Gati Ltd., Hyd, Hyderabad V. ITO, Ward-2(2), Hyd, Hyderabad

ITA 1325/HYD/2015

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3060 (ITAT-HYDERABAD)
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 01-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 30-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B KURMI NAIDU
• Keywords: Capital asset; Business expenditure; Question of law; Revenue expenditure; Capital expenditure
• Section: 143(3); 115JB; 37(1); 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA.NOS.1325/HYD/2015 ASSESSMENT YEAR 2007-08 GATI LIMITED HYDERABAD 500 084. PAN AABCG3709Q VS. INCOME TAX OFFICER, WARD 2 (2) HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. Y. RATNAKAR FOR REVENUE : MR. B. KURMI NAIDU DATE OF HEARING : 0 1 . 0 2 .201 6 DATE OF PRONOUNCEMENT : 10 . 02 .201 6 ORDER PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y. 2007-08. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE OR DER OF THE LD. CIT(A) IN CONFIRMING THE ASSESSMENT ORDER W HEREIN THE EXPENDITURE INCURRED BY THE ASSESSEE ON THE ISS UE OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB) HAS BEE N HELD AS CAPITAL EXPENDITURE AND NOT AS REVENUE EXPENDITURE AS CLAIMED BY THE ASSESSEE. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY, WHICH IS IN THE BUSINESS OF CARGO TRANSPOR T AND TRADING, FILED ITS RETURN OF INCOME FOR THE A.Y . 2007- 08 ON 31.10.2007 DECLARING A TOTAL INCOME OF 2 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. RS.15,54,67,315 AND BOOK PROFIT OF RS.2,62,85,309 U NDER SECTION 115JB OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) OF THE I.T. ACT, T HE INCOME OF THE ASSESSEE WAS DETERMINED AT RS.16,36,43,200. SUBSEQUENTLY, THE CIT ASSUMED JURISDICTION UNDER SECTION 263 OF THE I.T. ACT AND DIRECTED THE A.O. (I) TO BRING TO TAX THE GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION OF RS.15,46,428 AS INCOME FROM OTHER SOURCES; (II) TO DISALLOW GRATUITY OF RS.1,32 ,95,577; AND (III) TO DISALLOW EXPENDITURE AMOUNTING TO RS.2,69,26,757 RELATABLE TO ISSUE OF FOREIGN CURREN CY CONVERTIBLE BONDS. AGGRIEVED BY THE ORDER OF THE LD . CIT UNDER SECTION 263 OF THE I.T. ACT, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE ITAT. THE ITAT VIDE ORDERS DAT ED 04.01.2013 IN ITA.NO.749/HYD/2012 UPHELD THE INITIA TION OF PROCEEDINGS UNDER SECTION 263 OF THE I.T. ACT AN D AS FAR AS THE DISALLOWABILITY OF FCCB RELATED EXPENSES, TH E TRIBUNAL DIRECTED THE A.O. TO EXAMINE THE ISSUE OF ALLOWABILITY OR OTHERWISE OF THE EXPENSES, KEEPING IN VIEW THE RATIO OF VARIOUS DECISIONS RELIED UPON BY BOTH THE PARTIES AND AS DISCUSSED BY THE TRIBUNAL IN ITS ORD ER. AGAINST THE ORDER OF THE ITAT, THE ASSESSEE PREFERR ED AN APPEAL BEFORE THE HONBLE HIGH COURT BUT THE HONBL E HIGH COURT DISMISSED ASSESSEES APPEAL HOLDING THAT THERE WAS NO SUBSTANTIAL QUESTION OF LAW