Expenditure Incurred on Issuance of Debentures is Revenue Expenditure: ITAT Bangalore allows Deduction [Read Order]

2.1 The learned CIT(A) has erred in facts and in law in confirming the dis allowance of expenditure incurred in relation to issue of debentures amounting to Rs 19,38,800 (only 2 items), as capital expenditure.

2.2 The learned CIT(A) has erred in facts and in law to appreciate that where the stamp duty is incurred by the Appellant towards issue of debentures, the same is an allowable expenditure under section 37 of the Act.

2.3 The learned CIT(A) has erred in facts and in law to appreciate that the stamp duty for issue of debenture, is an allowable expenditure under the provisions of the Act, as the said stamp duty is compulsory levy under the Companies Act.

2.4 The learned CIT(A) has failed to appreciate that the money raised by issue of convertible debentures is in the nature of borrowing and not in the nature of share capital.

2.5 The learned CIT(A) has erred in not considering the written submissions made by the Appellant, in this regard.

2.6 The learned CIT(A) has erred in not considering the judicial precedents relied on by the Appellant including that of the jurisdictional High Court.

2.7 The learned CIT(A) has erred in not directing the learned Assessing Officer to verify whether an amount of Rs. 29,419 was disallowed by the Company as the said amount was incurred towards charges to ROC, as the Company in its Return of Income itself had voluntarily disallowed the said amount.

Ground 3: Sponsorship charges

3.1 The learned CIT(A) has erred in confirming the order of the AO in relation to sponsorship charges incurred by the Appellant.

3.2 The learned CIT(A) erroneously proceeded to uphold the contentions of the AO and erred in concluding that the sponsorship fee needs to be disallowed.

3.3 The learned CIT(A) and AO have erred in facts and in law to appreciate that the Company is engaged in the business of real estate development and to project its brand it is required to incur the advertisements through sponsorship of events.

3.4 The learned CIT(A) and AO have failed to appreciate that sponsorship of events are incidental to the business of the assessee to promote its product and therefore is an allowable expenditure as per the provisions of the Act.

3.5 The learned CIT(A) has erred in not considering the written submissions made by the Appellant, in this regard

3.6 The learned CIT(A) has erred in not considering the judicial precedents relied on by the assessee.”

The Appellant submits that each of the above grounds is independent and without prejudice to one another.”

2. During the course of hearing, the ld. counsel for the assessee has invited my attention that expenditure incurred in relation to debentures is revenue expenditure in the light of judgment of Hon’ble jurisdictional High Court in the case of CIT & Anr. Vs. ITC Hotels Ltd., 338 ITR 109; whereas the CIT(Appeals) has decided the appeal of assessee following the judgment of Hon’ble Gujarat High Court and Mumbai Bench of the Tribunal. The ld. counsel further contended that the Hon’ble jurisdictional High Court has decided the issue following the judgment of Hon’ble Rajasthan High Court in the case of CIT Vs. Secure Meters Ltd. reported at 321 ITR 611 in which the Hon’ble High Court has examined the issue in the light of various judicial pronouncements. The SLP filed against the judgment of Hon’ble Rajasthan High Court was also dismissed by the Hon’ble Apex Court. Therefore, the view taken by the Hon’ble Rajasthan High Court which was followed by the Hon’ble jurisdictional High Court in the case of CIT Vs. ITC Hotels Ltd. (supra) attained finality.

3. With regard to sponsorship charges, it was contended that the assessee has paid the sponsorship charges on account of business need. The expenditure was incurred towards music festival to Technology Alumni Association which is an alumni association of IIT, Kharagpur, therefore the said expenditure was allowable as revenue expenditure.

4. On the other hand, the ld. DR has placed reliance upon the order of CIT (Appeals) with regard to expenditure incurred in relation to issue of debentures and with respect to dis allowance of sponsorship expenses, the ld. DR has submitted that no evidence has been filed with regard to expenses either before the AO or the CIT(Appeals). Therefore, the revenue authorities were right in disallowing the claim.

5. Having carefully examined the orders of authorities below and the judgments referred to in the light of rival submissions, we find that the issue of expenditure incurred in relation to issue of debentures was examined by the CIT(Appeals) in the light of judgment of Hon’ble Gujarat High Court and the order of Mumbai Bench of the Tribunal and held that this expenditure cannot be allowed as revenue expenditure. Whereas, the Hon’ble Rajasthan High Court had examined this issue in the light of the Hon’ble Apex Court judgment and various judgments of different High Courts and finally concluded that debenture when issued is a loan, and, therefore, whether it is convertible or non-convertible, does not militate against the nature of the debenture, being loan, and therefore the expenditure incurred would be admissible as revenue expenditure. The relevant observations of the Hon’ble Rajasthan High Court are extracted here under for the sake of reference:-

“6. Coming to the second question, the learned Tribunal in this regard has held that the decision of the Hon’ble Supreme Court in Brooke Bond India Ltd. Vs. CIT reported in [1997] 225 ITR 798 is not applicable to the facts of the instant case because that was a situation in which expenditure on issue of shares was held to be ineligible for deduction, while the assessee has issued debentures for which Rs. 44 lakhs was claimed as deduction and it was considered that this aspect is settled by several decisions of various High Courts and it has been held by the Hon’ble Supreme Court in India Cements Ltd. v. CIT reported in [1966] 60 ITR 52, that a loan is not an asset or advance of enduring nature and the purpose of taking loan is totally an irrelevant consideration and hence the deduction on account of interest on loans cannot be denied. Then, the learned Tribunal also proceeded to rely upon another judgment of the Jaipur Bench of the Tribunal in the case of Rajasthan Financial Corporation Vs. Deputy CIT [1997] TW501, holding that the expenditure incurred for raising capital through bonds in business was revenue in nature and it was held that since in the present case the assessee had incurred expenses of Rs. 44 lakhs on issuance of debentures being a loan, in our considered opinion, there is no basis for not allowing deduction for the entire sum and thus this addition was deleted.

