Income Tax Appellate Tribunal - Ahmedabad
Banco Products (India) Ltd. vs Deputy Commissioner Of Income Tax on 28 May, 1997
Equivalent citations: [1997]63ITD370(AHD)
ORDER
B.L. Chhibber, A.M.
1. A short but important issue raised in this appeal by the assessee is whether public issue expenses incurred on issue of partly convertible debentures is allowable as revenue expenditure.
2. The assessee-company offered 3 lakhs equity shares of Rs. 10 each and 1,00,000 15 per cent partly convertible debentures of Rs. 100 each to the Public during the year under appeal. The objects of the public issue specified in the Prospectus issued by the assessee-company were as follows :
(1) To finance the capital expenditure of the company;
(2) To supplement the company's long-term resources for working capital; and (3) To obtain listing of the equity shares and debentures of the company on the stock exchange.
The assessee incurred aggregate expenditure of Rs. 8,00,132 on these public issues. The entire expenditure of Rs. 8,00,132 was bifurcated in the ratio of the amount of shares and debentures to the total public issue. The ratio worked out to 77 : 23 and accordingly 77 per cent of the expenditure was apportioned to debentures and 23 per cent of the expenditure was apportioned to equity shares. The expenditure relating to debentures amounting to Rs. 3,78,233 was claimed as deduction permissible under s. 37(1) of the IT Act and the expenditure relating to equity shares amounting to Rs. 1,12,979 was considered as preliminary expenditure. It was submitted before the AO that in respect of each debenture of the face value of Rs. 100, Rs. 30 was convertible into 3 shares of Rs. 10 each on 30th June, 1987, and the balance portion of Rs. 70 was non-convertible and was redeemable in the 6th, 7th and 8th years of issue. The AO while completing the assessment, disallowed the debenture issue expenditure of Rs. 3,78,233 on the ground that the expenditure was incurred to increase the share capital of the company and hence the same was not allowable as deduction.
3. The assessee appealed to the CIT(A). Relying on the principles laid down by the Supreme Court in the case of India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC), the assessee's representative submitted that the apex Court had observed in the aforesaid case that procuring of capital by way of issue of shares was different from obtaining loans through debentures. Reliance was further placed on the following High Court decisions :
(1) Hindustan Gas & Industries Ltd. vs. CIT (1979) 117 ITR 549 (Cal);
(2) Brooke Bond India Ltd. vs. CIT (1983) 140 ITR 272 (Cal);
(3) CIT vs. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar);
(4) Mohan Meakin Breweries Ltd. vs. CIT (1979) 117 ITR 505 (HP);
(5) Bharat Carbon & Ribbon Mfg. Co. Ltd. vs. CIT (1981) 127 ITR 239 (Del) and (6) Vazir Sultan Tobacco Co. Ltd. vs. CIT.
The learned CIT(A) held that the expenditure incurred on the convertible portion of Rs. 30 each was in the nature of capital expenditure because 30 per cent of the debenture issue would go to augment the share capital of the company and the balance 70 per cent could be treated as loan. In support of his findings, he relied upon the following decisions :
(a) CIT vs. Aditya Mills (1990) 181 ITR 195 (Raj);
(b) Mohan Meakin Breweries Ltd. vs. CIT (supra);
(c) Bharat Carbon & Ribbon Mfg. Co. Ltd. vs. CIT (supra) and
(d) Bombay Burmah Trading Corpn. Ltd. vs. CIT (1984) 145 ITR 793 (Bom).
Thus, the learned CIT(A) gave part relief.
