TaxTMI 
TaxTMI 
2026 (7) TMI 1734
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....7-08, 2008-09, 2009-10 & 2010-2011 was challenged. 5. The short question that arises in these appeals is whether redemption of Foreign Currency Convertible Bonds (hereinafter, 'FCCBs') ought to be considered as capital expenditure or as revenue expenditure. 6. A perusal of the ITAT's order dated 28th December, 2022 would show that as per ITAT, the said question has been decided in several decisions of this Court and the ITAT has, in fact, followed the said decisions including CIT v. Jagatjit Industries, (2006) 287 ITR 46. The findings of the ITAT are as under: "48. Briefly the facts are, in course of assessment proceeding, the Ministry Assessing Officer noticed that on the FCCBs issued in financial year 2005-06 for a period of 5 years which were subsequently convertible to equity shares, the assessee, in the computation of income has claimed deduction of Rs. 28,59,78,667/- as premium payable on redemption of FCCBs. After calling for necessary details and examining them the Assessing Officer noticed that the assessee had set off the premium payable on redemption of FCCBs. Being of the view that the premium payable on the FCCBs is a capital expenditure, the Assessing O....
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....nt entered into with the Mauritius company. Necessary amendments were made to the articles of association of the assessee-company. In connection with the debentures issued the assessee had incurred the following expenditure: Rs. (i) Paid to M/s. Price Water House Coopers (P.) Ltd. 53,32,500 (ii) Paid to M/s. Wadia Chandy and Co. 6,39,450 (iii) Payment M/s. KPMG India Pvt. Ltd. 4,88,768 Total 64,60,718 23. In addition to the aforesaid expenditure, the assessee also paid interest of Rs. 28,07,123 on the debentures in the relevant previous years. The aggregate of all the four items of expenditure came to Rs. 92,67,841. 24. The above expenditure was claimed as revenue expenditure in the return of income. The Assessing Officer was of the view that the debenture issue was in fact an issue of equity share capital to the Mauritius company and accordingly the entire expenditure should be disallowed as capital expenditure. In support of this conclusion he referred to the board resolution in which it was stated that the FCDs would be converted into equity shares on or before June 12, 2006, and these shares would be issued to the Mauritius....
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.... clearly showed that the issue was in truth and effect only an issue of share capital. It was accordingly contended that the judgments of the Supreme Court cited supra were squarely applicable. 27. It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. Reference in this connection may be made to the leading judgment of the Supreme Court in India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC). The question before us, however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius company under the investor agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obt....
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....over and above the amount received for the debentures, is a liability which has been incurred by the company for the purpose of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. 13. Section 37(1) further requires that the expenditure should not be of a capital nature. In the case of India Cements Ltd. v. CIT [(1966) 60 ITR 52 : AIR 1966 SC 1053] the appellant Company had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection with this loan it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. This Court considered whether the expenditure so incurred was business expenditure or whether it was capital expenditure. This Court quoted with approval the observations of Shah, J. in Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT [(1965) 56 ITR 52 : AIR 1965 SC 1201] (ITR at p. 59) that whether a particular expenditure is revenue expenditure incurred for the pu....
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....lation to the payer can be different from the character of that payment in the hands of the recipient. In the light of the ratio laid down by this Court in the case of India Cements Ltd. [(1966) 60 ITR 52 : AIR 1966 SC 1053] any liability incurred for the purpose of obtaining the loan would be revenue expenditure." 10. Moreover, the question raised by the Appellant in the present appeal that the expenditure ought to be spread across the life of the FCCBs i.e. 5 years and could not have been claimed in the very first year itself is also settled. In the decision of Jagatjit Industries (Supra), a Coordinate Bench of this Court, while placing reliance on the decisions in Madras Industrial Investment Corporation Ltd. (Supra) and Hindustan Aluminium Corporation Ltd. v. CIT, [1983] 144 ITR 474, held that the liability to pay premium arises in the year in which the debentures were issued. The Court further clarified that the same could be proportionately spread over the period prescribed for the maturity of such debentures. It was further held by the Coordinate Bench of this Court that it is immaterial whether the debentures were redeemable at will or only upon maturity. The Bench furth....