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4. This appeal was admitted on 25.02.2003 on the following substantial questions of law;

"(i) Whether in the facts and circumstances of the case, the Tribunal has committed an error and whether the Tribunal was right in allowing the deduction of Rs.8,55,716/- in respect of the rent, repairs and depreciation and other expenses in respect of the guest house u/s.37(4) of the Income Tax Act?

(ii) Whether in the facts and circumstances of the case, the Tribunal has erred in law and in fact in holding that the expenses to the tune of Rs.44,87,308/- incurred in the issue of debentures could be allowed as revenue expenditure?"

"7. We heard learned Senior Counsel appearing for either side at length. Facts would clearly indicate that assessee company had issued convertible debentures of Rs. 125/- each of which Rs. 45/- each was to be converted into three shares on 1.7.1983 during the assessment year 1984-85 and had incurred expenses to the tune of Rs. 19,00,925/-. According to the assessee, the expenses incurred are in respect of issuance of convertible debentures. Facts would further clearly indicate that major portion of the convertible debentures was converted into equity shares, and thereby assessing company had got enduring benefit. Debenture under the Company law means a document which either creates or acknowledges a debt. Debentures, wholly secured or unsecured are also used as convertible debentures with the option of being subsequently converted into shares. Share is a right to a special amount of the Share Capital of a company. Capital can be raised by converting debentures into equity shares. Expenditure incurred by the assessee on conversion of convertible debentures into equity shares would have to be treated as capital expenditure. Normally, in a company there are two kinds of share capital; preferential share capital and equity share capital. Generally, all share capital not falling within the description of O/TAXAP/314/2002 JUDGMENT preference capital is equity capital. Equity share capital is that part of share capital which confers a right either to the whole or part of any residue of any profits or to the whole or part of any residue of any assets remaining for distribution after satisfying the claims of any other shareholders whose right to participate therein is limited. Equity share-holders are owners of the company, sharing its risks, profits, and losses and having a residual claim on the earnings and assets of a company and are paid their share of the company's profit after all other claims are met, and in the event of liquidation of the company, they share whatever is left of the company after all its creditors have been paid. They enjoy limited liability i.e. liability only to the extent of their share-holding and they are only entitled to vote at the company's meetings, thus controlling the management. If the company prospers, it is the equity shareholder who is the greatest gainer. Therefore, in our view, when the debentures are converted into equity shares, the assessing company has already got enduring benefit and the expenditure incurred by the conversion of equity shares has to be treated as capital expenditure.

8. Apex Court in India Cements Ltd. Vs. CIT, Madras (supra), held that the loan obtained is not an asset or advantage of an enduring nature, but obtaining capital by issuance of shares is different from obtaining loan by debentures. Above referred judgment was followed by the Apex Court in Brooke Bond India Ltd. Vs. CIT (supra) and took the view that expenditure incurred by the company in connection with issue of shares with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the O/TAXAP/314/2002 JUDGMENT business of the company and in the profit- making.

9. In view of the above position, decisions cited by the learned counsel for the asessee have no application. Facts of the case clearly indicate that portion of the convertible debenture was converted into equity shares and assessee company had got enduring benefits and therefore, the expenditure incurred by the assessee on conversion of convertible debentures into equity shares has to be treated as capital expenditure. It may be noted that the Assessing Authority disallowed expenditure only to the extent pertaining to the convertible portion of the expenditure which formed part of the capital. As such disallowance made by the Income Tax Officer, which was confirmed by the Commissioner (Appeals) has to be sustained. The question of law raised by the Revenue, though not happily framed, is accordingly answered in the negative in favour of the Revenue and against the Assessee. Consequently, appeals are allowed and the order of the Tribunal is set aside."