1. The assessee is in appeal before us against the order of learned CIT(A)-C-III Mumbai, dt. 16th Nov., 1998 passed for asst. yr. 1995-96.
The first grievance of the assessee relates to confirmation of disallowance of debenture issue expenditure amounting to Rs. 5,21,22,533 on the ground that it is capital in nature.
2. The brief facts of the case are that the appellant assessee is a public limited company registered under the Companies Act, 1956. It is a manufacturer and supplier of benzoate plasticizers, benzoic acid and sodium benzoate, an import substitute. It has filed its return of income on 30th Nov., 1995 declaring total income of Rs. 1,43,01,080.
The case was selected for scrutiny and learned AO with a view to give logical end to the proceedings issued notice under Section 143(2) and 142(1) of the Act. The learned AO on scrutiny of the statement of total income noticed that assessee has claimed debenture issue expenses of Rs. 5,21,22,533 as allowable deduction while computing the income under the head profit and gains of business/profession. It revealed that assessee has issued 14 per cent secured fully convertible debentures during the previous year. In total 46,36,100 number of such debentures of Rs. 210 each were issued and allotted during the previous year to the public promoters, associate of promoters, financial institutions, non-residents, etc. It also emerges out that 52,66,125 number of fully convertible debentures of Rs. 170 each were also issued on right basis during the previous year and allotted to the existing shareholders of the assessee company. According to the AO, Part-A of the aforesaid 46,36,100 number of debentures was converted into equity shares of Rs. 10 each at a premium of Rs. 85 per share on allotment during the previous year itself and Part-B was converted into equity share of Rs. 10 each at a premium of Rs. 105 per share on the expiry of one year from the date of allotment. Similarly, Part-A of 52,66,125 number of debentures issued on right basis was converted into equity shares of Rs. 10 each at a premium of Rs. 65 each on 17th April, 1995 on allotment. According to the AO the debentures issued and allotted during the previous year were fully converted into equity shares within one year of allotment of the debentures, therefore, the debenture expenses which have been claimed as revenue in nature are not allowable and he issued a show-cause notice inviting the explanation of the assessee as to why such expenses may not be treated as capital in nature. In response to the query of AO assessee submitted its reply vide letter dt. 23rd March, 1998 and contended that during the year under consideration there was public-cum-right issue of fully convertible debentures amounting to Rs. 197 crores. The debentures issued by the assessee though convertible on a later date but they are secured loan in nature, even if the terms of issue may subsequently provide convertible of the same to equity capital. According to the assessee it would not make any change in the nature as security loan.
It was also pointed out that the debentures were carrying 14 per cent rate of interest and interest was paid to all the debenture applications from day one. According to the assessee it exhibits that it is a loan instrument as otherwise in case of application for equity, applicants do not get any interest from the date of application to the date of allotment. The assessee relied upon the judgment of Hon'ble Supreme Court rendered in the case of India Cement Ltd. v. CIT as well as on the judgment of Hon'ble Bombay High Court in the case of Dhrangadhm Chemical Works Ltd. .
The learned AO rejected all these contentions of the assessee and held that the expenses incurred by the assessee are capital expenses.
3. Appeal to the learned CIT(A) did not bring any relief to the assessee.
4. We have heard the learned Representatives and with their assistance gone through the record. The assessee has also filed written submission. The learned Counsel for the assessee while impugning the orders of Revenue authorities below submitted that three issues are emerging out from the record having a bearing on the controversy. In his first fold of submission he apprised us as to how, we are required to construe and appreciate the provisions of IT Act while deciding the nature of expenditure incurred on raising funds through loan/debt instrument. While referring to Section 36(1)(iii) he contended that amount of interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction. The learned Counsel for the assessee specifically invited our attention towards the Explanation appended with Sub-clause (iii) of Section 36(1) of the Act.
He further submitted that the debentures are to be treated as a loan/debt instrument and not the shares. For buttressing his contention he relied upon the decision of Hon'ble Supreme Court rendered in the case of India Cement v. CIT (supra) and pointed out that Hon'ble Supreme Court in this case has observed that obtaining capital by issue of a share is different from obtaining loan by debenture. The loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee. The loan is liability and has to be repaid and it is erroneous to consider a liability as an asset or an advantage. Thus, expenditure incurred on raising a loan is therefore, not capital expenditure but a revenue expenditure. The learned Counsel for the assessee further relied upon the judgment of Hon'ble Bombay High Court in the case of Dhrangadhra Chemical Works Ltd. v. CIT (supra). On the strength of this decision he contended that the debentures are a debit instrument and any amount spent on raising funds through the same is very much allowable expenses and can be claimed as deduction under Section 36(1)(iii) of the Act. The learned Counsel for the assessee while referring to the finding of the Revenue authorities below contended that they have totally ignored the aspect that at the point and time of issue of the debenture even if it is fully convertible debentures they are still debentures and secured loans in nature. The condition providing the conversion of the same to equity capital subsequently would not effect their nature of secured loans at the time of issuance of debenture. The Revenue authorities have also ignored the fact that the debentures are carrying 14 per cent rate of interest which was paid to all the debenture applicants from the day one to the date of conversion of equity and it is established the same as debit instrument because no interest is admissible on a share application. The debentures were secured by way of second charge/mortgage on the assets of the company both movable/immovable, present or future, as decided in consultation with the trustees of the FCDs.
