Appeal details
Counselvise Citation
564219914 RSA 2010
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 1 month(s) 24 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
06-09-2013
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
D
Next Hearing Date
07-08-2013
Assessment Year
2007-2008
Appeal Filed On
12-07-2010
Judgement Text
, IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL D DD D BENCH, BENCH, BENCH, BENCH, MUMBAI MUMBAI MUMBAI MUMBAI , . , . , ! ! ! ! '# '# '# '# BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM & & & & SHRI SHRI SHRI SHRI D. KARUNAKAR D. KARUNAKAR D. KARUNAKAR D. KARUNAKARA AA A RAO RAO RAO RAO, AM , AM , AM , AM ./ I.T.A. NO. I.T.A. NO. I.T.A. NO. I.T.A. NO. 5642/MUM/2010 5642/MUM/2010 5642/MUM/2010 5642/MUM/2010 ( $% $% $% $% & & & & / ASSESSMENT YEAR :2007-08) RELIANCE PETROMARKETING LTD. CHITRAKOOT, 3 RD FLOOR, SHREE RAM MILLS COMPOUND, G. K. MARG, WORLI, MUMBAI-400013 % % % % / VS. ASSISTANT COMMISSIONER OF INCOME TAX, RANGE- 7(2), ROOM NO. 670, 6 TH FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400020 #' ! ./ ( ./ PAN/GIR NO. :AABCR1721M ( ') / APPELLANT APPELLANT APPELLANT APPELLANT) .. ( *+') / RESPONDENT RESPONDENT RESPONDENT RESPONDENT) ') ') ') ') , , , , / APPELLANT BY : MR. FARROKH V IRANI *+') *+') *+') *+') - -- - , , , , /RESPONDENT BY : MR. SANTOSH KUMAR % % % % - -- - .! .! .! .! / DATE OF HEARING : 7 TH AUGUST 2013 /0& /0& /0& /0& - -- -.! .! .! .! /DATE OF PRONOUNCEMENT: 6 TH SEPTEMBER 2013 ' 1 / O R D E R PER : , . . / VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 25.3.2010 OF COMMISSIONER OF INCOME TAX(APPEALS) FO R THE ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS: 1. THE COMMISSIONER OF INCOME TAX (APPEALS) 13, MUMBAI {HEREINAFTER REFERRED TO AS CIT(A)} ERRED IN CONFIR MING THE DISALLOWANCE MADE BY THE ASST. COMMISSIONER OF INCO ME-TAX, CIRCLE 7(2), MUMBAI (HEREINAFTER REFERRED TO AS AO) OF AN AMOUNT OF RS.85,51,55,000/- BEING DISCOUNT ON DEBEN TURES, BY HOLDING THAT INTEREST FREE ADVANCES GIVEN TO SISTE R CONCERNS WERE NOT WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPO SES AND HENCE, THE INTEREST EXPENDITURE OF RS.85,51,55,000/ - IS NOT ALLOWABLE U/S.36(1)(III) /37 OF THE L.T. ACT, 1961 . ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 2 2. IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO GRO UND NO.1 ABOVE THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT R.W.R. 8D OF THE INCOME TAX RULES, AT RS.64,05,44,116/- BE ING EXPENDITURE INCURRED IN RELATION TO INVESTMENTS CAP ABLE OF EARNING THE EXEMPT INCOME, WHILE COMPUTING INCOME U NDER THE NORMAL PROVISIONS OF THE ACT (SECTION 28 TO 42 OF T HE ACT). 