Deputy Commissioner of Income tax, Bangalore V. M/s Coffee Day Resorts P Ltd, Bangalore

ITA 1433/BANG/2014

• Counselvise Citation: 143321114 RSA 2014
• Duration Of Justice: 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 15-04-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 17-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y RAJENDRA CITIIIDR
• Assessee Lawyers: C RAMESH
• Keywords: Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.1433/BANG/2014 ASSESSMENT YEAR : 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE. VS. M/S. COFFEE DAY RESORTS PVT. LTD., NO.23/2, COFFEE DAY SQUARE, VITTAL MALLYA ROAD, BANGALORE 560 001. PAN : AADCC 3595L APPELLANT RESPONDENT APPELLANT BY : SHRI Y. RAJENDRA, CIT-III(DR) RESPONDENT BY : SHRI C. RAMESH, C.A. DATE OF HEARING : 15.04.2015 DATE OF PRONOUNCEMENT : 08.05.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER D ATED 25.7.2014 OF THE CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMEN T YEAR 2010-11. ITA NO.1433/BANG/2014 PAGE 2 OF 8 2. GROUND NO.2, THE MAIN GROUND RAISED BY THE REVEN UE READS AS FOLLOWS:- 2. THE CIT(A) ERRED IN DELETING THE ADDITION OF R S 8,69,38,922/- PAID TOWARDS PROFESSIONAL & CONSULTAN CY CHARGES AND RS 63,15,825/- TOWARDS RATES & TAXES BY HOLDING THAT THE FACTS OF THE CASE OF CIT & ANOTHER VS. HAVELLS INDIA LTD (2012) 208 TAXMANN 114 (DEL) IS SQUARELY APPLICABLE TO THE FAC TS OF THE ASSESSEES CASE WITHOUT APPRECIATING THAT THE EXPEN DITURE INCURRED BY ISSUE OF COMPULSORILY CONVERTIBLE DEBENTURES IS OF CAPITAL EXPENDITURE NOT ELIGIBLE FOR A DEBIT TO THE PROFIT/ LOSS ACCOUNT AND THAT WHEN THE DEBENTURES ARE CONVERTED INTO SHARES THEY PARTAKE THE CHARACTER OF EQUITY CAPITAL. 3. THE ASSESSEE IS A COMPANY. IT IS A HOLDING COM PANY FOR CAF COFFEE DAY GROUP WHICH INCLUDES AMALGAMATED BEAN CO FFEE TRADING COMPANY LTD. AND A HOST OF OTHER COMPANIES. DURIN G THE PREVIOUS YEAR, THE ASSESSEE HAD ISSUED SHARES AS WELL AS COMPULSOR ILY CONVERTIBLE DEBENTURES (CCDS) AS FOLLOWS:- SL. NO. NATURE OF SECURITY QTY. RATE AMOUNT 1 EQUITY SHARES 100 1,768 176,800 2 COMPULSORILY CONVERTIBLE DEBENTURES 3,59,98,232 100 359,98,23,200 TOTAL FUNDING 360,00,00,000 4. IT IS NOT IN DISPUTE THAT EXPENSES WERE INCURRED FOR THE ISSUE OF AFORESAID EQUITY SHARES AS WELL AS CCDS. IT IS A LSO NOT IN DISPUTE THAT PROFESSIONAL CHARGES OF RS.8,69,38,922 AND RATES & TAXES OF RS.63,15,825 ITA NO.1433/BANG/2014 PAGE 3 OF 8 PERTAINED TO THE ISSUE OF CCDS. THE DETAILS IN TH IS REGARD AS GIVEN BY THE AO ARE AS FOLLOWS:- PROFESSIONAL CHARGES RS. TOTAL AMOUNT DEBITED 14,47,70,584 AMOUNTS ALREADY DISALLOWED IN STATEMENT OF INCOME 5,73,27,431 8,74,43,153 THE AMOUNTS ALLOWABLE AS REVENUE EXPENDITURE [2,578+60,665+4,25,758+15,050] 50423 8,68,38,922 RATES AND TAXES RS. TOTAL AMOUNT DEBITED 1,64,218 AMOUNTS ALREADY DISALLOWED IN STATEMENT OF INCOME 5 2,10,385 76,53,833 AMOUNTS ADDITIONALLY OFFERED TO BE DISALLOWED BY A SSESSEE AS PER LETTER DATED 20.12.2012 13,19,373 63,34,460 AMOUNTS ALLOWABLE AS REVENUE EXPENDITURE (10,620+1,783+6,000+232) 18,635 63,15,825 5. THE ASSESSEE HAD CLAIMED AFORESAID SUM AS DEDUCT ION TREATING IT AS A REVENUE EXPENDITURE. ACCORDING TO THE AO, THE EX PENDITURE IN QUESTION WAS INCURRED IN CONNECTION WITH ISSUE OF CCDS AND T HEREFORE THE EXPENSES WERE DIRECTLY RELATED TO EXPENDITURE OF THE CAPITAL BASE OF THE COMPANY AND THEREFORE COULD NOT BE ALLOWED AS A DEDUCTION. 