2017 (3) TMI 1390 - HC - Income Tax

Court upholds FCCB expenditure as revenue, dismissing appeal and affirming Tribunal's decision.

The Commissioner of Income Tax -6 Versus M/s. Faze Three Ltd.

The High Court dismissed the appeal challenging the Tribunal's decision on the deduction claim for expenses on Foreign Currency Convertible Bonds (FCCBs). ... Allowing a new claim of deduction, being expenses incurred on issue of Foreign Currency Convertible Bonds - amount not claimed in the return of income filed by the assessee nor any revised return of income was filed by it for claiming the same - Held that:- The issue arising herein stands concluded against the Revenue and in favour of the Respondent-Assessee by the decision of this Court in CIT v/s. Pruthvi Brokers and Shareholders Pvt. Ltd. [2012 (7) TMI 158 - BOMBAY HIGH COURT ] as held that The appellate authorities have the discretion whether or not to permit such additional claims to be raised. - Decided in favour of assessee Allowance of expenditure incurred on issue of Foreign Currency Convertible Bonds (FCCB) - Held that:- FCCBs expenditure incurred by it on the issue of bonds as on the date of its issue is expenditure incurred to obtain a loan. In such circumstances, even if the FCCB are convertible into equity at a later date, yet on the date of its issue, it is a loan. Therefore, expenditure incurred thereon is revenue in nature. See CIT v/s. Secure Meters Ltd. [2008 (11) TMI 66 - HIGH COURT RAJASTHAN ] - Decided in favour of assessee Issues:1. Admissibility of a new claim of deduction for expenses incurred on Foreign Currency Convertible Bonds (FCCBs).2. Classification of expenditure incurred on FCCBs as revenue or capital expenditure.Analysis:Issue 1: Admissibility of new claim of deduction for FCCBs expensesThe High Court considered the question of law raised by the Revenue regarding the admissibility of a new claim of deduction for expenses incurred on FCCBs. The Court referred to a previous decision in CIT v/s. Pruthvi Brokers and Shareholders Pvt. Ltd., where a similar issue was decided in favor of the assessee. The Court held that the issue was already settled in favor of the Respondent-Assessee, and therefore, the question did not give rise to any substantial question of law. As a result, the Court did not entertain this question.Issue 2: Classification of expenditure on FCCBsRegarding the classification of expenditure incurred on FCCBs as revenue or capital expenditure, the Respondent-Assessee had claimed a deduction for expenses related to the issuance of FCCBs. The Assessing Officer and the Commissioner of Income Tax (Appeals) had initially refused to examine this claim as it was not made in the return of income. However, the Tribunal allowed the claim, considering the FCCBs expenditure as revenue in nature. The Tribunal based its decision on the view that on the date of issuance, FCCBs represent a loan, even if they can be converted into equity later. The Court noted that FCCBs issued by the Respondent were convertible at the option of bondholders and not compulsorily convertible into equity. The Respondent's Counsel cited the decision of the Delhi High Court in CIT v/s. Havells India Ltd., which supported the allowance of such expenditure as revenue expenditure. The Court, in line with previous judgments by various High Courts, upheld the Tribunal's view that the expenditure is revenue in nature. Consequently, the Court did not find any reason to deviate from the consistent legal position on this issue and dismissed the appeal, ruling in favor of the Respondent.In conclusion, the High Court dismissed the appeal under Section 260A of the Income Tax Act, 1961, challenging the Tribunal's order regarding the deduction claim for expenses on FCCBs. The Court upheld the Tribunal's decision to allow the claim, considering the expenditure as revenue in nature, based on established legal precedents.