4. Shri S. N. Soparkar, the learned counsel for the assessee submitted that it was true that part of the borrowed funds were going to be converted into equity shares at a future date. That by itself, however, cannot change the characteristics of the receipts. Borrowings continued to remain borrowings till the end of the year. If that be so, expenditure incurred by the assessee would certainly be regarded as expenditure incurred on borrowing the funds. According to the learned counsel for the assessee what might happen at a future date is an issue which is not relevant for the purpose of deciding this controversy. It was true that at the end of the specific period (10 months), part of the debentures would be, as a matter of fact, were converted into shares. However, till the date of conversion the said amount was only a debt. Relying upon the judgment of the Supreme Court in the case of India Cement Ltd. vs. CIT (supra), the learned counsel for the assessee submitted that the assessee was entitled to the deduction of the entire expenditure attributable to the issue of partly convertible debentures (PCDs). According to the learned counsel the Hon'ble Supreme Court in the case of India Cement Ltd. (supra) categorically laid down that such an expenditure incurred for creating a debt would be allowable expenditure. And hence it is irrespective of the length for which the debt would be available. The learned counsel for the assessee further submitted that whenever a term loan is raised, the benefit of the same is available for a number of years, and even then the Department does not hold the expenditure for raising the term loan as a capital expenditure or whenever such attempt is made by the Department the Courts have always held that such an expenditure is revenue expenditure. In support of his arguments he relied upon the following decisions :
(1) Jeevanlal (1929) Ltd. vs. CIT (1969) 74 ITR 563 (SC);
(2) Orissa Cement (P) Ltd. vs. CIT (1969) 73 ITR 14 (Del);
(3) Addl. CIT vs. C. S. Thacker (1983) 142 ITR 438 (Pat);
(4) CIT vs. Oswal Spg. & Wvg. Mills (1986) 160 ITR 426 (P&H) and (5) CIT vs. Tumes Corpn. Ltd. (1989) 179 ITR 219 (MP).
5. Shri P. N. Dixit, the learned Departmental Representative strongly supported the orders of the authorities below. He took us through the relevant extracts from the terms of issue of such debentures and submitted that the company was under an obligation as was clear from the following paragraph relating to conversion :
"The debentures shall carry an obligation on the part of the company to issue to the holders of every such fully paid debenture on 30th June, 1987, and on the part of the holders of the debentures, to take up without any further act or application, three equity shares of Rs. 10 each credited as fully paid up at par. Thus, there will be a constructive receipt of Rs. 30 by the holders of the debentures towards the convertible part of each debenture and constructive payment of the same amount by them to the company towards the price of three fully paid up equity shares to be issued against each such debenture."
According to the learned Departmental Representative the following factual position clearly emerged from the prospectus :
"(1) The debenture issued as per terms of issue itself was liable to be converted into equity shares on 30th June, 1987, within a year from the date of issue being 3rd September, 1986, automatically and compulsorily without any further act or application on the part of such debenture-holder. (2) The debenture-holder or any subsequent transferee, before the date of conversion, has to hold such shares with the aforesaid condition of automatic and compulsory conversion having no choice or option in the matter. (3) The date and manner of such conversion was predetermined and final at the date of issue of such debentures itself. (4) Further, although the date of conversion was a subsequent date, but in view of legal amendments as noted above, such convertible portion had characteristics of equity shares which becomes further clear from stipulation regarding augmentation of number of such shares by conversion in the event of issue of bonus shares prior to such conversion. Had that been not so, then there was no need of such stipulation. (5) The further or restriction on repurchase of such debenture prior to conversion makes it abundantly clear as such restriction was obviously self-imposed in view of provisions of s. 77 of the Companies Act, 1956, prohibiting repurchase of its share capital from open market."
According to the learned Departmental Representative it was clear that funds so obtained from through the issue of convertible debentures were clearly identifiable as equity capital and loan funds from the very beginning and for all the time thereafter. The mere fact that such funds, temporarily for a brief period of about 6 months from the time of completion of formalities of allotment, were treated as raised against debenture with a mandatory condition of convertibility will not bestow on the entire funds, the characteristics of loan funds. The date and manner of conversion was certain and specific and nothing was left to chance and in any case when the return of income of the company was due to be filed on 30th June, 1987, and was actually filed on that date, the factum of conversion was a dead certainty. He, therefore, submitted that the CIT(A) rightly attributed the proportionate part of the issue expenses towards capital augmentation. In support of his arguments, he relied upon the following decisions :
(1) Richardson Hindustan Ltd. vs. CIT (1988) 169 ITR 516 (Bom);
(2) CIT vs. Motor Ind. Co. Ltd. vs. CIT (1988) 173 ITR 374 (Ker);
(3) Vazir Sultan Tobacco Co. Ltd. vs. CIT (1988) 174 ITR 689 (AP);
(4) Vazir Sultan Tobacco Co. Ltd. vs. CIT (1990) 184 ITR 70 (AP);
(5) Shree Ram Mills Ltd. vs. CIT (1992) 195 ITR 215 (Bom);
(6) Avery India Ltd. vs. CIT (1993) 199 ITR 745 (Cal);
(7) Union Carbide India Ltd. vs. CIT (1993) 203 ITR 584 (Cal);
(8) CIT vs. Mihir Textiles Ltd. (1994) 206 ITR 112 (Guj);
(9) Gujarat Steel Tubes Ltd. vs. CIT (1994) 210 ITR 358 (Guj) and (10) CIT vs. Ajit Mills Ltd. (1994) 210 ITR 658 (Guj).
