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2016 (5) TMI 360 - ITAT MUMBAI

2016 (5) TMI 360 - ITAT MUMBAI - TMI - Foreign Currency Convertible Bonds (FCCBs) - allowability of the claim of expenses - capital expenditure or revenue expenditure - Held that:- In the instant case, Ld AR for Assessee demonstrated that the Assessee earned substantial business from abroad after acquiring the foreign companies with the said FCC Bonds. The impugned expenditure incurred were incurred undisputedly by the Assessee in connection with FCCBs which were applied for acquiring the foreig .....

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Bond subscription $ 5.5 million was ultimately refunded with Interest after the lock in period. - Decided in favour of assessee

Disallowance u/s 14A - Held that:- Assessee has an additional ground mentioning that some investments made in the subsidiaries yielded dividends chargeable to tax in India. Such investments should be kept outside the scope of the provisions of Rule 8D of the IT Rules, 1962 while determining the quantity to be disallowed u/s 14A of the Act. In this regard, Ld .....

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t. This issue requires reconsideration and fresh decision by the AO in the light of the said decisions on the issue. - Decided in favour of assessee for statistical purposes

Disallowance of deduction of bad debts - Held that:- AO has not been able to point out an instance of bad debts where the action of the appellant was mala fide. An assessee is entitled to re-evaluate and revalue its debtors from time to time failing which he will have unrealistic realizable figures in his books of .....

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nd one cross objection under consideration involving the assessment year 2008-2009. Assessee filed the appeal ITA No. 8364/M/2011 & C. O. No. 233/M/2012. Revenue filed the appeal ITA No. 8066/M/2011. Since the issues raised in all the appeals are inter-connected, therefore, for the sake of convenience, they are clubbed, heard together and disposed of in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order. ITA No.8364/M/2011 (By assessee) 2. Th .....

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3,568/- under section 14A of the Act. 3. Without prejudice to the appellant s above contention that the amount of ₹ 35,53,568/- should not be disallowed u/s 14A of the Act, the Ld CIT (A) has erred in not restricting the quantum of disallowance u/s 14A of the Act to the amount of exempt income ie ₹ 20,17,860/-. 4. The Ld CIT (A) has erred in upholding the levy of interest u/s 234D of the Act. 3. The core issue raised in this appeal relates to the allowability of the claim of expenses .....

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strategic acquisitions and / or alliances overseas. The undisputed fact is that none of the bond subscribers exercised the option to convert the bonds into equity. In substance, all the bonds were redeemed with premium without any conversion into equity whatsoever. Assessee incurred the above sum of ₹ 5.82 Crs (rounded off) in connection with rise of such FCCBs, which were eventually redeemed with premium to the bond holders. The said ₹ 5.82 Crs was incurred on accounts of (i) fee p .....

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eduction of the sum of ₹ 5.82 Crs from the income of the assessee and relied heavily on the assessee‟s treatment of the said amount in the books of account. Assessee took the same in the balance sheet. AO disallowed the said sum of ₹ 5.82 Crs in the assessment on the ground that the said amount constitutes capital in nature. On the other hand, assessee is of the opinion that the said amount being paid to lead manager / legal advisors / listing fees constitutes revenue expenditu .....

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ssessee is in appeal before us with Ground no.1 mentioned above. 5. Before us, Ld Counsel for the assessee narrated the above facts of the issue and explained that the FCCBs in this case are only issued by the company as a debt raising instrument. The bond holders never had any voting rights as the same were never converted into equity shares of the company. The bonds eventually were redeemed with premium at the option of the bond holders. In such circumstances, in substance, the said bonds are .....

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s under:- 2.15. In this regard, reliance is placed on the following decisions wherein it has been held that expenses incurred on FCCB‟s are allowable as revenue expenditure even after considering the special Bench ruling in the case of Ashima Syntex (supra): Secure Meters Ltd (321 ITR 611) (Rajasthan High Court) - Supreme court has dismissed department‟s SLP vide appeal (Civil) 10548) of 2008 dated 11th August, 2009. Sukhjit Starch & Chemicals Ltd (326 ITR 29) (P & H) High Co .....

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the view of the above, it is respectfully submitted that expenses incurred on FCCB issue should be allowed as revenue expenditure u/s 37(1) of the Act. 6. On the other hand, Ld DR for the Revenue heavily relied on the order of the Tribunal in the case of Zee Telefilms Limited (33 taxmann.com 413), wherein it was held that such expenses should be considered as per the provisions of section 35D of the Act. 7. In this regard, Ld Counsel for the assessee argued vehemently stating that the issue bef .....

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ugust, 2008. In addition, Ld Counsel for the assessee relied on various other decisions to demonstrate that similar kind of expenses were allowed as revenue expenditure u/s 37(1) of the Act. The decisions in the case of Ashima syntax Ltd (100 ITD 247) and Secure Meters Limited (321 ITR 611) (Rajasthan High Court) are some of them. He vehemently demonstrated that this is the case where the bond holders never exercised the option of converting the bonds into equity shares. Therefore, the bonds rem .....

