TaxTMI 
TaxTMI 
2015 (9) TMI 556
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....ation of total income showing loss of Rs. 63,51,65,765 is at page-45 of the Paper book-I filed by the Assessee. The loss under the head "Profits and gains of business or profession" has been arrived at by the Assessee by taking the profit as per profit and loss account and thereafter, some additions and deductions have been made to arrive at the loss of Rs. 63,51,65,765/-. In this appeal, we need to focus only on two items of deducted from the profit as per profit and loss account viz.,(i) Exchange gain on FCCB reinstatement of Rs. 60,75,80,000/- (ii) Deduction u/s.35D of the Act of Rs. 11,36,59,330/-. 3. The provisions of Sec.35D of the Act, in so far as it is relevant for the purpose of deciding the issue in this appeal read thus:- Sec.35D : Amortisation of certain preliminary expenses. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), - (i) before the commencement of his business, or (ii) after the commencement of his business in connection with the extension of his Industrial undertaking or in connection with his se....
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.... sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the extension of the Industrial undertaking is completed or, as the case may be, the new Industrial unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the Industrial undertaking or the setting up of the new Industrial Unit of the assessee; (b) "capital employed in the business of the company" means- (i) in a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences; (ii) in a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the Industrial undertaking is completed, or, as the case may be, the new Industrial unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued....
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.... of the company as provided in Sec.35D(3)(b) of the Act. 6. The expenditure in question was incurred in connection with acquiring shares of two companies by name M/S.Azure Solutions Ltd. (later known as Subex Azure (UK) Ltd., and M/s. Syndesis Ltd. (Later known as M/s. Subex Americas Inc.). The controlling interest in these two companies was acquired by the Assessee consequent to acquisition of shares of the aforesaid two companies. The claim of the Assessee was therefore u/s.35D(1)(ii) of the Act viz., "incurring of expenditure after the commencement of business in connection with setting up a new Industrial unit. 7. The capital employed by the Assessee for the purpose of the said acquisition of shares was as follows:- Capital Employed Acquisition of M/S. Azure Solutions Ltd. (later known as M/S. Subex Azure (UK) Ltd. Acquisition of M/S. Syndesis Ltd. (Later known as M/S. Subex Americas Inc.) GDR Issue (1,12,28,728 @ Rs. 10/ per GDR) 11,72,87,280 - Share Premium @ 522.24 per GDR 612,52,10,911 - Issue of FCCB - 780,75,00,000 Total 624,24,98,191 780,75,00,000 8. The return for AY 08-09 was taken up for scrutiny. The AO ....
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....sessee. By implication both the aforesaid claims were accepted by the AO. 12. The CIT in exercise of his powers u/s.263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue. In his show cause notice issued u/s.263 of the Act dated 12.09.2013, the CIT was of the view that (a) deduction u/s.35D of the Act has been allowed in excess of what the Assessee is entitled to. (b) The Exchange gain on FCCB reinstatement of Rs. 60,75,80,000/- ought to have been treated as income and brought to tax. 13. In the course of hearing before CIT on 26.9.2013, the CIT expressed the view that deduction u/s.35D has been allowed in excess as follows:- "A) Total amount eligible for deduction under section 35D would be the actual expenditure of INR 577,890,354 incurred by the assessee, as restricted to the higher of: a. 5% of the cost of project, or b. 5% of the capital employed in the business. B) The cost of project has been considered as NIL, as the assessee has shown the amount so invested as 'Investments' and not as fixed assets being plant and machinery, etc. C) For the purpose of computing capital emplo....
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.... will appreciate that the assessee had incurred the said expenditure towards issue of GDRs and FCCBs and was related to the extension of the industrial undertaking of the assessee. 1.8. There is no definition of the word "extension" under the Act. The assessee wishes to draw reference to P. Ramanatha Aiyar's Law Lexicon Second Edition which shows that although the word "expansion" was considered as related to different fields, yet, the one in relation to industrial activity gives the meaning as "extension". Thus going by the meaning assigned to the word "extension", quite apart from the horizontal expansion in the industrial undertaking, vertical expansion also stands included within the meaning of the term 'extension" of the industrial undertaking. 1.9 The assessee has incurred the aforesaid expenditure for the purpose of acquisition of Subex Americas Inc. and Subex UK Limited. Hence, the same was incurred for the purpose of expansion of the business of the assessee. This is evident from the very fact that the assessee's gross revenue through these subsidiaries over the last two years has increased from 3,710 million to 5,408 million, being 46% increase in sales.....