6. We have considered the rival submissions and perused the facts on record. Basic requirement of a debt is repayability. Broadly, stated a debt is a liquidated money obligation for the recovery of which an action will lie. It is an ascertained liquidated quantified obligation enforceable in praesenti or in futuro. A debt must be a debitum that is due. Debitum in praesenti, solvendum in futuro is vital conception of a debt. Viewed from this angle, convertible portion of the debenture cannot be termed as a debt because in our considered view convertible debentures have characteristics of equity shares; these are equity shares in embryo. The conversion of such debentures on the stipulated date leads to augmentation of the equity base of the company. In the case before us convertible debentures were clearly identifiable as equity capital. The conversion was mandatory. Hence it cannot be said that convertible part had the characteristics of loan funds. The date and manner of conversion was certain and nothing was left to chance and in any case when the return of income of the company was due to be filed on 30th June, 1987, and was actually filed on that date, the factum of conversion was a dead certainty.
6.1. In India Cement Ltd. vs. CIT (supra) on which heavy reliance has been placed by the learned counsel for the assessee, the apex Court was dealing with a case of an appellant who had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith it spent a sum of Rs. 84,633 towards stamp duty, registration fee, lawyer's fee, etc. and claimed this amount as business expenditure. The Hon'ble Supreme Court held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as a deduction under s. 10(2)(xv) of the Indian IT Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. The Hon'ble Supreme Court further held that "obtaining capital by issue of share is different from obtaining loan by debentures". It is obvious that the Supreme Court was dealing with a case where loan was raised and the loan was in the nature of debt. It was neither a case where issue of equity shares or convertible/partly convertible debenture was involved. Before us is the case where expenditure was admittedly incurred on issue of equity shares and partly convertible debentures. Accordingly, the ratio laid down by the Supreme Court will not apply to the facts of the case before us.
6.2. The question whether expenditure incurred on issue of shares of a company is of a revenue or capital nature, there is a divergence of opinions among different High Courts as is evident from the cases of different High Courts cited by both the parties supra. But so far as Ahmedabad Benches are concerned, they are consistently following the judgment of the Gujarat High Court (Jurisdictional High Court) in the case of Shree Digvijay Cement Co. Ltd. vs. CIT 138 ITR 45 (Guj). None of the cases of the High Courts referred to supra deals with issue of convertible/partly convertible debentures. In the case before us the issue relates to the expenditure on issue of partly convertible debentures and for the reasons discussed above, we hold that the proportionate expenditure on the convertible part of the debenture is for the augmentation of equity base of the company and as such has to be treated as capital expenditure. We accordingly uphold the findings of the CIT(A). This ground fails and is dismissed.
7. The next grievance of the assessee is that the learned CIT(A) is not justified in law and on facts in confirming the disallowance of 1/5th of the motor car expenses amounting to Rs. 26,472 and depreciation of Rs. 10,635 thereon.
7.1. The assessee is a Public Limited Company.
The AO disallowed 1/5th of the expenditure on running and maintenance of motor cars and depreciation thereon for possible personal use of the cars by the directors and executives of the company. On appeal, the CIT(A) confirmed the disallowance made by the AO.
7.2. In our considered view the approach of both the authorities below is not legally tenable. The decision of Madras Bench of this Tribunal in the case of ITO vs. Ashoka Betelnut Co. (P) Ltd. (1985) 21 TTJ (Mad) 465 and the decision of Bench 'E' of Delhi Tribunal in the case of Perfect Pac Ltd. vs. IAC (1993) 46 TTJ (Del) 438 squarely apply to the facts of the case. We, therefore, reverse the findings of the authorities below and delete the impugned additions.
8. In the result, the appeal is allowed in part.