5. In his second fold of submission learned Counsel for the assessee pointed out that debenture is a debt/loan instrument. With a view to apprise us the specific meaning of debentures and share and how the Courts have construed and explained the meaning of these expressions the learned Counsel for the assessee drew our attention towards the decision of Hon'ble Madras High Court rendered in the case of CIT v.Laxmi Vilas Bank Ltd. , wherein Hon'ble Madras High Court while expounding the distinction between the debentures and shares has observed as under: In the Law Lexicon at p. 290 by P. Ramanatha Aiyar, a 'debenture' is a document or a certificate signed by the officer of a corporation or company acknowledging indebtedness for money lent and guaranteeing repayment with interest; a security for a loan of money issued by a public company, usually creating a charge on the whole or a part of the company's stock and property, though not necessarily in the form of a mortgage. Section 137 of the Transfer of Property Act regards debentures as the subject-matter of a transfer and not as constituting a transfer by itself. A debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture. Although the instruments called debentures may be described with comparative ease, a judicial definition of a debenture or at any rate an accurate one--has not been obtained and is perhaps not urgently required. In the Accountancy Text Book by William Pickles, 'debenture' is defined as a document, acknowledging a loan to a company and is generally executed under the seal of the company, usually (but not necessarily) containing provisions as to payment of interest and the repayment of the principal and giving a charge on the assets of such company, and may give security for the payment over some or all of the debts and undertakings of the company. In Halsbury's Laws of England, 4th Edn., 7th Vol., in para 813, the meaning of 'debenture' is stated as under: No precise definition of the word 'debenture' can be found, but various forms of instruments are called debentures. A debenture is a document which either creates or acknowledges a debt. A document may be a debenture although under its terms, the debt is only to be repaid out of a part of the profits. The term 'debenture' is usually associated with a company of some kind, and most debentures are securities given by companies, but they are often granted by clubs and occasionally by individuals.In Narendia Kumar Maheshwari v. Union of India , it has been held that a 'debenture' has been defined to mean essentially an acknowledgement of a debt with a commitment to repay the principal with interest. In India Cements Ltd. v. CIT (supra), B at p. 61, it was held that obtaining capital by issue of shares is different from obtaining a loan by debentures. A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee.
In Director-General of Investigation & Registration v. Deepak Fertilizers & Petrochemicals Corporation Ltd. (1994) 81 Comp Cas 342 (MRTPC)(FB), it was held that a 'debenture' is simply an acknowledgement of debt by the company whereby it undertakes to repay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture holder. Except where debentures are secured by mortgage of immovable property or hypothecation or pledge of movable property, they constitute actionable claims. It was further held that a debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Therefore, debentures are not goods within the meaning of Section 2(e) of the Monopolies and Restrictive Trade Practices Act.
6. Similarly, on the strength of Hon'ble Rajasthan High Court decision rendered in the case of CIT v. Shri Rajasthan Syntex Ltd. , he pointed out that the Hon'ble Court has observed that the term "debenture" is not a technical term nor a term of art but in its ordinary sense denotes one of the modes for borrowing money by any company in exercise of its borrowing powers.
7. The learned Counsel for the assessee while referring to Sections 117A, B, 118 and 119 of the Companies Act contended that there is clear distinction between debentures, shares and dividends. Debentures are securities, whether they are secured by way of a charge on the company's assets or secured by appointing of trustees, as the case may be. This creation of the charge on the assets or appointment of a trustee is only for the object to secure repayment of debenture money.
