TMI Blog2015 (2) TMI 251X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer took the business income as loss of ₹ 8.04 crore prior to the deduction of ₹ 14 crore. Therefore, the said amount was not allowed in the computation of total income by the Assessing Officer. Hence, we find that the CIT(A) has misunderstood the computation of total income in the assessment order. Accordingly, we set aside the direction given by the CIT(A) directing AO to make the disallowances of the sum of ₹ 14 crores as the same is factually incorrect. In view of the above finding we set aside the orders of authorities below on this issue and allow the claim of the assessee regarding the interest payable of ₹ 14 crore u/s 43 B. - Decided in favour of assessee. - IT APPEAL NO. 7819 (MUM.) OF 2010 - - - Dated:- 21-1-2015 - VIJAY PAL RAO AND D. KARUNAKARA RAO, JJ. For The Appellant : Vijay Mehta and Apurv Gandhi For The Respondent : Smt. S. Padmaja ORDER Per Vijay Pal Rao, JM This appeal by the assessee is directed against the order dated 9.9.2010 of CIT(A) for A.Y. 2005-06. The assessee has raised following grounds:- Grounds of Appeal Ground No.1: On the facts and in the circumstances of the case and in law, the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to pay to IDBI bank funded interest term loan at ₹ 73.99 crores. As per the terms of the restructuring package, the IDBI Bank agreed to accept 1,40,00,000 shares at the face value amounting to ₹ 14 crore. Thus the said restructuring of funded interest expenditure of ₹ 14 crore into Equity Capital was claimed as deductible expenditure in view of provision of section 43B of the Act. The CIT(A) did not accept the contention of the assessee and confirmed the disallowance made by Assessing Officer by following the decision of this Tribunal in the case of SRF Ltd. v. DCIT (34 SOT 1). 4. Before us, the Ld. Authorized Representative of the assessee has submitted that as a result of restructuring of loan taken from IDBI bank, the interest of ₹ 14 crore was converted into Equity at par which would be subject to buy back by M/s Garware Polysters Ltd, a group concern of the assessee with the return of 10.02% per annum to IDBI. The Ld. Authorized Representative had contended that by conversion of interest into payable Equity, the assessee discharged the interest liability payable to IDBI. He has referred section 43B as well as Explanation 3C and submitted that the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computation of income of previous year in which the converted interest is actually paid. The Ld. Authorized Representative submitted that as per Explanation 3C, it is only a deferment of the liability and allow in the year when converted interest is paid. He has pointed out that the CIT(A) relied upon the decision of this Tribunal in the case of SRF v. DCIT (supra), however, the said case is based on the premises of the expenditure actually incurred and not on the Explanation 3C to section 43B. Further the decision of Hyderabad Benches of the Tribunal in the case of Suryalakshmi Cotton Mills Ltd. v. ACIT (supra), was not considered by the Delhi Benches of the Tribunal in the case of SRF Ltd. v. DCIT (supra). The Ld. Authorized Representative has also pointed out that the CIT(A) has passed the direction to the Assessing Officer by assuming the wrong facts as a wrong item of disallowance was considered by the CIT(A)while issuing the direction to the Assessing Officer to disallow ₹ 14 crore instead of ₹ 8.82 crore. He has referred the assessment order and submitted that the Assessing Officer already disallowed ₹ 14 crore apart from ₹ 8.82 crore which was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment as per section 43B. He has then referred the Judgment of Hon'ble Madras high Court in the case of Kalpana Lamps and Components Ltd. v. DCIT (225 ITR 491) and submitted that the said decision is on the issue of conversion of interest payable into loans which is covered under Explanation to section 43B, therefore, the said judgment of the Hon'ble High Court is not applicable in the issue of conversion of interest payable into share capital. Thus the Ld. Authorized Representative has submitted that the conversion of interest payable into shares amounts to discharge of liability being paid and, therefore, does not hit by the Explanation 3C of section 43B. 5. On the other hand, the Ld. DR has submitted that Explanation 3C of section 43B has been included with the object to correct the mischief of claim of deduction without payment. Therefore, to understand the intention of the legislature mischief rule of interpretation has to be applied in this case. He has further submitted that the conversion of interest into equity capital is not actual payment of interest and, therefore, it shall not be deemed to have been actually paid. The object and scheme of section 43B is to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of Hon'ble Delhi High Court in the case of CIT v. Reinz Talbros (P) Ltd (supra), the same is not applicable in the facts of the present case and the High Court has followed the Judgment in the case of Eimko K.C.P Ltd. v. CIT (supra). 7. We have considered the rival submissions as well as relevant material on record. The question arises for our consideration and adjudication is whether the conversion of interest payable into share capital under the restricting of loan would be treated as payment of interest for the purpose of section 43B(d) or not. The Assessing Officer disallowed a sum of ₹ 14 crore u/s 43B on account of conversion of interest payable into shares issued to IDBI. The Assessing Officer has supported its action by Explanation 3C of section 43B. Therefore, the applicability of Explanation 3C in case of interest payable is converted into share capital become relevant. For ready reference we quote section 43B (1)(d) and Explanation 3C as under:- 43B(1) Notwithstanding anything contained in any other provision of this Act, a deduction other- wise allowable under this Act in respect of- ................. ................. (d) any sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference as the sum of converted interest whenever is actually paid will not represent repayment of the principal. 