INVOLVED IN THE MATTER. THEREFORE, THE A.O., WHILE GIVING EFFECT TO THE ORD ER OF ITAT, RE-EXAMINED THE ALLOWABILITY OF EXPENDITURE I NCURRED BY THE ASSESSEE ON ISSUE OF FCCBS AND HELD THAT FCC B BONDS WERE ISSUED WITH AN OPTION TO THE BOND HOLDER S TO 3 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. CONVERT THEM TO ORDINARY SHARES OR TO REDEEM THEIR CLAIM OF BONDS ON 06.12.2011 AT 147.882% OF THE PRINCIPAL . HE OBSERVED THAT SINCE THE SAID BONDS ARE CONVERTIBLE AND HAVE THE CHARACTERISTIC OF EQUITY SHARES, PROPORTIO NATE EXPENDITURE ON THE ISSUE OF BONDS HAS TO BE TREATED AS CAPITAL EXPENDITURE. HE FURTHER OBSERVED THAT THE M AIN PURPOSE OF FCCBS WAS FOR EXPANSION OF THEIR BUSINES S, I.E., INVESTMENT IN WIDE RANGING CAPITAL INVESTMENT PROJECTS AND THE ADVANTAGE THAT WOULD ACCRUE TO THE ASSESSEE FROM SUCH CAPITAL INVESTMENT WOULD BE OF A N ENDURING NATURE. HE FURTHER OBSERVED THAT THE BONDS WERE NOT MEANT TO BE PART OF PROFIT EARNING PROCESS OR A PART OF THE WORKING CAPITAL BUT WAS MEANT FOR INVESTMENT IN THE CAPITAL FIELD SUCH AS OFF-SHORE ACQUISITION, ACQUIS ITION/ PURCHASE OF SCRIPS, / INVESTMENT IN WHOLLY OWNED SUBSIDIARIES ETC., HE THEREFORE, TREATED THE EXPEND ITURE OF RS.2,64,26,757 INCURRED ON ISSUE OF THE BONDS AS CA PITAL EXPENDITURE AND ACCORDINGLY, BROUGHT IT TO TAX. AGG RIEVED, ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A) WHO CONFIRMED THE ORDER OF THE A.O. AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 3. THE LD. COUNSEL FOR THE ASSESSEE, MR. Y. RATNAKAR, WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW, AND SUBMITTE D THAT THE ASSESSEE COMPANY HAS ISSUED UNSECURED FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB) ON 05.12.2006 F OR $ 20,000 MILLION US DOLLARS AND THE BOND HOLDERS WERE GIVEN AN OPTION TO CONVERT FCCBS INTO ORIGINAL SHAR ES ON 4 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. OR BEFORE 05.11.2011 AND IN THE EVENT THE BOND HOLD ER IS NOT OPTING FOR SUCH CONVERSION, HE IS ENTITLED TO REDEMPTION ON 06.12.2014 AT 147.882% OF THE BOND AMOUNT. HE SUBMITTED THAT THE BONDS WERE ISSUED FOR SECURING FUNDS FOR BUSINESS PURPOSES INCLUDING EXPA NSION OF THE BUSINESS AND THE AMOUNT RECEIVED IS THUS AN UNSECURED LOAN IN THE HANDS OF THE COMPANY. HE SUBMITTED THAT THE EXPENDITURE OF RS.2,64,26,757 INCURRED BY THE ASSESSEE COMPANY FOR ISSUING THESE BONDS IS THEREFORE REVENUE EXPENDITURE. HE ALSO SUBMITTED THAT DURING THE F.Y. 2006-07 RELEVANT TO THE A.Y. 2007-0 8, THE FUNDS COLLECTED BY THE ASSESSEE COMPANY CONTINUED T O REMAIN WITH THE ASSESSEE ONLY AS A LIABILITY IN THE FORM OF UNSECURED LOANS AS NONE OF THE BOND HOLDERS EXERCIS ED ANY OPTION FOR CONVERSION OF THEIR BONDS INTO SHARE S DURING THE RELEVANT FINANCIAL YEAR. HE, FURTHER SUB MITTED THAT IN THE F.Y. 2007-08, THE BONDS TO THE EXTENT O F 5 MILLION US DOLLARS WERE CONVERTED INTO SHARE