2016 (2) TMI 404 - AT - Income Tax

Treatment of Foreign Currency Convertible Bonds (FCCBs) as Revenue Expenditure under IT Act

Gati Limited Versus Income Tax Officer, Ward – 2 (2) Hyderabad

The Tribunal held that the expenditure incurred by the assessee on the issue of Foreign Currency Convertible Bonds (FCCBs) should be treated as revenue ... 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 expressed in the cases of CIT vs. Havells India Ltd., (2012 (5) TMI 449 - DELHI HIGH COURT ) and also DCIT vs. UAG Builders (P.) Ltd., Delhi (2012 (9) TMI 764 - ITAT DELHI ). We, therefore, find that this issue is fairly covered by the above cited decisions. Hence, we hold that the expenditure incurred by the assessee on issue of FCCB is revenue expenditure allowable under section 37(1) of the I.T. Act. - Decided in favour of assessee Issues:Nature of expenditure incurred by the assessee on the issue of Foreign Currency Convertible Bonds (FCCBs) - whether capital expenditure or revenue expenditure.Analysis:The assessee, a Cargo Transport and Trading company, filed its return for A.Y. 2007-08, declaring income and book profit. The CIT directed the A.O. to disallow expenditure related to FCCBs. The ITAT upheld the initiation of proceedings under section 263 and directed re-examination of FCCB expenses. The High Court dismissed the appeal, leading to the A.O. treating the expenditure as capital. The assessee contended that the FCCBs were issued to secure funds for business purposes, making the expenditure revenue. The A.O. and CIT(A) disagreed, leading to the current appeal.The Hon'ble Supreme Court's decision in India Cements case established that the nature of expenditure for obtaining a loan does not depend on the loan's purpose. Various High Courts, including Madhya Pradesh, Calcutta, and Madras, have followed this precedent in cases involving debentures and loans. The Karnataka High Court and ITAT Bangalore have also ruled in favor of treating FCCB expenses as revenue. The expenditure on FCCBs was deemed revenue expenditure under section 37(1) of the IT Act, following the established legal principles.In conclusion, the Tribunal held that the expenditure incurred by the assessee on the issue of FCCBs should be treated as revenue expenditure under section 37(1) of the IT Act. The appeal of the assessee was allowed, emphasizing the legal precedence and established principles governing such expenditures.This detailed analysis of the judgment showcases the legal intricacies involved in determining the nature of expenditure on FCCBs and the application of relevant legal principles and precedents.