2015 (1) TMI 706 - HC - Income Tax

Appeal Dismissed, Convertible Debentures Capital Expenditure, Certificate for Supreme Court Appeal

The court dismissed the appeal, aligning with the Gujarat High Court's precedent that expenditure on convertible debentures is capital expenditure. ... Capital expenditure - expenditure on issue of convertible debentures - enduring benefit - distinction between raising loan and raising capital by issue of shares - reliance on binding precedent of Division Bench - certificate of fitness to appeal to Supreme CourtExpenditure on issue of convertible debentures - capital expenditure - enduring benefit - distinction between loan and issue of shares - Expenditure incurred in connection with the issue of convertible debentures is to be treated as capital expenditure where the convertible portion confers enduring benefit by being converted into equity shares. - HELD THAT: - The High Court considered whether expenditures on issuing convertible debentures are revenue or capital in nature. Relying on the Division Bench decision in Tax Appeal Nos. 481 & 482 of 1999 and the Apex Court authorities referred to therein, the Court accepted the reasoning that conversion of debentures into equity results in an increase of the company's capital base and confers an enduring benefit on the company. The Court noted the legal distinction between raising funds by way of loan (debentures) and raising capital by issuance of shares, and held that where a substantial portion of convertible debentures is converted into equity, the expenditure attributable to the convertible (capital) portion is capital expenditure. The Court found the view supported by earlier precedents to be a plausible and binding approach for this Court, and declined to refer the matter to a Larger Bench. [Paras 10, 11, 12]Appeal dismissed; expenditure relating to the convertible portion of debentures treated as capital expenditure; certificate of fitness granted to the assessee to appeal to the Apex Court.Final Conclusion: The appeal is dismissed: the High Court affirms that expenditure relating to the convertible portion of debentures, which results in conversion to equity and thereby affords an enduring benefit, is capital in nature; a certificate of fitness is granted to enable the assessee to carry the matter to the Supreme Court. Issues Involved:1. Whether the expenditure on the issue of convertible debentures is a capital expenditure.Detailed Analysis:Background:The appellant assessee challenged the order of the ITAT, Ahmedabad Bench 'C', which partly allowed the appeals filed by the assessee for the A.Y. 1994-95. The assessee filed its return declaring an income of Rs. 7,36,21,130/-, but the Revenue assessed it at Rs. 21,18,68,970/-. The assessee's appeal to the CIT(A) was partly allowed, leading to further appeals to the Tribunal, resulting in the current appeal.Legal Question:The core legal question framed was whether the expenditure on the issue of convertible debentures is a capital expenditure.Arguments by the Appellant:The appellant's counsel, Mr. Soparkar, cited various High Court decisions supporting the view that such expenditure is revenue expenditure:1. Madras High Court in 'COMMISSIONER OF INCOME-TAX VS. SOUTH INDIA CORPN. (AGENCIES) LTD.' held that expenditure on the issue of debentures, which may or may not convert into shares, is revenue expenditure.2. Madras High Court in 'COMMISSIONER OF INCOME-TAX VS. FIRST LEASING CO. OF INDIA LTD.' held that expenses on the issue of debentures are allowable.3. Rajasthan High Court in 'COMMISSIONER OF INCOME-TAX, UDAIPUR VS. SECURE METERS LTD.' held that expenses related to the issue of debentures are allowable as revenue expenditure.4. Punjab & Haryana High Court in 'COMMISSIONER OF INCOME-TAX VS. SUKHJIT STARCH & CHEMICALS LTD.' held that such expenditure is allowable as it is necessary for running the business.5. Karnataka High Court in 'COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD.' held that expenditure on convertible debentures is revenue expenditure.6. Delhi High Court in 'COMMISSIONER OF INCOME-TAX VS. ITC HOTELS LTD.' held that the source of income, not the source of receipt, should be situated outside India for exceptions in section 9(1)(vii)(b).Respondent's Argument:Mr. Mehta, representing the Revenue, cited the Division Bench judgment of the Gujarat High Court in 'INCOME TAX OFFICER VS. VXL LTD.' which held that expenditure on the issue of shares to increase share capital is capital expenditure, even if it incidentally helps the business.Court's Analysis:The court noted the divergence in views among different High Courts but found the Gujarat High Court's earlier decision in 'INCOME TAX OFFICER VS. VXL LTD.' compelling. The court emphasized that:1. Issuing convertible debentures, which are later converted into equity shares, provides an enduring benefit to the company.2. The expenditure on converting debentures into equity shares should be treated as capital expenditure.3. The Supreme Court in 'India Cements Ltd. Vs. CIT, Madras' and 'Brooke Bond India Ltd. Vs. CIT' distinguished between obtaining capital by issuing shares and obtaining a loan by debentures, affirming that increasing share capital is capital expenditure.Conclusion:The court dismissed the appeal, aligning with the Gujarat High Court's precedent that expenditure on convertible debentures is capital expenditure. However, acknowledging the differing views among High Courts, the court granted a certificate of fitness to the assessee to appeal to the Apex Court.Final Judgment:The appeal was dismissed, but the assessee was granted the certificate to approach the Supreme Court. No order as to costs was made.