9. As it is clarified in the Circular that the deduction of interest payable would not be allowed in the year in which it is converted into loan or borrowing or advance but would be allowed in the year when the converted interest is finally paid. Therefore, the purpose of inserting the Explanation 3C is to further defer the deduction to the year when the interest converted into loan or borrowings is finally paid. From the reading of section 43B(1)(d) and Explanation 3C as well as CBDT Circular No. 7/2006, it is discernible that the deduction is allowed only when the liability is discharged and not merely on deferring the same by conversion. The transaction of conversion of interest payable into loan or borrowing is deferment of payment of the amount and discharge of the liability because loan or borrowing has to be paid in future. But when the interest payable is converted into Equity Capital, the liability of interest payable is ceased to exist and stand discharged. Therefore, the essential ingredients of provisions of section 43B(1)(d) r.w. Explanation 3C is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re even without any trading asset coming into the trader's hands, the money spent may be regarded as expenditure. Entertainment expenditure is of this kind. Money spent to supply tea, coffee, etc., to customers only goes down the drain, as it were, but they are also to be regarded as legitimate business expenditure, because they are incurred out of considerations of business expediency. The Supreme Court in the case cited by Mr. Reddy were dealing with yet another species of business expenditure which does not result in the trader acquiring any tangible trading asset. Parties transacting business with each other may settle their differences and adjust their mutual rights and obligations. And where under such a settlement, a trading liability is incurred, there may be no outlay or outgoing and yet the amount may qualify for deduction as expenditure. The present case, however, does not touch any of the different ways in which business expenditure might arise for consideration. For we have to deal not with a running business, but with one which was yet to be born. It does not, therefore, matter whether a tangible asset comes in, or an intangible benefit results, or even whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m had arisen in the events that happened in this case, there is no scope for the further question of 'capital v. revenue ?' being debated. (Emphasis Supplied by us) 11. Thus the question was whether the expenditure was for the purpose of business of the assessee or not while considering the finding of the Tribunal, the Hon'ble High Court found as under:- The Tribunal also did not realize that the offer of know-how by Eimco to the assessee-company only represented its way of discharging its capital contribution for the floatation of the assessee-company and, in that sense, it could involve no expenditure. The Tribunal also overlooked that the allotment of shares was part of the rigging up of the assessee-company's share capital as a preliminary to the commencement of the business and m that sense too, no question of business expenditure, in the right sense of the term, could arise for consideration. 12. Thus the judgment of Hon'ble Supreme Court in the case of CIT v. Nainital Bank Ltd. (62 ITR 638) was found to be an acceptable proposition. In fact, the issue before the Hon'ble High Court in the case of Eimco K.C.P. Ltd. v. CIT (supra) was the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether sec. 43B is applicable or not. In the preceding paragraph we have observed that the assessee has discharged its liability by issuing CRPS to the institutions. Sec. 43B creates a fiction to provide that irrespective of the method of accounting followed by the assessee, certain liabilities would be allowed as deduction only on actual payment. In our view, the assessee has made a constructive payment and discharged its liability by issuing CRPS to the two institutions. The are in the form of sthares issued for consideration other than cash. To issue shares otherwise than by cash is a common way of discharging one's liability. The consideration has been received by the assessee in the form of reduction in rates of interest. Therefore, there is no gainsaying that the assessee has not made payment for the concessions received by it. It is not merely the issue of shares that has discharged the assessee from its liability. Incidental to the issue of shares, there are other rights also under the Companies Act, which the assessee will have to grant to the institutions as shareholders. The institutions will be entitled to the fixed rate of dividend. They will also have a right to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f loans and interest the assessee is going to reap benefits from year to year. It is merely a novatio with a revised rate of interest and hence there is no question of applying the ratio of the judgment of the Supreme Court in the case of Madras Industrial Investments Corporation Ltd. v. CIT (225 ITR 802) = (2002-TIOL-290-SC-IT-LS). In that case, there was a continuing benefit to the business by the issue of debentures at a discount in the sense that the amount received by the assessee was to be utilized over a number of years. Therefore, the court held that though the revenue expenditure incurred in the form of discount, is incurred wholly and exclusively for the purpose of business in the year in which it is incurred, it will have to be spread over the life of the debentures. On the other hand, in the present case, the assessee has not raised any capital in the form of cash which could be utilized over the period of the preference shares. Merely, some part of the interest which was to accrue in future, has been sacrificed by the institutions for which the assessee has been called upon to compensate in the year under consideration. Therefore, there is no question of spreading the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fiction to provide that irrespective of the method of accounting followed by the assessee, certain liabilities would be allowed as deduction only on actual payment. Assessee's case falls under Clause (d) of said section which covers interest payment to certain institution. Further, Explanation 3C to said section provides that where interest payable under section 43B(d) is converted into a loan or a borrowing, it shall not be deemed to have been actually paid. The assessee had converted outstanding interest liability along with restructuring expenses into CRPS as per revised restructuring scheme entered into by it with various banks and financial institutions such as IDBI, IFCI, SBI etc. Thus, the assessee had made a constructive payment and discharged its liability of interest by issuing CRPS to the above institutions. It would not be out of place to mention here that the above scheme was approved by 75 per cent of the creditors and it was not at the behest of the assessee. 