TMI Blog2002 (10) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in law, as it is based on ignoring the utter disregard to the evidence on record." 4. Ground Nos. 1 to 3 relate to the disallowance of the claim of debenture issue expenses to the extent of Rs. 18,17,680. The assessee in the present assessment year issued partly convertible debentures (PCD) at the rate of Rs. 125 per debenture. Rs. 62.50 was to be paid at the time of application and the balance equal amount was to be paid on allotment. As per the terms of the debenture issue. Part A was convertible portion of debentures in two equity shares of Rs. 10 each at a premium of Rs. 12.50 each. Thus, out of the total amount of Rs. 125 a sum of Rs. 45 represented Part A being convertible portion of debentures into two equity shares and the balance sum of Rs. 80 was non convertible portion of the debentures. On the issue of partly convertible debentures, the assessee-company spent a sum of Rs. 50,49,111 which was claimed as revenue expenditure. However, the Assessing Officer allowed only proportionate part of the expenditure which represented Rs. 80 out of Rs. 125 being the amount towards non convertible portion of the debentures. The balance amount of Rs. 18,17,680 was treated by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es incurred towards convertible portion into shares could not be allowed as deduction. 7. We have considered the rival submissions in the light of material placed before us and the precedents relied upon. There is no dispute about the authorities relied upon by both the sides inasmuch as the expenses in relation to debentures are to be allowed as deduction whereas the expenses in relation to shares are not to be allowed as revenue expenditure. The short point that falls for our consideration is as to whether the proportionate expenses in relation to Part-A, being the convertible portion of the debentures expenditure on issue of shares or expenditure issue of debentures. If this amount is held to be incurred on issuance of shares then the same is not to be allowed as revenue expenditure and if the same is held to be on issuance of debenture then the same has to be allowed as deduction. Clause 3 of the prospectus reads as under:-- "Conversion The debentures shall carry an obligation on the Company to issue to the holders of every such Debenture, and an obligation on the holders of the Debentures to, accept without any further act or application, two Equity Shares of the face ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e portion of Rs. 80, he will get a debenture certificate for the said amount. At page six of the prospectus mentioning the terms of payment, it is provided as under:-- The amounts paid on application and allotment will be appropriated as under: ---------------------------------------------------------------------------------------- Part A Part B Total -------------------------------------------------------------------------- Payment Convertible portion Non convertible received of Debentures portion of the (2 Equity Shares) Debentures ---------------------- Share Share Capital Premium Rs. Rs. -------------------------------------------------------------------------- On application 10.00 12.50 40.00 62.50 On allotment 10.00 12.50 40.00 62.50 -------------------------------------------------------------------------- Total 20.00 25.00 80.00 125.00 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees on account of incentive payments. The last disallowance of Rs. 15,000 xvas made on account of payment to Cargo agent for payment of custom duty. All these payments were held to be disallowable under section 40A(3) and the addition was made accordingly. The action of the Assessing Officer was confirmed by the CIT(A). Before us, the learned counsel for the assessee pointed out that so far as the payment made on account of purchase of consumables inBombaywere concerned, these were made by the head office in cash because the parties were new to the assessee. As regards the other disallowances made by the Assessing Officer, the learned counsel pleaded that these were not to be disallowed because these were made in exceptional circumstances. In the opposition, the learned DR relied on the order passed by the CIT(A) on this issue. 11. Having heard the rival submissions, and perused the relevant material, it is noted that the claim of the assessee on account of payments made in violation of section 40A(3) on account of purchase of consumables is not acceptable on the ground that the payments were of recurring nature and were made on more than one occasion to the same parties as has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of debenture gets concluded at that point of time. What happens afterwards was subsequent development. The Assessing Officer did not accept this contention also and he relied upon clause 3 of the prospectus dealing with the conversion which clearly provided that allotment of shares would be made on the same date the debentures were allotted. The simultaneous conversion would not allow the convertible debenture to exist even for a day as the point of entry was also the point of conversion and on the basis of these facts the Assessing Officer was of the view that once the amount go to increase the capital on the date of entry the expenditure incurred in this regard becomes capital in nature and he worked out the amount of Rs. 18,17,680 as relatable expenditure to the issue on pro rata basis and disallowed the amount. 3. The assessee came in appeal before the CIT(A) and reiterated the same submissions as were taken before the Assessing Officer. It was contended that entire expenditure was incurred in relation to the debenture issued. The fact that portion of this amount was to be later on converted to share capital did not change the character of expenses incurred which was in conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 125 each. Necessary permission had been accorded vide letter dated29-11-1991and copy thereof has been filed before us. Learned counsel also submitted that prospectus issued by the assessee-company also go to show that face value of the debenture was Rs. 125 each and all the expenses of approximately Rs. 75 lakhs were to be incurred in relation to issue of debenture. Our attention was drawn to page Nos. 20 and 21 of the prospectus which give out the brief details of expenses of the issue estimated at Rs. 75 lakhs which included brokerage, underwriting commission, fees of the Lead Manager/Advisors to the issue and the Registrars of the issue, stamp, duty, printing, publication distribution expenses, registration fees, legal and professional charges, bank charges, auditors fees and other misc. expenses. Learned counsel pointed out that details of the fee payable to the Lead Manager/Advisor to the issue, to the agent and trustees for debenture holders, details of underwriting commission and brokerage had also been given in subsequent para and a perusal thereof shall show that all the expenses are related to the issue of debentures. 5. Learned counsel further submitted that expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very intention of the assessee-company was to issue debenture as well as to raise share capital because the moment an assessee is allotted debenture of worth Rs. 125, he gets two shares and out of Rs. 125, the face value of debenture remains at Rs. 80 and Rs. 45 becomes the share capital. The Assessing Officer was justified to work out the expenses relating to issue of share capital on pro rata basis and rightly disallowed the amount of Rs. 18,17,680 and view taken by the Assessing Officer and CIT(A) deserves to be confirmed. 8. After considering the facts as noted above, it is undisputed fact that assessee had gone for issue of debenture. Legal position as it stands is that any expenditure relating to issue of debenture is an allowable expenditure as Their Lordships in the case of India Cements Ltd. after discussing the case law on the point concluded that obtaining capital by issue of shares is different from obtaining loan by debentures and all the expenses relating to issue of debenture are allowable. Their Lordships of Supreme Court in the case of Brooke Bond India Ltd. after placing reliance on the decision in the case of Punjab State Industrial Development Corpn. Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said prospectus give out the approximate expenses of the issue as well as the nature thereof. The approximate estimated expenses had been worked out at Rs. 75 lakhs and nature of expenses are as under: "Expenses of the issue The expenses of the present issue payable by the Company including brokerage, underwriting commission, fees of the Lead Managers/Advisors to the issue and of the Registrars to the issue, stamp duty, printing, publication and distribution expenses, registration fees, legal and professional charges, bank charges, auditors fees and other miscellaneous expenses are estimated at Rs. 75 lakhs and are payable by the Company which will be met out of the proceeds of this issue. Fee payable to the Lead Managers/Advisors Fee payable to SBI Capital Markets Ltd. and the Hongkong Shanghai Banking Corporation Limited Rs. 1,79,550 each as Lead Managers to the issue; and J.M. Financial Investment Consultancy Services Ltd. and ANZ Grindlays Bank p/c Rs. 19,950 each--as Advisors to the Issue are set out in the Company's letters dated 11-9-1991 and 2-12-1991 respectively; copies of which are kept open for inspection at the Registered Office of the Company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange inIndiaincluding Brokers to the Issue in the brokers' column in the Application Form. Brokerage at the same race will, also be payable to the Bankers to the Issue in respect of the allotment made against applications procured by them, provided the respective form of application bears their respective stamps in the Broker's column. No brokerage commission or commitment charges will be payable on the Debentures allotted out of the Debentures offered on preferential basis to the Employees (including Indian Working Directors)/Workers of the Company. However, brokerage at the aforesaid rate will be payable on the Debentures that get added to the issue to the public on account of under subscription in the quota reserved for preferential allotment to the employees of the Company." 11. The contention of the assessee in respect of the above expenses is that all the above referred to expenses were in relation to issue of debenture and had got no concern with the issue of shares, The Assessing Officer has nowhere questioned the authenticity of nature of the above referred to expenses nor Assessing Officer had made any effort to point out that any expense in the above referred to detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther noted that there would have been justification in the claim of the assessee for deduction of entire expenditure if the amount of debenture was appropriated towards share capital after some gap. This observation of the learned CIT(A) helps the assessee as time gap will not change the very nature of the expenses. It can be illustrated by an example. If a person borrows an amount of Rs. one lakh and on the date of taking of loan if he returns some of the amount of loan to the creditor in kind or subsequently, will not be having any impact so far as the nature of expenses are concerned. The assessee in this case incurred expenses for taking loan in the form of debenture and if he had issued two shares after allotment of the debentures, it amounts to returning some of the amount of loan to creditor but in no way it will change the very nature of the expenses which were exclusively for issue of debenture as Assessing Officer did not bring on record that any of the amount out of Rs. 50,49,111 was exclusively incurred, by the assessee for issue of shares. 13. Lastly it can be said that Assessing Officer was not justified in bifurcating the amount of expenses on pro rata basis. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer, disallowing Rs. 18,17,680 out of expenses of Rs. 50,49,111 claimed by the assessee on issue of partly convertible debentures on pro rata basis?" THIRD MEMBER ORDER R.M. Mehta, Vice-President .--The following question has been referred to me under section 255(4) of the Income-tax Act, 1961 pursuant to a difference between the learned Members constituting the Division Bench:-- "Whether, on the facts and in the circumstances of the case, the CIT (Appeals) was justified in confirming the action of the Assessing Officer, disallowing Rs. 18,17,680 out of expenses of Rs. 50,49,111 claimed by the assessee on issue of partly convertible debentures on pro rata basis?" 2. The facts in brief are that the assessee had incurred an expenditure of Rs. 50,49,111 on the issue of partly convertible debentures which it claimed as a deduction on Revenue account. The Assessing Officer at the assessment stage noticed that the public issue was in respect of 6,72,000 partly convertible debentures against the issue price of Rs. 125 per debenture out of which Rs. 62.50 was to be paid at the time of application and the balance at the time of allotment. 3. Part A of the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons noted as a fact that the conversion of a part of the debenture to shares was automatic without any further application from the allottees for the same. According to the CIT (Appeals) once a debenture was allotted to an applicant, he would be given two shares at Rs. 45 and for the balance of Rs. 80 a debenture certificate would be issued. This according to him reflected a clear intention of allotting the shares right at the beginning once an allotment was made in favour of the applicant vis-a-vis the convertible debenture. According to the CIT (Appeals) it was for this reason that the issue was called as one on account of "partly convertible debentures". The CIT (Appeals) in fact drew a distinction vis-a-vis a case where such conversion was stipulated to take place after a period of time and under these circumstances an assessee could contend that the entire expenditure be allowed as a deduction on Revenue account, but in the present case, the applicants were to be allowed allotment of shares right at the very beginning there being no time gap. The CIT (Appeals) also referred to the terms and conditions of the issue, which clearly stated that the purpose of the same was to partl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed as deduction on Revenue account. 11. The learned Accountant Member, who wrote the initial order, at the outset, referred to clause 3 of the prospectus, which is reproduced at page 5 of his order. According to him a bare reading of the clause brought forth the fact that the company would be obliged to issue two equity shares of Rs. 10 each at a premium of Rs. 12.50 each and the share holders would be under obligation to accept the shares without any further action on their part on the date of allotment of the debentures themselves. In other words, on the payment of application money as also the allotment money in relation to the partly convertible debentures the company would issue two equity shares at Rs. 45 on the date of the allotment of the debentures. This fact, according to the learned Accountant Member was also evident from the allotment advice--allotment money notice, a copy of which was produced before the Division Bench. It was also noted as a fact by the learned Accountant Member that the shares would be allotted on the same date on which the debentures were allotted and the conversion of the portion of the debentures into shares was to be done automatically by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to be treated as expenditure on capital account. The decisions referred to were those of India Cements Ltd.'s case; Brooke Bond India Ltd.'s case; and Punjab State Industrial Development Corpn. Ltd.'s case. 15. In referring to the facts of the case, the learned Judicial Member took note of the following: (i) The assessee had got permission from the Government of India for issue of 6,72,000 partly convertible debentures of Rs. 125 each; (ii) The reading of the prospectus revealed that various types of expenditure, which were to be incurred pertained to issue of debentures and nowhere had the words "issue of share capital" been used; (iii) The expenses had been incurred prior to the allotment whereas the Assessing Officer as also the CIT (Appeals) had looked into the events, which had happened after the allotment of the debentures; and (iv) The fact remained that the nature of expenses were from the very beginning relating to the issue of debentures and that the very intention of the assessee was to go for the issue of debentures. 