TaxTMI 
TaxTMI 
2002 (10) TMI 237
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.... incurred for issue of debentures and the bifurcation is vitiated in law, as it is based on ignoring the utter disregard to the evidence on record." 4. Ground Nos. 1 to 3 relate to the disallowance of the claim of debenture issue expenses to the extent of Rs. 18,17,680. The assessee in the present assessment year issued partly convertible debentures (PCD) at the rate of Rs. 125 per debenture. Rs. 62.50 was to be paid at the time of application and the balance equal amount was to be paid on allotment. As per the terms of the debenture issue. Part A was convertible portion of debentures in two equity shares of Rs. 10 each at a premium of Rs. 12.50 each. Thus, out of the total amount of Rs. 125 a sum of Rs. 45 represented Part A being convertible portion of debentures into two equity shares and the balance sum of Rs. 80 was non convertible portion of the debentures. On the issue of partly convertible debentures, the assessee-company spent a sum of Rs. 50,49,111 which was claimed as revenue expenditure. However, the Assessing Officer allowed only proportionate part of the expenditure which represented Rs. 80 out of Rs. 125 being the amount towards non convertible portion of the debe....
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....allowed by the Assessing Officer whereas the proportionate expenses incurred towards convertible portion into shares could not be allowed as deduction. 7. We have considered the rival submissions in the light of material placed before us and the precedents relied upon. There is no dispute about the authorities relied upon by both the sides inasmuch as the expenses in relation to debentures are to be allowed as deduction whereas the expenses in relation to shares are not to be allowed as revenue expenditure. The short point that falls for our consideration is as to whether the proportionate expenses in relation to Part-A, being the convertible portion of the debentures expenditure on issue of shares or expenditure issue of debentures. If this amount is held to be incurred on issuance of shares then the same is not to be allowed as revenue expenditure and if the same is held to be on issuance of debenture then the same has to be allowed as deduction. Clause 3 of the prospectus reads as under:-- "Conversion The debentures shall carry an obligation on the Company to issue to the holders of every such Debenture, and an obligation on the holders of the Debentures to, accept with....
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....get two shares of Rs. 10 each at Rs. 45 in total and for the balance portion of Rs. 80, he will get a debenture certificate for the said amount. At page six of the prospectus mentioning the terms of payment, it is provided as under:-- The amounts paid on application and allotment will be appropriated as under: ---------------------------------------------------------------------------------------- Part A Part B Total -------------------------------------------------------------------------- Payment Convertible portion Non convertible received of Debentures portion of the (2 Equity Shares) ....
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....subscriber was that on the payment of total consideration of Rs. 125 per PCD, the subscriber would receive. It thus, brings to light that though a nomenclature of partly convertible debenture has been employed in the prospectus yet the true nature of the same is the simultaneous issuance of equity shares capital as well as debentures. As the revenue authorities had allowed proportionate expenditure incurred towards the debenture portion and disallowed the balance amount attributable to the shares portion, we are of the considered opinion that this approach is in accordance with law. As such, we confirm the action of the CIT(A) on this issue. This ground therefore fails. 9. The only other ground which survives for our consideration relates to disallowance of Rs. 2,42,177 under section 4OA(3) of the Act. 10. The Assessing Officer noted that the company had made payment in contravention of the provisions of section 40A(3) on 12 different occasions on account of purchase of consumables inBombaytotalling Rs. 1,49,177. It was further noted that out of these twelve payments, six were to only one party namely M/s Vaju Bhai and Sons. Similarly, 3 other payments were found to be made t....
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...., we are of the considered opinion that there is no merit in this ground of appeal. 12. In the result, the appeal stands dismissed. Per Phool Singh, J.M.--I have gone through the draft order prepared by my learned brother but I do not agree with the view expressed by him on ground Nos. 1 to 3. Hence, I proceed to write my own order. 2. Facts relevant to the issue involved in ground Nos. 1 to 3, raised by the assessee, are that during assessment proceedings for assessment year 1992-93 the Assessing Officer noted that assessee-company made public issue of 6,72,000 partly convertible debentures against issue price of Rs. 125 per debenture. He further noted that company allowed conversion of debenture into two shares of Rs. 10 each with premium of Rs. 12.50 per share at the time of allotment. The assessee had incurred an expenditure of Rs. 50,49,111 in this regard and claimed that amount as revenue expenditure by relying upon the decision of Hon'ble Supreme Court in the case of India Cements Ltd. The Assessing Officer was not in agreement with the claim of the assessee and he confronted the assessee that part of debenture simultaneously gets converted into shares and the amoun....