13.3 Explanation 3C to section 43B of the Act was introduced by Finance Act, 2006 with retrospective effect from 1-4-1989. The Explanation provides that if interest liability is converted into Loans or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the preference shares and borrowings. The relevant extract is reproduced below : Subscription to preference share is a contribution to the capital of the company by its subscribers or shareholders and is not a borrowing by the company. In view of the above distinctions between loan and preference share capital and the jurisdictional High Court decision, we are of the view that the loan cannot be equated with Preference Share and consequently, it cannot be construed that Explanation 3C to section 43B of the Act covers not only loans and advances but also preference shares. 13.5 It is a well settled position of law that deeming provisions being legal fictions should be strictly construed. Explanation 3C being deeming provision strictly applies to conversion of outstanding interest amount into loans or borrowings and not to preference shares. Further, deeming provision being legal fictions could not be stretched indefinitely to include within its ambit items not specifically included therein. The following judicial decisions support the above proposition : (i) Chandrana Co. v. State of Mysore [1972] 2 SCR 344 (ii) Bengal Immunity Co. Ltd. v. State of Bihar AIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT (supra) in para 9.2.7 and 9.2.8 as under:- 9.2.7 Now we espouse the second part of the submission of the ld. DR in this regard. He canvassed a view that an expenditure denotes paying out or away and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s 37. Sub-section (1) of the section provides that any expenditure (not being expenditure in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . To put it differently, an expenditure must be laid out or expended wholly and exclusively for the purpose of business so as to be eligible for deduction u/s 37(1). There is absolutely no doubt that section 37(1) talks of granting deduction for an 'expenditure', and the Hon'ble Supreme Court in Indian Molasses Co. (P.) Ltd. (supra) has described 'expenditure' to mean what is 'paid out or away' and is something which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, their Lordships noticed that the word expenditure has not been defined in the Act. They held that : the word expenditure is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head profits and gains of business or profession . In sections 30 to 36 the expression expenditure incurred , as well as allowance and depreciation, has also been used. For example depreciation and allowances are dealt with in section 32, therefore, the parliament has used expression any expenditure in section 37 to cover both. Therefore, the expression expenditure as used in section 37 made in the circumstances of a particular case, covers an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee'. From the above enunciation of law by the Hon'ble Summit Court, there remains no doubt whatsoever that the term 'expenditure' in certain circumstances can also en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hibition or embargo that the sum actually paid will not cover payments through allotment of shares. The shares are tradable commodity and has a value which can be sold in the market as per the value of the share on the date of sale. It is easily convertible into money as and when required. Once there is no such prohibition u/s 43B for discharging the payment of interest liability and claiming of deduction thereof, by converting the payment through allotment of shares, then how the assessing officer sans any legal provision or any judicial authority could have entertained reason to be believe that such a deduction is not allowable. On these facts we are of the opinion that the reasons as recorded by the AO, do not clothe him with the jurisdiction u/s 147 to reopen the completed assessment. No legal provision or legal proposition has been brought to our notice in support the ground raised by the assessing officer in the reasons recorded for reopening the case. Thus on such reasons , we hold that the reopening u/s 147 cannot be validly initiated, as prima facie there is no 'reason to believe' that any income chargeable to tax has escaped assessment. The very initiation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Biocon Ltd. v. DCIT (supra), in our view, the Explanation 3C cannot be applied in case of interest payable, converted into share capital as the interest liability stand ceased to exist and not deferred as in case of conversion of interest loan or borrowing. The RBI master Circular would not help the case of revenue as it was a guideline for the banks ought to give the accounting treatment of restructured loan and interest. Before parting with the matter it is pertinent to note that the CIT(A) has taken a wrong item of disallowance while directing the Assessing Officer in the last para of the impugned order as under:- 2.3.11 In view of the foregoing, I am of the view that the appellant contention can not be accepted mainly on two counts, firstly the restructuring package no where states that the interest component of the loan is restructured, on the contrary fact is that loan is restructured. Secondly the so called liability of interest discharged through the issuance of share capital can not be said to be discharged in view of amendment carried out by Finance Act 2006, w.e.f. 1.04.1989 inserting Explanation 3C and 3D to section 43B. I also find that the Ld. AO in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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