In ordinary sense on the repayment amount payable on debenture such charge is discharged, whereas on the shares the company used to distribute the dividends which is an appropriation of income, hence appropriation of income vis-a-vis the charge created on the assets are two different circumstances. On merit, he further relied upon the following decisions:J.M. Shares & Stock Brokers Ltd. v. Dy. CIT (2004) 83 TTJ (Mumbai) 1052; 8. The learned Counsel for the assessee further contended that in the immediately preceding year the similar issue arose before the Tribunal and the Tribunal after putting reliance on the decision of Hon'ble Supreme Court in the case of Eastern Investments Ltd. v. CIT has treated the issuance of convertible debentures by the assessee as raising of loan and had allowed deduction on account of interest expenses.
9. On the other hand, learned Departmental Representative fervently contended that the issue is clearly covered against the assessee by the Special Bench decision of the Tribunal rendered in the case of Ashima Syntex Ltd. v. Asstt. CIT (2006) 102 TTJ (Ahd)(SB) 177 : (2006) 100 ITD 247 (Ahd)(SB). Inviting our attention as to how the facts are similar to the decision of Special Bench, learned Departmental Representative referred to page No. 14 of the prospectus of the debentures and pointed out that the debentures were issued for increasing the capital base of the company. Hence, the decision of the Special Bench is fully applicable and the expenses cannot be allowed as Revenue expenses.
10. The learned Counsel for the assessee while rebutting the contention of learned Departmental Representative contended that 44.70 per cent of the total issue are relating to A-portion of the debentures which were convertible in equity shares on the date of allotment, therefore, to that extent the decision of the Special Bench at the most is applicable and not on the rest of expenditure.
11. We have duly considered the rival contentions. In the preceding assessment year i.e. asst. yr. 1996-97, an identical issue arose in the case of assessee. The learned CIT(A) treated the expenses incurred by the assessee in respect of Part-B of the debentures for the period of their pre-conversion as revenue in nature. Dissatisfied with the order of learned CIT(A) the Revenue carried the dispute in appeal before the Tribunal and the Tribunal in ITA No. 1564/Mum/2000 has decided the issue in favour of the assessee vide its order dt. 18th Aug., 2006. The facts as emerge out in the Tribunal's order as well as finding of the Tribunal are worth to note and the same read as under: 3. Let the facts be stated first. In the immediately preceding year, i.e., the previous year relevant to the asst. yr. 1995-96, the assessee company had issued 46,22,800 fully convertible debentures @ Rs. 210 and allotted them on 17th Feb., 1995 (32,99,000 debentures) and 28th March, 1995 (13,23,800 debentures). The said debentures had two convertible portions, namely, Part "A" and Part "B". While Part "A" portion of the said debentures (convertible @ Rs. 95 each) stood converted on the date of allotment itself, i.e., 17th Feb., 1995 and 28th March, 1995, Part "B" portion of the said debentures (convertible @ Rs. 115 each) which were allotted on 17th Feb., 1995 (32,99,000 debentures) and 28th March, 1995 (13,23,800 debentures) were converted into equity shares on 17th Feb., 1996 and 28th March, 1996, respectively. In addition, the assessee company had also issued another 52,66,125 fully convertible debentures @ Rs. 170 each in the same financial year on rights basis and allotted them to its existing shareholders on 17th April, 1995. Part 'A' portion of 52,66,125 debentures issued on rights basis was converted into equity shares on 17th April, 1995, i.e., on allotment of debentures while Part "B" portion was converted into equity shares on 17th April, 1996, i.e., on expiry of one year from the date of allotment of debentures. Thus, Part "A" portion of all the debentures stood converted into equity shares on the date of allotment itself while their Part "B" portion was converted into equity shares immediately upon expiry of one year from the date of allotment of debentures. In other words, all the debentures stood converted into equity shares either on the date of allotment of debentures or on expiry of one year of their allotment.
4. In the statement of total income filed along with the return of income, interest amounting to Rs. 13,80,93,186 paid on debentures was claimed as revenue expenses which comprised of (i) Interest of Rs. 11,69,13,770 in respect of Part "B" portion of convertible debentures allotted on 17th Feb., 1995 (32,99,000 debentures), 28th March, 1995 (13,23,800 debentures) and 17th April, 1995 (52,66,125 debentures) till their conversion into equity shares on 17th Feb., 1996, 28th March, 1996 and 17th April, 1996 respectively; (ii) interest of Rs. 1,18,97,486 on non-convertible debentures issued in earlier years; (iii) interest of Rs. 30,12,188 on non-convertible portion of other partly convertible debentures issued in 1991; and (iv) interest of Rs. 62,69,741 on debenture applications from date of application to date of allotment. Interest on convertible portion was however capitalized in the final accounts and shown as capital work-in-progress. The AO formed the view that there was no liability on the part of the assessee to repay the amount raised through debentures as they were not only fully convertible but also stood fully converted into equity shares. According to him, the relationship of debtor and creditor was totally absent between the assessee company and the allottees of the said debentures. He therefore called upon the assessee to explain and justify its claim for deduction of the impugned amount of interest.
