TaxTMI 
TaxTMI 
2026 (6) TMI 723
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.... of the Act. The Appellant submits that expenses incurred by for issue of Market Linked/Non-Convertible Debentures are allowable u/s 37 of the Act; hence, the disallowance made by the AO shall be deleted." 3. The solitary issue that arises for consideration pertains to the disallowance of expenditure incurred on the issuance of Non-Convertible Debentures by invoking the provisions of section 35D of the Act. 4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a public limited company, and was earlier known as Edelweiss Finance and Investments Limited. The assessee is registered with the Reserve Bank of India ("RBI") for carrying on the business of Non-Banking Financial Company ("NBFC") without accepting public deposits. The assessee is engaged in the business of borrowing monies through various instruments and advancing such monies as loans against security. Further, it is also engaged in trading and investment in shares and securities. 5. For the year under consideration, the assessee filed its return of income on 25.01.2021, declaring a total income of Rs. 11,14,97,050/-. Subsequently, the assessee filed a r....
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....e assessee submitted that it has not entered into any new line of business and that the issuance of MLDs and NCDs are for its existing business activities as NBFC. 6. The Assessing Officer ("AO"), vide order dated 26.09.2022 passed under section 143(3) read with section 144B of the Act, disagreed with the submissions of the assessee and held that the public issue of debentures is debt instruments used by the assessee for raising funds by borrowing money from the public for the extension of the assessee's business portfolio, i.e., the finance portfolio. The AO further held that since the assessee has already commenced its finance business, the huge amount of Rs. 337 crore collected from the public by way of issuance of debentures is specifically for the extension or expansion of its existing business. The AO rejected the reliance placed by the assessee on the decision of the Hon'ble Supreme Court in India Cement Limited (supra), and held that the assessee's case is distinguishable from the facts under consideration before the Hon'ble Supreme Court in the aforesaid decision. The AO held that in India Cement Limited (supra), the issue was whether the expenditure was capital or ....
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....usively for the purpose of business. Thus, the learned AR submitted that the said expenditure is allowable under section 37(1) of the Act. In support of the submission that in cases where expenditure is allowable under section 37(1) of the Act, the provisions of section 35D are not attracted, the learned AR, inter alia, placed reliance upon the CBDT Circular No. 56 dated 19.03.1971. The learned AR submitted that the CBDT, after taking into consideration the decision of the Hon'ble Supreme Court in India Cement Limited (supra), vide aforesaid Circular, clarified that in cases where a company which is already in business, incurs expenditure on issue of debentures, and such expenditure is admissible as deduction against the profit of the year in which it is incurred, section 35D will not be applicable. The learned AR submitted that this contention of the assessee, though raised, was not dealt with by any of the lower authorities. Instead, the AO, as well as the learned CIT(A), rendered findings on the other aspect that, by raising funds through debentures, the assessee is extending its existing business. The learned AR submitted that the assessee, being an NBFC, was already engaged in....
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.... Amount (Rs.) 1. Advisory Fees Income - Lead Manager 55,04,500 2 Business Promotion Expenses 7,74,997 3 Commission expenses 11,97,17,576 4 Depository Charges 31,11,530 5 Listing Fees 2,72,500 6 Listing Fees - Stock Exchange 3,75,000 7 Miscellaneous expenses 3,85,563 8 Office stationery 4,55,772 9 Professional Fees 2,04,77,753 10 Rating fees 5,45,000 11 Registrar Fees 6,54,066 12 Registration Expenses 27,250 13 Stamp Duty Charges 25,03,000 14 Travelling Expenses 1,26,163 Total : 15,49,30,670 (15,49,30,669) 11. While filing its return of income, the assessee claimed an amount of Rs. 97,74,921/- towards the issuance of MLDs and NCDs, which was debited to the profit and loss account, and the balance amount of Rs. 14,51,66,749/- was recorded as an asset in the books of account in line with the principles of Ind-AS 109. However, the assessee, vide its revised return of income, also claimed the balance expenditure of Rs. 14,51,55,748/- as business expenditure. 12. We find that the primary contention of the assessee befor....
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....s: - "45. It may be noted that the provision for amortisation is not intended to supersede any other provision in the income-tax law under which the expenditure is allowable as a deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures, and such expenditure is admissible as a deduction against profits of the year in which it is incurred by virtue of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, section 3SD will not have the effect of bringing that expenditure within the scope of the expenditure to be amortised against profits over a 10-year period. As a corollary to this, where any expenditure has been included for the purpose of amortisation under section 35D on a claim being made by the assessee in that behalf, such expenditure will not qualify for deduction under any other provision of the Act for the same or any other assessment year vide subsection (6) of section 35D." 15. Therefore, from the plain reading of paragraph 45 of the CBDT Circular No. 56 dated 19.03.1971, it is evident that the CBDT clarified that the provision for amortisation under se....