7. We have gone through the judgment in Brooke Bond India Ltd.’ s case [1997] 225 ITR 798 (SC) and find that that was a case where the registration fee to the tune of Rs. 1,50,000 was paid to the Registrar of Companies for increasing the share capital of the company, while in the case of India Cements Ltd. [1966] 60 ITR 52, the matter related to the borrowing of Rs.40 lakhs from a financial institution, which loan was secured by a charge on the fixed assets of the company. The Hon’ble Supreme Court in this judgment considered various aspects of the matter including the previous English judgments and couple of judgments of the English courts based on the English Income tax Act and proceeded to draw distinction between the income tax law in England and India. Not only this, the Hon’ble Supreme Court further proceeded to examine a number of cases decided by various High Courts like Kerala, Andhra Pradesh, Calcutta, Bombay, etc., and had gone to the extent of holding that some of the judgments were wrongly decided. Then, the Hon’ble Supreme Court proceeded to hold as under (page 63) :

“10. To summarize this part of the case, we are of the opinion that : (a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained.”

Thus, it was held that the expenditure incurred in procuring the loan was revenue expenditure within section 10(2)(xv) of the old
Income Tax Act, which corresponds to section 37 of the present Act. By going through the said judgment, it further transpires that the Hon’ble Supreme Court also proceeded to examine the aspect of purpose of raising loan and its immediate or subsequent utilization for different purpose and examined that even if a loan is raised for purchasing raw material and after raising the loan the company finds it unnecessary to by raw material and spends the amount on capital asset, still it cannot be said to be capital expenditure, as it was held that the purpose for which the new loan was required was irrelevant to the question as to whether the expenditure for obtaining loan was revenue or capital expenditure. We are told that relying on this judgment many of the High Courts of the country have consistently taken the view that the expenditure incurred in issuing any debentures and raising loan on debentures is admissible obviously because the debenture is also a loan.

8. At this stage it was contended by the learned counsel for the Revenue that a distinction should be drawn between the convertible and non-convertible debentures inasmuch as if the debenture is converted into shares then it partakes of the character of capital and in that event the expenditure would not be revenue expenditure and would be capital expenditure. Learned counsel for the assessee informs that though it has not come on record so far but as a matter of fact the debentures issued were of convertible nature. Then, the learned counsel for the assessee argued relying upon the judgment of the Calcutta High Court in CIT Vs. East India Hotels Ltd. reported in [2001] 252 ITR 860, that the expenditure incurred even in raising loan by convertible debenture would also be admissible as revenue expenditure. The Calcutta High Court had adopted the reasoning that conversion of debentures results in repayment of loan and issuance of shares. This is one aspect of the matter. In our view, the other more important aspect of the matter is that the Hon’ble Supreme Court in India Cements’ case [1966] 60 ITR 52 has clearly excluded this aspect from consideration by holding that it is irrelevant to consider the object with which the loan was obtained.

9. Admittedly, the debentures when issued is a loan and, therefore, whether it is convertible or non-convertible does not militate against the nature of the debenture, being loan and, therefore, the expenditure incurred would be admissible as revenue expenditure.”

6. Against this judgment, a SLP was filed and the same was dismissed by the Hon’ble Supreme Court in Special Leave Appeal (CC) No. 10548 of 2009. The judgment of this Hon’ble Rajasthan High Court was followed by the Hon’ble jurisdictional High Court in the case of CIT Vs. ITC Hotels Ltd. (supra) by making the following observations:-

“5. After hearing the learned counsel for the parties, we have come across a judgment of the Rajasthan High Court in CIT Vs. Secure Meters Ltd. [2010] 321 ITR 611 (Raj) (Income-tax Appeal No. 8 of 2007—Jodhpur Bench of the Rajasthan High Court) considering the various aspects has come to the conclusion that even if the debenture were to be converted into share at a later date, the expenditure incurred on such convertible debenture has to be treated as a revenue expenditure. The order of the Jodhpur Bench was taken up before the Hon’ble Supreme Court in Special Leave Appeal CC 10548 of 2009. The Hon’ble apex court has dismissed the special leave petition.

6. Therefore, we are of the view that the point raised in this appeal has been decided in view of the dismissal of the special leave petition by the Hon’ble apex court.

7. Following the aforesaid decision, we are of the view that even if the debenture has to be converted into a share at a later date, the expenditure so incurred for collection of debenture has to be treated as revenue expenditure.”

7. In the light of these judgments, I find that the impugned issue is squarely covered in favor of the assessee. Therefore, I set aside the
order of CIT(Appeals) and direct the AO to allow the expenditure incurred in relation to issuance of debentures as revenue expenditure.

8. With regard to sponsorship charges, I find that the claim of assessee was denied for want of evidence of the expenditure incurred on account of sponsorship. During the course of hearing, no evidence is filed before the Tribunal, therefore I find no infirmity in the order of CIT(Appeals). Accordingly, the order of CIT(Appeals) is confirmed in this regard.

9. In the result, the appeal of assessee is partly allowed.

Pronounced in the open court on this 26th day of May, 2017.