Case Law Details
Mahindra & Mahindra Ltd. Vs Addl. CIT (ITAT Mumbai)
The assessing officer disallowed the premium paid on FCCB holding that being capital and contingent. The learned CIT(A) allow relief to the assessee by following the decision of tribunal in earlier years. We have seen that the coordinate bench of Tribunal in assessee’s own case for AY 2006-07 in ITA No. 8597/Mum/2010, on similar set of facts passed the following order;
“5. Next ground of appeal is about disallowance of pro rata premium of Rs.5.39 crores payable on redemption of ‘Foreign Currency Convertible Bonds'(FCCB). As per the AO the bonds were convertible into shares and, therefore, could not be construed as a borrowing, that they increased capital base of the company and that the expenditure incurred was capital in nature. The AR submitted that FCCB were a form of borrowing that they were shown in the balance- sheet under loans that premium payable on redemption was cost of borrowing, that option of conversion of bonds into shares was only with the bond holders, that conversion was a subsequent event which did not change the initial character of the bonds of a debt, that in the event of redemption payment of premium was mandatory, that premium being a cost of borrowing was allowable on time, that premium was neither capital nor contingent in nature, that issue of FCCB had been held to be revenue in appellant is own case for the assessment year 1997-98 (ITA/7845/M/2004).DR supported the order of the AO. In the matter of Crane software International Ltd. (ITA /741 and 742 Bangalore / 2010) issue of FCCB have been discussed as under –
“…the expenses were incurred in connection with the issue of FCCB. As the bonds were convertible, the assessing authority treated the bond proceeds as increased to capital. Accordingly, he treated the expenditure of Rs.6.63 crores. As capital in nature is, it was incurred for raising the capital of the assessee company. The said expenditure was disallowed. Assessee claimed the expenses is deductible as the expenses were incurred to raise loan finance. The assessing authority held that the bond holders at the option to convert the bonds to equity shares, and therefore, the collection of funds for the issue of bonds needs to be treated as to increase the capital and, therefore, the connected expenses would be capital in nature and hands disallowed. We agree with the view of the CIT (A) that the expenses are not capital in nature. As on 31.03.2006, the previous year ending for the assessment year 2006-07, the funds collected by the assessee company through the issue of the foreign currency convertible bonds, were in the nature of liability. The assessee company was bound to discharge is the bonds new dates. The assessee was paying interest is to bond holders. It is clear that the bond finance was in the nature of loan finance. It becomes the capital of the company on leave in the bond holders. and exercise their option at the appropriate time in future. That conversion is only a future event, that may or may not happen, depending on the option exercised by the bond holders. Therefore, the possible equity character of the funds ITA No. 8597/Mum/2010 was contingent on the assessed whether bonds would be converted or not, in a future date. The nature of a present-day loan fund cannot be held equity fund on the basis of such contingency. As far as the nature of the funds for the assessment year 2006 – 07 is concerned, it was a liability in the nature of loan, that too interest-bearing loan. If the funds are dated as equity capital for the assessment year 2006 – 07 how the payment of bond interest would be justified in law, is law does not permit payment of interest on a company’s equity capital.”
In the case of Secure metres Ltd.(321 ITR 61)Hon’ble Rajasthan HC has held –
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