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TMI Blog2016 (5) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... T (A) has erred in treating expenses of Rs. 5,82,40,318/- incurred on issue of Foreign Currency Convertible Bonds (FCCBs) as capital expenditure instead of revenue expenditure. 2. The Ld CIT (A) has erred in upholding the disallowance of expenditure of Rs. 35,53,568/- under section 14A of the Act. 3. Without prejudice to the appellant's above contention that the amount of Rs. 35,53,568/- should not be disallowed u/s 14A of the Act, the Ld CIT (A) has erred in not restricting the quantum of disallowance u/s 14A of the Act to the amount of exempt income ie Rs. 20,17,860/-. 4. The Ld CIT (A) has erred in upholding the levy of interest u/s 234D of the Act." 3. The core issue raised in this appeal relates to the allowability of the claim of expenses of Rs. 5,82,40,318/-. This expenditure was incurred in connection with the issue of Foreign Currency Convertible Bonds (FCCBs). Relevant facts in this regard include that the assessee raised FCCBs in the year under consideration. These are optionally convertible bonds into equity and the same is supported by the issue documents. When the same are not converted into equity, the bonds are to be redeemed with premium. The bonds were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he bonds eventually were redeemed with premium at the option of the bond holders. In such circumstances, in substance, the said bonds are to be deemed as debentures issued by the assessee for the business purposes. Further, he relied on various decisions to demonstrate that the said bonds were deemed as debentures and the expenses incurred in issuing such debt instruments were allowed as a revenue expenditure u/s 37(1) of the Act. Some of the decisions relied upon by the Ld Counsel for the assessee are enlisted in para 2.15 of the note furnished by the Ld Counsel for the assessee. The contents of para 2.15 and 2.16 are extracted as under:- "2.15. In this regard, reliance is placed on the following decisions wherein it has been held that expenses incurred on FCCB‟s are allowable as revenue expenditure even after considering the special Bench ruling in the case of Ashima Syntex (supra): Secure Meters Ltd (321 ITR 611) (Rajasthan High Court) - Supreme court has dismissed department‟s SLP vide appeal (Civil) 10548) of 2008 dated 11th August, 2009. Sukhjit Starch & Chemicals Ltd (326 ITR 29) (P & H) High Court ITC Hotels Ltd (334 ITR 109) (Karnataka High Court) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty premium account, a balance sheet entry. Relying on the judgment of the Hon‟ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Limited (82 ITR 363), Ld Counsel for the assessee submitted that the accounting entries do not impact tax implications. Further, relying on the recent decision of the ITAT, Hyderabad in the case of Bhagyanagar India Limited (ITA No. 99 and 1345/2012), Ld Counsel for the assessee submitted that the assessee‟s option to write off FCCB issue expenses against the security premium account does not preclude the assessee from claiming such expenditure u/s 37(1) of the Act if the same otherwise allowable. The FCCBs constitute a method of raising loans for the assessee and the expenses incurred in this regard are statutorily allowable u/s 37(1) of the Act. The same has the sanctity of judicial ruling in the case of Secure Meters Limited (321 ITR 611) and in the case of Sukhjit Starch and Chemicals Ltd (326 ITR 29). Thus, Ld Counsel for the assessee summed up by stating that the revenue expenditure incurred in connection with the FCCBs constitutes an allowable revenue expenditure u/s 37(1) of the Act and relied heavily on the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enture is very thin as they both are two different types of Debt Instruments. Further, we find that there is nexus between the expenditure and the purpose of the bonds of the assessee. In such case, the claim is allowable in view of the decision of the Hon‟ble Apex Court in the case of Hero Cycles P Ltd (supra). Relevant para from the said judgment is extracted as under:- "Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of „S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another‟ [2007 (288) ITR 1 (SC)]. Once it is established that thereso is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee if the citations referred above are considered, the disallowable sum will work out to Rs. 12,40,240/-. It is the claim of the assessee that the disallowance should not exceed Rs. 20,17,860/- and relied on the cited judgment of the Hon‟ble Delhi High Court judgment in the case of Joint Investments Private Ltd (supra). Further, assessee also an additional ground in support of the above grounds mentioning that some investments made in the subsidiaries yielded dividends chargeable to tax in India. Such investments should be kept outside the scope of the provisions of Rule 8D of the IT Rules, 1962 while determining the quantity to be disallowed u/s 14A of the Act. In this regard, Ld Counsel for the assessee cited various decisions and various arguments in support of his claim. One of such judgment is pronounced by the Hon‟ble Delhi High Court in the case of Joint Investments Private Limited, dated 25.2.2015, which is relevant for the proposition that the disallowable amount u/s 14A must not mean that the entire exempt income should be disallowed. Various decisions have come up on this issue involving the disallowance u/s 14A r.w. Rule 8D of the Act. Ld Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment / loans and advances in Storemedia. Assessee utilized the balance in the business restructuring reserve account to align the value of debtors and advance to the suppliers to fair value. The balance in the business restructuring reserve was thereafter transferred to the Profit & Loss Account and the same was utilised to write off the bad debts and advances to the suppliers (para5.3 and 5.4 of the written submissions are relevant in this regard). These facts were not properly under stood and appreciated by the AO in the assessment proceedings. AO erroneously came to the conclusion that the assessee failed to write off the bad debts in the Profit & Loss Account. However, assessee demonstrated the same during the first appellate proceedings and submitted that as per the conditions laid down in section 36(1)(vii) and 36(2) of the Act, the assessee is eligible for deduction on account of bad debts. Assessee also relied on the judgment of the Hon‟ble Supreme Court in the case of TRF Limited (323 ITR 397) (SC) apart from many other decisions mentioned in para 5.11 of the note furnished by the assessee. On appreciating the submissions of the assessee, CIT (A) granted relief to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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