6. BEFORE THE AO, THE ASSESSEE POINTED OUT THAT THE HONBLE HIGH COURT OF KARNATAKA IN CIT V. ITC HOTELS LTD., 334 ITR 109 (KAR) , FOLLOWING THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN CIT V. SECURE METERS ITA NO.1433/BANG/2014 PAGE 4 OF 8 LTD., 321 ITR 611 (RAJ) TOOK THE VIEW THAT EXPENSES INCURRED ON ISSUE OF DEBENTURES EVEN THOUGH THEY ARE TO BE CONVERTED INT O SHARES AT A LATER DATE HAS TO BE REGARDED AS REVENUE EXPENDITURE AND CANNO T BE TREATED AS CAPITAL EXPENDITURE. THE AO, HOWEVER, NOTICED THAT THE SPECIAL BENCH OF ITAT AHMEDABAD IN THE CASE OF M/S. ASHIMA SYNTEX LTD. (100 ITD 247)(SB) (AHD) TOOK THE VIEW THAT EXPENSES INCURRED IN RELATION TO ISSUE OF CCDS WAS TO RAISE CAPITAL BY ULTIMATELY CONVERTING DEBENTURES INTO EQUITY SHARES WITHOUT GIVING AN OPTION TO DEBENTURE HOLDER TO GET REDEMPTION OR A SAY IN CONVERSION. THE SPECIAL BENCH HELD THAT SUB STANCE OF TRANSACTION WAS ISSUE OF EQUITY CAPITAL PARTLY ON THE DATE OF A LLOTMENT OF DEBENTURES AND WAS THEREFORE OF A CAPITAL NATURE. THE AO WAS OF T HE FURTHER VIEW THAT HONBLE HIGH COURT OF KARNATAKA IN ITC HOTELS LTD. (SUPRA) MERELY FOLLOWED THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN SECURITY METERS LTD . (SUPRA) . ACCORDING TO THE AO, THE QUESTION WHICH THE HON BLE RAJASTHAN HIGH COURT CONSIDERED IN THE CASE OF SECURITY METERS LTD . (SUPRA) WAS AS TO, WHETHER EXPENSES INCURRED IN RELATION TO ISSUE OF DEBENTURES WAS TO BE ALLOWED AS A DEDUCTION U/S. 37 OF THE ACT AS REVENUE EXPENDITURE. ACCORDING TO THE AO, THE ISSUE WITH R EGARD TO EXPENDITURE INCURRED ON ISSUE OF CCDS WAS NOT CONSIDERED BY THE RAJASTHAN HIGH COURT. ACCORDING TO THE AO, THOUGH IN PARA 9 OF TH E DECISION RENDERED BY HONBLE RAJASTHAN HIGH COURT IN SECURITY METERS LTD . (SUPRA) , IT WAS OBSERVED THAT WHERE THE DEBENTURES IS CONVERTIBLE O R NON-CONVERTIBLE DOES NOT MILITATE AGAINST THE NATURE OF DEBENTURE BEING LOAN AND THEREFORE THE ITA NO.1433/BANG/2014 PAGE 5 OF 8 EXPENDITURE INCURRED WOULD BE ADMISSIBLE AS REVENUE EXPENDITURE. SUCH AN OBSERVATION WAS ONLY A PASSING REMARK. ACCORDIN G TO THE AO, FULL FACTS OF THE CASE WERE NOT BEFORE THE HONBLE RAJASTHAN H IGH COURT. THE AO WAS, THEREFORE, OF THE VIEW THAT THE DECISION RENDE RED BY THE HONBLE RAJASTHAN HIGH COURT HAS NOT BEEN RENDERED IN THE C ONTEXT OF CCDS. HENCE THE AO WAS OF THE VIEW THAT THE DECISION OF T HE ITAT SPECIAL BENCH AHMEDABAD IN ASHIMA SYNTEX LTD. (SUPRA), WAS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE AND ACCORDINGLY TH E AO DISALLOWED A SUM OF RS.8,69,38,922 BEING PROFESSIONAL AND CONSULTANC Y CHARGES AND A SUM OF RS.63,15,825 BEING RATES & TAXES, BOTH INCURRED IN RELATION TO ISSUE OF CCDS AS CAPITAL EXPENDITURE AND ADDED THE SAME TO T HE TOTAL INCOME OF THE ASSESSEE. 7. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) WAS OF THE VIEW THAT THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA RENDERED IN THE CASE OF ITC HOTELS LTD. (SUPRA) WAS APPLICABLE. THE CIT(A) ALSO FOUND THAT THE HONBLE DELHI HIGH COURT IN CIT V. HAVELLS INDIA LTD. (2012) 21 TAXMAN.COM 476 (DEL) , HAD ALSO HELD ON AN IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE, AFTER FOLLOWING THE DECISIONS OF HONBLE HIGH COURT OF KARNATAKA IN ITC HOTELS LTD. (SUPRA) AND HONBLE RAJASTHAN HIGH COURT IN SECURITY METERS LTD . (SUPRA) WITH THE FOLLOWING OBSERVATIONS:- IT IS WELL-SETTLED THAT EXPENDITURE INCURRED IN CO NNECTION WITH THE ISSUE OF DEBENTURES OR OBTAINING LOAN IS REVENUE EX PENDITURE. THE QUESTION UNDER CONSIDERATION, HOWEVER, IS WHETHER I T IS A ITA NO.1433/BANG/2014 PAGE 6 OF 8 DEBENTURE ISSUE OR AN ISSUE OF SHARE CAPITAL INVOLV ING THE STRENGTHENING OF THE CAPITAL BASE OF THE COMPANY. T HOUGH IT PRIMA FACIE APPEARS THAT THERE ARE SUFFICIENT FACTS TO IN DICATE THAT WHAT WAS CONTEMPLATED WAS AN ISSUE OF SHARES TO THE MAUR ITIUS COMPANY UNDER THE INVESTOR AGREEMENT WHICH WOULD RE SULT IN STRENGTHENING OF THE ASSESSEES CAPITAL BASE, HAVIN G REGARD TO THE JUDGMENTS CITED ON BEHALF OF THE ASSESSEE, IN WHICH IT HAS BEEN HELD THAT DESPITE INDICATIONS TO THE EFFECT THAT TH E DEBENTURES ARE TO BE CONVERTED IN THE NEAR FUTURE TO EQUITY SHARES , THE EXPENDITURE INCURRED SHOULD BE ALLOWED AS REVENUE E XPENDITURE ON THE BASIS OF THE FACTUAL POSITION OBTAINING AT T HE TIME OF THE DEBENTURE ISSUE, A DIFFERENT VIEW CANNOT BE TAKEN. [PARA 26]. 8. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WHO REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE GROUNDS OF APPEAL FILED BY THE REVENUE. WE HAVE CONSIDERED HIS SUBMISSIONS AND AR E OF THE VIEW THAT THE SAME ARE NOT ACCEPTABLE. THE DECISION RENDERED BY THE HONBLE DELHI HIGH COURT IN HAVELLS INDIA LTD. (SUPRA) IS ON IDENTICAL FACTS AS THAT OF THE ASSESSEE IN THE PRESENT CASE, WHERE DEBENTURES WERE SUBSCRIBED BY ARDUINO HOLDINGS LTD. AND KKR MAURITIUS PE INVESTME NTS II LTD. THE AO WAS OF THE VIEW THAT OBITER DICTUM OF THE HONBLE RAJASTHAN HIGH COURT RENDERED IN SECURITY METERS LTD . (SUPRA) WOULD NOT BE BINDING COMPARED TO THE RATIO DECENDI OF THE ITAT SPECIAL BENCH AHMEDABAD DECISION IN TH E CASE OF ASHIMA SYNTEX LTD. (SUPRA ) . IN OUR VIEW, THIS IS AN ERRONEOUS APPROACH. THE DECISION RENDERED BY THE HONBLE RAJ ASTHAN HIGH COURT, BE IT OBITER DICTUM , IS STILL BINDING ON THE TRIBUNAL VIS--VIS THE DE CISION ITA NO.1433/BANG/2014 PAGE 7 OF 8 RENDERED BY THE AHMEDABAD SPECIAL BENCH OF THE TRIB UNAL. IT IS MORE SO IN THE PRESENT CASE, AS THE DECISION RENDERED BY THE H ONBLE HIGH COURT OF KARNATAKA IS OF THE JURISDICTIONAL HIGH COURT. BES IDES THE ABOVE, IT IS ALSO NOTICED THAT THE MUMBAI SPECIAL BENCH OF THE TRIBUN AL IN THE CASE OF MAHINDRA & MAHINDRA LTD. V. DCIT, (2012) 24 TAXMAN. COM 267 (MUM) , AFTER CONSIDERING THE DECISIONS IN THE CASES OF SECURITY METERS LTD . (SUPRA) AND ITC HOTELS LTD. (SUPRA) , CAME TO THE CONCLUSION THAT PREMIUM PAID ON ALLOTMENT OF FOREIGN CURRENCY CONVERTIBLE BONDS WHI CH WERE CONVERTIBLE INTO SHARES WERE REVENUE EXPENDITURE. IN LIGHT OF THE P RECEDENTS REFERRED TO ABOVE, WE ARE OF THE VIEW THAT THE ORDER OF CIT(APP EALS) IS JUST AND APPROPRIATE AND DOES NOT CALL FOR ANY INTERFERENCE. 10. IN THE RESULT, THE APPEAL BY THE REVENUE IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF MAY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 8 TH MAY, 2015. /D S/ ITA NO.1433/BANG/2014 PAGE 8 OF 8 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.