CAPITA L AS THE BOND HOLDERS EXERCISED THEIR OPTION FOR CONVERSION DURING THE SAID F.Y. 2007-08 AND THIS WAS ALSO DECLARED IN THE PUBLIC ACCOUNTS FOR THE F.Y. 2007-08. HE HAS SUBMIT TED THAT THE REMAINING OUTSTANDING AMOUNT IN RESPECT OF THE BALANCE FCCBS HAS BEEN FULLY REPAID ON 31.12.2011 W ITH PREMIUM TO THE BOND HOLDERS WHICH FACT HAS ALSO BEE N TAKEN NOTE OF BY THE COMMISSIONER IN HIS ORDER UNDE R SECTION 263 OF THE I.T. ACT. HE HAS SUBMITTED THAT AS THE BONDS WERE ISSUED ONLY FOR THE PURPOSE OF SECURING LOAN FINANCE, THE ASSESSEE HAS NOT OBTAINED ANY ASSET OR ADVANTAGE OF ANY ENDURING NATURE AND THE EXPENDITUR E 5 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. MADE IS FOR SECURING THE USE OF MONEY IN BUSINESS F OR CERTAIN PERIOD. HE HAS SUBMITTED THAT IT IS IRRELEV ANT TO CONSIDER THE OBJECT FOR WHICH THE LOAN IS OBTAINED SO LONG AS IT IS FOR THE BUSINESS PURPOSES OF THE ASSESSEE, TO CONSIDER THE SAME AS REVENUE EXPENDITURE. ACCORDING TO HIM, THE UTILISATION OF FCCB PROCEEDS HAS NOTHING T O DO WITH CAPITAL OF THE COMPANY AND THEREFORE, IS ALLOW ABLE AS REVENUE EXPENDITURE. THUS, ACCORDING TO HIM, THE FI NDINGS OF THE A.O. AS WELL AS THE LD. CIT(A) ARE ERRONEOUS . HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS IN SUP PORT OF HIS CONTENTION. 1. INDIA CEMENTS LTD., VS. CIT (1966) 60 ITR 52 (SC ) 2. CIT VS. TUMUS ELECTRIC CORPN. LTD., (1990) 49 TAXMA N 249 (MP) (HC) 3. CIT VS. EAST INDIA HOTELS LTD., (2001) 119 TAXMA N 235 (CAL.) 4. CIT VS. SOUTH INDIA CORPN. (AGENCIES) LTD., (2007) 164 TAXMAN 249 (MAD.) 5. CIT VS. FIRST LEASING CO. OF INDIA LTD., (2008) 304 ITR 67 (MAD.) 6. CIT VS. SECURE METERS LTD., 321 ITR 611 7. CIT VS. ITC HOTELS LTD., 334 ITR 109 8. M/S. CRANE SOFTWARE INTERNATIONAL LTD. VS. DCIT, BANGALORE ORDER DATED 08.02.2011 IN ITA.NOS. 741 & 742/BANG/2 010. 9. CIT VS. HAVELLS INDIA LTD., 352 ITR 376 10. DCIT VS. UAG BUILDERS (P) LTD., DELHI (2012) 25 TAX MANN.COM 205 (DEL.) 3.1. FURTHER HE HAS ALSO RELIED UPON THE CBDT CIRCULAR NO.56 DATED 19 TH MARCH, 1971 ON THE PROVISIONS OF SECTION 35D WHEREIN IT WAS CLARIFIED THAT THE PR OVISIONS OF SECTION 35D WILL NOT HAVE THE EFFECT OF BRINGING THE EXPENDITURE COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF INDIA CEMENTS LTD., REPORTED IN (1966) 60 ITR 52 WITHIN THE SCOPE OF TH E EXPENDITURE TO BE AMORTIZED AGAINST PROFITS OVER TE N YEAR PERIOD UNDER SECTION 35D OF THE ACT. THUS, ACCORDIN G TO 6 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. HIM, THE EXPENDITURE ON THE ISSUE OF FCCB IS ALLOWA BLE AS REVENUE EXPENDITURE. 4. THE LD. D.R., ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE A.O. AND HAS PLACED RELIANCE UPON THE FINDINGS OF THE A.O. AND THE CIT(A). 