9911796707
TMI Blog2015 (9) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... ,51,65,765 is at page-45 of the Paper book-I filed by the Assessee. The loss under the head "Profits and gains of business or profession" has been arrived at by the Assessee by taking the profit as per profit and loss account and thereafter, some additions and deductions have been made to arrive at the loss of Rs. 63,51,65,765/-. In this appeal, we need to focus only on two items of deducted from the profit as per profit and loss account viz.,(i) Exchange gain on FCCB reinstatement of Rs. 60,75,80,000/- (ii) Deduction u/s.35D of the Act of Rs. 11,36,59,330/-. 3. The provisions of Sec.35D of the Act, in so far as it is relevant for the purpose of deciding the issue in this appeal read thus:- Sec.35D : Amortisation of certain preliminary expenses. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), - (i) before the commencement of his business, or (ii) after the commencement of his business in connection with the extension of his Industrial undertaking or in connection with his setting up a new Industrial unit, the assessee shall, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown in the books of the assessee as on the last day of the previous year in which the extension of the Industrial undertaking is completed or, as the case may be, the new Industrial unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the Industrial undertaking or the setting up of the new Industrial Unit of the assessee; (b) "capital employed in the business of the company" means- (i) in a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences; (ii) in a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the Industrial undertaking is completed, or, as the case may be, the new Industrial unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the Industrial undertaking or setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with acquiring shares of two companies by name M/S.Azure Solutions Ltd. (later known as Subex Azure (UK) Ltd., and M/s. Syndesis Ltd. (Later known as M/s. Subex Americas Inc.). The controlling interest in these two companies was acquired by the Assessee consequent to acquisition of shares of the aforesaid two companies. The claim of the Assessee was therefore u/s.35D(1)(ii) of the Act viz., "incurring of expenditure after the commencement of business in connection with setting up a new Industrial unit. 7. The capital employed by the Assessee for the purpose of the said acquisition of shares was as follows:- Capital Employed Acquisition of M/S. Azure Solutions Ltd. (later known as M/S. Subex Azure (UK) Ltd. Acquisition of M/S. Syndesis Ltd. (Later known as M/S. Subex Americas Inc.) GDR Issue (1,12,28,728 @ Rs. 10/ per GDR) 11,72,87,280 - Share Premium @ 522.24 per GDR 612,52,10,911 - Issue of FCCB - 780,75,00,000 Total 624,24,98,191 780,75,00,000 8. The return for AY 08-09 was taken up for scrutiny. The AO issued a show cause notice dated 11.11.2011 in which he called for details of deduction claimed u/s.35D-Claimed on what expenses? It is very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue. In his show cause notice issued u/s.263 of the Act dated 12.09.2013, the CIT was of the view that (a) deduction u/s.35D of the Act has been allowed in excess of what the Assessee is entitled to. (b) The Exchange gain on FCCB reinstatement of Rs. 60,75,80,000/- ought to have been treated as income and brought to tax. 13. In the course of hearing before CIT on 26.9.2013, the CIT expressed the view that deduction u/s.35D has been allowed in excess as follows:- "A) Total amount eligible for deduction under section 35D would be the actual expenditure of INR 577,890,354 incurred by the assessee, as restricted to the higher of: a. 5% of the cost of project, or b. 5% of the capital employed in the business. B) The cost of project has been considered as NIL, as the assessee has shown the amount so invested as 'Investments' and not as fixed assets being plant and machinery, etc. C) For the purpose of computing capital employed, only the amounts invested to the extent raised through the issuance of Global Depository Receipts ('GDRs') has been considered. Furthermore, only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the word "extension" under the Act. The assessee wishes to draw reference to P. Ramanatha Aiyar's Law Lexicon Second Edition which shows that although the word "expansion" was considered as related to different fields, yet, the one in relation to industrial activity gives the meaning as "extension". Thus going by the meaning assigned to the word "extension", quite apart from the horizontal expansion in the industrial undertaking, vertical expansion also stands included within the meaning of the term 'extension" of the industrial undertaking. 1.9 The assessee has incurred the aforesaid expenditure for the purpose of acquisition of Subex Americas Inc. and Subex UK Limited. Hence, the same was incurred for the purpose of expansion of the business of the assessee. This is evident from the very fact that the assessee's gross revenue through these subsidiaries over the last two years has increased from 3,710 million to 5,408 million, being 46% increase in sales. 1.10 Further, with reference to the computation of the cost of project', it would not be appropriate to hold in a narrow manner that the assessee has not shown any investment in fixed asset/land and build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, whether constituting a charge on the assets of the company or not. FCCB is bonds and therefore Debentures within the meaning of the terms u/s.35D. The Assessee also pointed out that FCCBs were issued under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 wherein the meaning of FCCBs is given as "bonds issued in accordance with the said scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments". The Assessee therefore submitted that FCCBs should be equated with Debentures for the purpose of computing capital employed u/s.35D of the Act. (4) With regard to treating "unrealized foreign exchange gain" as income chargeable to tax, the Assessee submitted as follows:- "2.1 During the course of the hearing, your honour relying on the decision of the Honorable Supreme Court in the case of Woodward Governor (supra) (A copy of the decision is enclosed herewith as Annexure 5), mentioned that the unrealized foreign exchange gain amounting to INR 607, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computation of income of ÀY 09-10 is enclosed herewith as Annexure 7. 