5. In reply, the assessee company made three-fold submissions before the AO : one, impugned interest is deductible under Section 36(1)(iii) as the capital raised through issue of debentures has been used for the purposes of business in that it has been invested in acquisition of new assets for diversification and extension of its existing business; two, though the debenture issue was fully convertible yet it remained a debt before its conversion and hence a loan before its conversion into equity; and, three, the impugned expenditure is also admissible for deduction under Section 37 as it has been laid out and expended wholly and exclusively for the purposes of the business.
6. Not satisfied with the explanation given by the assessee, the AQ rejected the claim of the assessee for deduction under Section 36(1)(iii) mainly on the ground that once the debentures were converted into equity shares, there was no liability on the part of the assessee to repay any part of the amount contributed by the allottees of the debentures. He also rejected the claim of the assessee for deduction under Section 37 mainly on the ground that the impugned expenditure had, in substance, raised the share capital base of the assessee company and hence was in the nature of capital expenditure.
7. On appeal, the assessee submitted before the learned CIT(A) that debenture capital was clearly in the nature of loan or debt until the date of conversion of debentures into shares and that the liability to repay came to an end only on the conversion of debentures into shares. In support of the aforesaid submission, the assessee invited the attention of the learned CIT(A) to (i) Schedule VI, Part I of the balance sheet in which debentures were shown under the head "Secured loans" on the liabilities side of the balance sheet; (ii) p. 6 of the debenture certificate in which it was stated that it would continue to be a debenture certificate upto 27th March, 1996; and (iii) p. 7 of the debenture certificate which (a) contained certificate of registration of mortgage issued by the Registrar of Companies; (b) provided for interest on debentures; and (c) deprived the debenture holders of the right to vote. On the strength of the aforesaid, the assessee sought to establish before the learned CIT(A) that the debentures issued by the assessee continued to be debts till they were converted into equity shares.
Referring to the judgment in Eastern Investments Ltd. v. CIT , the assessee submitted before the learned CIT(A) that conversion was only a mode of repayment of debt created by debentures and hence the said debt would continue to be in force till it was paid back through conversion. Accepting the aforesaid submissions, the learned CIT(A) has directed the AO to allow the impugned interest under Section 36(1)(iii).
8. In support of the appeal, the learned Departmental Representative has relied upon the findings recorded in the assessment order and supported the stand taken by the AO. 9. In reply, the learned Counsel for the assessee supported the order passed by the learned CIT(A).
10. We have carefully considered the submissions made by both the parties including the judicial authorities referred to by them.
Short issue is whether the assessee is entitled to claim deduction for interest under Section 36(1)(iii) in respect of debenture capital from the date of allotment of debentures till their discharge including their conversion into equity shares. Deduction under Section 36(1)(iii) is available in respect of interest paid on borrowed capital used for the purposes of the business. It is not the case of the Department that debenture capital has not been used by the assessee for the purposes of its own business till its ultimate conversion into equity capital. On the other hand, we find that the debenture capital has been used by the assessee for expanding its existing business. The AO has rejected the claim of the assessee for deduction under Section 36(1)(iii) mainly on the ground that once the debentures were converted into equity shares, there was no liability on the part of the assessee to repay any part of the amount contributed by the allottees of the debentures. In our view, a debenture continues to be a debt till it is repaid or discharged. Debenture capital, is therefore in the nature of borrowed capital till its repayment or discharge. Conversion of debentures into equity shares is also a mode of repayment or discharge of the debt created by debentures. Upon conversion, debenture capital stands liquidated and consequently gets converted into equity capital. Thus, debenture capital remains borrowed capital till it is repaid/discharged or converted into equity capital and hence the assessee is entitled to seek deduction for interest on such convertible debentures till their conversion or discharge. The mere fact that the debentures are fully convertible and have been fully converted into equity shares cannot, in our humble view, be a ground for denying deduction of interest for the pre-conversion period. The order of the learned CIT(A) is also supported by the following observations of the Hon'ble Supreme Court in Eastern Investments Ltd. v. CIT (supra): Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law. The only argument urged against allowing this deduction to be made is that the person who took the debentures was the party who sold the ordinary shares. It cannot be disputed that if the debentures were held by a third party, the interest payable on the same would be an allowable deduction in calculating the total income of the assessee company.