3. GROUND NO. 1 REGARDING DISALLOWANCE OF DISCOUNT ON DEBENTURES. THE ASSESSEE HAD ISSUED 1,32,50,000 ZERO COUPON SEC URED OPTIONALLY FULLY CONVERTIBLE REDEEMABLE DEBENTURES DURING THE YEAR 2006-07 AT FACE VALUE OF ` 1,000/- EACH AT A DISCOUNT @ ` 400 PER D EBENTURE. THESE DEBENTURES WERE REDEEMABLE ON 1.4.2011 AT FACE VALU E OF ` 1,000/-. THIS DIFFERENCE OF ` 400/- IS AMORTISED BY THE ASSESSEE OVER THIS PERIOD. THE AO NOTED THAT OUT OF TOTAL 1,32,50,000 DEBENTURES 1 ,00,29,850 DEBENTURES WERE REDEEMED BETWEEN 29 TH AND 31 ST DECEMBER 2008 AND BALANCE 3220150 DEBENTURES WERE REDEEMED ON 31 ST MARCH 2009. DURING THE YEAR THE ASSESSEE HAS AMORTISED ` 85.82 CRORES OUT OF TOTAL DISCOUNT OF ` 530 CRORES AND HAS REDUCED THE SAME FROM THE P REFERENCE SHARE PREMIUM ACCOUNT. HOWEVER, THE ASSESSEE HAS CLAIMED THIS AMOUNT IN COMPUTATION OF INCOME AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW-CAUSE AS TO WHY THE AMOU NT SHOWN AS DISCOUNT ON DEBENTURES BE NOT DISALLOWED AND ADDED BACK TO THE TOTAL INCOME. THE ASSESSEE REPLIED VIDE ITS LETTERS DATED 24.11.2009 AND 17.12.2009 AND SUBMITTED THAT THE DISCOUNT ON DEBEN TURES IS AKIN TO INTEREST WHICH IS DEDUCTIBLE EXPENDITURE AS IT IS I NCURRED FOR THE PURPOSE OF BUSINESS. THE ASSESSING OFFICER DID NOT ACCEPT T HE CONTENTION OF THE ASSESSEE AND OBSERVED THAT THE DISCOUNT AMOUNT HAS BEEN ADJUSTED ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 3 AGAINST SHARE PREMIUM AND THEREFORE IT IS CAPITAL E XPENDITURE. ALTERNATIVELY THE AO HAS ALSO HELD THAT THE AMORTIS ATION OF DISCOUNT HAS NOT BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT WHI CH MEANS THAT THE ASSESSEE HAS WRITTEN OF THE AMOUNT IN THE BOOKS. TH E ASSESSEE HAS NOT FOLLOWED A PROPER METHOD OF WRITING OF THIS AMOUNT IN THE BOOK TO AVOID THE DEDUCTION FOR TAXABILITY U/S 41(1). HENCE THE A O HELD THAT THE AMOUNT OF ` 85.5 CRORES IS TO BE ADDED U/S 41(1) OF THE IN COME TAX ACT. FURTHER THE AO HAS HELD THAT THIS AMOUNT HAS TO BE DISALLOW ED U/S 14A R.W.R 8D OF THE INCOME TAX ACT ON THE GROUND THAT THE AMOUNT RE CEIVED BY THE ASSESSEE ON ISSUE OF DEBENTURES HAS BEEN INVESTED I N THE SISTER CONCERNS. ON APPEAL, THE CIT(A) HAS HELD THAT THE A SSESSEE HAS UTILISED THE AMOUNT FOR GIVING INTEREST FREE ADVANCES TO SIS TER CONCERNS THEREFORE, THE SAME ARE NOT WHOLLY AND EXCLUSIVELY FOR BUSINES S PURPOSE AND CONSEQUENTLY THE INTEREST EXPENDITURE OF ` 85,51,55 ,000/- IS NOT ALLOWABLE U/S 36(1)(III)/37 OF INCOME TAX ACT. THE CIT(A) HOWEVER HELD THAT PROVISIONS OF SECTION 41(1) OF THE ACT ARE NOT APPLICABLE TO THE FACTS OF THE CASE. 4. BEFORE US THE LD. AR OF THE ASSESSEE HAS SUBMITT ED THAT THE CIT(A) HAS DISALLOWED THE AMOUNT OF DISCOUNT ON DEBENTURES ON THE GROUND THAT THE ASSESSEE HAS GIVEN THIS AMOUNT AS INTEREST FREE ADVANCES TO THE SISTER CONCERNS WHICH IS NOT WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE OF THE ASSESSEE. THE LD. AR HAS REFERRED TH E MEMORANDUM OF THE ASSOCIATION OF THE COMPANY AND SUBMITTED THAT A S PER OBJECT NO. 27 TO LAND INVESTMENT IN SECURITIES AND SHARES, BOND ETC. IS ONE OF THE MAIN ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 4 OBJECTS OF THE ASSESSEE THEREFORE, THE INVESTMENT I S VERY MUCH PART OF BUSINESS ACTIVITIES OF THE ASSESSEE. HE HAS FURTHER SUBMITTED THAT THE ASSESSEE HAS PROCURED LOANS BY ISSUING THE DEBENTUR ES AS REFLECTED IN THE BOOKS OF ACCOUNT UNDER THE HEAD SECURED LOANS. SINCE THE ASSESSEE HAS ALSO ISSUED SHARES ON PREMIUM THEREFORE THE ASS ESSEE HAS ADJUSTED THE DISCOUNT ON ISSUE OF DEBENTURE AGAINST THE SHAR E PREMIUM BUT TREATMENT AND ENTRIES IN THE BOOKS OF ACCOUNT WOULD NOT BAR THE ASSESSEE CLAIMING THE SAME AS A DEDUCTIBLE EXPENDIT URE UNDER THE INCOME TAX ACT. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF CIT VS DISTRIBUTORS (BARODA) (P.) LTD. 83 ITR 377. THE LD. COUNSEL HAS FURTHER C ONTENDED THAT ADVANCE TO THE GROUP CONCERN IS FOR BUSINESS EXPEDIENCY AS THE SISTER CONCERNS ARE ALSO IN THE SAME LINE OF BUSINESS THEREFORE, TH E EXPENDITURE IS ALLOWABLE AS THE ADVANCE WAS GIVEN FOR COMMERCIAL E XPEDIENCY. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DE CISION OF HONBLE SUPREME COURT IN CASE OF S. A. BUILDERS LTD. VS CIT 288 ITR 1. THE LD. COUNSEL HAS POINTED OUT THAT THE LOAN WAS GIVEN TO THE SISTER CONCERNS NAMELY RELIANCE EXPLORATION PVT. LTD. AND RELIANCE EXTRUSION PVT. LTD. WHICH ARE IN THE SAME LINE OF BUSINESS. HE HAS FURT HER SUBMITTED THAT THE ADVANCE GIVEN TO THE GROUP CONCERNS HAVE BEEN RECEI VED BACK IN THE SUBSEQUENT YEAR AND THEREFORE THE OBSERVATION OF CI T(A) THAT THE INTENTION OF THE ASSESSEE IN GIVING ADVANCE TO THE GROUP CONCERNS AGAINST ZERO COUPON OPTIONAL CONVERTIBLE LOANS WAS TO EARN TAX FREE INCOME ON THE SHARES AFTER CONVERSION OF LOAN IS NO T CORRECT. THE LD. AR HAS SUBMITTED THAT WHEN THERE IS NO CONVERSION OF T HE CONVERTIBLE LOAN ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 5 THEN THE CLAIM CANNOT BE DISALLOWED ON THE PRESUMPT ION THAT THE ASSESSEE HAD THE INTENTION TO EARN THE DIVIDEND INC OME. HE HAS RELIED UPON THE DECISION OF HONBLE RAJASTHAN HIGH COURT I N CASE OF CIT VS SECURE METERS LTD. 321 ITR 611 AND SUBMITTED THAT T HE EXPENDITURE INCURRED ON ISSUE OF DEBENTURE BEING LOAN IS ADMISS IBLE AS REVENUE EXPENDITURE. THE LD. COUNSEL HAS FURTHER POINTED OU T THAT THE SLP FILED BY THE REVENUE AGAINST THE DECISION OF HONBLE RAJA STHAN HIGH COURT IN CASE OF M/S SECURE METERS LTD. HAS BEEN DISMISSED V IDE DECISION DATED 11.8.2009. HE HAS FILED A COPY OF THE SAME. THE LD. COUNSEL HAS ALSO RELIED UPON THE FOLLOWING DECISION OF THIS TRIBUNAL : M/S VELOCITY TRADING PVT. LTD. VS ACIT DATED 8.2.20 05 M/S GOLD ROCK INVESTMENTS LTD. VS DCIT DATED 16.6. 2005 MEGHRAJ FINANCIAL SERVICES DCIT DATED9.2.2004 5. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON TH E ORDER OF THE CIT(A) AND SUBMITTED THAT THE ASSESSEE HAS FAILED T O ESTABLISH THAT THE INTEREST FREE ADVANCE WERE GIVEN FOR BUSINESS EXPED IENCY WHEN IT HAS NOT BEEN BROUGHT ON RECORD HOW THE MONEY HAS BEEN U TILIZED BY THE SISTER CONCERNS. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS DISALLOWED THE AMOUNT OF DISCOUNT OF DEBENTURES ON THE GROUND THAT THE SAME IS CAPITA L EXPENDITURE APART FROM INVOKING THE PROVISIONS OF SECTION 41(1). THE CIT(A) HAS HELD THAT THE PROVISIONS OF SECTION 41(1) ARE NOT APPLICABLE IN THE FACTS OF THE CASE. EVEN THE CIT(A) DID NOT CONCUR WITH THE AO FOR THE DISALLOWANCE ON THE ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 6 GROUND THAT THE EXPENDITURE IS CAPITAL IN NATURE. T HE CIT(A) HAS DISALLOWED THE PROPORTIONATE AMOUNT ON THE GROUND T HAT THE AMOUNT HAS BEEN GIVEN AS INTEREST FREE ADVANCE TO THE SISTER C ONCERNS AND THEREFORE EXPENDITURE HAS NOT BEEN INCURRED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF BUSINESS. THE FIRST LINE OF CONTENTION O F LD. AR IS THAT THE INVESTMENT IS ONE OF THE MAIN OBJECTS OF THE ASSESS EE THEREFORE, THE ADVANCE GIVEN UNDER ZERO COUPON CONVERTIBLE LOANS T O THE SISTER CONCERNS IS PART OF THE BUSINESS ACTIVITY OF THE AS SESSEE. WE REPRODUCE THE OBJECT CLAUSE 27 OF THE MEMORANDUM AND ASSOCIAT ION OF ARTICLES ASSESSMENT OF THE ASSESSEE COMPANY AS UNDER: 27 TO LEND, INVEST OR OTHERWISE EMPLOY OR DEAL WIT H SURPLUS MONEY BELONGING TO OR ENTRUSTED TO THE COMPANY IN S ECURITIES AND SHARES, BONDS, REAL ESTATE OR OTHER MOVABLE OR IMMOVABLE PROPERTY OR WITH OR WITHOUT SECURITY UPON SUCH TERM S AND IN SUCH MANNER AS MAY BE THOUGHT PROPER AND FROM TIME TO TIME TO VARY SUCH TRANSACTIONS AND INVESTMENTS IN SUCH M ANNER AS THE DIRECTORS MAY THINK FIT SUBJECT TO THE PROVISIO NS OF THE COMPANIES ACT, 1956. 7. IT HAS NOT BEEN DISPUTED BY THE REVENUE THAT THE SISTER CONCERNS, WHOM THE ASSESSEE HAS ADVANCED UNDER ZERO COUPON OP TIONALLY CONVERTIBLE LOANS ARE IN THE SAME LINE OF BUSINESS AND THE ASSESSEE IS TRADING IN TRANSPORTATION FUEL WITH THE GROUP CONCE RNS. THEREFORE, THE ASSESSEE IS HAVING BUSINESS WITH ITS GROUP CONCERNS . AS FAR AS THE ALLOWABILITY OF DISCOUNT ON ISSUE OF DEBENTURES THI S ISSUE HAS BEEN SETTLED BY THE HONBLE SUPREME COURT IN CASE OF MADRAS INVE STMENT CORPORATION VS CIT 225 ITR 802. THE HONBLE SUPREME COURT HAS O BSERVED AT PAGE NO. 811 AS UNDER: ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 7 THEREFORE, WHEN A COMPANY ISSUES DEBENTURES AT A D ISCOUNT, IT INCURS A LIABILITY TO PAY A LARGER AMOUNT THAN WHAT IT HAS BORROWED, AT A FUTURE DATE. WE NEED NOT GO INTO THE QUESTION WHETHER THIS ADDITIONAL LIABILITY EQUIVALENT TO THE DISCOUNT, WHICH IS INCURRED IN PRAESENTI BUT IS PAYABLE IN FU TURE, REPRESENTS DEFERRED INTEREST OR NOT. THAT MAY DEPEN D UPON THE TOTALITY OF CIRCUMSTANCES RELATING TO THE ISSUE OF DEBENTURES, INCLUDING ITS TERMS. THE LIABILITY, HOWEVER, TO PAY THE DISCOUNTED AMOUNT OVER AND ABOVE THE AMOUNT RECEIVED FOR THE DEBENTURES, IS A LIABILITY WHICH HAS BEEN INCURRED BY THE COMPANY FOR THE PURPOSES OF ITS BUSINESS IN ORDER T O GENERATE FUNDS FOR ITS BUSINESS ACTIVITIES. THE AMOUNTS SO O BTAINED BY ISSUE OF DEBENTURES ARE USED BY THE COMPANY FOR THE PURPOSES OF ITS BUSINESS. THIS WOULD, THEREFORE, BE EXPENDIT URE. 8. THUS, IT HAS BEEN HELD BY THE HONBLE SUPREME CO URT THAT WHEN THE COMPANY ISSUE DEBENTURE AT DISCOUNT IT INCURS A LIA BILITY TO PAY LARGER AMOUNT THAN WHAT IT HAS BORROWED AT A FUTURE DATE. THE LIABILITY EQUIVALENT TO DISCOUNT IS INCURRED IN PRESENT