (supra) and held that the expression expenditure as used in section 37 cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of deduction being actual payment of interest. The Ld. DR has also placed reliance on RBI Master Circular dated 1st July 2014 on income recognition, asset classification and provisioning pertaining to advances and submitted that as per para 14 of the master circular, funded interest on loan (FITL)/debt or equity instrument created by conversion of unpaid interest will be classified in the same asset classification category in which the restructured advances has been classified. The Ld. DR has thus submitted that the bank treats the converted unpaid interest into Equity as the same asset being restructured advance. Therefore, the liability is not discharged in the accounts of the bank till the bank realize the amount from sale of the equity instrument and only on the realization it will be recognized in the P&L Account. The Ld. DR has forcefully contended that conversion is not treated by the bank as recovery of interest but only on the sale/redemption of the equity it is recognized in the P&L Account. Therefore, during the year it cannot be treated as payment of interest. He has relied upon the order of CIT(A) as well as the following decisions as relied upon by the CIT(A): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid." 8. Section 43B stipulates a condition of actual payment in respect of certain deductions which are otherwise allowable under the other provisions of the Act. Therefore, section 43B defers the deduction otherwise allowable to the year in which the payment is made. Clause (d) of this section is regarding the sum payable as interest on any loan or borrowing from certain public/state financial institution or industrial investment corporation to be allowed only in the year of actual payment. Explanation 3C further clarifies the term actual payment and stipulates that the deduction of interest payable is allowable only on actual payment and not on deferment of liability of converting the same into loan or borrowings. Thus it is clear that the liability of interest payable shall be discharged and not deferred to avail the deduction as per provisions of section 43B r.w. Explanation 3C. The CBDT Circular No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of deferment of liability. Therefore, in case of discharge of liability by any mode would not fall under the ambit of Explanation 3C as the liability is no more in existence once it is discharged and the allowability of deduction of the interest payable cannot be claimed in any subsequent year as there will be no further payment. On the contrary the liability of loan or borrowing has to be discharged in future. There is no dispute that the amount in question being the interest payable is otherwise allowable expenditure u/s 36(1)(iii) of the Income Tax Act in the earlier years when it became due but it could be allowed for want of actual payment as per section 43B. The CIT(A) has followed the decision of this Tribunal in the case of SRF Ltd. v. DCIT (supra), wherein the Tribunal followed the decision of Hon'ble Madras High Court as well as Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. (supra). The Hon'ble High Court in case of Eimco K.C.P. Ltd. v. CIT (supra) has not disputed the allowability of trading liability/expenditure without outlay or outgoing and hence the same qualifies for deduction as expenditure . The relevant observations of the Hon'ble Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company after formation gets going with its avowed business. The Income-tax Act does not allow any expenditure other than expenditure for the purpose of the assessee's business. 'For the purposes of the assessee's business' is the term employed by the statute. This implies that by the time we speak of the business, it must exist or must have come into being. Only expenses in the course of carrying on the business, or at least with a view to carry on business, can be treated as expenses incurred or laid out for the purpose of the business. Any expenditure after the cessation of the business cannot be deducted, because they are not for the purpose of carrying on the business. Likewise, any expenditure for the purpose of bringing into existence a business also are non-deductible. Such expenditures are not to be treated as being for the purposes of the business, for the simple reason that the business has not yet come into being and it is only at the planning stage of formation. Expenses incurred for promoting or incorporating a company are even at one further remove from expenses intended to launch a business (sic). For launching a company constitutes a still earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 2,80,000 to Eimco was to reimburse the contribution of Eimco by way of know-how, which can never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It is not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. Reliance by Mr. Reddy on the judgment of this Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 is wholly inappropriate. There know-how was acquired to produce higher yield and sub-culture of high yielding strain of penicillin. The assessee-company was already engaged in the manufacture of antibiotics including penicillin before it acquired the know-how. Therefore, it was a case of a running company acquiring know-how to increase its yield and quality of its product and for the better conduct and improvement of the existing business and, therefore, the amount spent on acquiring know-how was held to be revenue expenditure." 13. The Hon'ble Supreme Court has also not disputed the proposition as laid down in case of Alembic Chemical Works Co. Ltd. v. CIT (177 ITR 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. There is merely a reduction in the rates of interest for the remaining period of the loans. Thus, in future, interest liability will keep on accruing to the assessee, albeit at a lower rate. But the part of interest which the institutions have sacrificed by such reduction in the rates, they have asked for their pound of flesh immediately from the assessee. Accordingly, the liability to compensate has arisen in the year under consideration, it has crystallized also in this year and therefore, the assessee should be entitled to the deduction thereof. Here, we may hasten to add that Explanation 3C to sec. 43B will not apply. The said Explanation provides that where interest payable u/s 43B (d) is converted into a loan or a borrowing, it shall not be deemed to have been actually paid. The legislature in its wisdom, has not included the conversion of interest payable into share capital. This is because, perhaps, on conversion of interest payable into share capital, the lender, to the extent of amount