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2016 (2) TMI 404 - ITAT HYDERABAD

2016 (2) TMI 404 - ITAT HYDERABAD - TMI - Expenditure incurred on the issue of Foreign Currency Convertible Bonds (FCCB) - capital expenditure OR revenue expenditure - Held that:- A Bench of this Tribunal at Bangalore in the case of M/s. Crane Software International Ltd., Bangalore vs. DCIT, Circle-11(2) (2011 (2) TMI 1414 - ITAT BANGALORE), has considered whether FCCB issue expenses are in the nature of capital or revenue and has held the same to be revenue in nature. Similar view has been e .....

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i Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member For the Petitioner : Mr. Y. Ratnakar For the Respondent : Mr. B. Kurmi Naidu ORDER Per Smt. P. Madhavi Devi, J. M. This is assessee s appeal for the A.Y. 2007-08. In this appeal, the assessee is aggrieved by the order of the Ld. CIT(A) in confirming the assessment order wherein the expenditure incurred by the assessee on the issue of Foreign Currency Convertible Bonds ( FCCB ) has been held as capital expenditure and not as rev .....

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CIT assumed jurisdiction under section 263 of the I.T. Act and directed the A.O. (i) to bring to tax the gain on account of foreign exchange fluctuation of ₹ 15,46,428 as income from other sources; (ii) to disallow gratuity of ₹ 1,32,95,577; and (iii) to disallow expenditure amounting to ₹ 2,69,26,757 relatable to issue of foreign currency convertible bonds. Aggrieved by the order of the Ld. CIT under section 263 of the I.T. Act, the assessee preferred an appeal before the ITAT .....

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High Court but the Hon ble High Court dismissed assessee s appeal holding that there was no substantial question of law involved in the matter. Therefore, the A.O., while giving effect to the order of ITAT, re-examined the allowability of expenditure incurred by the assessee on issue of FCCBs and held that FCCB bonds were issued with an option to the bond holders to convert them to ordinary shares or to redeem their claim of bonds on 06.12.2011 at 147.882% of the principal. He observed that sin .....

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it earning process or a part of the working capital but was meant for investment in the capital field such as off-shore acquisition, acquisition/ purchase of scrips, / investment in wholly owned subsidiaries etc., He therefore, treated the expenditure of ₹ 2,64,26,757 incurred on issue of the bonds as capital expenditure and accordingly, brought it to tax. Aggrieved, assessee filed an appeal before the Ld. CIT(A) who confirmed the order of the A.O. and the assessee is in second appeal befo .....

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06.12.2014 at 147.882% of the bond amount. He submitted that the bonds were issued for securing funds for business purposes including expansion of the business and the amount received is thus an unsecured loan in the hands of the company. He submitted that the expenditure of ₹ 2,64,26,757 incurred by the assessee company for issuing these bonds is therefore revenue expenditure. He also submitted that during the F.Y. 2006-07 relevant to the A.Y. 2007-08, the funds collected by the assessee .....

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F.Y. 2007-08. He has submitted that the remaining outstanding amount in respect of the balance FCCBs has been fully repaid on 31.12.2011 with premium to the bond holders which fact has also been taken note of by the Commissioner in his order under section 263 of the I.T. Act. He has submitted that as the bonds were issued only for the purpose of securing loan finance, the assessee has not obtained any asset or advantage of any enduring nature and the expenditure made is for securing the use of m .....

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e following decisions in support of his contention. 1. India Cements Ltd., vs. CIT (1966) 60 ITR 52 (SC) 2. CIT vs. Tumus Electric Corpn. Ltd., (1990) 49 Taxman 249 (MP) (HC) 3. CIT vs. East India Hotels Ltd., (2001) 119 Taxman 235 (Cal.) 4. CIT vs. South India Corpn. (Agencies) Ltd., (2007) 164 Taxman 249 (Mad.) 5. CIT vs. First Leasing Co. of India Ltd., (2008) 304 ITR 67 (Mad.) 6. CIT vs. Secure Meters Ltd., 321 ITR 611 7. CIT vs. ITC Hotels Ltd., 334 ITR 109 8. M/s. Crane Software Internatio .....

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e of India Cements Ltd., reported in (1966) 60 ITR 52 within the scope of the expenditure to be amortized against profits over ten year period under section 35D of the Act. Thus, according to him, the expenditure on the issue of FCCB is allowable as revenue expenditure. 4. The Ld. D.R., on the other hand, supported the orders of the A.O. and has placed reliance upon the findings of the A.O. and the CIT(A). 5. Having regard to the rival contentions and the material on record, we find that the onl .....

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essee, as, a loan is a liability and has to be repaid and it is therefore, erroneous to consider the liability as an asset or an advantage. It was further held that the nature of the expenditure incurred in raising a loan would not depend upon the nature or purpose of the loan as the loan may be intended to be used for the purchase of raw material when it is negotiated but the company may, after raising the loan, change its mind and spend it on secured capital assets. Therefore, the purpose for .....

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f CIT vs. Tumus Electric Corpn. Ltd., (1990) 49 Taxman 249 (MP) (cited supra), after considering the above judgment of the Hon ble Supreme Court has held that the expenditure incurred by the assessee therein in connection with the execution of a mortgage deed to secure a loan was revenue expenditure as there was no regulation regarding the application of capital subsidy to any specific purpose. 6. In the case of CIT vs. East India Hotels Ltd., (cited supra), the Hon ble High Court of Calcutta wa .....

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of section 35D and the amortization allowable and the said provision has further been clarified that it is not intended to supersede any other provision of the I.T. Act, under which such expenditure is admissible as a deduction. In the case before the Hon ble Calcutta High Court, 20% of the debentures was payable by the end of three years from the date of issue of debentures by way of issue of shares and the balance 20% at the end of 8th, 9th , 10th and 11th years from the date of allotment of .....

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