TMI Blog2007 (3) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome noticed that assessee has claimed debenture issue expenses of Rs. 5,21,22,533 as allowable deduction while computing the income under the head profit and gains of business/profession. It revealed that assessee has issued 14 per cent secured fully convertible debentures during the previous year. In total 46,36,100 number of such debentures of Rs. 210 each were issued and allotted during the previous year to the public promoters, associate of promoters, financial institutions, non-residents, etc. It also emerges out that 52,66,125 number of fully convertible debentures of Rs. 170 each were also issued on right basis during the previous year and allotted to the existing shareholders of the assessee company. According to the AO, Part-A of the aforesaid 46,36,100 number of debentures was converted into equity shares of Rs. 10 each at a premium of Rs. 85 per share on allotment during the previous year itself and Part-B was converted into equity share of Rs. 10 each at a premium of Rs. 105 per share on the expiry of one year from the date of allotment. Similarly, Part-A of 52,66,125 number of debentures issued on right basis was converted into equity shares of Rs. 10 each at a premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strument. While referring to s. 36(1)(iii) he contended that amount of interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction. The learned counsel for the assessee specifically invited our attention towards the Explanation appended with sub-cl. (iii) of s. 36(1) of the Act. He further submitted that the debentures are to be treated as a loan/debt instrument and not the shares. For buttressing his contention he relied upon the decision of Hon'ble Supreme Court rendered in the case of India Cement vs. CIT and pointed out that Hon'ble Supreme Court in this case has observed that obtaining capital by issue of a share is different from obtaining loan by debenture. The loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. The loan is liability and has to be repaid and it is erroneous to consider a liability as an asset or an advantage. Thus, expenditure incurred on raising a loan is therefore, not capital expenditure but a revenue expenditure. The learned counsel for the assessee further relied upon the judgment of Hon'ble Bombay High Court in the case of Dhrangadh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as constituting a transfer by itself. A debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture. Although the instruments called debentures may be described with comparative ease, a judicial definition of a debenture or at any rate an accurate one-has not been obtained and is perhaps not urgently required. In the Accountancy Text Book by William pickles, 'debenture' is defined as a document, acknowledging a loan to a company and is generally executed under the seal of the company, usually (but not necessarily) containing provisions as to payment of interest and the repayment of the principal and giving a charge on the assets of such company, and may give security for the payment over some or all of the debts and undertakings of the company. In Halsbury's Laws of England, 4th Edn., 7th Vol., in para 813, the meaning of 'debenture' is stated as under: 'No precise definition of the word 'debenture' can be found, but various forms of instruments are called debentures. A debenture is a document which either creates or acknowledges a debt. A document may be a debenture although under its terms, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany's assets or secured by appointing of trustees, as the case may be. This creation of the charge on the assets or appointment of a trustee is only for the object to secure repayment of debenture money. In ordinary sense on the repayment amount payable on debenture such charge is discharged, whereas on the shares the company used to distribute the dividends which is an appropriation of income, hence appropriation of income vis-a-vis the charge created on the assets are two different circumstances. On merit, he further relied upon the following decisions: (1) Voltas Ltd. vs. Dy. CIT (1998) 61 TTJ (Mumbai) 543; (2) FGP Ltd. (ITA No. 2150/B/85); (3) J.M. Shares Stock Brokers Ltd. vs. Dy. CIT (2004) 83 TTJ (Mumbai) 1052; (4) CIT vs. East India Hotels Ltd. (2001) 171 CTR (Cal) 614 : (2001) 252 ITR 860 (Cal). 