BUT P AYABLE IN FUTURE. ON THE POINT OF ALLOWABILITY OF THE SAID DISCOUNT U/S 37(1) THE HONBLE SUPREME COURT HAS HELD AT PAGE NO. 812 TO 813 AS UN DER: OUR ATTENTION WAS DRAWN TO THE CASE OF LOMAX (INSP ECTOR OF TAXES) V. PETER DIXON AND SON LTD., A DECISION OF T HE ENGLISH COURT OF APPEAL REPORTED IN [1944] 12 ITR (SUPPL) 1 , WHERE THE ENGLISH COURT HAD TREATED DISCOUNT OR PREMIUM IN TH E HANDS OF THE RECIPIENT AS A RECEIPT OF A CAPITAL NATURE. BUT THE CHARACTER OF PAYMENT IN RELATION TO THE PAYER CAN BE DIFFEREN T FROM THE CHARACTER OF THAT PAYMENT IN THE HANDS OF THE RECIP IENT. IN THE LIGHT OF THE RATIO LAID DOWN BY THIS COURT IN THE C ASE OF INDIA CEMENTS LTD. [1966] 60 ITR 52, ANY LIABILITY INCURR ED FOR THE PURPOSE OF OBTAINING THE LOAN WOULD BE REVENUE EXPE NDITURE. THE TRIBUNAL, HOWEVER, HELD THAT SINCE THE ENTIRE L IABILITY TO PAY THE DISCOUNT HAD BEEN INCURRED IN THE ACCOUNTING YE AR IN QUESTION, THE ASSESSEE WAS ENTITLED TO DEDUCT THE E NTIRE AMOUNT OF RS. 3,00,000 IN THAT ACCOUNTING YEAR. THIS CONCL USION DOES NOT APPEAR TO BE JUSTIFIED LOOKING TO THE NATURE OF THE LIABILITY. IT IS TRUE THAT THE LIABILITY HAS BEEN INCURRED IN THE ACCOUNTING YEAR. BUT THE LIABILITY IS A CONTINUING LIABILITY W HICH STRETCHES OVER A PERIOD OF 12 YEARS. IT IS, THEREFORE, A LIAB ILITY SPREAD OVER A PERIOD OF 12 YEARS. ORDINARILY, REVENUE EXPENDITU RE WHICH IS ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 8 INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHIC H IT IS INCURRED. IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN IF THE ASSESSEE HAS WRITTEN IT OFF IN HIS BOOKS OVER A PERIOD OF YE ARS. HOWEVER, THE FACTS MAY JUSTIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SPREAD AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT, ALLOWING THE ENTIRE EXPENDI TURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PRO FITS OF A PARTICULAR YEAR. THUS IN THE CASE OF HINDUSTAN ALUM INIUM CORPORATION LTD. V. CIT [1983] 144 ITR 474, THE CAL CUTTA HIGH COURT UPHELD THE CLAIM OF THE ASSESSEE TO SPREAD OU T A LUMP SUM PAYMENT TO SECURE TECHNICAL ASSISTANCE AND TRAI NING OVER A NUMBER OF YEARS AND ALLOWED A PROPORTIONATE DEDUCTI ON IN THE ACCOUNTING YEAR IN QUESTION. ISSUING DEBENTURES AT A DISCOUNT IS ANOTHER SUCH IN STANCE WHERE, ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABI LITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES, TH E PAYMENT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE I S A CONTINUING BENEFIT TO THE BUSINESS OF THE COMPANY O VER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THEREFORE, BE SPREAD OVER THE PERIOD OF THE DEBENTURES. THE APPELLANT, THEREFORE, HAD, IN ITS RETURN, CORRE CTLY CLAIMED A DEDUCTION ONLY IN RESPECT OF THE PROPORTIONATE PART OF DISCOUNT OF RS. 12,500 OVER THE RELEVANT ACCOUNTING PERIOD I N QUESTION. IN THIS CONNECTION, WE AGREE WITH THE REASONING AND CO NCLUSION OF THE MADHYA PRADESH HIGH COURT IN THE CASE OF M. P. FINANCIAL CORPORATION V. CIT [1987] 165 ITR 765. THE