GARWARE CHEMICALS LTD, MUMBAI V. DCIT 8(1), MUMBAI

ITA 7819/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88181 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 24-09-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 12-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: APURV GANDHI SMT
• Keywords: Depreciation; Business expenditure; Retrospective amendment; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 37(1); 147; 148; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO.7819/MUM/2010 ASSESSMENT YEAR: -2005-06 M/S GARWARE CHEMICALS LTD. GARWARE HOUSE, WESTERN EXPRESS HIGHWAY, VILE PARLE (EAST) MUMBAI 400 057. VS.` DY. COMMISSIONER OF INCOME TAX-8(1) MUMBAI PAN:-AAACW0552A APPELLANT RESPONDENT ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 9.9.2010 OF CIT(A) FOR A.Y. 2005-06. THE ASSESSEE H AS RAISED FOLLOWING GROUNDS:- GROUNDS OF APPEAL GROUND NO.1: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HON'BLE CIT(A) ERRED IN HOLDING THAT THE RESTRUCTURING PACKAGE WIT H IDBI DOES NOT STATE THAT THE INTEREST COMPONENT OF THE LOAN HAS BEEN RESTRUCTURE D AND ON THE CONTRARY, THE LOAN HAS BEEN RESTRUCTURED. THE HON 'BLE CIT(A) GROSSLY ERRED IN NOT APPRECIATING THE EVIDENCES FILED DURING THE COURSE OF APPELLATE PROC EEDINGS TO SUBSTANTIATE THAT THE ASSESSEE BY SHRI VIJAY MEHTA AND SHRI APURV GANDHI REVENUE BY SMT. S. PADMAJA DATE OF HEARING 11.12.2014 DATE OF PRONOUNCEMENT 21.01.2015 M/S GARWARE CHEMICALS LTD. 2 | P A G E FUNDED INTEREST TERM LOAN REPRESENTS INTEREST COMPO NENT ONLY AND NOT PRINCIPLE LOAN. GROUND NO.2: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HON'BLE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AS SESSING OFFICER OF RS.14 CRORES BEING OUTSTANDING INTEREST PAID TO THE !DBI BANK BY WAY OF CONVERSION OF THE SAME INTO 1.40 CRORES EQUITY SHARES OF THE FACE VALUE OF RS. 14 CRORES UNDER THE RESTRUCTURING PACKAGE GIVEN BY !DBI BANK. THE HON'B LE CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT CONVERSION OF UNPAID INT EREST DUE TO A BANK INTO EQUITY CAPITAL AMOUNTED TO PAYMENT OF THE SAID AMOUNT WHIC H WAS ALLOWABLE AS DEDUCTION U / S 43 B OF THE INCOME TAX ACT. GROUND NO.3: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HON 'BLE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN DISALLOWING THE CLAIM ON THE BASIS OF EXPLANATION 3C TO SECTION 43B WHICH AP PLIES TO CONVERSION OF OUTSTANDING INTEREST DUE TO THE BANK INTO A LOAN OR BORROWING. THE HON'BLE CIT(A) ERRED IN HOLDING THAT THE SAID EXPLANATION APPLIES TO THE FACTS OF THE APPELLANT'S CASE WHEREIN THE OUTSTANDING INTEREST DUE TO BANK W AS CONVERTED INTO EQUITY CAPITAL. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING OF VARIOUS PETRO CHEMICAL PRODUCT. DURING THE COURSE OF ASSESS MENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIME D THE DEDUCTION OF RS. 14 CRORE U/S 43B OF INCOME TAX ACT. THE ASSESSING OFFICER FOUND THAT THE CLAIM OF THE ASSESSEE U/S 43B IS IN CONNECTION WITH THE DISCHARGE OF FUNDED INTEREST AMOUNT PAYABLE TO IDBI AMOUNTING TO RS. 1 4 CRORE BY WAY OF CONVERSION OF THE SAME INTO EQUITY SHARES OF THE AS SESSEE COMPANY. THE ASSESSING OFFICER HAS HELD THAT IN VIEW OF THE EXPLA NATION 3C OF SECTION 43B, THE CLAIM OF THE ASSESSEE IS NOT ALLOWABLE AND ACCORDINGLY REJECTED. 3. ON APPEAL, BEFORE THE CIT(A) THE ASSESSEE SUBMIT TED THAT AS A RESULT OF RESTRUCTURING PACKAGE ENTERED INTO WITH IDBI BANK, THE ASSESSEE COMPANY M/S GARWARE CHEMICALS LTD. 3 | P A G E HAD TO PAY TO IDBI BANK FUNDED INTEREST TERM LOAN AT R S. 73.99 CRORES. AS PER THE TERMS OF THE RESTRUCTURING PACKAGE, THE IDB I BANK AGREED TO ACCEPT 1,40,00,000 SHARES AT THE FACE VALUE AMOUNTING TO R S. 14 CRORE. THUS THE SAID RESTRUCTURING OF FUNDED INTEREST EXPENDITURE OF R S. 14 CRORE INTO EQUITY CAPITAL WAS CLAIMED AS DEDUCTIBLE EXPENDITURE IN VIEW OF PROVISION OF SECTION 43B OF THE ACT. THE CIT(A) DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE DISALLOWANCE MADE BY ASSESSI NG OFFICER BY FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF SRF LTD. VS. DCIT (34 SOT 1). 4. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT AS A RESULT OF RESTRUCTURING OF LOAN TAKEN FROM IDBI BANK, THE INTEREST OF RS. 14 CRORE WAS CONVERTED INTO EQUI TY AT PAR WHICH WOULD BE SUBJECT TO BUY BACK BY M/S GARWARE POLYSTERS LTD , A GROUP CONCERN OF THE ASSESSEE WITH THE RETURN OF 10.02% PER ANNUM TO IDBI. THE LD. AUTHORIZED REPRESENTATIVE HAD CONTENDED THAT BY CONVERS ION OF INTEREST INTO PAYABLE EQUITY, THE ASSESSEE DISCHARGED THE INT EREST LIABILITY PAYABLE TO IDBI. HE HAS REFERRED SECTION 43B AS WELL AS EXPL ANATION 3C AND SUBMITTED THAT THE LEGISLATURE HAS INTENTIONALLY AND AT ITS WISDOM EXCLUDED THE INTEREST PAYABLE WHICH HAS BEEN CONVERTED INTO LOAN OR BORROWING FROM THE TERM ACTUALLY PAID. THEREFORE, ONLY THE CONVERSION OF INTEREST PAYABLE INTO LOAN OR BORROWING SHALL DEEMED TO HAVE NOT BEEN ACTUALLY PAID. THE DEEMING FICTION UNDER EXPLANATION 3C CANNOT BE EXPANDED BEYOND THE SPECIFIC INSTANCE GIVEN IN THE EXPLANATIO N. THUS THE CONVERSION OF INTEREST PAYABLE INTO EQUITY WOULD NOT BE COVERED UNDER THE EXPLANATION 3C TO SECTION 43B. IF THE INTENTION OF THE LEGISLAT URE WAS TO EXCLUDE THE M/S GARWARE CHEMICALS LTD. 4 | P A G E CONVERSION OF INTEREST INTO EQUITY FROM THE TERM AC TUALLY PAID THEN IT WOULD HAVE BEEN SPECIFICALLY MENTIONED IN THE EXPLANA TION 3C. THEREFORE, THE NON INCLUSION OF CONVERSION OF INTEREST PAYABLE INTO EQUITY IN THE EXPLANATION MAKES IT CLEAR THAT THE DEEMING PROVISIO N CANNOT BE