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e judgment of the Hon‟ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Limited (82 ITR 363), Ld Counsel for the assessee submitted that the accounting entries do not impact tax implications. Further, relying on the recent decision of the ITAT, Hyderabad in the case of Bhagyanagar India Limited (ITA No. 99 and 1345/2012), Ld Counsel for the assessee submitted that the assessee‟s option to write off FCCB issue expenses against the security premium account does not .....

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iture incurred in connection with the FCCBs constitutes an allowable revenue expenditure u/s 37(1) of the Act and relied heavily on the judgment of the Hon‟ble Bombay High Court in the case of Grindwell Nortion India Limited (ITA No.694 of 2012) dated 24th December, 2014. Further, it is the case of the Ld Counsel for the assessee that the Ld DR cannot make a new case before the Tribunal, which was not raised during the assessment / first appellate proceedings. For this, he relied on the Sp .....

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id to those parties who contributed for the success of the issue of FCCB amounting to US $5.5 millions. In principle, the payments of this nature in our opinion falls in revenue zone. But the fact is that they'd were incurred in connection with issue of FCCBs. Assessee raised these Foreign Currency Bonds of ₹ 1 lakh Each. Details of such expenditure is given on page 42 of the APB. In this contest, assessee paid ₹ 5.82 Crs (rounded off) to lead managers / legal advisors and listin .....

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ring the companies abroad. Being optionally convertible, the bond holders have the option to convert into equity. But the assessee did not issue shares to the Bond holders as they did not exercise that option. Rather, assessee refunded the Bond money with premium to the Bond Holders. Considering the fact of REFUND of entire FCCBond money, we are of the opinion that FFCB issue exercise of the assessee amounts to one raising debt for the intended purpose and it is unconnected to the issue of share .....

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cerned, law in this behalf is recapitulated by this Court in the case of S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another‟ [2007 (288) ITR 1 (SC)]. Once it is established that thereso is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to dec .....

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Ld DR for the revenue filed written note stating that that the claim of such expenses is to be considered within the meaning of the provisions of section 35D of the Act. In this regard, Ld AR for the sssssee traced the way AO dealt with this issue and submitted that AO's case is if the said expenses constitutes Revenue or Capital with in the meaning of section 37 of the Act. Applicability of the provisions of Section 35D of the Act was never the issue before either the AO or before the CIT( .....

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ture incurred were incurred undisputedly by the Assessee in connection with FCCBs which were applied for acquiring the foreign companies which brought more business for the Assessee. Thus, there is nexus to the business of the Assessee. Considering all the facts of the present case we are of the opinion, that the order of the CIT(A) is required to be reversed. Accordingly, the relevant grounds of the assessee are allowed. Summary 13. We have held that the expenses in question are in principle of .....

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ssee earned exempt income of ₹ 20,17,860/-. Against this, AO quantified disallowable sum of ₹ 35,53,568/- u/s 14A of the Act. As per the assessee if the citations referred above are considered, the disallowable sum will work out to ₹ 12,40,240/-. It is the claim of the assessee that the disallowance should not exceed ₹ 20,17,860/- and relied on the cited judgment of the Hon‟ble Delhi High Court judgment in the case of Joint Investments Private Ltd (supra). Further, .....

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‟ble Delhi High Court in the case of Joint Investments Private Limited, dated 25.2.2015, which is relevant for the proposition that the disallowable amount u/s 14A must not mean that the entire exempt income should be disallowed. Various decisions have come up on this issue involving the disallowance u/s 14A r.w. Rule 8D of the Act. Ld Representatives of both the parties suggested that this issue requires reconsideration and fresh decision by the AO in the light of the said decisions on th .....

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also remanded. Accordingly, Ground nos.2, 3 and 4 are allowed for statistical purposes. 16. In the result, appeal of the assessee is allowed for statistical purposes. ITA No.8066/M/2011 (By Revenue) C.O.No.233/M/2012 (By assessee) 17. The captioned appeal is filed by the Revenue and the Cross objection is filed by the assessee for the AY 2008-2009. Ground raised in Revneue‟s appeal is as under:- That on the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in all .....

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ce the respondent had fulfilled the conditions of section 36(1)(vii) of the Act. 18. In the above Revenue‟s appeal as well as the assessee‟s Cross Objection, the common issue raised relates to the allowability of the bad debts. Relevant facts in this regard are that the assessee claimed an amount of ₹ 24,88,85,442/- as amounts written off as bad debts. This debt arose in connection with the amalgamation between the assessee and its subsidiary of Storemedia Technologies Private .....

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thereafter transferred to the Profit & Loss Account and the same was utilised to write off the bad debts and advances to the suppliers (para5.3 and 5.4 of the written submissions are relevant in this regard). These facts were not properly under stood and appreciated by the AO in the assessment proceedings. AO erroneously came to the conclusion that the assessee failed to write off the bad debts in the Profit & Loss Account. However, assessee demonstrated the same during the first appell .....

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