Income Tax Appellate Tribunal - Mumbai
J.M. Shares And Stock Brokers Ltd. vs Deputy Commissioner Of Income Tax on 9 December, 2003
Equivalent citations: (2004)83TTJ(MUM)1052
ORDER
A.K. Garodia, A.M.
1. This is an assessee's appeal directed against the order of the learned CIT(A)-XIV, Mumbai, dt. 17th Sept., 1996 for asst. yr. 1992-93. The first ground relates to disallowance of Rs. 11,01,379 on account of issue expenses on the convertible portion of partly convertible debentures (PCD) and expenses on issue of shares Rs. 68,096 claimed under Section 35D which was disallowed on the ground that the assessee is not an industrial undertaking.
2. The facts of the case are that some convertible debentures were issued during the year and convertible part of debentures of the face value of Rs. 50 was to be converted into five shares of Rs. 10 each and as a matter of fact, these debentures got converted into equity shares, during the year itself. And under the circumstances, the AO treated the expenditure on account of issue of convertible part of the debentures also as expenses incurred on issue of shares (sic). The learned CIT(A) upheld the order of the AO by appreciating the fact that the conversion took place in the year under consideration itself. The deduction of Rs. 68,096 claimed under Section 35D was disallowed by the AO on the ground that the assessee is not an industrial undertaking, and hence, it is not eligible for the deduction under Section 35D and learned CIT(A) agreed to this view of the AO also. Now, the assessee is in further appeal before us.
3. It was argued by the learned Authorised Representative that when the debentures were issued, it was debentures without any dispute and was convertible after six months into shares. Although conversion took place in the same year, as per Authorised Representative this does not change the character of the debentures issued. Reliance was placed on the judgment in the case of CIT v. East India Hotels Ltd. (2001) 252 ITR 860 (Cal) and India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC). A copy of Tribunal's order in the case of Telco v. ITO in ITA No. 1154/B/85 was also filed and is placed on paper book page Nos. 77 to 80. Another judgment of the Tribunal was also filed in the case of Voltas Ltd. v. CIT as per ITA No. 7512/B/90 placed on page Nos. 81 to 84 of the paper book. In the case of East India Hotels Ltd. (supra), the convertible portion of the debentures were to be converted after three years and not in the same year. In the case of India Cements Ltd. (supra), the issue was the expenses incurred in obtaining loan of Rs. 40 lakhs from IFCI and not in connection with debentures. In both the judgments of the Tribunal relied upon by the learned Authorised Representative, the conversion was to take place after a period of time but not to be converted in the same year. It was held in all these judgments that expenses incurred on issue of convertible portion of PCD also are of revenue expenditure.
4. 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 learned Departmental Representative is also on this consideration that since 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 count, we agree with the arguments of 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. But regarding the disallowance of Rs. 68,096 under Section 35D on the ground that the assessee is not an industrial undertaking, the issue was not really pressed by the learned Authorised Representative and we sustain the order of the learned CIT(A) on this count. Hence, the assessee gets part relief of Rs. 11,01,379 on this ground out of Rs. 11,69,475.
5. The second ground relates to not allowing the interest income of Rs. 5,43,257 to be deducted from the share issue expenses. The learned Authorised Representative relied on the judgment in the case of CIT v. Kamal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC). In this case, the interest was earned against the deposit to open letter of credit for purchase of machinery required for setting up its plant and it was held that the deposit of money was directly linked with the purchase of plant and machinery and hence, any income earned on such deposit was incidental to the acquisition of assets for the setting up of the plant and machinery. The interest was a capital receipt, which would go to reduce the cost of asset. The learned Authorised Representative argued that the deposit with bank in the case in hand also was under mandatory situation and hence by applying the ratio of this judgment, it was rightly claimed as deduction against the share issue expenses. The learned Departmental Representative relied upon the order of the learned CIT(A). It was also argued by the learned Authorised Representative that this issue is squarely covered in favour of the assessee by the order of the Tribunal in the case of Dy. CIT v. XLO GWB Cardon Shaft Ltd. as appearing on pp. 60 to 70 of the paper book. In this case also, the issue involved was adjustment of interest income against the share issue expenses and after considering the various judgments in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC); in the case of Karnal Co-operative Sugar Mills Ltd. v. CIT (1998) 233 ITR 531 (P&H); in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC), and in the case of CIT v. Bokaro Steels Ltd. (1999) 236 ITR 315 (SC) it was held by the Tribunal that interest was earned on account of some precondition associated with the funds obtained, and hence, it is not a case of surplus money not immediately required and the relief was granted to the assessee.
6. In the case in hand also the deposit with bank is kept under mandatory situation and hence respectfully following the judgment of the co-ordinate Bench of the Tribunal in ITA Nos. 6113/B/95 and 2931/B/98, the assessee succeeds on this ground.
7. The next ground is relating to disallowance of membership fees paid to OTCEI Rs. 2 lakhs. It was argued by the learned Authorised Representative that this issue is fully covered in favour of the assessee by the order of the Tribunal in the case of Asstt. CIT v. Marvel Equity (P) Ltd. as per ITA No. 271/M/2000 placed on page Nos. 71 to 76 of the paper book. The learned Departmental Representative relied on the order of the learned CIT(A).
8. We have heard the rival submissions, perused the materials on record and gone through the order of the Tribunal as cited by the learned Authorised Representative. We are of the considered opinion that the facts of the case in hand being similar, the issue is fully covered in favour of the assessee and respectfully following the order of the Tribunal. We delete this addition. This ground of the assessee also succeeds.
9. Ground No. 4 is regarding the deduction under Section 80M. This ground was not pressed by the learned Authorised Representative, hence, dismissed as not pressed.
10. In the result, the appeal is partly allowed.