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.... (3) On the question of whether FCCBs can be treated as "Debentures", the Assessee submitted that Sec.2(12) of the Companies Act, 1956 defines "Debentures" to include debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. FCCB is bonds and therefore Debentures within the meaning of the terms u/s.35D. The Assessee also pointed out that FCCBs were issued under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 wherein the meaning of FCCBs is given as "bonds issued in accordance with the said scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments". The Assessee therefore submitted that FCCBs should be equated with Debentures for the purpose of computing capital employed u/s.35D of the Act. (4) With regard to treating "unrealized foreign exchange gain" as income chargeable to tax, the Assessee submitted as follows:- "2.1 During the course of the hearing, your honour ....
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....ssee has suo-motu added back an amount of Rs. 1.929,600,000 being foreign exchange loss on restatement of such liability arising in connection with investments made outside India in its return of income for ÀY 09-10. A copy of relevant extract of computation of income of ÀY 09-10 is enclosed herewith as Annexure 7. 2.10 Accordingly, in view of the above, the assessee prays that the unrealized gains ought not to be treated as income for the year under consideration." (5) On the question whether jurisdiction u/s.263 of the Act could be exercised in a case such as the Assessee, the Assessee submitted as follows:- "2.11 It is apparent from a bare reading of the provisions of section 263 of the Act that the prerequisite to exercise jurisdiction by the Commissioner of Income-tax ('CIT') is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The CIT has to satisfy the twin conditions, namely, - the order of the AO sought to be revised is erroneous; and - it is prejudicial to the interest of the revenue. 2.12 It is only when an order satisfies both the above conditions, that section 263....
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....not verify the claim of the Assessee for deduction u/s.35D of the Act, by taking note of the definition of capital employed and as to whether share premium can be considered as part of the capital employed and whether FCCBs can be considered as debentures and taken as part of capital employed for the purpose of allowing deduction u/s.35D of the Act. Though the claim for deduction u/s.35D of the Act was subject to scrutiny by the AO while concluding the assessment, there are several perspectives to allowing deduction u/s.35D of the Act and the perspective pointed out in the show cause notice u/s.263 of the Act were not verified by the AO and therefore his order was erroneous and prejudicial to the interest of the revenue. In coming to the above conclusion the CIT placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Infosys Technologies Ltd. 341 ITR 293 (Karn.). In the aforesaid decision, the assessee claimed certain reliefs in terms of DTAA. The assessing authority had indicated that, deductions on such amounts were in terms of double taxation agreement relief in existence between our country and the countries of Canada and Thailand and allo....
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....Supreme Court not only in the case of Electro House (supra) and more so on the basis of the observations and law as declared in the case of Malabar Industrial Co. Ltd. (supra), we are fully satisfied that a situation where a deduction of the present nature is allowed or in the sense deducted from out of the tax liability of the assessee without indicating the basis, can definitely be construed as an order both erroneous and prejudicial, as this is definitely a possibility and it is only because it is per se, not discernable in the revisional order, but definitely gives rise to a situation where the CIT may consider the order as erroneous and prejudicial and the CIT having remanded the matter to the assessing authority, we are of the clear opinion that it cannot be characterized as a situation beyond the realm of s. 263 of the Act, as the order being erroneous and prejudicial is a clear possibility particularly the assessing authority not disclosing the basis. 22. To test this proposition, if an order which is explicit is passed by the assessing authority and indicating that the assessee is entitled to a particular extent of relief, but if it is with reference to relevant article....
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....ng FCCBs as Debentures while computing "Capital Employed", the CIT held that share premium cannot be regarded as part of capital employed. In coming to the aforesaid conclusion, the CIT placed reliance on the decision of the Hon'ble Delhi High Court in the case of Berger Paints India Ltd. Vs. CIT 292 ITR 658 (Del.). In the aforesaid decision the Hon'ble Delhi High Court was concerned with a question as to whether share premium can be considered as part of the capital employed for the purpose of allowing deduction u/s.35D of the Act. The Hon'ble Delhi High Court held that as per Explanation to sub-s. (3) of s. 35D, capital employed in the business of the company is the aggregate of three distinct components namely, share capital, debentures and long-term borrowings. It does not include reserves and surplus of the company. Therefore, premium, if any, collected by the company on the issue of its share capital does not constitute a part of capital employed in the business of the company for the purpose of quantification of deduction under s. 35D. Issue No.4 18.4 With regard to the question whether FCCBs can be considered as "Debentures" and taken as part of capital em....
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.... or not. The learned counsel for the Assessee placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. 332 ITR 167 (Del). In the aforesaid decision the Hon'ble Delhi High Court held that there was a distinction between "lack of enquiry" and "inadequate enquiry". If there is an enquiry, even inadequate, that would not by itself give occasion to the CIT to pass order under s. 263, merely because he has a different opinion in the matter. Such a course of action is open only in cases of "lack of enquiry". Contention of the Revenue that the AO did not consider as to whether the expenditure in question was capital or revenue expenditure cannot be accepted. Although apparently the assessment does not give any reasons for allowing the entire expenditure as revenue expenditure, that by itself would not be indicative of the fact that the AO has not applied his mind to the issue. AO is not required to give detailed reason in respect of each and every item of deduction in the assessment order. AO had called for explanation regarding this very item and the assessee had furnished its explanation. It cannot be said that it is a case of '....