VIEW THA T WE HAVE TAKEN IS ALSO IN CONFORMITY WITH THE ACCOUNTING PRA CTICE OF SHOWING THE DISCOUNT IN THE DISCOUNT ON DEBENTURES ACCOUNT WHICH IS WRITTEN OFF OVER THE PERIOD OF THE DEBENTU RES. THE APPELLANT IS, THEREFORE, ENTITLED TO DEDUCT A S UM OF RS. 12,500 OUT OF THE DISCOUNT OF RS. 3,00,000 IN THE R ELEVANT ASSESSMENT YEAR. THE BALANCE EXPENDITURE OF RS. 2,8 7,500 CANNOT BE DEDUCTED IN THE ASSESSMENT YEAR IN QUESTI ON. QUESTION NO. 2 (AS REFRAMED), THEREFORE, WHICH IS T HE SUBJECT- MATTER OF APPEAL BEFORE US, IS ANSWERED IN THE NEGA TIVE IN SO FAR AS IT RELATES TO THE DEDUCTION OF RS. 2,87,500 IN T HE ASSESSMENT YEAR IN QUESTION THOUGH FOR REASONS ENTIRELY DIFFER ENT FROM THOSE GIVEN BY THE HIGH COURT. THE SECOND PART OF THE REF RAMED QUESTION IS ANSWERED IN THE AFFIRMATIVE. BUT ONLY A PROPORTIONATE PART OF THE DISCOUNT CAN BE DEDUCTED IN THE ASSESSMENT YEAR IN QUESTION AS SET OUT EARLIER. THE APPEAL IS DISPOSED OF ACCORDINGLY AND THE JUDGMENT OF THE HIG H COURT IS SET ASIDE. THERE WILL BE NO ORDER AS TO COSTS IN TH E CIRCUMSTANCES OF THE CASE. ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 9 9. IT IS CLEAR FROM THE DECISION OF HONBLE SUPREME COURT THAT FOR ISSUING DEBENTURE AT DISCOUNT THE ASSESSEE HAS INCU RRED THE LIABILITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES . HOWEVER, THE PAYMENT IS TO SPREAD OVER A NUMBER OF YEARS THEREFO RE, IT IS A CONTINUING BENEFIT TO THE BUSINESS OF THE ASSESSEE OVER THE EN TIRE PERIOD. ACCORDINGLY, LIABILITY SHOULD SPREAD OVER THE PERIO D OF DEBENTURES. THE HONBLE RAJASTHAN HIGH COURT IN CASE OF CIT VS SECU RE METERS (SUPRA) HAS CONSIDERED A SIMILAR ISSUE IN PARA 7 TO 10 AS UNDER : WE HAVE GONE THROUGH THE JUDGMENT IN BROOKE BOND I NDIA 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 BORROWI NG 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 A SPECTS OF THE MATTER INCLUDING THE PREVIOUS ENGLISH JUDGMENTS AND COUPLE OF JUDGMENTS OF THE ENGLISH COURTS BASED ON THE ENG LISH INCOME TAX ACT AND PROCEEDED TO DRAW DISTINCTION BETWEEN T HE INCOME TAX LAW IN ENGLAND AND INDIA. NOT ONLY THIS, THE H ON'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 T HE EXTENT OF HOLDING THAT SOME OF THE JUDGMENTS WERE WRONGLY DEC IDED. THEN, THE HON'BLE SUPREME COURT PROCEEDED TO HOLD A S UNDER (PAGE 63) : '10. TO SUMMARISE THIS PART OF THE CASE, WE ARE OF THE OPINION THAT : (A) THE LOAN OBTAINED IS NOT AN ASSET OR ADV ANTAGE OF AN ENDURING NATURE ; (B) THAT THE EXPENDITURE WAS MADE FOR SECURING THE USE OF MONEY FOR A CERTAIN PERIOD ; A ND (C) THAT IT IS IRRELEVANT TO CONSIDER THE OBJECT WITH WHICH TH E LOAN WAS OBTAINED.' THUS, IT WAS HELD THAT THE EXPENDITURE INCURRED IN PROCURING THE LOAN WAS REVENUE EXPENDITURE WITHIN SECTION 10(2)(X V) OF THE OLD INCOME-TAX ACT, WHICH CORRESPONDS TO SECTION 3 7 OF THE PRESENT ACT. BY GOING THROUGH THE SAID JUDGMENT, I T FURTHER TRANSPIRES THAT THE HON'BLE SUPREME COURT ALSO PRO CEEDED TO EXAMINE THE ASPECT OF PURPOSE OF RAISING LOAN AND I TS ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 10 IMMEDIATE OR SUBSEQUENT UTILISATION FOR DIFFERENT P URPOSE AND EXAMINED THAT EVEN IF A LOAN IS RAISED FOR PURCHAS ING RAW MATERIAL AND AFTER RAISING THE LOAN THE COMPANY FI NDS IT UNNECESSARY TO BY RAW MATERIAL AND SPENDS THE AMOU NT ON CAPITAL ASSET, STILL IT CANNOT BE SAID TO BE CAPITA L EXPENDITURE, AS IT WAS HELD THAT THE PURPOSE FOR WHICH THE NEW L OAN WAS REQUIRED WAS IRRELEVANT TO THE QUESTION AS TO WHET HER THE EXPENDITURE FOR OBTAINING LOAN WAS REVENUE OR CAPI TAL EXPENDITURE. WE ARE TOLD THAT RELYING ON THIS JUDGM ENT MANY OF THE HIGH COURTS OF THE COUNTRY HAVE CONSISTENTLY TA KEN THE VIEW THAT THE EXPENDITURE INCURRED IN ISSUING ANY DEBENT URES AND RAISING LOAN ON DEBENTURES IS ADMISSIBLE OBVIOUSLY BECAUSE THE DEBENTURE IS ALSO A LOAN. AT THIS STAGE IT WAS CONTENDED BY THE LEARNED COUNS EL 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 PARTAKE S OF THE CHARACTER OF CAPITAL AND IN THAT EVENT THE EXPENDIT URE WOULD NOT BE REVENUE EXPENDITURE AND WOULD BE CAPITAL EXP ENDITURE. LEARNED COUNSEL FOR THE ASSESSEE INFORMS THAT THOUG H IT HAS NOT COME ON RECORD SO FAR BUT AS A MATTER OF FACT THE D EBENTURES ISSUED WERE OF CONVERTIBLE NATURE. THEN, THE LEARNE D COUNSEL FOR THE ASSESSEE ARGUED RELYING UPON THE JUDGMENT OF TH E CALCUTTA HIGH COURT IN CIT V. EAST INDIA HOTELS LTD. REPORTE D IN [2001] 252 ITR 860, THAT THE EXPENDITURE INCURRED EVEN IN RAISING LOAN BY CONVERTIBLE DEBENTURE WOULD ALSO BE ADMISSIBLE A S REVENUE EXPENDITURE. THE CALCUTTA HIGH COURT HAD ADOPTED TH E 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 MA TTER IS THAT THE HON'BLE SUPREME COURT IN INDIA CEMENTS CASE [1 966] 60 ITR 52 HAS CLEARLY EXCLUDED THIS ASPECT FROM CONSIDERAT ION BY HOLDING THAT IT IS IRRELEVANT TO CONSIDER THE OBJEC T WITH WHICH THE LOAN WAS OBTAINED. ADMITTEDLY, THE DEBENTURE WHEN ISSUED IS A LOAN AND , THEREFORE, WHETHER IT IS CONVERTIBLE OR NON-CONVERTIBLE DOES N OT MILITATE AGAINST THE NATURE OF THE DEBENTURE, BEING LOAN AND , THEREFORE, THE EXPENDITURE INCURRED WOULD BE ADMISSIBLE AS REV ENUE EXPENDITURE. 10. THE SLP FILED BY THE REVENUE AGAINST THE DECISI ON OF HONBLE RAJASTHAN HIGH COURT HAS BEEN DISMISSED BY THE HON BLE SUPREME COURT VIDE DECISION DATED 11.8.2009 BY OBSERVING AS UNDER : ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 11 INCOME TAX ASSESSEE ISSUES DEBENTURES- TREATS EX PENSES AS REVENUE EXPENDITURE HC ALLOWS THE SAME BY OBSERVI NG THAT IT IS IRRELEVANT TO CONSIDER THE OBJECT, WITH WHICH TH E LOAN WAS OBTAINED ADMITTEDLY THE DEBENTURES WHEN ISSUED AR E A LOAN, AND THEREFORE, WHETHER IT IS CONVERTIBLE, OR NON CO NVERTIBLE, DOES NOT MILITATE AGAINST THE NATURE OF THE DEBENTU RE, BEING LOAN, AND THEREFORE, THE EXPENDITURE INCURRED WOULD BE ADMISSIBLE AS REVENUE EXPENDITURE REVENUES APPEA L DISMISSED BY SUPREME COURT. 11. AS IT HAS BEEN HELD THAT THE DEBENTURES WHEN IS SUED ARE A LOAN THEREFORE WHETHER IT IS CONVERTIBLE OR NON-CONVERTI BLE IT DOES NOT MILITATE AGAINST THE NATURE OF THE DEBENTURE BEING LOAN AND THEREFORE THE EXPENDITURE INCURRED WOULD BE ADMISSIBLE AS REVENUE EXPENDITURE. 