2012 (5) TMI 449 - DELHI HIGH COURT

Pre-operative expenses - revenue or cpaital expenditure - Non deduction of TDS - testing charges paid to the US Company - Disallowance u/s 40(a)(i) - fee for technical services under Section 9(1)(vii)(b) - held that:- the fees for technical services are taxable in the hands of the US Company under the provisions of the Act. The question to be considered then would be whether there is anything in the agreement for avoidance of double taxation between India and USA which would exempt or reduce the burden of taxation in respect of the fees for technical services received by the US Company. This aspect of the matter has not been examined by the Tribunal, though raised before it by the assessee, since there was no occasion for the Tribunal to do so on account of the view it took regarding the taxability of the fees for technical services under the Act. It is axiomatic that if the receipt is not taxable under the Act, then there is no need to examine whether it would fall under any of the provisions of the agreement for avoidance of double taxation. - Decided against revenue.

Pre operative expenses - held that:- The fact that in the books of account the assessee had capitalised the expenses does not prevent the assessee from claiming them as revenue expenses since the question of allowance of expenses has to be considered in the light of the legal position and the accounting treatment cannot be conclusive. - Decided in favor of assessee and against the revenue.

Expenditure relating to fully convertible debentures - whether related to issue or shares or merely related to issue of debenture - held that:- It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. - The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company.

Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee [India Cements Ltd. v. CIT [1965 (12) TMI 22 (SC)], in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue - Decided in favor of assessee.