8. The learned counsel for the assessee further contended that in the immediately preceding year the similar issue arose before the Tribunal and the Tribunal after putting reliance on the decision of Hon'ble Supreme Court in the case of Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC) has treated the issuance of convertible debentures by the assessee as raising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, 1995, Part "B" portion of the said debentures (convertible @ Rs. 115 each) which were allotted on 17th Feb., 1995 (32,99,000 debentures) and 28th March, 1995 (13,23,800 debentures) were converted into equity shares on 17th Feb., 1996 and 28th March, 1996, respectively. In addition, the assessee company had also issued another 52,66,125 fully convertible debentures @ Rs. 170 each in the same financial year on rights basis and allotted them to its existing shareholders on 17th April, 1995. Part 'A' portion of 52,66,125 debentures issued on rights basis was converted into equity shares on 17tp April, 1995, i.e., on allotment of debentures while Part "B" portion was converted into equity shares on 17th April, 1996, i.e., on expiry of one year from the date of allotment of debentures. Thus, Part "A" portion of all the debentures stood converted into equity shares on the date of allotment itself while their Part "B" portion was converted into equity shares immediately upon expiry of one year from the date of allotment of debentures. In other words, all the debentures stood converted into equity shares either on the date of allotment of debentures or on expiry of one year of their a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any part of the amount contributed by the allottees of the debentures. He also rejected the claim of the assessee for deduction under s. 37 mainly on the ground that the impugned expenditure had, in substance, raised the share capital base of the assessee company and hence was in the nature of capital expenditure. 7. On appeal, the assessee submitted before the learned CIT(A) that debenture capital was clearly in the nature of loan or debt until the date of conversion of debentures into shares and that the liability to repay came to an end only on the conversion of debentures into shares. In support of the aforesaid submission, the assessee invited the attention of the learned CIT(A) to (i) Sch. VI, Part I of the balance sheet in which debentures were shown under the head "Secured loans" on the liabilities side of the balance sheet; (ii) p. 6 of the debenture certificate in which it was stated that it would continue to be a debenture certificate upto 27th March, 1996; and (iii) p. 7 of the debenture certificate which (a) contained certificate of registration of mortgage issued by the Registrar of Companies; (b) provided for interest on debentures; and (c) deprived the debenture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently gets converted into equity capital. Thus, debenture capital remains borrowed capital till it is repaid/discharged or converted into equity capital and hence the assessee is entitled to seek deduction for interest on such convertible debentures till their conversion or discharge. The mere fact that the debentures are fully convertible and have been fully converted into equity shares cannot, in our humble view, be a ground for denying deduction of interest for the pre-conversion period. The order of the learned CIT(A) is also supported by the following observations of the Hon'ble Supreme Court in Eastern Investments Ltd. vs. CIT: 'Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law. The only argument urged against allowing this deduction to be made is that the person who took the debentures was the party who sold the ordinary shares. It cannot be disputed that if the debentures were held by a third party, the interest payable on the same would be an allowable deduction in calculating. the total income of the assessee company. What difference does it make if the holder of the debentures is a shareholder? There appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not point out any circumstance which can persuade us to take a different view on facts than the one taken by the Tribunal in asst. yr. 1996-97. He emphasized that in view of the Special Bench decision of the Tribunal this order does not deserves to be followed 12. We have gone through the Special Bench decision and find that on the strength of Hon'ble Supreme Court decisions in the cases of Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC) and Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) as well as Punjab Haryana High Court in the case of Pepsu Road Transport Corporation vs. CIT (1981) 23 CTR (P H) 19 : (1981) 130 ITR 18 (P H) has observed in para 13 of the order that if the expenditure is for raising capital base it would be capital expenditure even if the funds so received have been used for business purposes and also for helping profit making or required for more working capital needs of the company. According to the Special Bench the argument that capital was raised for enhanced requirement of working capital and for capital project or was a help in profit making was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the case of Banco Products (India) Ltd. where the decision of the Calcutta High Court in the case of East India Hotels Ltd. was not available to the Ahmedabad Bench that decided the case. (b) In the case of J.M. Shares Stock Brokers Ltd. before the Bombay Bench of the Tribunal, the assessee issued certain convertible debentures during the year at the face value of Rs. 50 each which was to be converted into five shares of Rs. 10 each and as matter of fact, these debentures got converted into equity shares, during the year itself. The AO treated the expenditure on the issue of debentures as expenditure incurred on the issue of shares. The CIT(A) upheld the disallowance. When the matter came up before the Tribunal, the