Expenditure incurred by the assessee on issue of Foreign Currency Convertible Bonds (FCCB) is revenue expenditure allowable under section 37(1) of the I. T. Act, 1961 and not the capital expenditure
1. Assessee company, which is in the business of Cargo Transport and Trading, filed its return of income for the A.Y. 2007- 08 on 31.10.2007 declaring a total income of Rs.15,54,67,315 and book profit of Rs.2,62,85,309 under section 115JB of the Act
2. During the assessment proceedings under section 143(3) of the I.T. Act, the income of the assessee was determined at Rs.16,36,43,200
3. Subsequently, the CIT assumed jurisdiction under section 263 of the I.T. Act and directed the A.O.
(i) to bring to tax the gain on account of foreign exchange fluctuation of Rs.15,46,428 as income from other sources;
(ii) to disallow gratuity of Rs.1,32,95,577; and
(iii) to disallow expenditure amounting to Rs.2,69,26,757 relatable to issue of foreign currency convertible bonds
4. Aggrieved by the order of the Ld. CIT under section 263 of the I.T. Act, the assessee preferred an appeal before the ITAT
5. The ITAT vide orders dated 04.01.2013 in ITA.No.749/Hyd/2012 upheld the initiation of proceedings under section 263 of the I.T. Act and as far as the disallowability of FCCB related expenses, the Tribunal directed the A.O. to examine the issue of allowability or otherwise of the expenses, keeping in view the ratio of various decisions relied upon by both the parties and as discussed by the Tribunal in its order
6. Against the order of the ITAT, the assessee preferred an appeal before the Hon’ble High Court but the Hon’ble High Court dismissed assessee’s appeal holding that there was no substantial question of law involved in the matter
7. Therefore, the A.O., while giving effect to the order of ITAT, re-examined the allowability of expenditure incurred by the assessee on issue of FCCBs and held that FCCB bonds were issued with an option to the bond holders to convert them to ordinary shares or to redeem their claim of bonds on 06.12.2011 at 147.882% of the principal
8. He observed that since the said bonds are convertible and have the characteristic of equity shares, proportionate expenditure on the issue of bonds has to be treated as capital expenditure
9. He further observed that the main purpose of FCCBs was for expansion of their business, i.e., investment in wide ranging capital investment projects and the advantage that would accrue to the assessee from such capital investment would be of an enduring nature
10. He further observed that the bonds were not meant to be part of profit earning process or a part of the working capital but was meant for investment in the capital field such as off-shore acquisition, acquisition/ purchase of scrips, / investment in wholly owned subsidiaries etc.
11. He therefore, treated the expenditure of Rs.2,64,26,757 incurred on issue of the bonds as capital expenditure and accordingly, brought it to tax
12. Aggrieved, assessee filed an appeal before the Ld. CIT(A) who confirmed the order of the A.O.
13. Assessee preferred second appeal to ITAT which is the present appeal
The Hon’ble Karnataka High Court in the case of ITC Hotels Ltd., (cited supra) has also considered the judgment of the Rajasthan High Court in the case of Secure Metres Ltd., (cited supra), to hold that even if the debentures were to be converted into the shares at a later date, the expenditure incurred on such convertible debentures has to be treated as revenue expenditure. We find that ‘A’ Bench of this Tribunal at Bangalore in the case of M/s. Crane Software International Ltd., Bangalore vs. DCIT, Circle-11(2) (cited supra), has considered whether FCCB issue expenses are in the nature of capital or revenue and has held the same to be revenue in nature. Similar view has been expressed by the Hon’ble Delhi High Court in the cases of CIT vs. Havells India Ltd., (cited supra) and also DCIT vs. UAG Builders (P.) Ltd., Delhi (cited supra). We, therefore, find that this issue is fairly covered by the above cited decisions. Hence, we hold that the expenditure incurred by the assessee on issue of FCCB is revenue expenditure allowable under section 37(1) of the I.T. Act.
Cases referred to