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TMI Blog2022 (5) TMI 777X X X X Extracts X X X X X X X X Extracts X X X X ..... ses for implementing the activities of the CDR. In fact, the major component of Rs. 1,46,45,814/- is a sum of Rs. 1,00,00,000/- paid to the ICICI bank by way of remuneration since the ICICI Bank had acted as a Monitoring Institution . Thus there is neither acquisition of any kind of enduring advantage nor the expenditure could be termed as capital. At this stage, for the sake of completeness, we would like to address a pertinent concern of the revenue which the Ld. AO has mentioned in the order of assessment. According to the Ld. AO, by virtue of CDR, the debt was converted into equity (i.e. OCCRPS) and hence there is a benefit of enduring nature. In this regard, firstly we would like mention that the CDR contains several waivers and modifications granted by the lenders and the conversion of debt into OCCRPS is just a part of the whole package. Moreover, the conversion of debt into OCCRPS is also well-addressed in our earlier discussion where we have observed that by issue of OCCRPS, there was no fresh inflow of the capital or increase in capital employed. Hence there is no benefit of enduring nature even by converting debt into OCCRPS, as per the ratio laid down in General Insura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BACKGROUND: 3. The assessee is a company engaged in the business of micro-finance . It filed return of income declaring a loss of Rs. 41,91,80,660/-. The Ld. AO completed assessment u/s 143(3) of the Act at a loss of Rs. 21,76,92,620/- after making various disallowances. Aggrieved by the order of assessment, the assesse filed appeal to Ld. CIT(A). The Ld. CIT(A) allowed part-relief. Still being aggrieved by the order of Ld. CIT(A), the assessee has preferred this appeal and now before us. GROUNDS: 4. The assessee has raised following grounds: 1. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is contrary to the facts and also the law applicable to the facts of the case. 2. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is not justified in sustaining the addition of Rs.1,78,98,000/- made by the assessing officer towards disallowance of the fee paid to Registrar of Companies for increasing the authorized share capital treating the same as capital expenditure in nature. 3. The order of the Ld. Commissioner of Income Tax (Appeals)-3, Hyderabad is not justified in sustaining the addition of Rs.1,46,45, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized share capital for which the assessee had to pay a fee of Rs. 1,78,98,000/- to the Registrar of Companies (ROC). The assessee debited this fee to P L A/c and claimed the same as deduction in computing business income. According to the assessee, the increase in authorized capital was necessitated due to CDR and hence the fee of Rs. 1,78,98,000/- incurred by it is revenue in nature. During the course of assessment-proceeding, when the Ld. AO enquired the assessee about this fee vide letter dated 05.03.2015, the assessee submitted following response, which is placed on Page No. 43 to 44 of the Paper-Book: 1. The fee incurred for increase in authorized share capital is Rs. 1,78,98,000. This has been treated as a revenue expense for I.T. purpose. The authorized capital was increased to accommodate the issue of OCCRPS that was a condition for implementation of corporate debt restructuring plan (CDR) and a part of Master Restructuring Agreement (MRA) as decided upon by the participating banks/FIs and accepted by the assessee company. The CDR and subsequent conversion of debt/loan into OCCRPS was necessary for the running of the business and for continued funding in form of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture is capital in nature since it has resulted in increase in share capital which is an enduring benefit to the assessee. Accordingly, the Ld. AO disallowed the deduction. The assessee challenged this addition before Ld. CIT(A) but the Ld. CIT(A) also agreed with the Ld. AO and confirmed the disallowance. 8. Before us, the Ld. DR placed strong reliance on the orders of lower authorities and argued that the issue is squarely covered by the decisions relied upon by the lower authorities, viz. Brooke Bond India Ltd. (supra) and Vazir Sultan Tobacco Co. Ltd. (supra), according to which the fee paid for increase in authorized capital is a capital expenditure. Therefore, the Ld. DR prayed to uphold the disallowance. 