12. IN THE CASE OF THE ASSESSEE THE DEBENTURES HAVE BEEN REDEEMED AND IT IS NOT A CASE OF CONVERSION INTO SHARES THER EFORE IT REMAINS A LOAN THROUGH OUT THE PERIOD TILL IT WAS REPAID BY REDEMP TION OF DEBENTURE. 13. IN VIEW OF THE DECISION OF HONBLE RAJASTHAN HI GH COURT IN CASE OF CIT VS SECURE METERS LTD. (SUPRA) WHICH HAS BEEN UP HELD BY HONBLE SUPREME COURT, WE HOLD THAT THE DISCOUNT ON ISSUE O F DEBENTURE IS EXPENDITURE FOR RAISING LOAN AND THEREFORE THE SAME IS ALLOWABLE AS BUSINESS EXPENDITURE. AS PER THE DECISIONS OF THE H ONBLE RAJASTHAN HIGH COURT AND SUPREME COURT (SUPRA) IT IS IRRELEVANT TO CONSIDER THE OBJECT WITH WHICH THE LOAN WAS OBTAINED HOWEVER IN THE CAS E OF THE ASSESSEE THE LOAN WAS OBTAINED TO INVEST IN THE ZERO COUPON CONVERTIBLE LOAN ADVANCE TO THE SISTER CONCERNS WHICH ARE IN THE SAM E LINE OF BUSINESS THEREFORE, IN VIEW OF THE DECISION OF HONBLE SUPRE ME COURT IN CASE OF S. ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 12 A. BUILDERS LTD. (SUPRA) THE SAME IS FOR THE BUSINE SS/COMMERCIAL EXPEDIENCY AND HENCE IS ALLOWABLE EXPENDITURE. 14. GROUND NO. 2 REGARDING DISALLOWANCE U/S 14A BY APPLYING RULE 8D. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONS IDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THE RULE 8D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION IN VIEW OF HONBLE JURISDICTION HIGH COURT IN CASE OF GODREJ A ND BOYCE MFG. CO. LTD. V. DCIT 328 ITR 81. THE AUTHORITIES BELOW HAVE INVO KED SECTION 14A ON THE GROUND THAT THE ASSESSEE INVESTED THIS MONEY IN THE ZERO COUPON CONVERTIBLE LOANS THEREFORE THE INTENTION OF THE AS SESSEE WAS TO EARN DIVIDEND INCOME. IT HAS BEEN BROUGHT ON RECORD BY T HE ASSESSEE THAT THE LOANS WERE RECEIVED BACK BY THE ASSESSEE AND THERE WAS NO CONVERSION OF LOAN INTO SHARES. EVEN OTHERWISE SECTION 14A CAN NOT BE INVOKED ON THE PRESUMPTION THAT THE PARTICULAR INVESTMENT WOULD BE CONVERTIBLE INTO SHARES AND IN FUTURE AFTER SUCH CONVERSION THE ASSE SSEE IS GOING TO EARN DIVIDEND INCOME. ACCORDINGLY WE DO NOT FIND ANY JUS TIFICATION IN INVOKING SECTION 14A FOR DISALLOWANCE OF THE EXPENDITURE WHE N THE ASSESSEE HAS INVESTED IN THE FORM OF GIVING ZERO COUPON OPTIONAL LY CONVERTIBLE LOAN. EVEN OTHERWISE AS HELD BY THE HONBLE SUPREME COURT THAT THE CONVERTIBILITY OR NON-CONVERTIBILITY DOES NOT MILIT ATE AGAINST THE NATURE OF THE DEBENTURE BEING LOAN. APPLYING THE SAME ANALOGY NO DISALLOWANCE U/S 14A IS CALLED FOR ADVANCING LOAN TO THE SISTER CONCERNS. ACCORDINGLY THE ORDER OF THE AUTHORITIES BELOW IS SET ASIDE. ITA NO. 5642/M/2010 RELIANCE PETROMARKETING LTD. 13 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF SEPTEMBER 2013 SD/- SD/- ( . ) ! '# (D. KARUNAKARA RAO) ACCOUNTANT MEMBER ( ) $ '# (VIJAY PAL RAO) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 6 TH SEPTEMBER 2013 SUBODH COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI
