TMI Blog2013 (11) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in view of Hon’ble Jurisdiction High Court in case of Godrej and Boyce Mfg. Co. Ltd. v. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT]. The authorities below have invoked section 14A on the ground that the assessee invested this money in the Zero Coupon Convertible Loans therefore the intention of the assessee was to earn dividend income. It has been brought on record by the assessee that the loans were received back by the assessee and there was no conversion of loan into shares. Even otherwise section 14A cannot be invoked on the presumption that the particular investment would be convertible into shares and in future after such conversion the assessee is going to earn dividend income – No justification in invoking section 14A for disallowance of the expenditure when the assessee has invested in the form of giving Zero Coupon Optionally Convertible Loan – Decided in favor of Assessee. - ITA No.5642/Mum/2010 - - - Dated:- 6-9-2013 - Vijay Pal Rao And D Karunakara Rao, JJ. For the Appellant : Mr Farrokh V Irani For the Respondent : Mr Santosh Kumar ORDER:- PER : Vijay Pal Rao This appeal by the assessee is directed against the order dated 25.3.2010 of Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and observed that the discount amount has been adjusted against share premium and therefore it is capital expenditure. Alternatively the AO has also held that the amortisation of discount has not been debited in the profit and loss account which means that the assessee has written of the amount in the books. The assessee has not followed a proper method of writing of this amount in the book to avoid the deduction for taxability u/s 41(1). Hence the AO held that the amount of Rs. 85.5 crores is to be added u/s 41(1) of the Income Tax Act. Further the AO has held that this amount has to be disallowed u/s 14A r.w.r 8D of the Income Tax Act on the ground that the amount received by the assessee on issue of debentures has been invested in the sister concerns. On appeal, the CIT(A) has held that the assessee has utilised the amount for giving interest free advances to sister concerns therefore, the same are not wholly and exclusively for business purpose and consequently the interest expenditure of Rs. 85,51,55,000/- is not allowable u/s 36(1)(iii)/37 of Income Tax Act. The CIT(A) however held that provisions of section 41(1) of the Act are not applicable to the facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in case of CIT Vs Secure Meters Ltd. 321 ITR 611 and submitted that the expenditure incurred on issue of debenture being loan is admissible as revenue expenditure. The Ld. Counsel has further pointed out that the SLP filed by the revenue against the decision of Hon ble Rajasthan High Court in case of M/s Secure Meters Ltd. has been dismissed vide decision dated 11.8.2009. He has filed a copy of the same. The Ld. Counsel has also relied upon the following decision of this Tribunal: - M/s Velocity Trading Pvt. Ltd. Vs ACIT dated 8.2.2005 - M/s Gold Rock Investments Ltd. Vs DCIT dated 16.6.2005 - Meghraj Financial Services DCIT dated9.2.2004 5. On the other hand, the Ld. DR has relied upon the order of the CIT(A) and submitted that the assessee has failed to establish that the interest free advance were given for business expediency when it has not been brought on record how the money has been utilized by the sister concerns. 6. We have considered the rival submissions as well relevant material on record. The Assessing Officer has disallowed the amount of discount of debentures on the ground that the same is capital expenditure apart from invoking the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. 8. Thus, it has been held by the Hon ble Supreme Court that when the company issue debenture at discount it incurs a liability to pay larger amount than what it has borrowed at a future date. The liability equivalent to discount is incurred in present but payable in future. On the point of allowability of the said discount u/s 37(1) the Hon ble Supreme Court has held at page No. 812 to 813 as under: Our attention was drawn to the case of Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., a decision of the English Court of Appeal reported in [1944] 12 ITR (Suppl) 1, where the English Court had treated discount or premium in the hands of the recipient as a receipt of a capital nature. But the character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient. In the light of the ratio l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the accounting practice of showing the discount in the discount on debentures account which is written off over the period of the debentures. The appellant is, therefore, entitled to deduct a sum of Rs. 12,500 out of the discount of Rs. 3,00,000 in the relevant assessment year. The balance expenditure of Rs. 2,87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed), therefore, which is the subjectmatter of appeal before us, is answered in the negative in so far as it relates to the deduction of Rs. 2,87,500 in the assessment year in question though for reasons entirely different from those given by the High Court. The second part of the reframed question is answered in the affirmative. But only a proportionate part of the discount can be deducted in the assessment year in question as set out earlier. The appeal is disposed of accordingly and the judgment of the High Court is set aside. There will be no order as to costs in the circumstances of the case. 9. It is clear from the decision of Hon ble Supreme Court that for issuing debenture at discount the assessee has incurred the liability to pay the discount in the year of issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, still it cannot be said to be capital expenditure, as it was held that the purpose for which the new loan was required was irrelevant to the question as to whether the expenditure for obtaining loan was revenue or capital expenditure. We are told that relying on this judgment many of the High Courts of the country have consistently taken the view that the expenditure incurred in issuing any debentures and raising loan on debentures is admissible obviously because the debenture is also a loan. At this stage it was contended by the learned counsel for the Revenue that a distinction should be drawn between the convertible and non-convertible debentures inasmuch as if the debenture is converted into shares then it partakes of the character of capital and in that event the expenditure would not be revenue expenditure and would be capital expenditure. Learned counsel for the assessee informs that though it has not come on record so far but as a matter of fact the debentures issued were of convertible nature. Then, the learned counsel for the assessee argued relying upon the judgment of the Calcutta High Court in CIT v. East India Hotels Ltd. reported in [2001] 252 ITR 860, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrelevant to consider the object with which the loan was obtained however in the case of the assessee the loan was obtained to invest in the Zero Coupon Convertible Loan advance to the sister concerns which are in the same line of business therefore, in view of the decision of Hon ble Supreme Court in case of S. A. Builders Ltd. (supra) the same is for the business/commercial expediency and hence is allowable expenditure. 14. Ground No. 2 regarding disallowance u/s 14A by applying rule 8D. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. At the outset we note that the rule 8D is not applicable for the assessment year under consideration in view of Hon ble Jurisdiction High Court in case of Godrej and Boyce Mfg. Co. Ltd. v. DCIT 328 ITR 81. The authorities below have invoked section 14A on the ground that the assessee invested this money in the Zero Coupon Convertible Loans therefore the intention of the assessee was to earn dividend income. It has been brought on record by the assessee that the loans were received back by the assessee and there was no conversion of loan into shares. Even otherwise section 14A cannot be invoked on the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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