EXPANDED BEYOND THE SPECIFIC SCOPE OF THE PROVISION. I N SUPPORT OF THIS CONTENTION, HE HAS RELIED UPON THE DECISION OF HYDER ABAD BENCHES OF THIS TRIBUNAL IN THE CASE OF SURYALAKSHMI COTTON MILLS LTD. VS. ACIT IN ITA NO. 1065/HYD/2005 DATED 5.5.2008 AND SUBMITTED THAT THE TRIBUNAL HAS ACCEPTED THE ISSUE OF SHARE AS DISCHARGING ONES LIAB ILITY BY MODE OF OTHER THAN CASH WHICH IS A COMMON METHOD. HE HAS POINTED O UT THAT THE TRIBUNAL IN THE SAID CASE HAS OBSERVED THAT THE LEGIS LATURE IN ITS WISDOM HAS NOT INCLUDED THE CONVERSION OF INTEREST PAYABLE I NTO SHARE CAPITAL IN EXPLANATION 3C. THEREFORE, THERE IS NO NEED TO GO I NTO THE INTENTION OF THE LEGISLATURE WHILE ENACTING EXPLANATION 3C AND ONE NE ED NOT READ A FURTHER FICTION WHICH IS NOT THERE IN A PROVISION WHICH OTH ERWISE, IS A FICTIONAL PROVISION. THUS THE LD. AUTHORIZED REPRESENTATIVE H AS CONTENDED THAT A FICTION PROVISION HAS TO BE STRICTLY CONSTRUED AND TH ERE CANNOT BE A FICTION IN A FICTION. THEREFORE, THE CONVERSION OF INTEREST PAYABLE INTO SHARE CAPITAL IS NOT HIT BY THE EXPLANATION 3C TO SECTION 43B. TH E LD. AUTHORIZED REPRESENTATIVE THEN REFERRED THE CBDT CIRCULAR NO. 7 OF 2006 DATED 17.7.2006 REPORTED IN 289 ITR (ST) 26 AND SUBMITTED THAT THE BOARD HAS CLARIFIED THAT THE UNPAID INTEREST WHENEVER PAID T O THE BANK OR FINANCIAL INSTITUTION WILL BE IN THE NATURE OF REVE NUE EXPENDITURE DESERVING DEDUCTION IN COMPUTATION OF INCOME. THE CONVERTED INTE REST BY WHATEVER NAME CALLED IN THE WAKE OF ITS CONVERSION INTO LOAN OR BORROWINGS OR ADVANCES WILL BE ELIGIBLE FOR DEDUCTION IN COMPUTATI ON OF INCOME OF PREVIOUS YEAR IN WHICH THE CONVERTED INTEREST IS AC TUALLY PAID. THE LD. M/S GARWARE CHEMICALS LTD. 5 | P A G E AUTHORIZED REPRESENTATIVE SUBMITTED THAT AS PER EXPLA NATION 3C, IT IS ONLY A DEFERMENT OF THE LIABILITY AND ALLOW IN THE YEAR W HEN CONVERTED INTEREST IS PAID. HE HAS POINTED OUT THAT THE CIT(A) RELIED UPO N THE DECISION OF THIS TRIBUNAL IN THE CASE OF SRF VS. DCIT (SUPRA), HOWEV ER, THE SAID CASE IS BASED ON THE PREMISES OF THE EXPENDITURE ACTUALLY I NCURRED AND NOT ON THE EXPLANATION 3C TO SECTION 43B. FURTHER THE DECISION OF HYDERABAD BENCHES OF THE TRIBUNAL IN THE CASE OF SURYALAKSHMI COTTON MILLS LTD. VS. ACIT (SUPRA), WAS NOT CONSIDERED BY THE DELHI BENCHES OF THE TRIBUNAL IN THE CASE OF SRF LTD. VS. DCIT (SUPRA). THE LD. AUTHORIZE D REPRESENTATIVE HAS ALSO POINTED OUT THAT THE CIT(A) HAS PASSED THE DIRE CTION TO THE ASSESSING OFFICER BY ASSUMING THE WRONG FACTS AS A WRONG ITEM OF DISALLOWANCE WAS CONSIDERED BY THE CIT(A)WHILE ISSUING THE DIRECTION T O THE ASSESSING OFFICER TO DISALLOW RS. 14 CRORE INSTEAD OF RS. 8.8 2 CRORE. HE HAS REFERRED THE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSING OFFICER ALREADY DISALLOWED RS. 14 CRORE APART FROM RS. 8.82 CRORE WH ICH WAS NOT AN ISSUE BEFORE THE CIT(A). THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT IN THE CASE OF SRF LTD. VS. DCIT (SUPRA), THE TRIBUN AL HAS FOLLOWED THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF EIMKO K.C.P LTD. VS. CIT (147 ITR 603). HOWEVER, THE ISSUE BEFORE THE HON'BLE HIGH COURT WA S ALLOWABILITY OF THE EXPENDITURE FOR THE PURPOSE OF B USINESS AND, THEREFORE, ISSUING THE SHARE CAPITAL AT THE PRELIMINARY STAGE WOULD NOT AMOUNT TO EXPENDITURE FOR THE PURPOSE OF BUSINESS. THE HON'BLE SUPREME COURT WHILE UPHOLDING THE DECISION OF HON'BLE HIGH COURT HAS OBS ERVED THAT IT WAS NOT IN THE COURSE OF CARRYING THE BUSINESS AND, THEREFOR E, THE EXPENDITURE INCURRED AT THE PRELIMINARY STAGE WAS FOUND NOT TO B E ALLOWABLE. THE LD. AUTHORIZED REPRESENTATIVE THEN REFERRED THE DECISION O F THIS TRIBUNAL IN THE CASE OF RANBAXY LABORATORIES LTD. VS. ADDL. CIT [39 SOT 17) (URO)] M/S GARWARE CHEMICALS LTD. 6 | P A G E AND SUBMITTED THAT THE ISSUE BEFORE THE TRIBUNAL WAS NOT DISCHARGING THE LIABILITY OF EXPENDITURE BUT LESS AMOUNT OF PREMIUM ON SHARE CAPITAL WAS RECEIVED FROM THE EMPLOYEES. THEREFORE, THE SAID DECIS ION IS NOT RELEVANT ON THE ISSUE UNDER CONSIDERATION. THE LD. AUTHORIZED RE PRESENTATIVE THEN REFERRED THE DECISION OF BANGALORE BENCHES OF THE TRI BUNAL IN THE CASE OF JSW STEEL LTD. VS. ACIT [2011] 9 ITR (AT)39 AND SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL AN D TAKEN THE SIMILAR VIEW AS IN THE CASE OF SURYALAKSHMI COTTON MILLS LT D. VS. ACIT (SUPRA). THE LD. AUTHORIZED REPRESENTATIVE THEN REFERRED THE DECISIO N OF SPECIAL BENCH OF THE TRIBUNAL AT BANGALORE IN THE CASE OF BIOCON LTD. VS. DCIT (144 ITD 21) AND SUBMITTED THAT THE SPECIAL BENCH HAS DISTINGUISH ED THE DECISION IN THE CASE OF RANBAXY LABORATORIES LTD. VS. ADDL. CIT (SUPRA) AND HELD THAT THE EXPRESSION EXPENDITURE AS USED IN SECTION 37 CO VERS AN AMOUNT WHICH HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. T HUS IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF BIOCON LTD. VS. DCIT (SUPRA) PAYING OUT OF THE EXPENDITURE IS NOT RESTRICTED TO T HE PAYMENT IN CASH ALONE. THE LD. AUTHORIZED REPRESENTATIVE THEN REFE RRED THE DECISION OF THIS TRIBUNAL DATED 12.11.2014 IN THE CASE OF CABLE CORPORATION OF INDIA LTD. VS. DCIT IN ITA NO. 7758/MUM/2011 AND SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN FA VOUR OF THE ASSESSEE BY TREATING THE CONVERSION OF INTEREST PAYABLE INTO SHARES AS PAYMENT AS PER SECTION 43B. HE HAS THEN REFERRED THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE CASE OF KALPANA LAMPS AND COMPONENTS LTD. VS. DCIT (225 ITR 491) AND SUBMITTED THAT THE SAID DECISION IS ON THE ISSUE OF CONVERSION OF INTEREST PAYABLE INTO LOANS WHICH IS COVERED UNDER EXPLANATION TO SECTION 43B, THEREFORE, THE SAID JUDGM ENT OF THE HONBLE HIGH COURT IS NOT APPLICABLE IN THE ISSUE OF CONVER SION OF INTEREST PAYABLE M/S GARWARE CHEMICALS LTD. 7 | P A G E INTO SHARE CAPITAL. THUS THE LD. AUTHORIZED REPRESEN TATIVE HAS SUBMITTED THAT THE CONVERSION OF INTEREST PAYABLE INTO SHARES AMOUNTS TO DISCHARGE OF LIABILITY BEING PAID AND, THEREFORE, DOES NOT HIT BY THE EXPLANATION 3C OF SECTION 43B. 5. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT E XPLANATION 3C OF SECTION 43B HAS BEEN INCLUDED WITH THE OBJECT TO CORR ECT THE MISCHIEF OF CLAIM OF DEDUCTION WITHOUT PAYMENT. THEREFORE, TO UNDE RSTAND THE INTENTION OF THE LEGISLATURE MISCHIEF RULE OF INTER PRETATION HAS TO BE APPLIED IN THIS CASE. HE HAS FURTHER SUBMITTED THAT THE CONV ERSION OF INTEREST INTO EQUITY CAPITAL IS NOT ACTUAL PAYMENT OF INTEREST AN D, THEREFORE, IT SHALL NOT BE DEEMED TO HAVE BEEN ACTUALLY PAID. THE OBJECT AND SCHEME OF SECTION 43B IS TO ALLOW THE EXPENDITURE ONLY WHEN IT IS ACTU ALLY PAID AND NOT WHEN IT IS DEFERRED OR NOT PAID. HE HAS ALSO REFERRED THE C BDT CIRCULAR NO. 7/2006 DATED 17.07.2006 AND SUBMITTED THAT THE BOARD HA S CLARIFIED THAT CONVERTED INTEREST BY WHATEVER NAME WILL BE ELIGIBLE FOR DEDUCTION ONLY IN THE YEAR WHEN THE CONVERTED INTEREST IS ACTUALLY PAI D. THE LD. DR HAS SUBMITTED THAT IT IS NOT POSSIBLE TO VISUALIZE ALL K INDS OF ARRANGEMENT WHICH WILL BE ENTERED INTO BY BORROWERS AND LENDERS IN THIS REGARD, THEREFORE, NON INCLUSION OF CONVERSION OF INTEREST PAYABLE INT O EQUITY IN EXPLANATION 3C WOULD NOT CHANGE THE BASIC CONDITION OF ALLOWABIL ITY OF DEDUCTION BEING ACTUAL PAYMENT OF INTEREST. THE LD. DR HAS ALSO PLAC ED RELIANCE ON RBI MASTER CIRCULAR DATED 1 ST JULY 2014 ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING PERTAINING TO ADVANC ES AND SUBMITTED THAT AS PER PARA 14 OF THE MASTER CIRCULAR, FUNDED INTERE ST ON LOAN (FITL)/DEBT OR EQUITY INSTRUMENT CREATED BY CONVERSION OF UNPAI D INTEREST WILL BE M/S GARWARE CHEMICALS LTD. 8 | P A G E CLASSIFIED IN THE SAME ASSET CLASSIFICATION CATEGORY IN WHICH THE RESTRUCTURED ADVANCES HAS BEEN CLASSIFIED. THE LD. D R HAS THUS SUBMITTED THAT THE BANK TREATS THE CONVERTED UNPAID INTEREST IN TO EQUITY AS THE SAME ASSET BEING RESTRUCTURED ADVANCE. THEREFORE, THE LIAB ILITY IS NOT DISCHARGED IN THE ACCOUNTS OF THE BANK TILL THE BANK REALIZE T HE AMOUNT FROM SALE OF THE EQUITY INSTRUMENT AND ONLY ON THE REALIZATION IT WI LL BE RECOGNIZED IN THE P&L ACCOUNT. THE LD. DR HAS FORCEFULLY CONTENDED THAT CONVERSION IS NOT TREATED BY THE BANK AS RECOVERY OF INTEREST BUT ONL Y ON THE SALE/REDEMPTION OF THE EQUITY IT IS RECOGNIZED IN THE P&L ACCOUNT. THEREFORE, DURING THE YEAR IT CANNOT BE TREATED AS P AYMENT OF INTEREST. HE HAS RELIED UPON THE ORDER OF CIT(A) AS WELL AS THE F OLLOWING DECISIONS AS RELIED UPON BY THE CIT(A):- (I) ITO VS. GLITTEK GRANITES LTD. 53 SOT 575 (II) CIT VS. REINZ TALBROS (P) LTD. 252 ITR 637 6. IN REJOINDER THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT BY CONVERSION OF INTEREST PAYABLE INT O ACCOUNT, THE BANK BECOMES THE SHARE HOLDER AND OWNER OF THE COMPANY AN D, THEREFORE, THERE IS NO LIABILITY TO BE DISCHARGED BY THE ASSESSEE. HE HAS FURTHER SUBMITTED THAT THE KOLKATA BENCHES OF THE TRIBUNAL IN THE CAS E OF ITO VS. GLITTEK GRANITES LTD (SUPRA) IS PRIOR TO THE SPECIAL BENCH DE CISION AND, THEREFORE, IS NO MORE A GOOD LAW. AS REGARDS THE DECISION OF HONBL E DELHI HIGH COURT IN THE CASE OF CIT VS. REINZ TALBROS (P) LTD (SUPRA), THE SAME IS NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE AND THE HIGH COURT HAS FOLLOWED THE JUDGMENT IN THE CASE OF EIMKO K.C.P LTD. VS. CIT (SUP RA). M/S GARWARE CHEMICALS LTD. 9 | P A G E 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL A S RELEVANT MATERIAL ON RECORD. THE QUESTION ARISES FOR OUR CONSIDERATION AND ADJUDICATION IS WHETHER THE CONVERSION OF INTEREST PAYABLE INTO SHA RE CAPITAL UNDER THE RESTRICTING OF LOAN WOULD BE TREATED AS PAYMENT OF I NTEREST FOR THE PURPOSE OF SECTION 43B(D) OR NOT. THE ASSESSING OFFICER DISA LLOWED A SUM OF RS. 14 CRORE U/S 43B ON ACCOUNT OF CONVERSION OF INTEREST PAYABLE INTO SHARES ISSUED TO IDBI. THE ASSESSING OFFICER HAS SUPPORTED ITS ACTION BY EXPLANATION 3C OF SECTION 43B. THEREFORE, THE APP LICABILITY OF EXPLANATION 3C IN CASE OF INTEREST PAYABLE IS CONVERTED INTO SH ARE CAPITAL BECOME RELEVANT. FOR READY REFERENCE WE QUOTE SECTION 43B (1)(D) AND EXPLANATION 3C AS UNDER:- 43B(1) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVI SION OF THIS ACT, A DEDUCTION OTHER- WISE ALLOWABLE UNDER THIS ACT IN RES PECT OF- ------------------------- ---------------------------- (D) ANY SUM PAYABLE BY THE ASSESSEE AS INTEREST ON ANY LOA N OR BORROWING FROM ANY PUBLIC FINANCIAL INSTITUTION 6 OR A STATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPORATION], IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE AGREEMENT GOVERNING SUCH LOAN OR BORRO WING,] SHALL BE ALLOWED (IRRESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO T HE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY HIM) ONLY IN COMPUTING THE INCO ME REFERRED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUAL LY PAID BY HIM M/S GARWARE CHEMICALS LTD. 10 | P A G E EXPLANATION 3C.FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT A DEDUCTION OF ANY SUM, BEING INTEREST PAYABLE UNDER CLAUSE (D) OF THIS SECTION, SHALL BE ALLOWED IF SUCH INTEREST HAS BEEN ACTUALLY PAID AND ANY INTEREST REFERRED TO IN THAT CLAUSE WHICH HAS BEEN