16. The learned Judicial Member also referred to the prospectus and extracted therefrom relevant clauses pertaining to the incurring of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking a loan and the same was, therefore, allowable as deduction on Revenue account and the subsequent return in part and which in the present case is the issue of two shares would not change the nature of the expenditure. 18. In accepting the arguments raised on behalf of the assessee and treating the action of the tax authorities to be unjustified in bifurcating the amount of expenditure on pro rata basis, the learned Judicial Member relied on the judgment of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. This was a case in which the assessee derived income from interest as also letting out the warehouses etc. It claimed deduction of expenditure to the tune of Rs. 38,00,000 and odd under section 37 of the Act. The Assessing Officer allowed only some part of the expenditure, which according to him, could be allocated to the taxable income and disallowed the remaining, which according to him was referable to non-taxable income exempt under section 10(29) of the Income-tax Act. The Commissioner of Income-tax (Appeals) allowed relief to the assessee, but the Tribunal reversed the order upholding that of the Assessing Officer. The Hon'ble High Court conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res was capital in nature. The facts of the present case, according to the learned Departmental Representative, clearly indicated that the object of the issue was to get the shares and debentures of the company listed on the stock exchange and further after the issue the company would become a company in which the public were substantially interested and the provisions of the Wealth-tax Act 1957 would not be applicable, and, the company would not be liable to pay Wealth-tax [page 9 of the prospectus referred to]. The learned Departmental Representative also referred to pages 6 and 7 of the prospectus to highlight the position of the capital structure of the company prior to and after the issue of the partly convertible debentures emphasizing that the share capital also went up after the conversion of debentures and attention was also invited once again to the prospectus and other connected terms of the issue for highlighting that when a person applied he paid for the shares as also the debentures and on allotment the Debentures as also the shares automatically came to him without any further action on his part. According to the learned Departmental Representative a person had no op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this was not applicable being distinguishable on facts. 23. In reply the learned counsel for the assessee contended that the expenditure in question pertained to the issue of debentures and mention of Wealth-tax and Income-tax benefits was a subsequent event. He in turn sought to distinguish the two judgments relied upon by the learned Departmental Representative and these being the one of Ahmedabad Bench of the Tribunal in the case of Banco Products (India) Ltd. and the other being Jonas Woodhead Sons (India) Ltd's case. 24. I have considered the rival submissions and have also perused the orders passed by the learned Members constituting the Division Bench, along with the authorities relied upon before the Division Bench and now before me in the present reference. As rightly contended by the learned Departmental Representative, there is no dispute between the learned Members of the Division Bench that the expenditure pertaining to issue of share capital is not to be allowed on Revenue account. The parties before me have very aptly and have in fact clearly understood the impact of the judgment of the Hon'ble Supreme Court in the case of India Cements Ltd., but at the ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue was required to be bifurcated on a pro rata basis treating a part thereof to be capital in nature being related to the issue of share capital. The learned Departmental Representative has also referred to relevant portions of the prospectus and other connected documents to emphasize relevant facts of the case and her reliance on the unreported decision of the Delhi Benches of the Tribunal in the case of Sona Steering Systems Ltd. is apt and in fact direct and this would also be my observation in respect of the reported decision of the Ahmedabad Bench of the Tribunal in the case of Banco Products (India) Ltd. That was a case in which the assessee company had incurred certain expenditure on issue of partly convertible debentures and claimed the same as Revenue expenditure by treating the same as pertaining to borrowing of funds. It was submitted before the Assessing Officer that in respect of each debenture of the face value of Rs. 100 Rs. 30 was convertible into three shares of Rs. 10 each on30th June, 1987and the balance of Rs. 70 was non-convertible and was redeemable in the 6th, 7th and 8th years of issue. The Assessing Officer disallowed the claim treating the same to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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