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ONLY DISPUTE I S TO THE NATURE OF EXPENDITURE INCURRED BY THE ASSESSEE ON I SSUE OF FCCBS. THE HONBLE SUPREME COURT IN THE CASE OF IN DIA CEMENTS (CITED SUPRA) WAS CONSIDERING THE ALLOWABI LITY OF CLAIM OF EXPENDITURE OF THE ASSESSEE THEREIN, INCUR RED BY IT, ON STAMPS, REGISTRATION FEES ETC., FOR SECURING A LOAN, AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE ACT , AND HELD THAT LOAN OBTAINED CANNOT BE TREATED AS AN ASS ET OR ADVANTAGE OF AN ENDURING NATURE FOR THE BENEFIT OF THE BUSINESS OF THE ASSESSEE, AS, A LOAN IS A LIABILITY AND HAS TO BE REPAID AND IT IS THEREFORE, ERRONEOUS TO CONS IDER THE LIABILITY AS AN ASSET OR AN ADVANTAGE. IT WAS FURTH ER HELD THAT THE NATURE OF THE EXPENDITURE INCURRED IN RAIS ING A LOAN WOULD NOT DEPEND UPON THE NATURE OR PURPOSE OF THE LOAN AS THE LOAN MAY BE INTENDED TO BE USED FOR THE PURCHASE OF RAW MATERIAL WHEN IT IS NEGOTIATED BUT THE COMPANY MAY, AFTER RAISING THE LOAN, CHANGE ITS MIN D AND SPEND IT ON SECURED CAPITAL ASSETS. THEREFORE, THE PURPOSE FOR WHICH THE LOAN WAS REQUIRED WAS IRRELEVANT TO T HE CONSIDERATION OF THE QUESTION, WHETHER THE EXPENDIT URE FOR OBTAINING THE LOAN WAS A REVENUE EXPENDITURE OR CAP ITAL 7 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. EXPENDITURE AND THEREFORE, IT WAS HELD THAT THE EXPENDITURE INCURRED FOR AVAILING LOAN IS ALLOWABLE UNDER SECTION 37(1) OF THE ACT. THIS DECISION OF THE HON BLE SUPREME COURT HAS BEEN FOLLOWED BY VARIOUS HIGH COU RTS IN THE CASES CITED BY THE LD. COUNSEL FOR THE ASSES SEE CITED SUPRA. THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT VS. TUMUS ELECTRIC CORPN. LTD., (19 90) 49 TAXMAN 249 (MP) (CITED SUPRA), AFTER CONSIDERING TH E ABOVE JUDGMENT OF THE HONBLE SUPREME COURT HAS HEL D THAT THE EXPENDITURE INCURRED BY THE ASSESSEE THERE IN IN CONNECTION WITH THE EXECUTION OF A MORTGAGE DEED TO SECURE A LOAN WAS REVENUE EXPENDITURE AS THERE WAS NO REGULATION REGARDING THE APPLICATION OF CAPITAL SUB SIDY TO ANY SPECIFIC PURPOSE. 6. IN THE CASE OF CIT VS. EAST INDIA HOTELS LTD., (CITED SUPRA), THE HONBLE HIGH COURT OF CALCUTTA W AS CONSIDERING THE ALLOWABILITY OF THE EXPENDITURE ON ACCOUNT OF ISSUE OF DEBENTURES AND THE APPLICABILITY OF SEC TION 35D TO SUCH EXPENSES AND IT WAS HELD THAT SECTION 35D H AS BEEN INTRODUCED W.E.F. 01.04.1971 TO GIVE BENEFIT T O THE ASSESSEES IN CASE OF CAPITAL EXPENSES BUT A DEDUCTI ON, WHICH IS OTHERWISE ALLOWABLE AS REVENUE EXPENDITURE , CANNOT BE DENIED AFTER INSERTION OF SECTION 35D. TH E HONBLE HIGH COURT ALSO TOOK NOTE OF THE CBDT CIRCU LAR NO.56 DATED 19.03.1971 WHICH CLARIFIED THE PROVISION OF SECTION 35D AND THE AMORTIZATION ALLOWABLE AND THE SAID PROVISION HAS FURTHER BEEN CLARIFIED THAT IT IS NOT INTENDED TO SUPERSEDE ANY OTHER PROVISION OF THE I.T. ACT, U NDER 8 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. WHICH SUCH EXPENDITURE IS ADMISSIBLE AS A DEDUCTION . IN THE CASE BEFORE THE HONBLE CALCUTTA HIGH COURT, 20 % OF THE DEBENTURES