CONVERTED INTO A LOAN OR BORROWING SHALL NOT BE DEEMED TO HAVE BEEN ACTUALLY PAID. 8. SECTION 43B STIPULATES A CONDITION OF ACTUAL PAY MENT IN RESPECT OF CERTAIN DEDUCTIONS WHICH ARE OTHERWISE ALLOWABLE UNDE R THE OTHER PROVISIONS OF THE ACT. THEREFORE, SECTION 43B DEFERS THE DEDUCTION OTHERWISE ALLOWABLE TO THE YEAR IN WHICH THE PAYMEN T IS MADE. CLAUSE (D) OF THIS SECTION IS REGARDING THE SUM PAYABLE AS INTE REST ON ANY LOAN OR BORROWING FROM CERTAIN PUBLIC/STATE FINANCIAL INSTI TUTION OR INDUSTRIAL INVESTMENT CORPORATION TO BE ALLOWED ONLY IN THE YEA R OF ACTUAL PAYMENT. EXPLANATION 3C FURTHER CLARIFIES THE TERM ACTUAL PA YMENT AND STIPULATES THAT THE DEDUCTION OF INTEREST PAYABLE IS ALLOWABLE O NLY ON ACTUAL PAYMENT AND NOT ON DEFERMENT OF LIABILITY OF CONVERTING THE S AME INTO LOAN OR BORROWINGS. THUS IT IS CLEAR THAT THE LIABILITY OF INTEREST PAYABLE SHALL BE DISCHARGED AND NOT DEFERRED TO AVAIL THE DEDUCTION AS PE R PROVISIONS OF SECTION 43B R.W. EXPLANATION 3C. THE CBDT CIRCULAR NO. 7/06 (SUPRA) MAKES IT FURTHER CLEAR AS UNDER:- THE UNPAID INTEREST WHENEVER ACTUALLY PAID TO THE BANK OR FINANCIAL INSTITUTION WILL BE IN THE NATURE OF REVENUE EXPEND ITURE DESERVING DEDUCTION IN THE COMPUTATION OF INCOME. THEREFORE, THE CONVERTED INTEREST, BY WHATEVER NAME CALLED, IN THE WAKE OF ITS CONVERSION INTO A L OAN OR ADVANCE, WILL BE ELIGIBLE FOR DEDUCTION IN THE COMPUTATION OF INCOME OF THE PREVIOUS YEAR IN WHICH THE CONVERTED INTEREST IS ACTUALLY PAID. IN O THER WORDS, NOMENCLATURE OF THE SUM OF CONVERTED INTEREST WILL MAKE NO DIFFEREN CE AS THE SUM OF CONVERTED INTEREST WHENEVER IS ACTUALLY PAID WILL NOT REPRESE NT REPAYMENT OF THE PRINCIPAL. M/S GARWARE CHEMICALS LTD. 11 | P A G E 9. AS IT IS CLARIFIED IN THE CIRCULAR THAT THE DEDUC TION OF INTEREST PAYABLE WOULD NOT BE ALLOWED IN THE YEAR IN WHICH IT IS CONVE RTED INTO LOAN OR BORROWING OR ADVANCE BUT WOULD BE ALLOWED IN THE YEAR WHEN THE CONVERTED INTEREST IS FINALLY PAID. THEREFORE, THE PURPOSE OF INSERTING THE EXPLANATION 3C IS TO FURTHER DEFER THE DEDUCTION TO THE YEAR WHEN T HE INTEREST CONVERTED INTO LOAN OR BORROWINGS IS FINALLY PAID. FROM THE READI NG OF SECTION 43B(1)(D) AND EXPLANATION 3C AS WELL AS CBDT CIRCULAR NO. 7/2006, IT IS DISCERNIBLE THAT THE DEDUCTION IS ALLOWED ONLY WHEN THE LIABILITY IS DISC HARGED AND NOT MERELY ON DEFERRING THE SAME BY CONVERSION. THE TRANSACTION O F CONVERSION OF INTEREST PAYABLE INTO LOAN OR BORROWING IS DEFERMENT OF PAYME NT OF THE AMOUNT AND DISCHARGE OF THE LIABILITY BECAUSE LOAN OR BORROWING HAS TO BE PAID IN FUTURE. BUT WHEN THE INTEREST PAYABLE IS CONVERTED INTO EQUI TY CAPITAL, THE LIABILITY OF INTEREST PAYABLE IS CEASED TO EXIST AND STAND DISCHA RGED. THEREFORE, THE ESSENTIAL INGREDIENTS OF PROVISIONS OF SECTION 43B( 1)(D) R.W. EXPLANATION 3C IS NOT TO ALLOW THE DEDUCTION OF CURRENT LIABILITY OF I NTEREST PAYABLE WHEN IT IS DEFERRED BY CONVERTING INTO LOAN OR BORROWING. THE E SSENCE OF EXPLANATION 3C IS THAT THE INTEREST PAYABLE SHALL NOT BE DEEMED AS ACTUALLY PAID IF THE LIABILITY STILL EXIST THOUGH UNDER DIFFERENT CHARACTER BEING LO AN OR BORROWINGS. THE EXPLANATION 3C DOES NOT CONTEMPLATE ANY MODE OF PAYME NT NEITHER THE PROVISIONS OF SECTION 43B SPECIFY ANY MODE OF PAYMEN T BUT IT TALKS ABOUT THE SUM WHICH IS ACTUALLY PAID BY THE ASSESSEE. THE CONV ERSION OF INTEREST PAYABLE INTO LOAN OR BORROWING IS OTHERWISE NOT THE PAYMENT OF INTEREST AND DISCHARGE OF INTEREST LIABILITY BUT IT IS ONLY A MEASURE OF DE FERMENT OF LIABILITY. THEREFORE, IN CASE OF DISCHARGE OF LIABILITY BY ANY MODE WOULD N OT FALL UNDER THE AMBIT OF EXPLANATION 3C AS THE LIABILITY IS NO MORE IN EXIS TENCE ONCE IT IS DISCHARGED AND THE ALLOWABILITY OF DEDUCTION OF THE INTEREST PAY ABLE CANNOT BE CLAIMED IN ANY SUBSEQUENT YEAR AS THERE WILL BE NO FURTHER PAY MENT. ON THE CONTRARY THE M/S GARWARE CHEMICALS LTD. 12 | P A G E LIABILITY OF LOAN OR BORROWING HAS TO BE DISCHARGED IN FUTURE. THERE IS NO DISPUTE THAT THE AMOUNT IN QUESTION BEING THE INTERE ST PAYABLE IS OTHERWISE ALLOWABLE EXPENDITURE U/S 36(1)(III) OF THE INCOME TAX ACT IN THE EARLIER YEARS WHEN IT BECAME DUE BUT IT COULD BE ALLOWED FOR WANT O F ACTUAL PAYMENT AS PER SECTION 43B. THE CIT(A) HAS FOLLOWED THE DECISION O F THIS TRIBUNAL IN THE CASE OF SRF LTD. VS. DCIT (SUPRA), WHEREIN THE TRIBUNAL F OLLOWED THE DECISION OF HONBLE MADRAS HIGH COURT AS WELL AS HON'BLE SUPREM E COURT IN THE CASE OF EIMCO K.C.P. LTD. (SUPRA). THE HON'BLE HIGH COURT I N CASE OF EIMCO K.C.P. LTD. VS. CIT (SUPRA) HAS NOT DISPUTED THE ALLOWABILITY OF TRADING LIABILITY/EXPENDITURE WITHOUT OUTLAY OR OUTGOING AND HENCE THE SAME QUALIFIES FOR DEDUCTION AS EXPENDITURE . THE RELEVANT OBSERVATIO NS OF THE HON'BLE HIGH COURT IS AT PAGE 607 AND 608 ARE AS UNDER:- MR. UTTAM REDDY FOR THE ASSESSEE-COMPANY SAID THAT FOR AN EXPENDITURE TO BE ALLOWED UNDER THE ACT, IT IS NOT ALWAYS NECESSARY TH AT IT SHOULD INVOLVE AN OUTLAY OR EVEN AN OUTGOING OF MONEY FROM THE ASSESSEE. HE RELIED ON SOME OBSERVATIONS OF THE SUPREME COURT IN CIT V. NAINITAL BANK LTD. [19 66] 62 ITR 638 . WE DO NOT DISPUTE THIS PROPOSITION. NORMALLY, TRADING EXPENDITU RE BRINGS IN SOME ASSET INTO THE BUSINESS, AS WHEN THE TRADER SPENDS MONEY TO PURCHA SE STOCK-IN TRADE. THERE ARE CASES WHERE EVEN WITHOUT ANY TRADING ASSET COMING INTO THE TRADER'S HANDS, THE MONEY SPENT MAY BE REGARDED AS EXPENDITURE. ENTERT AINMENT EXPENDITURE IS OF THIS KIND. MONEY SPENT TO SUPPLY TEA, COFFEE, ETC., TO CUSTOMERS ONLY GOES DOWN THE DRAIN, AS IT WERE, BUT THEY ARE ALSO TO BE REGARDED AS LEGITIMATE BUSINESS EXPENDITURE, BECAUSE THEY ARE INCURRED OUT OF CONSIDER ATIONS OF BUSINESS EXPEDIENCY. THE SUPREME COURT IN THE CASE CITED BY M R. REDDY WERE DEALING WITH YET ANOTHER SPECIES OF BUSINESS EXPENDITURE WHICH DO ES NOT RESULT IN THE TRADER ACQUIRING ANY TANGIBLE TRADING ASSET. PARTIES TRANSACTING BUSINESS WITH EACH OTHER MAY SETTLE THEIR DIFFERENCES AND ADJUST THEIR MU TUAL RIGHTS AND OBLIGATIONS. AND WHERE UNDER SUCH A SETTLEMENT, A TRAD ING LIABILITY IS INCURRED, THERE MAY BE NO OUTLAY OR OUTGOING AND YET THE AMOU NT MAY QUALIFY FOR DEDUCTION AS EXPENDITURE. THE PRESENT CASE, HOWEVER, D OES NOT TOUCH ANY OF THE DIFFERENT WAYS IN WHICH BUSINESS EXPENDITURE MIGHT ARISE FOR CONSIDERATION. FOR WE HAVE TO DEAL NOT WITH A RUNNING BUSINESS, BUT WITH ONE WHICH WAS YET TO BE BORN. IT DOES NOT, THEREFORE, MATTER WHETHER A TANGI BLE ASSET COMES IN, OR AN INTANGIBLE BENEFIT RESULTS, OR EVEN WHETHER THE TEST OF COMMERCIAL EXPEDIENCY IS M/S GARWARE CHEMICALS LTD. 13 | P A G E SATISFIED. ALL THESE CONSIDERATIONS ARE BESIDE THE POI NT, SO LONG AS THERE IS NO BUSINESS TO SPEAK OF AT THE MATERIAL TIME. (EMPHASIS SUPPLIED BY US) 10. THE QUESTION BEFORE THE HON'BLE HIGH COURT WAS ADMISSIBILITY OF THE EXPENDITURE AS DEDUCTION FOR THE PURPOSE OF ASSESSEES BUSINESS AND NOT THE MODE OF PAYMENT. THE HONBLE HIGH COURT FOUND THAT T HE EXPENDITURE FOR THE PURPOSE OF BRINGING INTO EXISTENCE A BUSINESS ARE N OT DEDUCTIBLE AS IT IS OBSERVED AT PAGE 607 AS UNDER:- EVEN OTHERWISE, THE ADMISSIBILITY OF EXPENDITURE AS A DEDUCTION, FOR PURPOSES OF INCOME-TAX, AT ANY RATE, WOULD ARISE ONLY WHERE THE COMPANY AFTER FORMATION GETS GOING WITH ITS AVOWED BUSINESS. THE INCOME-TAX ACT DOES NOT ALLOW ANY EXPENDITURE OTHER THAN EXPENDITURE FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS. 'FOR THE PURPOSES OF THE ASSESSEE'S BUSINESS' IS TH E TERM EMPLOYED BY THE STATUTE. THIS IMPLIES THAT BY THE TIME WE SPEAK OF THE BUSIN ESS, IT MUST EXIST OR MUST HAVE COME INTO BEING. ONLY EXPENSES IN THE COURSE O F CARRYING ON THE BUSINESS, OR AT LEAST WITH A VIEW TO CARRY ON BUSINESS, CAN B E TREATED AS EXPENSES INCURRED OR LAID OUT FOR THE PURPOSE OF THE BUSINESS. ANY EX PENDITURE AFTER THE CESSATION OF THE BUSINESS CANNOT BE DEDUCTED, BECAUSE THEY AR E NOT FOR THE PURPOSE OF CARRYING ON THE BUSINESS. LIKEWISE, ANY EXPENDITURE FOR THE PURPOSE OF BRINGING INTO EXISTENCE A BUSINESS ALSO ARE NON-DEDUCTIBLE. SUCH EXPENDITURES ARE NOT TO BE TREATED AS BEING FOR THE PURPOSES OF THE BUSI NESS, FOR THE SIMPLE REASON THAT THE BUSINESS HAS NOT YET COME INTO BEIN G AND IT IS ONLY AT THE PLANNING STAGE OF FORMATION. EXPENSES INCURRED FOR PROMOTING OR INCORPORATING A COMPANY ARE EVEN AT ONE FURTHER REM OVE FROM EXPENSES INTENDED TO LAUNCH A BUSINESS (SIC). FOR LAUNCHING A COMPANY CONSTITUTES A STILL EARLIER STAGE IN THE PROCESS OF LAUNCHING T HE BUSINESS OF THE COMPANY. SO, ON ANY VIEW OF THE ALLOTMENT OF SHARES TO EIMCO ON ITS UNDERTAKING TO OFFER KNOW-HOW, THE ASSESSEE-COMPANY CANNOT BE TREATED AS HAVING INCURRED OR LAID OUT ANY EXPENDITURE FOR THE PURPOSE OF ITS BUSINESS . IT WOULD BE SENSIBLE TO TALK OF RECEIPTS AND EXPE NSES ONLY AFTER THE COMPANY IS INCORPORATED AND THE BUSINESS GETS GOING , NOT AT THE STAGE OF BRINGING INTO EXISTENCE THE VERY SUBJECT OF CHARGE. IN THIS VIEW, THAT NO EXPENDITURE IN THE TRADING SENSE OF THE TERM HAD AR ISEN IN THE EVENTS THAT HAPPENED IN THIS CASE, THERE IS NO SCOPE FOR THE FU RTHER QUESTION OF 'CAPITAL V. REVENUE ?' BEING DEBATED. (EMPHASIS SUPPLIED BY US) M/S GARWARE CHEMICALS LTD. 14 | P A G E 11. THUS THE QUESTION WAS WHETHER THE EXPENDITURE WA S FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE OR NOT WHILE CONSIDERING TH E FINDING OF THE TRIBUNAL, THE HONBLE HIGH COURT FOUND AS UNDER:- THE TRIBUNAL ALSO DID NOT REALIZE THAT THE OFFER O F KNOW-HOW BY EIMCO TO THE ASSESSEE-. OMPANY ONLY REPRESENTED ITS WAY OF DISCH ARGING ITS CAPITAL CONTRIBUTION FOR THE FLOATATION OF THE ASSESSEE-COM PANY AND, IN THAT SENSE, IT COULD INVOLVE NO EXPENDITURE. THE TRIBUNAL ALSO OVE RLOOKED THAT THE ALLOTMENT OF SHARES WAS PART OF THE RIGGING UP OF THE ASSESSE E-COMPANY'S SHARE CAPITAL AS A PRELIMINARY TO THE COMMENCEMENT OF THE BUSINESS A ND M THAT SENSE TOO, NO QUESTION OF BUSINESS EXPENDITURE, IN THE RIGHT SENS E OF THE TERM, COULD ARISE FOR CONSIDERATION. 12. THUS THE JUDGMENT OF HONBLE SUPREME COURT IN TH E CASE OF CIT VS. NAINITAL BANK LTD. ( 62 ITR 638) WAS FOUND TO BE AN A CCEPTABLE PROPOSITION. IN FACT, THE ISSUE BEFORE THE HON'BLE HIGH COURT IN TH E CASE OF EIMCO K.C.P. LTD. VS. CIT (SUPRA) WAS THE ISSUE OF SHARE CAPITAL AT P RELIMINARY STAGE AND FOR THE FLOTATION OF THE ASSESSEE COMPANY, THEREFORE, IT WA S FOUND THAT THE EXPENDITURE WAS NOT INCURRED FOR THE EXISTING BUSINES S OF THE ASSESSEE BECAUSE THE SHARES WERE ISSUED AGAINST THE TECHNICA L KNOW HOW AT PRE FORMATION STAGE OF ASSESSEES COMPANY AND NOT AFTER FORMATION AND SETTING UP OF THE BUSINESS. THEREFORE, FOR ALLOWING THE EXPEND ITURE, THE BUSINESS MUST EXIST OR MUST HAVE COME INTO BEING. THE HON'BLE SUP REME COURT WHILE UPHOLDING THE DECISION OF HON'BLE HIGH COURT IN 242 ITR 659 HAS OBSERVED AT PAGE NO. 446 AS UNDER:- 10. WHAT IN EFFECT WAS DONE BY THE APPELLANT IN ALLOTT ING EQUITY SHARES OF RS. 2,80,000 TO EIMCO WAS TO REIMBURSE THE CONTRIBUTION OF EIMCO BY WAY OF KNOW-HOW, WHICH CAN NEVER BE TREATED AS EXPENDITURE, MUCH LESS AN EXPEN DITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR PURPOSES OF THE BUSINESS OF THE APP ELLANT. IT