2.10 Accordingly, in view of the above, the assessee prays that the unrealized gains ought not to be treated as income for the year under consideration." (5) On the question whether jurisdiction u/s.263 of the Act could be exercised in a case such as the Assessee, the Assessee submitted as follows:- "2.11 It is apparent from a bare reading of the provisions of section 263 of the Act that the prerequisite to exercise jurisdiction by the Commissioner of Income-tax ('CIT') is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The CIT has to satisfy the twin conditions, namely, - the order of the AO sought to be revised is erroneous; and - it is prejudicial to the interest of the revenue. 2.12 It is only when an order satisfies both the above conditions, that section 263 would get attracted. 2.13 The expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment' have been defined in Black's Law Dictionary, Sixth Edition, page 542. As per the definition - - 'Erroneous' means' i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployed for the purpose of allowing deduction u/s.35D of the Act. Though the claim for deduction u/s.35D of the Act was subject to scrutiny by the AO while concluding the assessment, there are several perspectives to allowing deduction u/s.35D of the Act and the perspective pointed out in the show cause notice u/s.263 of the Act were not verified by the AO and therefore his order was erroneous and prejudicial to the interest of the revenue. In coming to the above conclusion the CIT placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Infosys Technologies Ltd. 341 ITR 293 (Karn.). In the aforesaid decision, the assessee claimed certain reliefs in terms of DTAA. The assessing authority had indicated that, deductions on such amounts were in terms of double taxation agreement relief in existence between our country and the countries of Canada and Thailand and allowed reliefs as claimed by the assessee. The CIT revised the said order u/s.263 of the Act and directed the AO to examine the terms of the DTAAs with Canada and Thailand and ascertain the exact relief that the assessee can claim under art. 23(2) of the DTAA with Canada and art. 23(3) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from out of the tax liability of the assessee without indicating the basis, can definitely be construed as an order both erroneous and prejudicial, as this is definitely a possibility and it is only because it is per se, not discernable in the revisional order, but definitely gives rise to a situation where the CIT may consider the order as erroneous and prejudicial and the CIT having remanded the matter to the assessing authority, we are of the clear opinion that it cannot be characterized as a situation beyond the realm of s. 263 of the Act, as the order being erroneous and prejudicial is a clear possibility particularly the assessing authority not disclosing the basis. 22. To test this proposition, if an order which is explicit is passed by the assessing authority and indicating that the assessee is entitled to a particular extent of relief, but if it is with reference to relevant articles of the DTAA and if it is not either a proper computation or not fully in consonance with the same and if it has resulted in a situation of granting a greater relief than the assessee is otherwise entitled to under these agreements and if the CIT can revise such an order without any hassle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 292 ITR 658 (Del.). In the aforesaid decision the Hon'ble Delhi High Court was concerned with a question as to whether share premium can be considered as part of the capital employed for the purpose of allowing deduction u/s.35D of the Act. The Hon'ble Delhi High Court held that as per Explanation to sub-s. (3) of s. 35D, capital employed in the business of the company is the aggregate of three distinct components namely, share capital, debentures and long-term borrowings. It does not include reserves and surplus of the company. Therefore, premium, if any, collected by the company on the issue of its share capital does not constitute a part of capital employed in the business of the company for the purpose of quantification of deduction under s. 35D. Issue No.4 18.4 With regard to the question whether FCCBs can be considered as "Debentures" and taken as part of capital employed for allowing deduction u/s.35D of the act, the CIT held as follows:- "4.5. The Assessee also contended that the Foreign Currency Convertible Bonds are documents which creates or acknowledges a debt and should be equated with debentures but not produced any evidence to support its claim. In the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If there is an enquiry, even inadequate, that would not by itself give occasion to the CIT to pass order under s. 263, merely because he has a different opinion in the matter. Such a course of action is open only in cases of "lack of enquiry". Contention of the Revenue that the AO did not consider as to whether the expenditure in question was capital or revenue expenditure cannot be accepted. Although apparently the assessment does not give any reasons for allowing the entire expenditure as revenue expenditure, that by itself would not be indicative of the fact that the AO has not applied his mind to the issue. AO is not required to give detailed reason in respect of each and every item of deduction in the assessment order. AO had called for explanation regarding this very item and the assessee had furnished its explanation. It cannot be said that it is a case of 'lack of enquiry'. Further reliance was also placed by him on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Anil Kumar Sharma 335 ITR 83 (Del) wherein the facts were that the CIT came to the conclusion that the issue relating to taxability of compensation received by the assessee was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the present case, We have already seen that the AO did not apply his mind to the aspects set out by the CIT in the order u/s.263 of the Act. Therefore the decision referred to by the learned counsel for the Assessee does not support the plea of the Assessee in this regard. 