matter was decided in favour of the assessee by observing as under: 'Now, limited question before us to adjudicate upon, is whether the conversion of PCD into shares in the same year or after the end of the relevant year has got any bearing on the allowability of the expenses incurred on the issue of convertible portion of the debentures. The addition by the AO is based on this consideration alone and on this consideration only the learned CIT(A) confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not converted in the share: In the case of Essar Steels Ltd. vs. Dy. CIT (2005) 97 TTJ (Ahd)(TM) 985 : (2005) 97 ITD 125 (Ahd)(TM), the assessee issued fully convertible debentures in the year 1989 which were converted into shares partly on allotment in 1990 and fully by 1992. The assessee incurred a sum of Rs. 6,51,95,614 for the issue of debentures and claimed the same to be revenue, even though this amount was capitalized by the assessee being expenditure incurred in connection with rights issue of debentures during the relevant accounting year. The AO noted the object of issue to be-(i) to part finance the steel project and related investments; (ii) to meet the expenditure of the issue; (iii) to repay the bridge loan, if any, taken against the loan issue; and (iv) to meet the normal capital expenditure of working capital needs. He observed that the entire issue went to increase the paid up capital and share premium account because the entire debenture was fully convertible into shares within a period of 15 months. He, therefore, held that the expenditure was in the nature of expenditure mentioned in s. 35D and only 10 per cent was allowed. The CIT(A) upheld the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal which are against the assessee and ultimately in opening line of para 28 the Special Bench has observed that "we have, therefore, to examine to which category of cases the claim of the assessee falls. To determine that, we have to first understand the real nature of the transaction in the light of the three decisions of the Supreme Court (i) in the case of Juggilal Kamlapat vs. CIT (1969) 73 ITR 702 (SC) (ii) in the case of Sunil Siddharthbhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) and (iii) in the case of CIT vs. B.M. Kharwar (1969) 72 ITR 603 (SC). These cases have laid down a rule that is the substance of the transaction which matters ignoring the nomenclature". Similarly, in para No. 31, the Special Bench observed that the decisions of the Tribunal in the cases of Sona Steering Systems Ltd. vs. Dy. CIT (2003) 129 Taxman 152 (Del)(Mag); Dy. CIT vs. Ranbaxy Laboratories Ltd. (2004) 89 TTJ (Del) 100 : (2004) 88 ITD 283 (Del); Banco Products (India) Ltd. vs. Dy. CIT (1997) 59 TTJ (Ahd) 387 : (1997) 63 ITD 370 (Ahd) have also been decided by looking into the substance of the matter and held that the expenditure as was relatable to non-convertible deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t loan is payable by issue of shares that is not a repayment of the loan within eleven years. The loan has not been taken for a certain and limited period, therefore, the decision of the Supreme Court in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) is not applicable. Therefore, expenses on the issue of debentures cannot be allowed as revenue expenses. Secondly, after the insertion of s. 35D the expenses on the issue of debentures cannot be allowed as revenue expenses. In India Cements Ltd. vs. CIT, at p. 63, their Lordships observed as under: 'To summarise this part of the case, we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within s. 10(2)(xv).' Whether the expenditure on issue of fresh shares is revenue expenditure or capital expenditure? When the money is secured for certain period the expenditure is revenue expenditure within the meaning of s. 10(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly on allotment of debenture itself and partly after 15 months. Here, the intention is thus was otherwise. The conversion is not an incentive for debenture but a prelude to issue of shares." On going through this finding of the Special Bench, it infers that if debenture is a loan then deduction on account of interest expenses can be given because in the case before Hon'ble Calcutta High Court the debenture was held to be a loan and those facts were not identical to the facts before the Special Bench, however, in the present case in asst. yr. 1996-97 on an identical issue the Tribunal vide its order dt. 18th Aug., 2006 has held that the fund raised through debentures is a loan and on such loan interest is allowable. The Tribunal while holding so put reliance upon the decision of Hon'ble Supreme Court reported in (1951) 20 ITR 1 (SC). In this way the Tribunal in 1996-97 allowed the deduction in respect of interest liability pertaining to convertible and non-convertible debentures till their conversion. We do not see any good reason to deviate from this stand of the Tribunal in this assessment year and to probe the issue further on facts, because of Special Bench decision, moreso, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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