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TMI Blog2018 (9) TMI 781X X X X Extracts X X X X X X X X Extracts X X X X ..... not been debited in the profit and loss account as expenditure, nor the assessee has claimed any deduction and the assessee is following mercantile system of accounting, there is no question of disallowing the deduction which has not at all been claimed by the assessee. As regards the merits of the case, on similar analogy, since the impugned expenditure was not incurred during the current year, there is no question of disallowing the same in the current assessment year. As we have already given a finding that there was no question of making a disallowance of interest expenditure for whatever reason as the said expenditure was not at all debited during the year, the assessee succeeds on both the counts of lack of validity of reopening as well as merits of addition. In this regard, we are not inclined to accede to DR's request that a direction should be given for making the addition in earlier assessment year. We are of the opinion that in doing so, we shall be exceeding our jurisdiction. The ITAT is not mandated to exercise revisionary powers which are vested with CIT u/s. 263 to cure fatal errors and omission on the part of the Revenue authorities. - Decided in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating reassessment proceedings under section 147 of the Act, without having proper jurisdiction, based on mere change in opinion and without any new material being available on record to form a basis for 'reason to believe' that income has escaped assessment. 4. The Ld. AO has not demonstrated any failure on the part of the Appellant to furnish material facts, and hence the notice under section 148 of the Act is bad in law and liable to be quashed. 4. In this case, the A.O. completed the assessment order u/s. 143(3) of the Income Tax Act, 1961 ( the Act' for short) vide order dated 31.12.2010. Subsequently, the assessment notice was issued by noting the following reasons: It is found that the Board of Directors of assessee company approved a resolution on 18/12/2006 to convert foreign currency loan including interest accrued thereon up to 31-12-2006 aggregating to ₹ 4,49,86,680/- into equity share capital. However, allotment of share application money was pending as on March, 2007. Subsequently in A. Y. 2008-09 (F. Y. 2007-08) as seen from the Note-3 of Schedule 1 of Balance Sheet that equity shares of said amount including accrued interest up to D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t FY i.e. 2007-08, no question of making a disallowance of the said expenditure arises. 2.1.2 Separately, the liability of interest payment on ECB became due/ got crystallized in FY 2006-07 i-e AY 2007-08 and not in the captioned AY as per the terms of the ECB agreement. Also, the Assessee Company withheld applicable taxes at the appropriate rates and deposited the same in FY 2006-07 as per the applicable withholding tax provisions. Therefore, the basis of disallowance of interest expenditure of assuming that the interest liability was crystallised in the FY relating to the captioned AY 2008-09 is factually misplaced and incorrect. 2.1.3 Further, the assessee company submits that, it has been consistently following mercantile system of accounting for all the past and future years, and therefore, considering the fact that, the Assessee Company did not debit any interest expenditure amount to its profit loss account for FY 2007-08 nor it claimed any tax deduction of any interest expenditure in the current FY, the question of disallowing any interest expense does not arise. 2.1.4 In this context, the Assessee Company relies on the Delhi High Court ruling in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax (Appeals) has held that, debentures till the date of conversion in to equity are debt and gnyjnterest paid on such debentures till,.date of conversion is an allowable normal business expenditure. The relevant extract of the judgment is as under: Commissioner of Income Tax (A) rightly observed that debentures, whether fully or partly or optionally convertible, are nothing but debt till the date of conversion and any interest paid ort these debentures is allowable as normal business expenditure. The only uncertainty in the optionally convertible debentures issued by the assessee is whether the debenture holder will go for conversion into shares or will continue to hold them as debentures. Ld. Commissioner of Income Tax (A) rightly held that this uncertainty in no way impacts the assessee company's liability to pay interest till the date of conversion. Accordingly, since the ECB till the date of conversion in to equity is a debt, the interest paid on such loan is allowable business expenditure. 2.3 Your goodself had specifically raised an argument in the order, on whether the Assessee Company has complied with the provision of TDS on interest (i.e. whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be treated as capital expenditure and deleted the addition. The ld. CIT(A) in this regard held as under: 4. As regards ground No. 1, it was noted that vide resolution dated 18/12/2006, the assessee company converted the foreign currency loan including interest there upon into equity share capital. The allotment of share application money were as on March 2007 and were subsequently allotted in AY.2008-09. However, the interest upto the December 31/02/2006 on the foreign currency loan debited in the profit and loss account in AY.2007-08 was disallowed by the AO as capital expenses in nature. The detailed submission of the appellant is reproduced as above. 4.1 The appellant has contended that the interest accrued upto 31/12/006 was on the loan amount and was duly claimed in A.Y 2007-08 as observed by the AO also in the reasons for reopening. In this case, therefore, it is the admitted position that till 31/12/2006, it was the ECB loan on which interest was payable/claimed. Thus till date the amount is shown as loan, the interest payable upon the loan amount is of revenue nature. The appellant has converted the outstanding loan and interest accrued thereupon upto 31/12/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest as capital expenditure which has not at all been debited in the impugned assessment year. Since, there is no debit of interest in the current assessment year, there is no question whatsoever of disallowing the same on the ground that there has been escapement of income. 14. To reiterate, when the amount in question has not been debited in the profit and loss account as expenditure, nor the assessee has claimed any deduction and the assessee is following mercantile system of accounting, there is no question of disallowing the deduction which has not at all been claimed by the assessee. In this connection, the Hon'ble Delhi High Court decision in the case of Boble Hewitt (I) (P.) Ltd (supra) applies on all fours to the facts of this case. Hence, the reason recorded for reopening is that there is escapement of income is totally unsustainable at the threshold. Hence, the validity of reopening in this case is held to be subject to rescission. 15. As regards the merits of the case, on similar analogy, since the impugned expenditure was not incurred during the current year, there is no question of disallowing the same in the current assessment year. We note that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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