Case Law Details

Case Name : D.C.I.T. VS. M/s. McNally Bharat Engineering Co.Ltd.(ITAT Kolkata)
Appeal Number : I.T.A No.100/KOL/2011, I.T.A No.532/Kol/2012
Date of Judgement/Order : 01/03/2017, I.T.A No.217/Kol/2012, I.T.A No.533/Kol/2012, I.T.A No.218/Kol/2012
Related Assessment Year : 01/03/2017
Courts : All ITAT (4418) ITAT Kolkata (280)

The debentures whether convertible or non convertible are in the nature of loan at the time of their issuance and any expenditure incurred on issue of such debentures or bonds had to be regarded as part of the borrowing cost and have to be allowed as a deduction and as a revenue expenditure. This expenditure cannot be regarded as capital.


1. During the year under consideration, the company issued unsecured Foreign Currency Convertible Bonds(FCCB) amounting to Rs. 30 crores. At the time of issuance of FCCB, the Assessee had incurred an expenditure of Rs. 1,34,11,254/- in relation to above issue. During the course of assessment proceedings, the AO called upon the Assessee to explain as to why the said expenditure should not be treated as capital expenditure. In response to the said query, the Assessee filed detailed reply vide its letter dated 08-10-2009 contending that since expenditure has been incurred for raising debts to be utilized for the purposes of business, the expenditure has to be considered as revenue in nature and allowable as deductible expenditure in computing total income.

2. Disregarding the above submission, the AO. in the order u/s 143(3) disallowed the expenditure incurred on issue of FCCB on the basis that since the expenses does not represent interest expenses, the same are not allowable. The AO further observed that since FCCBs are convertible into equity share, expenses incurred for such issue is in the nature of capital expenditure and not allowable as deduction in computing Total Income.

3. Before CIT(A) the assessee primarily placed reliance on the decision of the Hon’ble Rajasthan High Court in the case of CIT vs Secure Meters Ltd. (2010) 321 ITR 611 (Raj.) wherein it was held that debentures when issued are loans and whether it is convertible or non convertible does not militate against the nature of the debenture being in the nature of the loan and therefore expenditure incurred would be admissible as revenue expenditure. It was also brought to the notice of CIT(A) that SLP filed by the department against the aforesaid decision of the Hon’ble Rajasthan High Court was rejected. Further reliance was placed on the Hon’ble Mumbai ITAT in the case of Mahindra & Mahindra vs JCIT 36 SOT 348 (Mum) wherein it was held that the expenditure incurred on account of foreign currency convertible bonds (FCCB) would be admissible as revenue expenditure.

4. The CIT(A) on consideration of the above submissions was of the view that the expenditure in question has to be allowed as deduction. The following were the relevant observations of CIT(A):‑

“I have gone through the contention of the appellant and the A.O. and read through the judgments relied upon by the A/R. The matter has already been decided by the Rajasthan High Court which has further been affirmed by the Apex Court. In the said case, it has been categorically held that the debentures when issued is a loan, whether it is convertible or non-convertible, does not militate against the nature of the debenture being loan. Therefore, the expenditure incurred would be admissible as revenue expenditure in the light of the judgment of the apex Court in the case of India Cements Ltd. Contention of the A.O, that aforesaid judgments relate to debentures and not FCCBs does not hold good as relying on the judgment of the Hon’ble Rajasthan High Court, Hon’ble Mumbai Tribunal has already held that FCCB expenses is an allowable expenditure. Since the issue under consideration is directly covered by the aforesaid judgments, the ground is allowed in favour of the appellant. The A.O. is directed to allow Rs. 1,34,11,254/- as revenue expenditure in computing Total Income.”

4. Aggrieved by the order of CIT(A) the revenue has raised ground no.3 before the Tribunal.

5. Before us the ld. DR relied on the order of AO. The ld. Counsel for the assessee reiterated the submissions as were made before CIT(A). It was also brought to our notice that in assessee’ s own case in ITA No.840/Ko1/2013 by order dated 15.07.2016 this tribunal allowed similar claim of the assessee.

6. We have considered the rival submissions. We are of the view that the issue in question is squarely covered by the decisions referred to by the assessee before CIT(A). The debentures whether convertible or non convertible are in the nature of loan at the time of their issuance and any expenditure incurred on issue of such debentures or bonds had to be regarded as part of the borrowing cost and have to be allowed as a deduction and as a revenue expenditure. This expenditure cannot be regarded as capital. We do not find any infirmity in the order of CIT(A) and accordingly ground no.3 raised by the revenue is dismissed.

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