What difference does it make if the holder of the debentures is a shareholder? There appears to be none in principle in view of the fact that no suggestion of fraud is made in respect of the transaction which is carried out between the company and the administrator and which has been sanctioned by the Court. If the debentures had been paid for in cash by the same party, no objection could have been taken to allowing the interest amount to be deducted. In principle, there appears to us no difference, if instead of paying in cash the payment of the price is in the shape of giving over shares of the company, when the transaction is not challenged on the ground of fraud and is approved by the Court in the reorganisation of the capital of the company....
11. In view of the foregoing, each of the grounds taken by the Department is disposed off as under: (i) Ground No. 1 is dismissed for the reason that the learned CIT(A) is right in holding that the assessee is entitled to deduction under Section 36(1)(iii) in respect of its interest liability on Part "B" of the aforesaid convertible debentures till their conversion into equity capital and that similar principle would govern the deduction for interest under Section 36(1)(iii) for the non-convertible portion of the debentures also.
(ii) Ground No. 2 is dismissed for the reason that the assessee company has not claimed any deduction for interest in respect of Part "A" of the aforesaid debentures from the date of allotment to the date of conversion as the debentures stood converted into equity shares on the date of allotment itself and also for the reason that the learned CIT(A), as held above, is right in directing the AO to allow deduction in respect of Part "B" of the debentures for their pre-conversion period.
(iii) Ground No. 3 is dismissed for the reason that the debentures were in the nature of debt carrying fixed rate of interest and hence the assessee company carried the liability to pay the interest for pre-conversion period in respect of Part "B" of the aforesaid debentures.
(iv) Ground No. 4 is dismissed for the reason that the relationship of a creditor and a debtor existed between the assessee and allottees of debentures to the extent of Part "B" thereof till their conversion into equity shares.
The facts in the present assessment year are identical to the facts of asst. yr. 1996-97. The learned Departmental Representative could not point out any circumstance which can persuade us to take a different view on facts than the one taken by the Tribunal in asst. yr. 1996-97.
He emphasized that in view of the Special Bench decision of the Tribunal this order does not deserves to be followed.
12. We have gone through the Special Bench decision and find that on the strength of Hon'ble Supreme Court decisions in the cases of Brooke Bond India Ltd. v. CIT and Punjab State Industrial Development Corporation Ltd. v. CIT as well as Punjab & Haryana High Court in the case of Pepsu Road Transport Corporation v.CIT has observed in para 13 of the order that if the expenditure is for raising capital base it would be capital expenditure even if the funds so received have been used for business purposes and also for helping profit making or required for more working capital needs of the company. According to the Special Bench the argument that capital was raised for enhanced requirement of working capital and for capital project or was a help in profit making was not accepted by the Hon'ble Supreme Court. After a detailed analysis of number of decisions the Special Bench had carved out three groups of decisions of the Tribunal in which one group is in favour of the assessee, the second group is partially in favour of the assessee, i.e. where expenses proportionate to the period of debenture prior to its conversion was allowed as revenue expenses and in the third group of cases such expenses have been treated as capital expenditure. The observation of the Special Bench in this regard at paras 25 and 26 are worth to note: 25. We find that various decisions have discussed the issue of allowability of expenses incurred on issue of debentures and in the following cases the claim of the assessee has been allowed: (a) In the case of Modern Syntex (India) Ltd. (supra) before the Tribunal, the expenditure incurred on the issue of debentures compulsorily convertible into shares was allowed as a deduction. In that case, the company issued 1,52,67,350 secured fully convertible debentures at Rs. 120 each at par aggregating to Rs. 183.2 crores.
The debentures consisted of two parts of Rs. 60 each-Part A was to be compulsorily and automatically converted into shares of Rs. 10 each at a premium of Rs. 20 each after six months and Part B was also converted into two shares of Rs. 10 each at a premium of Rs. 20 each after 18 months. The Tribunal observed that the debenture was nothing more than an acknowledgement of debt. It is a statement that the company will pay a certain sum of money on a given day and will also pay interest on the same. Debenture means a debenture acknowledging a loan made to the company and proving for the payment of interest on the sum borrowed until debenture is redeemed, namely, payment of principal sum. The characteristic features of the debentures are : (i) it is issued by the company and it is in the form of certain indebtedness; (ii) it provides for repayment of principal and interest at a specified date or dates. With regard to the convertible debentures, it was observed that an option is given to the debenture holders to convert them into equity or preferential share at stated rate of exchange after certain period which is also another form of loan for a specific period till they are converted into shares. Referring Section 35D and the Board circular, the Tribunal has allowed the expenditure except the solitary decision in the case of Banco Products (India) Ltd. (supra) where the decision of the Calcutta High Court in the case of East India Hotels Ltd. (supra) was not available to the Ahmedabad Bench that decided the case.