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....eriod of time say one year, then he was of the view that there could be some justification of claim that the entire expenditure would be allowable as expenditure relating to the debenture issue but in the present case the applicants were to be allowed allotment of shares right from the very beginning as there was no time gap. The terms and conditions of the issue clearly indicated that the purpose of the same was to partly raise share capital and partly loan against the debenture. In view of these facts and circumstances of the CIT(A) did not see any justification to deviate from the view taken by the Assessing Officer. He also distinguished the reasoning of Apex Court decision in the case of India Cements Ltd and concluded that ratio of that case did not support the case of the assessee as in this case intention to allot shares right from the very beginning was very much there and it could not be said that entire expenditure incurred by the assessee in connection with this issue related to the money raised on the debenture only. He accordingly rejected the ground agitated before him. Aggrieved, the assessee came in appeal before the Tribunal. 4. Before the Bench the learned cou....
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.... allotment of debenture is Rs. 125 each for cash at par and for that one such notice dated 26-3-1992 sent to Pratima Mehta in whose favour 50 debentures had been is filed to substantiate the fact that even an intimation is sent about issue of partly convertible debenture and that makes the case more clear that whole of the transaction was that of issue of debenture and expenses were incurred by the assessee exclusively for issue of debenture and the same should have been allowed in full. 6. Reliance had again been placed by the learned counsel on the decision of Hon'ble Supreme Court in the case of India Cements Ltd. and it was submitted that Their Lordships had laid down that a loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee and expenses incurred for such transactions are revenue expenditure and allowable. Their Lordships have also laid down that it is irrelevant to consider the object with which the loan was obtained and expenses were allowed in that case. Applying the said ratio to the facts of this case the learned counsel submitted that here transaction was taking of loan and after taking loan some of the amo....
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....ager/Advisor, to Registrars to the issue; to the Agents and trustees for debenture holders as well as under writing commission and brokerage were in respect of issue of debentures. No where word issue of share capital had been used and rightly so because from the very beginning the assessee had gone for issue of debentures which no doubt were partly convertible. The expenses were incurred prior to the allotment and the Assessing Officer as well as the CIT(A) had gone with the subsequent development which happened after allotment of one debenture. No doubt as noted in para 7 by my learned brother there is procedure of conversion of the debentures and appropriation of the money of debenture which provides that as soon as one debenture is allotted, the amount of Rs. 40 will be appropriated towards two shares of Rs. I 0 each at issue premium of Rs. 12.50 and remaining amount would be in respect of debenture. However, this relates to the allotment of shares and has got no concern with the expenses. Fact remains that nature of expenses which was from the very beginning relating to issue of debentures remain the same even after subsequent conversion of debenture. The very intention of the....
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....nual service charges of Rs. 26,000 payable half-yearly in equal instalments on June 1st and December 1st of each year and would bear all the expenses incurred in connection with the drafting, stamping and registration of the documents connected with the Trusteeship agreement and also all costs incurred by the Trustees in their discharge of obligations until the trust is determined. Underwriting Commission Underwriting Commission is payable to underwriters of Debentures at the following rates: (a) On the Debenture underwritten by them and subscribed by the public @ 1.5% on the issue price of the Debentures for amounts underwritten up to Rs. 5 lakhs. --@ 1% on the issue price of the Debentures for amounts underwritten in excess of Rs. 5 lakhs. (b) On the Debenture underwritten by them and devolving on them --@ 2.5% on the issue price of the Debentures for amounts underwritten upto Rs. 5 lakhs. --@ 2% on the issue price of the Debentures for amounts underwritten in excess of Rs. 5 lakhs. No underwriting commission is payable on Debentures Underwritten on contingent basis. However, underwriting commission is payable at the same rate on the Debentures underwritte....