converted, does not remain a creditor of the borrower. In fact, on allotment of shares, the institutions have become contributors to the capital and participants in the capital of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant case records and also the documentary evidences advanced by the ld. AR in the form of paper book, case laws etc., 13.1 The issue for adjudication is whether the assessee is to be allowed deduction under section 43B of the Act on conversion of outstanding interest into CRPS having regard to retrospective insertion of Explanation 3C to section 43B of the Act. The relevant extract of section 43B and Explanation 3C to section 43B of the Act reads as follows :- "43B. Notwithstanding anything contained in any other provision of this Act deduction otherwise allowable under this Act in respect of - ** ** ** ** ** ** ** ** ** (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution [or a State Financial Corporation or a State Industrial Investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing, or ** ** ** Shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnath Khanna v. CIT [2004] ( 266 ITR 1 1) has held that when a particular expression/definition is omitted under any provision, it cannot be said that the Legislature has done so without any purpose or intent and as such, such omission cannot be supplied by the interpretative process. 13.4 Some of the material differences between loans and preference shares are as follows : Loans & Advances Preference Shares Lenders are not owners of the Company Preference share holders are owner of the company. Company gets deduction on interest payment. Company does not get deduction on payment of dividend. Company is not required to pay any tax on payment of interest Company is required to pay DDT on payment of dividend. Interest is taxable in the hands of the lender. Dividend is not taxable in the hands of the shareholders. Expenditure incurred for raising loan is revenue expenditure. Expenditure incurred for issuing shares is capital expenditure. (i) Further, we would like to mention here that the preference shareholders held voting rights in the company (source page 60 of paper book). (ii) Further, on direction of the Bench, the assessee has also filed the stock exchange quotes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can they become creditors. 13.8 In view of the judicial stand on the issue, we are not in agreement with the Assessing Officer's portrayal that the interest payable which was converted into loan and, thus, it doesn't make a difference if the assessee changes the nomenclature whereby we fully endorse the view of the CIT(A) that Though actual cash did not change hands and the transaction was completed through book adjustments and that the interest liability had been paid off through giving the creditor a share in the ownership of the assessee-company and, thus, the assessee was entitled to claim the amount so paid off under section 43B of the Act as a deduction and also in respect of applicability of restructuring expenses, even then if such expenditure were not to be termed 'interest', it would still be allowable as it had been incurred with the objective of squaring off a liability that was on revenue account and would thus acquire the character of a revenue expense. 13.9 To sum up, we decide the issue against the revenue and affirm the order of the CIT(A) on this aspect. 15. The Tribunal has taken note of the distinction between the preference share and borrowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(h) of the Expenditure Act, 1957 defines 'expenditure' as : 'Any sum of money or money's worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee......'. When section 43(2) of the Act is read in conjunction with section 37(1), the meaning of the term 'expenditure' turns out to be the same as is there in the aforequoted part of the definition under section 2(h) of the Expenditure Act, 1957, viz., not only 'paying out' but also 'incurring'. Coming back to our context, it is seen that by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act. 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering "loss" in certain circumstances within the purview of "expenditure" as used in section in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Rs. 2.17 crores and the balance sum of Rs. 2.16 crores have been discharged by allotting equity shares with face value of Rs. 10/-. The discharge of this interest liability has been made during the previous year relevant to the A.Y. 2005-06 which has been claimed as deduction u/s 43B. From the perusal of the "reasons recorded" it is seen that assessing officer has entertained the 'reasons to believe' that income chargeable to tax has escaped, assessment on the ground that the payment through allotment of equity shares to IDBI is not the actual payment and therefore, deduction claimed by the assessee is not allowable. Section 43B per se does not provide the manner in which the payment of interest is to be made, it only provides that the deduction is allowable on the sum payable mention in clauses (a) to (f), if such sum is actually paid by the assessee. The said section creates fiction that certain liabilities, irrespective of the method of accounting followed by the assessee, would be allowed as deduction only on actual payment. The clause (d) of the said section covers interest payment to the banks. The interest payment has to be made in cash or in actual terms of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st technical know how in new company. The decision in the case of ITO v. Glittek Granites Ltd. (supra) the Kolkata Benches of this Tribunal simply followed the decision in the case of SRF Ltd. v. DCIT (supra). It is pertinent to note that the decision in the case of Suryalakshmi Cotton Mills Ltd. v. ACIT (supra) was the first decision of the Tribunal on this point was not considered by the Tribunal in the case of SRF Ltd. v. DCIT (supra) and even, otherwise, the decision in the case of Eimco K.C.P (supra), the question before the Hon'ble High Court and Hon'ble Supreme Court was entirely different and not about the mode of payment but it was the expenditure at pre operative stage of the assessee company and only for floating the share capital. 18. In view of the above discussion as well as decision of Special Bench of this Tribunal in the case of Biocon Ltd. v. DCIT (supra), we are of the view that the interest expenditure which is otherwise allowable deduction u/s 36(1)(iii) but deffered as per the provisions of section 43B cannot be disallowed because of the reason that the payment is not in cash but by issuance of share capital. Accordingly, we concur with the view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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