IS NOT A CASE WHERE AFTER THE INCORPORATION, THE APPELLANT-COMPANY IN THE COURSE OF CARRYING ON ITS BUSINESS, SPENT THE SAID AMOUNT FOR ACQUIRING ANY ASSET. RELIANCE B Y MR. REDDY ON THE JUDGMENT OF THIS COURT IN ALEMBIC CHEMICAL WORKS CO. LTD. V. CIT[198 9] 177 ITR 377 / 43 TAXMAN 312 IS WHOLLY INAPPROPRIATE. THERE KNOW-HOW WAS ACQUIR ED TO PRODUCE HIGHER YIELD AND SUB-CULTURE OF HIGH YIELDING STRAIN OF PENICILL IN. THE ASSESSEE-COMPANY WAS M/S GARWARE CHEMICALS LTD. 15 | P A G E ALREADY ENGAGED IN THE MANUFACTURE OF ANTIBIOTICS I NCLUDING PENICILLIN BEFORE IT ACQUIRED THE KNOW-HOW. THEREFORE, IT WAS A CASE OF A RUNNING COMPANY ACQUIRING KNOW-HOW TO INCREASE ITS YIELD AND QUALITY OF ITS P RODUCT AND FOR THE BETTER CONDUCT AND IMPROVEMENT OF THE EXISTING BUSINESS AND, THERE FORE, THE AMOUNT SPENT ON ACQUIRING KNOW-HOW WAS HELD TO BE REVENUE EXPENDITU RE. 13. THE HON'BLE SUPREME COURT HAS ALSO NOT DISPUTED THE PROPOSITION AS LAID DOWN IN CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT ( 177 ITR 377) AND IT WAS OBSERVED THAT IN THE SAID CASE THE ASSESS EE WAS ALREADY ENGAGED IN MANUFACTURING OF ANTIBIOTIC, PENICILLIN BEFORE IT ACQUIRED KNOW HOW. THUS IT WAS HELD THAT THE EXPENDITURE INCURRED B Y ISSUING SHARE CAPITAL QUALIFIED THE ALLOWABLE DEDUCTION IF THE SAME WAS IN CURRED FOR THE BUSINESS OF THE ASSESSEE. THE HYDERABAD BENCHES OF THE TRIBUNAL I N THE CASE OF SURYALAKSHMI COTTON MILLS LTD. VS. ACIT (SUPRA), WHI LE CONSIDERING AN IDENTICAL ISSUE HELD IN PARA 10 AS UNDER:- THE NEXT QUESTION THAT ARISES IS WHETHER SEC. 43B IS APPLICABLE OR NOT. IN THE PRECEDING PARAGRAPH WE HAVE OBSERVED THAT THE ASSES SEE HAS DISCHARGED ITS LIABILITY BY ISSUING CRPS TO THE INSTITUTIONS. SEC. 43B CREATES A FICTION TO PROVIDE THAT IRRESPECTIVE OF THE METHOD OF ACCOUNTING FOLLO WED BY THE ASSESSEE, CERTAIN LIABILITIES WOULD BE ALLOWED AS DEDUCTION ONLY ON A CTUAL PAYMENT. IN OUR VIEW, THE ASSESSEE HAS MADE A CONSTRUCTIVE PAYMENT AND DISCHA RGED ITS LIABILITY BY ISSUING CRPS TO THE TWO INSTITUTIONS. THE ARE IN THE FORM O F STHARES ISSUED FOR CONSIDERATION OTHER THAN CASH. TO ISSUE SHARES OTHERWISE THAN BY CASH IS A COMMON WAY OF DISCHARGING ONE'S LIABILITY. THE CONSIDERATION HAS BEEN RECEIVED BY THE ASSESSEE IN THE FORM OF REDUCTION IN RATES OF INTEREST. THEREFO RE, THERE IS NO GAINSAYING THAT THE ASSESSEE HAS NOT MADE PAYMENT FOR THE CONCESSIONS R ECEIVED BY IT. IT IS NOT MERELY THE ISSUE OF SHARES THAT HAS DISCHARGED THE ASSESSE E FROM ITS LIABILITY. INCIDENTAL TO THE ISSUE OF SHARES, THERE ARE OTHER RIGHTS ALSO UN DER THE COMPANIES ACT, WHICH THE ASSESSEE WILL HAVE TO GRANT TO THE INSTITUTIONS AS SHAREHOLDERS. THE INSTITUTIONS WILL BE ENTITLED TO THE FIXED RATE OF DIVIDEND. THEY WIL L ALSO HAVE A RIGHT TO ATTEND THE GENERAL MEETING OF THE COMPANY AND VOTE ON RESOLUTI ONS, DIRECTLY AFFECTING THEIR INTEREST AND ON ALL RESOLUTIONS IF THEIR DIVIDEND I S IN ARREARS FOR NOT LESS THAN TWO YEARS. IN THE EVENT OF WINDING UP OR REPAYMENT OF C APITAL, THE INSTITUTIONS WILL HAVE A PREFERENTIAL RIGHT TO BE PAID THE ARREARS OF DIVI DEND PAYABLE UP TO THE DATE OF SUCH EVENT. THEY ALSO WILL HAVE A PREFERENTIAL RIGH T IN RESPECT OF REPAYMENT OF CAPITAL. THUS, BESIDES THE ISSUANCE OF SHARES, THE ASSESSEE IS ALSO PUT UNDER M/S GARWARE CHEMICALS LTD. 16 | P A G E INCIDENTAL OBLIGATIONS IN THE PROCESS. IT NEED TO B E CLARIFIED THAT WITH THE RELIEF GRANTED BY THE INSTITUTIONS, IT IS NOT THAT LONG-TE RM BENEFITS WILL KEEP ON ACCRUING TO THE ASSESSEE. THERE IS MERELY A REDUCTION IN THE RATES OF INTEREST FOR THE REMAINING PERIOD OF THE LOANS. THUS, IN FUTURE, INT EREST LIABILITY WILL KEEP ON ACCRUING TO THE ASSESSEE, ALBEIT AT A LOWER RATE. B UT THE PART OF INTEREST WHICH THE INSTITUTIONS HAVE SACRIFICED BY SUCH REDUCTION IN T HE RATES, THEY HAVE ASKED FOR THEIR POUND OF FLESH IMMEDIATELY FROM THE ASSESSEE. ACCOR DINGLY, THE LIABILITY TO COMPENSATE HAS ARISEN IN THE YEAR UNDER CONSIDERATI ON, IT HAS CRYSTALLIZED ALSO IN THIS YEAR AND THEREFORE, THE ASSESSEE SHOULD BE ENT ITLED TO THE DEDUCTION THEREOF. HERE, WE MAY HASTEN TO ADD THAT EXPLANATION 3C TO S EC. 43B WILL NOT APPLY. THE SAID EXPLANATION PROVIDES THAT WHERE INTEREST PAYAB LE U/S 43B (D) IS CONVERTED INTO A LOAN OR A BORROWING, IT SHALL NOT BE DEEMED TO HAVE BEEN ACTUALLY PAID. THE LEGISLATURE IN ITS WISDOM, HAS NOT INCLUDED THE CON VERSION OF INTEREST PAYABLE INTO SHARE CAPITAL. THIS IS BECAUSE, PERHAPS, ON CONVERS ION OF INTEREST PAYABLE INTO SHARE CAPITAL, THE LENDER, TO THE EXTENT OF AMOUNT CONVER TED, DOES NOT REMAIN A CREDITOR OF THE BORROWER. IN FACT, ON ALLOTMENT OF SHARES, T HE INSTITUTIONS HAVE BECOME CONTRIBUTORS TO THE CAPITAL AND PARTICIPANTS IN THE CAPITAL OF THE COMPANY. THEREFORE, THERE IS NO NEED TO GO INTO THE INTENTIO N OF THE LEGISLATURE WHILE ENACTING EXPLANATION 3C AND ONE NEED NOT READ A FURTHER FICT ION WHICH IS NOT THERE INTO A PROVISION WHICH OTHERWISE IS A FICTIONAL PROVISION. IT IS WELL ESTABLISHED THAT A FICTIONAL PROVISION HAS TO BE STRICTLY CONSTRUED AN D THERE CANNOT BE A FICTION IN A FICTION. THUS, THE CONVERSION OF INTEREST INTO SHAR E CAPITAL IS NOT HIT BY EXPLANATION 3C TO SEC. 43B. EARLIER, WE HAVE MENTIONED THAT IT IS NOT THAT BY THIS RESTRUCTURING OF LOANS AND INTEREST THE ASSESSEE IS GOING TO REAP BENEFITS FROM YEAR TO YEAR. IT IS MERELY A NOVATIO WITH A REVISED RATE OF INTEREST AN D HENCE THERE IS NO QUESTION OF APPLYING THE RATIO OF THE JUDGMENT OF THE SUPREME C OURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENTS CORPORATION LTD. V. CIT (225 ITR 802) = (2002-TIOL-290- SC-IT-LS). IN THAT CASE, THERE WAS A CONTINUING BEN EFIT TO THE BUSINESS BY THE ISSUE OF DEBENTURES AT A DISCOUNT IN THE SENSE THAT THE A MOUNT RECEIVED BY THE ASSESSEE WAS TO BE UTILIZED OVER A NUMBER OF YEARS. THEREFOR E, THE COURT HELD THAT THOUGH THE REVENUE EXPENDITURE INCURRED IN THE FORM OF DIS COUNT, IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IN THE YEAR IN WHICH IT IS INCURRED, IT WILL HAVE TO BE SPREAD OVER THE LIFE OF THE DEBENTURES. ON THE OTHER HAND, IN THE PRESENT CASE, THE ASSESSEE HAS NOT RAISED ANY CAPITAL IN TH E FORM OF CASH WHICH COULD BE UTILIZED OVER THE PERIOD OF THE PREFERENCE SHARES. MERELY, SOME PART OF THE INTEREST WHICH WAS TO ACCRUE IN FUTURE, HAS BEEN SACRIFICED BY THE INSTITUTIONS FOR WHICH THE ASSESSEE HAS BEEN CALLED UPON TO COMPENSATE IN THE YEAR UNDER CONSIDERATION. THEREFORE, THERE IS NO QUESTION OF SPREADING THE EX PENDITURE OVER THE PERIOD OF THE PREFERENCE SHARES. FINALLY, WE DRAW SUPPORT FROM TH E SAME DECISION FOR THE CONCLUSION WE HAVE ARRIVED AT. AT PAGE 808 (OF 225 ITR) THE COURT HAS OBSERVED THAT EXPENDITURE IS NOT NECESSARILY CONFINED TO THE MONEY WHICH HAS BEEN ACTUALLY PAID OUT. IT COVERS A LIABILITY WHICH HAS ACCRUED O R WHICH HAS BEEN INCURRED ALTHOUGH IT MAY HAVE TO BE DISCHARGED AT A FUTURE D ATE. ACCORDINGLY, WE ALLOW THE CLAIM OF THE ASSESSEE OF RS.6,71,60,OOO. M/S GARWARE CHEMICALS LTD. 17 | P A G E 14. SIMILARLY, THE BANGALORE BENCHES OF THIS TRIBUN AL IN THE CASE OF JSW STEEL LTD. VS. ACIT (SUPRA) AHS HELD IN PARA 13 TO 1 3.9 AS UNDER:- 13. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS, THO ROUGHLY PERUSED THE RELEVANT CASE RECORDS AND ALSO THE DOCUMENTARY EVIDENCES ADV ANCED BY THE LD. AR IN THE FORM OF PAPER BOOK, CASE LAWS ETC., 13.1 THE ISSUE FOR ADJUDICATION IS WHETHER THE ASSESSEE IS TO BE ALLOWED DEDUCTION UNDER SECTION 43B OF THE ACT ON CONVERSION OF OUTSTANDING INTEREST INTO CRPS HAVING REGARD TO RETROSPECTIVE INSERTION OFEXPLANATION 3C TO SECTION 43B OF THE ACT. THE RELEVANT EXTRACT OF SECTION 43B AND EXPLANATION 3C TO SECTION 43B OF THE ACT READS AS FOLLOWS :- '43B. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTH ER PROVISION OF THIS ACT DEDUCTION OTHERWISE ALLOWABLE UNDER THIS ACT IN RES PECT OF - (A)** ** ** (B)** ** ** (C)** ** ** (D)ANY SUM PAYABLE BY THE ASSESSEE AS INTEREST ON A NY LOAN OR BORROWING FROM ANY PUBLIC FINANCIAL INSTITUTION [OR A STATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPORATION], IN ACCORDANCE W ITH THE TERMS AND CONDITIONS OF THE AGREEMENT GOVERNING SUCH LOAN OR BORROWING, OR (E)** ** ** SHALL BE ALLOWED (IRRESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO THE M ETHOD OF ACCOUNTING REGULARLY EMPLOYED BY HIM) ONLY IN COMPUTING THE INCOME REFER RED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY HIM....' EXPLANATION 3C.FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT A DEDUCTION OF ANY SUM, BEING INTEREST PAYABLE UNDER CLAUSE (D) OF THIS SECTION, SHALL BE ALLOWED IF SUCH INTEREST HAS BEEN ACTUALLY PAID AND ANY INTERE ST REFERRED TO IN THAT CLAUSE WHICH HAS BEEN CONVERTED INTO A LOAN OR BORROWING SHALL N OT BE DEEMED TO HAVE BEEN ACTUALLY PAID.' 13.2 ON PERUSAL OF SECTION 43B, IT COULD BE SEEN THAT T HE SAID SECTION CREATES A FICTION TO PROVIDE THAT IRRESPECTIVE OF THE METHOD OF ACCOUNTI NG FOLLOWED BY THE ASSESSEE, CERTAIN LIABILITIES WOULD BE ALLOWED AS DEDUCTION ONLY ON A CTUAL PAYMENT. ASSESSEES CASE FALLS UNDER CLAUSE (D) OF SAID SECTION WHICH COVERS INTER EST PAYMENT TO CERTAIN INSTITUTION. FURTHER, EXPLANATION 3C TO SAID SECTION PROVIDES TH AT WHERE INTEREST PAYABLE UNDER SECTION 43B(D) IS CONVERTED INTO A LOAN OR A BORROW ING, IT SHALL NOT BE DEEMED TO HAVE BEEN ACTUALLY PAID. THE ASSESSEE HAD CONVERTED OUTS TANDING INTEREST LIABILITY ALONG WITH RESTRUCTURING EXPENSES INTO CRPS AS PER REVISED RES TRUCTURING SCHEME ENTERED INTO BY IT M/S GARWARE CHEMICALS LTD. 18 | P A G E WITH VARIOUS BANKS AND FINANCIAL INSTITUTIONS SUCH AS IDBI, IFCI, SBI ETC. THUS, THE ASSESSEE HAD MADE A CONSTRUCTIVE PAYMENT AND DISCHA RGED ITS LIABILITY OF INTEREST BY ISSUING CRPS TO THE ABOVE INSTITUTIONS. IT WOULD NO T BE OUT OF PLACE TO MENTION HERE THAT THE ABOVE SCHEME WAS APPROVED BY 75 PER CENT OF THE CREDITORS AND IT WAS NOT AT THE BEHEST OF THE ASSESSEE. 13.3 EXPLANATION 3C TO SECTION 43B OF THE ACT WAS INTRO DUCED BY FINANCE ACT, 2006 WITH RETROSPECTIVE EFFECT FROM 1-4-1989. THE EXPLANATION PROVIDES THAT IF INTEREST LIABILITY IS CONVERTED INTO 'LOANS OR ADVANCE' THEN SAID CONVERS ION DOES NOT AMOUNT TO PAYMENT AND NO DEDUCTION SHALL BE ALLOWED IN THE YEAR OF CONVER SION. THE LEGISLATURE IN ITS WISDOM HAD NOT INCLUDED THE CONVERSION OF INTEREST PAYABLE INTO SHARE CAPITAL IN EXPLANATION 3C TO SECTION 43B OF THE ACT. THIS IS BECAUSE, PERH APS, ON CONVERSION OF OUTSTANDING INTEREST INTO SHARE CAPITAL, THE LENDER, TO THE EXT ENT OF AMOUNT CONVERTED DOES NOT REMAIN A CREDITOR OF THE BORROWER. IN FACT, ON ALLOTMENT O F SHARES, THE LENDER BECOMES CONTRIBUTORS TO THE CAPITAL AND PARTICIPANTS IN THE CAPITAL OF THE COMPANY. THUS, THE CONVERSION OF INTEREST INTO SHARE CAPITAL IS NOT HI T BY EXPLANATION 3C TO SECTION 43B. THE HONBLE SUPREME COURT IN THE CASE OF PRAKASHNATH KH ANNAV. CIT [2004] ( 266 ITR 1 1 ) HAS HELD THAT WHEN A PARTICULAR EXPRESSION/DEFINITION I S OMITTED UNDER ANY PROVISION, IT CANNOT BE SAID THAT THE LEGISLATURE HAS DONE SO WIT HOUT ANY PURPOSE OR INTENT AND AS SUCH, SUCH OMISSION CANNOT BE SUPPLIED BY THE INTER PRETATIVE PROCESS. 