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.... as CIT(A) have proceeded with the facts that very intention of the assessee was to raise share capital as well as borrowing of the amount. However, the learned counsel has rightly pointed out that allotment of shares as well as appropriation of the amount of debenture towards issue of share is a subsequent event and that would not change the very nature of the expenses which were incurred by the assessee prior to conversion of the debenture. This distinction drawn by the learned counsel for the assessee is justified one because conversion of the debenture is subsequent development and that too after allotment of debenture to each of the applicant. But herein the case before us we are concerned with the nature of expenses and as referred to above, expenses were exclusively for the issue of debenture as Assessing Officer has not brought any material on record to link any of the amount claimed by the assessee as exclusively meant for issue of shares. There may be very nominal amount incurred by the assessee in respect of printing of share, despatch of share or some allied expenses but those were nominal and can be ignored in view of the fact that nature of expenses as given in the pr....
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....h Court by concluding that income from various ventures was earned in the course of one indivisible business then impugned order upholding the apportionment of the expenditure and allowing deduction of only that portion of it which was referable to the taxable income, was unsustainable. Facts of the present case are a bit different but ratio is impliedly applicable and goes in favour of the assessee. Issue of debenture was one transaction and admittedly expenses relatable to issue of debenture are allowable. The Assessing Officer had nowhere recorded a specific finding that any amount of the expenses claimed by the assessee was exclusively relatable to share capital as expenses relatable to issue of share is a capital expenditure and in the absence of such finding the amount cannot be apportioned as done by the Assessing Officer in the case in hand. 14. On the basis of above discussion I am of the definite view that whole of the amount claimed by the assessee was relatable to issue of debenture and thus allowable. Ground Nos. 1 to 3 stand decided in favour of the assessee. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Since there was difference of opinion on the i....
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....see's case before the Assessing Officer was that the transaction of conversion arose only when the applicant/allottee became the holder of the debenture and the transaction of issue of debenture got concluded at that point of time and what transpired later on was not relevant. This stand was not accepted by the Assessing Officer, who inreferring to clause 3 of the prospectus noted as a fact that it was clearly provided therein that the allotment of shares would be made on the same date on which the debentures were allotted. In other words, the simultaneous conversion would not allow the convertible debenture to exist even for a day as the point of entry was also the point of conversion and on the basis of these facts, the Assessing Officer took the view that once the amount proceeded to increase the capital on the date of entry the expenditure incurred thereto became capital in nature and, therefore, the proportionate disallowance of the claim. 6. Before the Commissioner of Income-tax (Appeals) the assessee reiterated the arguments advanced before the Assessing Officer, the main contention being that the entire expenditure was incurred in relation to the debenture issue and the ....
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....loan towards fixed capital was of no consequence. 10. On behalf of the assessee a reference was made to the prospectus pertaining to the issue of the partly convertible debentures inviting reference to relevant clauses the thrust of the argument being that the company issued only convertible debentures and the issue of shares was of no significance in examining the claim of expenditure incurred on the partly convertible debentures. It was also emphasized on behalf of the assessee that the Controller of Capital Issues while granting permission had referred to the issue of partly convertible debentures and not shares and attention was also drawn to the allotment advice -- allotment money notice, which according to the assessee, showed that the company was only issuing debentures. In conclusion it was urged that the entire claim be allowed as a Revenue expenditure and that the tax authorities were not justified in disallowing a part of the expenditure being relatable to the issue of equity shares. As against the aforesaid, the learned Departmental Representative on behalf of the Revenue supported the action of the tax authorities and submitted that share issue expenses were not all....
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.... but also to the equity shares and similarly on the payment of the balance amount towards allotment the subscriber obtained a right in the debenture as also in the equity shares and both the debentures and equity shares were allotted on the same day; and (iv) That the documents on record revealed a clear understanding between the company and the subscribers that on the payment of total consideration of Rs. 125 per non-convertible debenture, the subscriber would receive two equity shares of Rs. 45 and a debenture of Rs. 80. 13. According to the learned Accountant Member although the nomenclature of a partly convertible debenture had been employed in the prospectus yet the true nature of the same was otherwise i.e. simultaneous issue of equity shares as also debentures. The view, in other words, was that the Revenue authorities had by allowing proportionate expenditure incurred towards the debenture portion and disallowing the balance attributable to the share portion had acted in accordance with law and, therefore, the action of the CIT (Appeals) was required to be confirmed. The learned Accountant Member, therefore, rejected the ground raised by the assessee. 14. The learn....