(b) In the case of J.M. Shares & Stock Brokers Ltd. (supra) before the Bombay Bench of the Tribunal, the assessee issued certain convertible debentures during the year at the face value of Rs. 50 each which was to be converted into five shares of Rs. 10 each and as matter of fact, these debentures got converted into equity shares, during the year itself. The AO treated the expenditure on the issue of debentures as expenditure incurred on the issue of shares. The CIT(A) upheld the disallowance. When the matter came up before the Tribunal, the matter was decided in favour of the assessee by observing as under: Now, limited question before us to adjudicate upon, is whether the conversion of PCD into shares in the same year or after the end of the relevant year has got any bearing on the allowability of the expenses incurred on the issue of convertible portion of the debentures. The addition by the AO is based on this consideration alone and on this consideration only the learned CIT(A) confirmed the action of the AO. The argument of the learned Departmental Representative is also on this consideration that if conversion took place in the same year itself, it shall be treated as issue of shares, whereas the learned Authorised Representative's argument is that the conversion was effected after six months of the issue which in this case fell within the same year but if the timing of issue had been different, the date of conversion after six months might have fallen in the next year also. There is force in the arguments of the learned Authorised Representative that at the time of issue of debentures, the convertible portion was also debentures only and only because the date of conversion after six months has fallen within the same year, it cannot be considered as issue of shares. On this point, we agree with the arguments of the learned Authorised Representative and once we agree on this basic argument that the expenses were incurred for issue of debenture, the issue stands covered in favour of the assessee by the various judgments, relied upon by the learned Authorised Representative and respectfully following the same, we are of the considered opinion that the disallowance of Rs. 11,01,379 towards expenses on convertible portion of partly convertible debentures is allowable as revenue expenditure.
(c) In the case of Tata Chemicals Ltd. (supra) before the Bombay Tribunal, the assessee incurred the expenditure of Rs. 16,99,497 on issue of non-convertible and partly convertible debentures. The Tribunal held that the fertilizer division of the assessee was part of the business and that was being carried on by the assessee during the relevant previous year and, therefore, the debenture issue expenses are allowable as deduction.
(d) In the case of Fag Precision Bearings Ltd. (in ITA No. 4652/Ahd/1992), the Ahmedabad Bench vide order dt. 26th May, 2003 held that the expenditure by the assessee was for raising loan by issue of debentures and the fact that ultimately the convertible debentures have been converted into shares in the subsequent year would not be of any consequence. The expenditure would remain to be an expenditure incurred for raising of finance for the purpose of business of the assessee and would, therefore, be an allowable deduction.
26. We also find that in the following cases the claim was allowed proportionately to the time the debenture was not converted in the share: In the case of Essar Steels Ltd. v. Dy. CIT (2005) 97 TTJ (Ahd)(TM) 985 : (2005) 97 ITD 125 (Ahd)(TM), the assessee issued fully convertible debentures in the year 1989 which were converted into shares partly on allotment in 1990 and fully by 1992. The assessee incurred a sum of Rs. 6,51,95,614 for the issue of debentures and claimed the same to be revenue, even though this amount was capitalized by the assessee being expenditure incurred in connection with rights issue of debentures during the relevant accounting year.
The AO noted the object of issue to be--(i) to part finance the steel project and related investments; (ii) to meet the expenditure of the issue; (iii) to repay the bridge loan, if any, taken against the loan issue; and (iv) to meet the normal capital expenditure of working capital needs. He observed that the entire issue went to increase the paid up capital and share premium account because the entire debenture was fully convertible into shares within a period of 15 months. He, therefore, held that the expenditure was in the nature of expenditure mentioned in Section 35D and only 10 per cent was allowed. The CIT(A) upheld the disallowance by observing that after a period of 15 months equity funds and the same fund was available as equity funds and the amount raised, therefore, was available with the assessee on a permanent basis. Reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of VXL India Ltd. (ITA Nos. 5382 and 5383/Ahd/1989, dt. 16th June, 1999) was also placed. After considering the case of the assessee, the Division Bench of the Tribunal held in para 39 as under: 39. We have heard both the parties and considered the rival submissions. In the case of VXL India Ltd. (supra), the assessee issued convertible debentures of Rs. 125 each out of which Rs. 45 each is to be converted into three shares on 1st July, 1983. The expenditure was disallowed by the AO on the ground that the portion of the convertible debenture is converted into equity shares. The Tribunal referred to the decision of the Supreme Court in the case of India Cements Ltd (supra), the decision of the Tribunal in the case of Voltas Ltd. v. Dy. CIT (1998) 61 TTJ (Mum) 543 as well as in the case of Telco (in ITA No. 154/Bom/1985), wherein it was held that the question of convertibility arrives at the time of repayment which is a mode of repayment only. The expenditure was incurred for raising the loan and, therefore, it was an allowable deduction. In the present case, right shares of debentures were issued which were to be converted into shares within a period of 15 months. The expenditure when it was incurred was for raising loan and as held by the Tribunal in the case of VXL India Ltd. (supra) and decisions referred to therein, the conversion was only a mode of repayment of loan raised by issue of debentures. The expenditure was thus for raising the loan and, therefore, in view of the Supreme Court decision in the case of Madras Industrial Investment Corpn. (supra), the proportionate expenditure has to be allowed during the period of 15 months of the debenture. The proportionate expenditure pertaining to the year under consideration may thus be allowed to the assessee in the light of the aforesaid Supreme Court decision. The observation of the Revenue authorities that it was in the nature of expenditure under Section 35D is not warranted because at the time when the expenditure was incurred, it was for right issue of debentures and not capital. We direct accordingly.
In para No. 27, the Special Bench has noticed the decisions of the Tribunal which are against the assessee and ultimately in opening line of para 28 the Special Bench has observed that "we have, therefore, to examine to which category of cases the claim of the assessee falls. To determine that, we have to first understand the real nature of the transaction in the light of the three decisions of the Supreme Court (i) in the case of Juggilal Kamlapat v. CIT (ii) in the case of Sunil Siddharthbhai v. CIT and (iii) in the case of CIT v. B.M. Kharwar . These cases have laid down a rule that is the substance of the transaction which matters ignoring the nomenclature". Similarly, in para No. 31, the Special Bench observed that the decisions of the Tribunal in the cases of Sona Steering Systems Ltd. v. Dy CIT (2003) 129 Taxman 152 (Del) (Mag); Dy.
CIT v. Ranbaxy Laboratories Ltd. (2004) 89 TTJ (Del) 100 : (2004) 88 ITD 283 (Del); Banco Products (India) Ltd. v. Dy. CIT (1997) 59 TTJ (Ahd) 387 : (1997) 63 LTD 370 (Ahd) have also been decided by. looking into the substance of the matter and held that the expenditure as was relatable to non-convertible debentures alone was allowable as a deduction. It is seen that the learned Vice President who has authored the decision of the Special Bench is the author of the Division Bench order in the case of Essar Steels Ltd. v. Dy. CIT (2005) 97 TTJ (Ahd)(TM) 985 : (2005) 97 ITD 125 (Ahd)(TM) and in the Division Bench order the expenditures for debenture pertaining to pre-conversion period were held as revenue in nature. After noticing this aspect the Special Bench has highlighted that it is the substance which has to be seen and not the nomenclature. In view of this circumstance one has to look into the substance of the transaction whether it is for increasing the capital base of the company or not. For examining this aspect of the matter the Tribunal's decision in asst. yr. 1996-97 is the best evidence for our guidance, wherein issuance of the debenture was treated as raising loan. We need not to look into any other circumstance because for one assessee consistency is much desired virtue. If the Special Bench has held that in any case debenture issue expenses have to be treated as capitalin nature in that situation we have no choice except to deviate from the decision of Tribunal rendered in asst. yr. 1996-97. Moreso, this decision of Tribunal has been rendered on 18th Aug., 2006 i.e. much after the decision of the Special Bench which was given on 24th March, 2006. Apart from all these things, in our opinion, the Hon'ble Calcutta High Court has considered this issue in the case of CIT v. East India Hotels . The observation of the Hon'ble High Court in this case reads as under: The facts are not in dispute that the assessee has incurred expenses of Rs. 67,18,758 on the issue of 7,50,000 debentures of Rs. 100 each for a total value of Rs. 7.50 crores and that amount is repaid as under: (a) 20 per cent at the end of three years from the date of allotment of debentures by way of issue of equity shares.
(b) 20 per cent each thereafter at the end of the 8th, 9th, 10th and 11th years. from the date of allotment of debentures by payment in cheques.
The CIT has given the main reason for disallowance that 20 per cent of the amount collected by issue of debentures will be paid by the end of three years from the date of allotment of debentures, by way of issue of equity shares. According to the CIT, when 20 per cent loan is payable by issue of shares that is not a repayment of the loan within eleven years. The loan has not been taken for a certain and limited period, therefore, the decision of the Supreme Court in the case of India Cements Ltd. v. CIT is not applicable. Therefore, expenses on the issue of debentures cannot be allowed as revenue expenses. Secondly, after the insertion of Section 35D the expenses on the issue of debentures cannot be allowed as revenue expenses.