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....in the case of Vanashree Builders & Developers (P) Ltd. Vs. CIT (2013) 40 taxmann.com 75 after considering the decision of the Hon'ble Karnataka High Court in the case of Infosys Technologies Ltd. (supra) has held that if AO made enquiries and applied his mind than the CIT cannot revise the order u/s.263 of the Act. In the present case, We have already seen that the AO did not apply his mind to the aspects set out by the CIT in the order u/s.263 of the Act. Therefore the decision referred to by the learned counsel for the Assessee does not support the plea of the Assessee in this regard. 24. The next submission of the learned counsel for the Assessee on the first issue was that the deduction u/s.35D is to be allowed over a period of 5 years. The first year in which the Assessee was entitled to claim deduction u/s.35D of the Act was AY 07-08. In that year in proceedings u/s.143(3) of the Act, the AO had allowed the claim of the Assessee. In the subsequent 4 years, the claim has to be allowed as the investigation of eligibility of claim can be examined in such cases only in the 1st year of eligibility. In the subsequent years the deduction cannot be varied or withdrawn unless ....
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.... issue to be considered is as to whether the Assessee can be allowed relief on the basis of "Cost of Project" u/s.35D(3)(a) of the Act? 28. On the above issue, the CIT held that the definition of cost of project in Expln. (a) below Sec.35D(3) of the Act referred to "actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the Assessee"..... The CIT held that the cost of acquisition of the two businesses were shown as "Investments" by the Assessee in its Balance sheet and the same cannot be called "Fixed Assets" and therefore the claim in this regard by the Assessee cannot be accepted. On the above issue, the learned counsel for the Assessee reiterated submissions as were made in reply to the show cause notice u/s.263 of the Act. 29. We have considered the submissions of the learned counsel for the Assessee and are of the view that the same is not acceptable. The Assessee chose the option of claiming deduction of 5% of capital employed in the business of the company as provided in Sec.35D(3)(b) of the Act and never o....
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....l.). In the aforesaid decision the Hon'ble Delhi High Court was concerned with a question as to whether share premium can be considered as part of the capital employed for the purpose of allowing deduction u/s.35D of the Act. The Hon'ble Delhi High Court held that as per Explanation to sub-s. (3) of s. 35D, capital employed in the business of the company is the aggregate of three distinct components namely, share capital, debentures and long-term borrowings. It does not include reserves and surplus of the company. Therefore, premium, if any, collected by the company on the issue of its share capital does not constitute a part of capital employed in the business of the company for the purpose of quantification of deduction under s. 35D. 32. The contention of the learned counsel for the Assessee was that the ITAT Ahmedabad in the case of JCIT Vs. Sirhind Steel Ltd. 97 ITD 502(Ahd.) in the context of Sec.35D, the Bench took the view that Share premium has to be considered as part of "Issued Share capital". The Delhi High Court in the case of Berger Paints (supra) has however taken a contrary view. According to him the issue was debatable and two views were available on the ....
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....part of the "issued share capital" for allowing deduction u/s.35D of the Act. 34. We are of the view that the plea of the learned counsel for the Assessee cannot be accepted. Thus issue No.3 is also decided against the Assessee. 35. The fourth issue that arises for consideration is as to whether question whether FCCBs can be considered as "Debentures" and taken as part of capital employed for allowing deduction u/s.35D of the Act? 36. On the above issue, we find that Sec.2(12) of the Companies Act, 1956 defines "Debentures" to include debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. FCCB is bonds and therefore Debentures within the meaning of the terms u/s.35D. The FCCBs were issued under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 wherein the meaning FCCBs is given as "bonds issued in accordance with the said scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to de....
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....me Court in the case of Woodward Governor (supra) laid down the principles in this regard. The Hon'ble Court in Para-4 of its judgment observed as follows:- "At the outset, for the sake of convenience, we may state that in this batch of civil appeals broadly we have before us two categories. In the first category, we are concerned with exchange differences arising in foreign currency transaction on revenue items. In such category, we are concerned with the assessee(s) incurring loss on revenue account. In that category, we are concerned with the provisions of ss. 28, 29, 37(1) and 145 of the IT Act, 1961 ("1961 Act"). In the second category of cases, we are concerned with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets. In other words, in the second category of cases, we are concerned with the assessee(s) incurring liabilities on capital account. In such cases, we are required to consider the provisions of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002)." Thereafter in para 22 of its judgment it dealt with cases where the fluctuation is on account of capital items as follows:- "Facts in....