WAS PAYABLE BY THE END OF THREE YEAR S FROM THE DATE OF ISSUE OF DEBENTURES BY WAY OF ISSU E OF SHARES AND THE BALANCE 20% AT THE END OF 8 TH , 9 TH , 10 TH AND 11 TH YEARS FROM THE DATE OF ALLOTMENT OF DEBENTURES BY PAYMENT IN CHEQUES. THE HONBLE HIGH COURT HELD THE ABOVE FACTS OF CONVERSION OF 20% OF THE DEBENTURES INTO SHARES BY THE END OF 3 YEARS TO MAKE THE DEBENTURES MORE LUCRATIVE/ATTRACTIVE DOES NOT CHANGE THE CHARACTER OF REPAYMENT OF THE LOAN WITHIN 11 YEARS AS IT RETAINS THE CHARACTER OF A LOAN. 7. IN THE CASE OF CIT VS. SOUTH INDIA CORPORATION (AGENCIES) LTD., (CITED SUPRA), THE HONBLE HIGH CO URT OF MADRAS WAS SEIZED OF THE ISSUE AS TO WHETHER THE EXPENDITURE INCURRED ON ISSUE OF DEBENTURES WAS CAP ITAL OR REVENUE AND AFTER CONSIDERING THE DECISION OF TH E HONBLE SUPREME COURT IN THE CASE OF INDIA CEMENTS (CITED SUPRA) AS WELL AS THE DELHI HIGH COURT DECIS ION IN THE CASE OF CIT VS. THIRANI CHEMICALS LTD., REPORTE D IN 290 ITR 196, HELD THAT THE EXPENDITURE INCURRED ON THE ISSUE OF DEBENTURES IS PERMISSIBLE DEDUCTION UNDER SECTION 37 OF THE I.T. ACT. SIMILAR VIEW WAS EXPRES SED BY THE HONBLE HIGH COURT OF MADRAS IN THE CASE OF FIR ST LEASING COMPANY & INDIA LIMITED (CITED SUPRA). 8. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF ITC HOTELS LTD., (CITED SUPRA) HAS ALSO CONSIDER ED THE 9 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. JUDGMENT OF THE RAJASTHAN HIGH COURT IN THE CASE OF SECURE METRES LTD., (CITED SUPRA), TO HOLD THAT EVE N IF THE DEBENTURES WERE TO BE CONVERTED INTO THE SHARES AT A LATER DATE, THE EXPENDITURE INCURRED ON SUCH CONVERTIBLE DEBENTURES HAS TO BE TREATED AS REVENUE EXPENDITURE . WE FIND THAT A BENCH OF THIS TRIBUNAL AT BANGALORE I N THE CASE OF M/S. CRANE SOFTWARE INTERNATIONAL LTD., BAN GALORE VS. DCIT, CIRCLE-11(2) (CITED SUPRA), HAS CONSIDERE D WHETHER FCCB ISSUE EXPENSES ARE IN THE NATURE OF CA PITAL OR REVENUE AND HAS HELD THE SAME TO BE REVENUE IN NATURE. SIMILAR VIEW HAS BEEN EXPRESSED BY THE HON BLE DELHI HIGH COURT IN THE CASES OF CIT VS. HAVELLS IN DIA LTD., (CITED SUPRA) AND ALSO DCIT VS. UAG BUILDERS (P.) L TD., DELHI (CITED SUPRA). WE, THEREFORE, FIND THAT THIS ISSUE IS FAIRLY COVERED BY THE ABOVE CITED DECISIONS. HENCE, WE HOLD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON IS SUE OF FCCB IS REVENUE EXPENDITURE ALLOWABLE UNDER SECTION 37(1) OF THE I.T. ACT. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 10.02.2016. SD/- SD/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 10 TH FEBRUARY, 2016 VBP/- 10 ITA.NO.1325/HYD/2015 GATI LIMITED, HYDERABAD. COPY TO : 1. GATI LIMITED, PLOT NO.20, SURVEY NO.12, KOTHAGUDA, KONDAPUR, HYDERABAD 500 084. 2. THE INCOME TAX OFFICER, WARD 2(2), 8 TH FLOOR, I.T. TOWERS, A.C. GUARDS, HYDERABAD. 3. CIT - 2, HYDERABAD. 4. PR. CIT - 2, HYDERABAD. 5. D.R. ITAT B BENCH, HYDERABAD. 6 . GUARD FILE