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TMI Blog2008 (5) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration. In its computation of income, the assessee had claimed deduction of the above sum as expenditure incurred on issue of cumulative redeemable preference shares (CRPS) to IDBI and IFCI. In its books of account, the expenditure was treated as deferred revenue expenditure to be written off in ten annual instalments. The details furnished by the assessee revealed that it had availed term loan facilities from IDBI and IFCI in the financial year 1997-98 to part finance the expansion programme undertaken by it. Subsequently, the assessee ran into financial difficulties and hence approached the financial institutions for restructuring the loans. The said institutions granted certain relief and concessions by way of rescheduling the loan instalments and also reduction in interest rates. However, the relief and concessions were granted with a condition that the assessee will convert part of the present value of sacrifice made by them into CRPS carrying a coupon rate of 0.10% which is redeemable in one instalment in 2012 to IDBI and 2011 to IFCI. Pursuant to this condition, the assessee issued 0.1% CRPS of ₹ 100 each to the tune of ₹ 400 lakhs to IDBI and ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest already accrued plus the future sacrifice in terms of reduction of interest and rescheduling of loan. Sec.43B (d) applies only to interest payable whereas in the present case, what is compensated is interest foregone and not interest payable. It is a consideration for the package as a whole and is almost a novatio. Referring to sections 80A and 85 of the Companies Act, 1956, it was submitted that preference share capital was neither a loan nor a borrowal. At the most, it was contended, if at all it has to be spread over, the apportionment should be rational but certainly it cannot be disallowed u/s 43B of the Act. The learned Departmental Representative relying on the order of the CIT (A), emphasised the applicability of sec.43B and submitted that there being no outflow of funds, the same was disallowable. It was more in the nature of opportunity costs and hence not allowable. 6. We have duly considered the rival contentions and the material on record. At the outset, we may admit that we have failed to understand how it is an opportunity cost and what the learned Departmental Representative means by it. If he means that it is a notional cost, then perhaps, he is mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 27.16 mn. From the above condition laid down by both the institutions, it is very evident that the amount quantified for the issue of CRPS constitutes the sacrifice on account of reduction in the rate of interest only. The sacrifice on account of rescheduling the loans is not quantified and hence does not form part of the aggregate of ₹ 67.17 mn. Being the amount of CRPS to be issued. 9. Now, first let us examine the accounting aspect of the matter. The assessee is put under an obligation to issue the preference shares to the two institutions. Obviously, the amount of ₹ 67.16 mn. will have to be credited to the share capital account. The question now arises is where should the corresponding debit go. It cannot be debited to the account of the institutions because they are not loans. It cannot also be debited to any asset account because no asset is coming into existence by issuing the shares. So what remains now is only the expenditure account which can be debited. This leads us to the conclusion that the amount of ₹ 67.16 mn. constitutes expenditure for the assessee. The next question to be addressed is as to what is the nature of the expenditure. In par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to attend the general meeting of the company and vote on resolutions, directly affecting their interest and on all resolutions if their dividend is in arrears for not less than two years. In the event of winding up or repayment of capital, the institutions will have a preferential right to be paid the arrears of dividend payable up to the date of such event. They also will have a preferential right in respect of repayment of capital. Thus, besides the issuance of shares, the assessee is also put under incidental obligations in the process. It need to be clarified that with the relief granted by the institutions, it is not that long-term benefits will keep on accruing to the assessee. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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