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.... the Hon'ble Supreme Court also took into consideration its earlier decision in Eastern Investments Ltd. vs. CIT, reported in [1951] 20 ITR 1 (SC), wherein interest paid by an investment company towards borrowing money on debentures was held to be incurred solely for the purpose of making or earning profit, as the transaction was found to be entered into to facilitate the running of the business and was made on the ground of commercial expediency. Accordingly, the Hon'ble Supreme Court in India Cements Limited (supra) held that its earlier decision in Eastern Investments Ltd. (supra) is directly applicable to the facts under consideration. It is pertinent to note that in India Cements Limited (supra), the learned Counsel for the Revenue tried to distinguish the decision in Eastern Investments Limited (supra) on the basis that the case of an investment company stands on a different footing from the case of a manufacturing company. However, the Hon'ble Supreme Court, rejecting the submissions of the learned Counsel for the Revenue, held that in some respects the position of an investment company and a manufacturing company may be different, but in determining the question of whether ....
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.... paid by it was incurred solely for the purpose of making or earning such income, profits or gains within the purview of section 12(2) of the Indian Income-tax Act, It held on a review of the facts that the transaction was voluntarily entered into in order indirectly to facilitate the running of the business of the company and was made on the ground of commercial expediency. This case, in our opinion, directly covers the present case, although Mr. Desai suggests that the case of an investment company stands on a different footing from the case of a manufacturing company. In some respects, their position may be different but in determining the question whether raising money is incidental to a business or not, we cannot discern any difference between are investment company and a manufacturing company. We may mention that in that case this court was not considering whether the expenditure was in the nature of a capital expenditure or not, because it was agreed all through that the expenditure was not in the nature of capital expenditure, and the only question which this court dealt with was whether the expenditure was incurred solely for the purpose of making or earning income, profit....
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.... find merit in the submissions of the assessee that the expenditure on issuance of debentures was incurred wholly and exclusively for the purpose of its business and, hence, is allowable under section 37(1) of the Act. Further, the CBDT, vide its Circular No. 56 dated 19.03.1971, has already clarified that, in cases where the expenditure on the issue of debentures is admissible as a deduction against the profits of the year, such expenditure shall not fall within the purview of section 35D of the Act. 19. We find that after taking into consideration Circular No. 56 issued by the CBDT on 19.03.1971, the Hon'ble Delhi High Court in CIT vs. Thirani Chemicals Ltd., reported in (2007) 290 ITR 196 (Del), held that the expenditure incurred on issuance of debentures is a permissible deduction, notwithstanding the provisions of section 35D of the Act. The relevant findings of the Hon'ble Delhi High Court, in the aforesaid decision, are reproduced as follows: - 1. The assessee-company, in order to modernize and expand its activities and with a view to augment its long term capital requirements, raised funds to the extent of Rs. 406.65 lakhs during the relevant accounting year by ....
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....as that the circular notwithstanding, section 35D covered cases of expenditure incurred on expansion of the existing business like the respondent's business in the present case and would, therefore, exclude any other provision which may have permitted deduction of expenditure that requires to be amortized under section 35D. There is, in our view, no merit in that contention. The circular in question inter alia says that expenditure incurred on the issue of debentures is an admissible deduction in the light of the decision of the Supreme Court in India Cements Ltd.'s case (supra). It is true that India cements Ltd.'s case (supra) did not directly deal with expenditure incurred on the issue of debentures. That was a case where the assessee had borrowed a loan and the question was whether expenditure incurred on any such loan transaction was an admissible expenditure. The circular all the same extends the logic underlying the said decisions to cases where the expenditure is incurred by the assessee by issue of debentures as is the position in the instant case. If that be so, it is difficult to see how the Revenue can still argue that since the case in hand refers to issue ....
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....h were under consideration before the Hon'ble Madras High Court, and the same are reproduced as follows: - "4. The appellant (assessee) a limited company was at all relevant time engaged in the business of manufacture of what is called synthetic fibres, yarns fabric, carbon graphite and other products. On 5th July, 1989, the board of directors of the appellant-assessee (company) resolved that company would undertake in their industrial undertaking modernisation-cum-balancing scheme as approved by their bankers (ICICI) for various projects including expansion and modification of polycondensation facilities, expansion of spinning line, nylon polymerization, modification and installation of DG sets, laboratory equipments and installation of power substation and installation of new polycondensation plant. 5. In order to accomplish this expansion activity in their unit, the board of directors of the appellant-company, resolved to raise the money to the extent of Rs. 18.59 crores by way of issuance of partly convertible and partly non-convertible debentures. In terms of this decision, each debenture was to be valued at face value of Rs. 50 out of which convertible part ....