In India Cements Ltd. v. CIT (supra), at p. 63, their Lordships observed as under: To summarise this part of the case, we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within Section 10(2)(xv).
Whether the expenditure on issue of fresh shares is revenue expenditure or capital expenditure? When the money is secured for certain period the expenditure is revenue expenditure within the meaning of Section 10(2), Clause (xv) of the Act as held by the apex Court in the case of India Cements Ltd. (supra).
Section 35D has been introduced to give benefit to assessees in cases of capital expenses. When the capital expenses cannot be allowed as deduction in computing the income, but under Section 35D capital expenses can be allowed as deduction in ten year span, i.e., 1/10 in each year. But how a deduction, which is allowable otherwise as revenue expenses, can be denied after the insertion of Section 35D, learned Counsel failed to explain.
The Board has also clarified this issue in Circular No. 56, dt. 19th March, 1971. The Board clarified that the provision for amortisation is not intended to supersede any other provision of the IT law under which such expenditure is admissible as a deduction or deduction allowable by virtue of the decision of the Supreme Court in India Cements Ltd. (supra).
Admittedly, here the loan has to be repaid within eleven years from the date of allotment of debentures. If 20 per cent of that loan is payable by the end of three years from the date of issue of debentures by way of issue of shares to make the debentures more lucrative/attractive that does not change the character of repayment of loan within eleven years.
Therefore, in view of this admitted fact we find no reason to interfere in the order of the Tribunal.
In the result, we answer the question in the affirmative, that is, in favour of the assessee and against the Revenue.
The Special Bench while dealing with this decision has recorded a finding that in the case of the Hon'ble Calcutta High Court the debenture was held to be loan and 20 per cent are repaid by the allotment of shares was found to be an incentive for debenture subscription. The finding recorded in para 35 by the Special Bench reads as under: 35. Maganlal Mohanlal Panchlal (HUF)'s case (supra)--Gujarat High Court decision, states that a solitary decision is to be followed but only when it is applicable to the facts and circumstances of the case. It has a persuasive value and not a binding decision like that of Supreme Court, This is with regard to decision of Calcutta High Court in the case of East India Hotels Ltd. (supra). In this case, the debenture was held to be loan and 20 per cent repaid by the allotment of shares was found to be an incentive for debentures subscription. There is nothing in the present case of that nature.
Intention was to issue shares, partly on allotment of debenture itself and partly after 15 months. Here, the intention is thus was otherwise. The conversion is not an incentive for debenture but a prelude to issue of shares.
On going through this finding of the Special Bench, it infers that if debenture is a loan then deduction on account of interest expenses can be given because in the case before Hon'ble Calcutta High Court the debenture was held to be a loan and those facts were not identical to the facts before the Special Bench, however, in the present case in asst. yr. 1996-97 on an identical issue the Tribunal vide its order dt.
18th Aug., 2006 has held that the fund raised through debentures is a loan and on such loan interest is allowable. The Tribunal while holding so put reliance upon the decision of Hon'ble Supreme Court (extracted supra). In this way the Tribunal in 1996-97 allowed the deduction in respect of interest liability pertaining to convertible and non-convertible debentures till their conversion. We do not see any good reason to deviate from this stand of the Tribunal in this assessment year and to probe the issue further on facts, because of Special Bench decision, moreso, the earlier view was taken on the basis of the Hon'ble Supreme Court decision and it is also in the line of Hon'ble Calcutta High Court decision rendered in the case of East India Hotels Ltd. (supra). In view of the above we partly allow the grounds of appeal raised by the assessee and direct the AO that he shall grant deduction in respect of expenses on Part-B of the aforesaid convertible and non-convertible debentures till their conversion into equity capital.
13. The assessee has raised additional ground of appeal also, wherein it is contended that if the issue expenses in respect of "A" portion of the debenture convertible in equity shares on allotment are not to be allowed as revenue expenses then the deduction under Section 35D(2) of the IT Act be allowed.
14. With the assistance of learned Representatives we have gone through the record carefully. We find that none of the Revenue authorities has examined this issue. Since we have upheld the findings of the Revenue authorities that the expenses relating to "A" portion of the debentures convertible on the date of allotment are to be treated as capital expenses, these expenses are to be amortized as per Section 35D and a deduction as contemplated in the provision is to be granted to the assessee. Therefore, we set aside this issue to the file of AO and direct him to verify the facts relating to expenses in respect of "A" portion of the debenture issue and then grant the deduction according to Section 35D(2) of the Act.
15. No other ground was pressed. In the result, appeal of the assessee is partly allowed.