9. We have considered the submissions made by Ld. DR, perused the material held on record and carefully considered the decisions relied upon by the lower authorities. We observe that the Hon ble Apex Court has held in Brooke Bond India Ltd. (supra) that the expenditure incurred on the expansion of the capital base of the company is a capital expenditure. Similarly, in Vazir Sultan Tobacco Co. Ltd. (supra), the Hon ble Andhra Pradesh High Court has also held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra) and disallowed (i) but allowed (ii). On appeal, the ITAT approved the action of CIT(A). Thus, to sum up, there can be two situations in the matter of increase in authorized share capital, viz. (i) There is a fresh inflow of funds and capital employed is increased. In that case, the decision of Hon ble Supreme Court in Brooke Bond India Ltd. (supra) shall apply and the expenditure shall not be allowable as deduction being a capital expenditure, and (ii) There is no fresh inflow of funds and there is no increase in capital employed. In that case, the decision of Hon ble Supreme Court in General Insurance Corporation (supra) shall apply and the expenditure shall be allowable as deduction being a revenue expenditure. Reverting back to the facts of present appeal, it is on record that the increase in authorized capital was necessitated due to CDR and under the CDR, there was no fresh inflow of funds, only the existing debts were restructured whereby the OCCRPS were issued. Being so, we observe that the situation is governed by the decision in General Insurance Corporation (supra) and not by Brooke Bond India Ltd (supra). Therefore, we are of the view that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ender. 4) Annual fee towards functioning as Monitoring Institution to ICICI as mandated and decided by the CDR Cell. It is evident that these are financing, facilitation and regulatory charges paid by the Company for conversion of regular debts/loans into CDR programme. This conversion was necessary to continue the day to day operation of the assessee and helped in maintain operational liquidity. There were no capital appreciation or capital benefit or additional capital infusion for/into the Company. The CDR package is like any other finance or lending agreement and related costs have to be treated as revenue expenses just like interest expense, loan processing fees, bank charges, facilitation fees, regulatory charges, stamp duty, documentation charges and compliance charges etc. Enclosed the copy CDR Expenses Ledger with narration in Annexure-1 for your ready reference. For the sake of brevity, we are not reproducing here Annexure-1 which gives a detailed list of various expenses. 12. The Ld. AO disallowed deduction by observing as under in Para No. 4.2, sub-para 1 and 4 of the assessment-order as under: 1. In this case, the assessee company has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we would like to address a pertinent concern of the revenue which the Ld. AO has mentioned in the order of assessment. According to the Ld. AO, by virtue of CDR, the debt was converted into equity (i.e. OCCRPS) and hence there is a benefit of enduring nature. In this regard, firstly we would like mention that the CDR contains several waivers and modifications granted by the lenders and the conversion of debt into OCCRPS is just a part of the whole package. Moreover, the conversion of debt into OCCRPS is also well-addressed in our earlier discussion where we have observed that by issue of OCCRPS, there was no fresh inflow of the capital or increase in capital employed. Hence there is no benefit of enduring nature even by converting debt into OCCRPS, as per the ratio laid down in General Insurance Corporation (supra). Thus, we are of the considered view that the expenditure of Rs. 1,46,45,814/- incurred by the assessee is a revenue expenditure and deserves deduction. We therefore, accept the claim of the assessee. Accordingly, this Ground is also accepted. GROUND No. 4: 16. In this Ground, the assessee has challenged the disallowance of Rs. 12,03,12,777/- made by Ld. AO o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (5) of section 11; Explanation to section 11(5)(iii) reads as under: Explanation In this clause, scheduled bank means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934). The Ld. AO observed that the three banks, viz. HSBC, Standard Chartered Bank and Citi Bank are included in the second schedule to the RBI Act, 1934 and therefore they fall within the meaning of scheduled bank for the purpose of section 43B. The Ld. AO also rejected second contention by observing that for the purpose of section 43B, the terms and conditions of the agreement entered into by the assessee with those three banks have to be seen and there is no relevant of the CDR s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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