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2022 (12) TMI 204 - AT - Income TaxCessation of liability of Foreign Currency Convertible Bond on the date of buy-back - Applicability of provisions of section 28(iv) and section 41(1) - differential amount between the cost price of the Foreign Currency Convertible Bond bonds minus the buy-back price of the Foreign Currency Convertible Bonds credited to the capital reserve by the assessee - amount collected by the company was shown under the head Loan funds as Unsecured loan - As submitted that as far as the issue of Foreign Currency Convertible Bond was concerned, neither provisions of section 41(1) of the Act nor section 28(iv) of the Act were applicable to the case of the assessee - HELD THAT - As decided by CIT-A assessee has demonstrated with ample evidence that no part of the proceeds were utilised towards non-capital expenditure. The learned Commissioner of Income-tax (Appeals) has sustained the proportionate disallowance on an incorrect assumption of facts and he has simply discarded the certificate of the chartered accountant without any cogent reasons. Therefore, part sustenance by the learned Commissioner of Income-tax (Appeals), i. e., of Rs. 19.03 crores also needs to be deleted. The same is ordered accordingly. Therefore, in view of the detailed reasons as given in the preceding paragraphs no addition of account of Foreign Currency Convertible Bonds survives and the grounds of appeal filed by the assessee stand allowed whereas the grounds preferred by the Department stand dismissed.
Issues Involved:
1. Taxability of the differential amount from the buy-back of Foreign Currency Convertible Bonds (FCCBs) under Section 28(iv) and Section 41(1) of the Income-tax Act, 1961. 2. Proportional disallowance of Rs. 19.03 crores by the Commissioner of Income-tax (Appeals) (CIT(A)). 3. Adjustment of disallowance under Section 14A while computing book profits under Section 115JB of the Income-tax Act, 1961. Detailed Analysis: 1. Taxability of the Differential Amount from Buy-Back of FCCBs: The primary issue was whether the differential amount between the cost price and the buy-back price of FCCBs, credited to the capital reserve, should be taxed under Section 28(iv) or Section 41(1) of the Income-tax Act, 1961. The assessee argued that both sections were inapplicable as the amount was a capital receipt arising from a debt transaction, not a trading liability. The Tribunal noted that the FCCBs were issued to raise capital, and the proceeds were shown as unsecured loans. The buy-back of FCCBs at a discount led to a cessation of liability, which the Assessing Officer (AO) treated as income under Section 28(iv). However, the Tribunal, referencing the Supreme Court judgment in Commissioner v. Mahindra and Mahindra Ltd. [2018] 404 ITR 1 (SC), concluded that for Section 28(iv) to apply, the benefit must be in a form other than money. Since the waiver amount was in cash, Section 28(iv) was not applicable. Similarly, Section 41(1) was inapplicable as the liability waived was not a trading liability, and no deduction had been claimed in respect of the FCCBs in previous years. 2. Proportional Disallowance of Rs. 19.03 Crores: The CIT(A) sustained a proportional disallowance of Rs. 19.03 crores, reasoning that this amount was not used for capital expenditure. The assessee provided a chartered accountant's certificate confirming that the entire FCCB proceeds were utilized for capital expenditure. The Tribunal found that the CIT(A) erred in not considering this certificate, which demonstrated that no part of the proceeds was used for non-capital expenditure. Therefore, the Tribunal concluded that the proportional disallowance was based on an incorrect assumption and deleted the sustained addition of Rs. 19.03 crores. 3. Adjustment of Disallowance under Section 14A in Book Profits under Section 115JB: The AO made a disallowance under Section 14A and adjusted the same while computing book profits under Section 115JB. The CIT(A) directed the AO to delete this adjustment, relying on the Tribunal's previous decision in the assessee's case for the assessment year 2008-09 and other judicial precedents. The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench decision in Asst. CIT v. Vireet Investment Pvt. Ltd. [2017] 58 ITR (Trib) 313 (Delhi) and the Karnataka High Court's decision in Sobha Developers Ltd. v. Dy. CIT [2021] 125 taxmann.com 72 (Karn), which held that disallowance under Section 14A cannot be adjusted while computing book profits under Section 115JB. Conclusion: The Tribunal ruled in favor of the assessee on all counts: - The differential amount from the buy-back of FCCBs was not taxable under Section 28(iv) or Section 41(1). - The proportional disallowance of Rs. 19.03 crores was deleted. - The adjustment of disallowance under Section 14A in the computation of book profits under Section 115JB was not permissible. Thus, the assessee's appeal was allowed, and the Department's appeal was dismissed.
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