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.... to the issue of debentures and the Assessing Officer was, therefore, not justified in disallowing the sum of Rs. 18,17,680 on pro rata basis. 17. The learned Judicial Member proceeded at this stage to clarify the intention of the assessee and which the Assessing Officer as well as the CIT (Appeals) had held to be the borrowing of money as also to raise the share capital. According to the learned Judicial Member the assessee had rightly pointed out that allotment of shares as also the appropriation of the amount towards issue of shares was a subsequent event and this by itself would not change the nature of the expenditure, which had been incurred by the assessee prior to the conversion of debentures. The view, in other words, was that the conversion of the debenture was a subsequent development and that too after the allotment of the debenture. The learned Judicial Member further observed that the expenditure incurred on issue of share capital could be very nominal, namely, the printing of shares and dispatch thereof and some allied expenses, but such nominal expenditure could be ignored given the fact that the nature of expenses as given in the prospectus clearly showed that a....
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....claim in full. 19. I have heard both the parties at length, the learned counsel for the appellant reiterating the arguments advanced before the Division Bench. He emphasized the following:-- (i) The prospectus only talked of debentures, this being an issue of partly convertible debentures; (ii) The permission issued by the Government of India also mentioned that the same was for the issue of partly convertible debentures; and (ii) The initial issue was of debentures and what was appropriated towards shares was a subsequent event. In other words, everything pertained to issue of debentures and insofar as the issue of shares was concerned, there was a period of interregnum. 20. According to the learned counsel the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. was squarely, applicable and he also placed reliance-on the judgment of the Hon'ble Calcutta High Court in the case of CIT v. East India Hotels Ltd. [2001] 252 ITR 860. The judgment of the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. according to the learned counsel was not applicable since that pertained to the issue of share capital and not debent....
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....fferent types of income earned by an assessee whether taxable or non-taxable since what was being decided was whether a part of the expenditure claimed by the assessee was capital or revenue in nature. The learned Departmental Representative in turn placed reliance on the judgment of the Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. v. CIT [1997] 224 ITR 342, which according to her, was on the claim of expenditure under section 37 and taking care of a situation where there could be partial/proportionate disallowance. According to the learned Departmental Representative, the legal position set out in the case of India Cements Ltd was not being disputed, but in the present case, a part of the expenditure pertained to the raising of share capital and which was, therefore, not allowable on Revenue account. The learned Departmental Representative also placed reliance on the judgment of the Ahmedabad Bench of the Tribunal in the case of Banco Products (India) Ltd. v. Dy. CIT [1997] 63 ITD 370 as also an unreported decision of the Delhi Bench of the Tribunal in cross appeals in the case of Sand Steering Systems Ltd. v. Dy. CIT [IT Appeal No. 103 (Delhi) of 1996, ....
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..... 67,00,000 and odd was incurred on the issue of debentures and the repayment in the form of issue of equity shares over a period of time was not found to be relevant by Their Lordships who opined that the expenditure pertained to the issue of debentures and was, therefore, allowable. In the present case, it has been aptly highlighted by the learned Accountant Member and thereafter by the learned Departmental Representative that the issue of debentures and equity shares was a simultaneous act on the same date. 25. It clearly emerges from a perusal of the record that whatever be the nomenclature indicated in the various documents, the issue was of debentures and shares simultaneously and an applicant when making payment of application money and subsequently the allotment amount was in no doubt that on payment of a stipulated amount he would be issued a debenture of a stipulated value and equity shares once again of a specified value and as rightly noted by the learned Accountant Member, nothing more was required to be done on the part of the applicant and the issue of debentures and shares was simultaneous and automatic there being no intervening period of even a minute to be qui....