24. The next submission of the learned counsel for the Assessee on the first issue was that the deduction u/s.35D is to be allowed over a period of 5 years. The first year in which the Assessee was entitled to claim deduction u/s.35D of the Act was AY 07-08. In that year in proceedings u/s.143(3) of the Act, the AO had allowed the claim of the Assessee. In the subsequent 4 years, the claim has to be allowed as the investigation of eligibility of claim can be examined in such cases only in the 1st year of eligibility. In the subsequent years the deduction cannot be varied or withdrawn unless the 1st year in which the claim was made is also altered. In this regard, it was fairly admitted by the learned counsel for the Assessee that in AY 07-08, the AO has after the proceedings u/s.263 of the Act for AY 08-09 (impugned order), rectified the order of assessment for AY 07-08 in proceedings u/s.154 of the Act and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the Assessee"..... The CIT held that the cost of acquisition of the two businesses were shown as "Investments" by the Assessee in its Balance sheet and the same cannot be called "Fixed Assets" and therefore the claim in this regard by the Assessee cannot be accepted. On the above issue, the learned counsel for the Assessee reiterated submissions as were made in reply to the show cause notice u/s.263 of the Act. 29. We have considered the submissions of the learned counsel for the Assessee and are of the view that the same is not acceptable. The Assessee chose the option of claiming deduction of 5% of capital employed in the business of the company as provided in Sec.35D(3)(b) of the Act and never opted to claim 5% of the "cost of the project u/s.35D(3)(a) of the Act. Cost of Project has been defined in Expln. (a) (ii) as :- (ii) in a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the company is the aggregate of three distinct components namely, share capital, debentures and long-term borrowings. It does not include reserves and surplus of the company. Therefore, premium, if any, collected by the company on the issue of its share capital does not constitute a part of capital employed in the business of the company for the purpose of quantification of deduction under s. 35D. 32. The contention of the learned counsel for the Assessee was that the ITAT Ahmedabad in the case of JCIT Vs. Sirhind Steel Ltd. 97 ITD 502(Ahd.) in the context of Sec.35D, the Bench took the view that Share premium has to be considered as part of "Issued Share capital". The Delhi High Court in the case of Berger Paints (supra) has however taken a contrary view. According to him the issue was debatable and two views were available on the issue and therefore no fault can be found in the order of the AO to warrant exercise of jurisdiction u/s.263 of the Act. The learned counsel for the Assessee also submitted that the decisions that come later in point of time and on the date when jurisdiction u/s.263 of the Act was exercised cannot obliterate the existence of debate on the date wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures" and taken as part of capital employed for allowing deduction u/s.35D of the Act? 36. On the above issue, we find that Sec.2(12) of the Companies Act, 1956 defines "Debentures" to include debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. FCCB is bonds and therefore Debentures within the meaning of the terms u/s.35D. The FCCBs were issued under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 wherein the meaning FCCBs is given as "bonds issued in accordance with the said scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments. On the above issue, the CIT held the Assessee has not produced any evidence to support its claim that FCCB were to be equated with debentures. We are of the view that the conclusions of the CIT are unsustainable. In the light of the definition of Debentures as contained in the Companies Act, 1956 to include Bonds and in the light of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s arising in foreign currency transaction on revenue items. In such category, we are concerned with the assessee(s) incurring loss on revenue account. In that category, we are concerned with the provisions of ss. 28, 29, 37(1) and 145 of the IT Act, 1961 ("1961 Act"). In the second category of cases, we are concerned with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets. In other words, in the second category of cases, we are concerned with the assessee(s) incurring liabilities on capital account. In such cases, we are required to consider the provisions of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002)." Thereafter in para 22 of its judgment it dealt with cases where the fluctuation is on account of capital items as follows:- "Facts in M/s Honda Siel Power Products Ltd. (Civil Appeal arising out of SLP(C) No. 7632/08) Capital account case : 22. The main issue which arises for determination in this batch of civil appeals is : whether the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer erred in reducing it in the income of the assessee while computing the deduction under Section 80HHE. The Hon'ble Madras High Court held that the claim of the revenue was unsustainable. The Hon'ble Court held that since the amount had direct nexus with the capital raised, the assessee's claim that the same was capital receipt and hence not taxable was correct.
42. In our view the facts of the case in the decision of the Madras High Court in the case of PVP Ventures Ltd. (supra), is identical to the facts of the case of the Assessee in this appeal. FCCBs are instruments issued to investors for raising funds which is repayable after certain period. It is a debt instrument. 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. Therefore the gain or loss would be on capital account and not taxable. We accordingly hold in favour of the Assessee on this issue.
43. In the result appeal of the Assessee is partly allowed.
Pronounced in the open court on this 19.6.2015. X X X X Extracts X X X X X X X X Extracts X X X X
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