2014 (7) TMI 175 - HC - Income Tax

Court upholds treating FCCB expenses as revenue expenditure under Income Tax Act, dismissing Commissioner's intervention.

The High Court upheld the Assessing Officer's decision to treat expenses on Foreign Currency Convertible Bonds (FCCBs) as revenue expenditure, dismissing ... Expenses incurred on issuance of FCCBs – Held that:- The Tribunal was of the view that the expenditure incurred by the assessee on issue of the bonds was claimed to be deductible being revenue in nature and that was allowed after due verification/examination - the CIT could not have concluded on same material that the FCCBs, in real sense, were equity shares right from the beginning and that the conversion of bonds was only a routine technical compliance as per the Regulations and guidelines - the material does not indicate that conversion is automatic and that unless the option is exercised conversion or the consideration was not permissible - a possible view taken by the AO should not have been termed as prejudicial to the interest of the revenue – thus, no substantial question of law arises for consideration – Decided against Revenue. Issues:1. Interpretation of expenses incurred on issuance of Foreign Currency Convertible Bonds (FCCBs) as revenue or capital expenditure.Analysis:The judgment involves an appeal concerning the assessment year 1998-99 where the Tribunal partially allowed the assessee's appeal. The Commissioner of Income Tax-VII had exercised powers under section 263 of the Income Tax Act, 1961, deeming the Assessing Officer's finding as prejudicial to the revenue's interest. The dispute revolved around the nature of expenses incurred on FCCBs by the assessee, engaged in telecommunication and internet services.The primary contention was whether the expenses on FCCBs should be classified as revenue or capital expenditure. The appellant argued that since FCCBs were convertible and could augment share capital, the expenditure should be considered capital. Conversely, the respondent contended that conversion was subject to bond holders' option, and until conversion, interest payments were mandatory, justifying the revenue classification. The Tribunal upheld the Assessing Officer's view that the conversion was not automatic and required bond holder action, supporting the revenue's interest.Upon reviewing the Tribunal's order, the High Court noted that the Assessing Officer had diligently considered all bond features and conversion terms before allowing the expenditure as revenue. The Court emphasized that the conversion was not automatic but contingent on bond holder action, rendering the Commissioner's intervention under section 263 unwarranted. The Court concluded that the Assessing Officer's view was reasonable and not prejudicial to revenue, dismissing the appeal as it did not raise a substantial question of law.In summary, the judgment clarifies the treatment of expenses on FCCBs, affirming the revenue classification based on the non-automatic nature of conversion and bond holder discretion. The decision underscores the Assessing Officer's thorough examination and upholds the view that the expenditure was correctly treated as revenue, rejecting the need for further judicial intervention.