13.4 SOME OF THE MATERIAL DIFFERENCES BETWEEN LOANS AND PREFERENCE SHARES ARE AS FOLLOWS : LOANS & ADVANCES PREFERENCE SHARES LENDERS ARE NOT OWNERS OF THE COMPANY PREFERENCE SHARE HOLDERS ARE OWNER OF THE COMPANY. COMPANY GETS DEDUCTION ON INTEREST PAYMENT. COMPANY DOES NOT GET DEDUCTION ON PAYMENT OF DIVIDEND. COMPAN Y IS NOT REQUIRED TO PAY ANY TAX ON PAYMENT OF INTEREST COMPANY IS REQUIRED TO PAY DDT ON PAYMENT OF DIVIDEND. INTEREST IS TAXABLE IN THE HANDS OF THE LENDER. DIVIDEND IS NOT TAXABLE IN THE HANDS OF THE SHAREHOLDERS. EXPENDITURE INCURRED FOR RAISING LOAN IS REVENUE EXPENDITURE. EXPENDITURE INCURRED FOR ISSUING SHARES IS CAPITAL EXPENDITURE. (I)FURTHER, WE WOULD LIKE TO MENTION HERE THAT THE PREFERENCE SHAREHOLDERS HELD VOTING RIGHTS IN THE COMPANY (SOURCE PAGE 60 OF PAPER BOOK ). (II)FURTHER, ON DIRECTION OF THE BENCH, THE ASSESSE E HAS ALSO FILED THE STOCK EXCHANGE QUOTES OF CRPS OF THE ASSESSEE TO PROVE THAT CRPS I SSUED BY THE ASSESSEE WERE TRADED ON STOCK EXCHANGE. M/S GARWARE CHEMICALS LTD. 19 | P A G E (III)THE JURISDICTIONAL HIGH COURT IN THE CASE OF K IRLOSKAR ELECTRIC CO. LTD. V. CIT [1997] 228 ITR 674 (KAR.) HAS CLEARLY EXPLAINED THE DIFFERENCE BETWEEN THE PREFERENCE SHARES AND BORROWINGS. THE RELEVANT EXTR ACT IS REPRODUCED BELOW : 'SUBSCRIPTION TO PREFERENCE SHARE IS A CONTRIBUTION TO THE CAPITAL OF THE COMPANY BY ITS SUBSCRIBERS OR SHAREHOLDERS AND IS NOT A BORROW ING BY THE COMPANY.' IN VIEW OF THE ABOVE DISTINCTIONS BETWEEN LOAN AND PREFERENCE SHARE CAPITAL AND THE JURISDICTIONAL HIGH COURT DECISION, WE ARE OF THE V IEW THAT THE LOAN CANNOT BE EQUATED WITH PREFERENCE SHARE AND CONSEQUENTLY, IT CANNOT B E CONSTRUED THAT EXPLANATION 3C TO SECTION 43B OF THE ACT COVERS NOT ONLY LOANS AND AD VANCES BUT ALSO PREFERENCE SHARES. 13.5 IT IS A WELL SETTLED POSITION OF LAW THAT DEEMING PROVISIONS BEING LEGAL FICTIONS SHOULD BE STRICTLY CONSTRUED. EXPLANATION 3C BEING DEEMING PROVISION STRICTLY APPLIES TO CONVERSION OF OUTSTANDING INTEREST AMOUNT INTO LOAN S OR BORROWINGS AND NOT TO PREFERENCE SHARES. FURTHER, DEEMING PROVISION BEING LEGAL FICTIONS COULD NOT BE STRETCHED INDEFINITELY TO INCLUDE WITHIN ITS AMBIT ITEMS NOT SPECIFICALLY INCLUDED THEREIN. THE FOLLOWING JUDICIAL DECISIONS SUPPORT THE ABOVE PROP OSITION : (I) CHANDRANA & CO. V. STATE OF MYSORE [1972] 2 SCR 344 (II) BENGAL IMMUNITY CO. LTD. V. STATE OF BIHAR AIR 1955 SC 661 (III) CIT V. CHHOTELAL KANHIYALAL [1971] (2 TTJ 347, 351) (SIC) 13.6 LASTLY, WE ARE OF THE VIEW THAT THE ISSUE IS SQUAR ELY COVERED BY THE HONBLE HYDERABAD TRIBUNAL DECISION IN THE CASE OF SURYALAK SHMI COTTON MILLS LTD. (SUPRA) AND NOTHING CONTRARY HAS BEEN BROUGHT ON RECORD BY THE LEARNED DR DURING THE COURSE OF HEARING. 13.7 IN THIS CONTEXT, THE JUDGMENT OF THE HONBLE HIGH COURT OF ANDHRA PRADESH IN THE CASE OF LALCHAND SURANA V. HYDERABAD VANASPATHY LTD . [1990] 68 COMP. CASES 415 IS ALSO RELEVANT. THE ISSUE THAT WAS CONSIDERED BY THE HONBLE HIGH COURT OF ANDHRA PRADESH WAS WHETHER THE PETITIONERS, BEING PREFEREN TIAL SHARE HOLDERS CAN CALL THEMSELVES CREDITORS AND ASK FOR WINDING UP OF TH E COMPANY UNDER SECTION 433(E) READ WITH SECTION 434(1) AND SECTION 439(1)(B) OF THE CO MPANIES ACT. THE HIGH COURT WAS OF THE VIEW THAT THE PREFERENTIAL SHARE HOLDERS ARE AL SO SHAREHOLDERS AND BY NO STRETCH OF IMAGINATION CAN THEY BECOME CREDITORS. 13.8 IN VIEW OF THE JUDICIAL STAND ON THE ISSUE, WE ARE NOT IN AGREEMENT WITH THE ASSESSING OFFICERS PORTRAYAL THAT THE INTEREST PAY ABLE WHICH WAS CONVERTED INTO LOAN AND, THUS, IT DOESNT MAKE A DIFFERENCE IF THE ASSE SSEE CHANGES THE NOMENCLATURE WHEREBY WE FULLY ENDORSE THE VIEW OF THE CIT(A) THAT THOUGH ACTUAL CASH DID NOT CHANGE HANDS AND THE TRANSACTION WAS COMPLETED THROUGH BOOK ADJU STMENTS AND THAT THE INTEREST LIABILITY HAD BEEN PAID OFF THROUGH GIVING THE CRED ITOR A SHARE IN THE OWNERSHIP OF THE ASSESSEE-COMPANY AND, THUS, THE ASSESSEE WAS ENTITL ED TO CLAIM THE AMOUNT SO PAID OFF UNDER SECTION 43B OF THE ACT AS A DEDUCTION AND ALS O IN RESPECT OF APPLICABILITY OF RESTRUCTURING EXPENSES, EVEN THEN IF SUCH EXPENDITU RE WERE NOT TO BE TERMED INTEREST, IT WOULD STILL BE ALLOWABLE AS IT HAD BEEN INCURRED WI TH THE OBJECTIVE OF SQUARING OFF A LIABILITY THAT WAS ON REVENUE ACCOUNT AND WOULD THU S ACQUIRE THE CHARACTER OF A REVENUE EXPENSE. 13.9 TO SUM UP, WE DECIDE THE ISSUE AGAINST THE REVENUE AND AFFIRM THE ORDER OF THE CIT(A) ON THIS ASPECT. M/S GARWARE CHEMICALS LTD. 20 | P A G E 15. THE TRIBUNAL HAS TAKEN NOTE OF THE DISTINCTION B ETWEEN THE PREFERENCE SHARE AND BORROWINGS AS HELD BY KARNATAKA HIGH COURT IN THE CASE OF KIRLOSKAR ELECTRIC CO. LTD. VS. CIT (228 ITR 674). THE ALLOWABILITY OF EXPENDITURE WITHOUT OUTGO HAS BEEN CONSIDERED BY TH E SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BIOCON LTD. VS. DCIT (SUPRA) IN PARA 9.2.7 AND 9.2.8 AS UNDER:- 9.2.7 NOW WE ESPOUSE THE SECOND PART OF THE SUBMISSION O F THE LD. DR IN THIS REGARD. HE CANVASSED A VIEW THAT AN EXPENDITURE DEN OTES 'PAYING OUT OR AWAY' AND UNLESS THE MONEY GOES OUT FROM THE ASSESSEE, TH ERE CAN BE NO EXPENDITURE SO AS TO QUALIFY FOR DEDUCTION U/S 37. SUB-SECTION (1) OF THE SECTION PROVIDES THAT ANY EXPENDITURE (NOT BEING EXPENDITURE IN THE NATURE DE SCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON'. TO PUT IT DIFFERENTLY, AN EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS SO AS TO BE ELIGIBLE FOR DEDUCTION U/S 37( 1). THERE IS ABSOLUTELY NO DOUBT THAT SECTION 37(1) TALKS OF GRANTING DEDUCTION FOR AN 'EXPENDITURE', AND THE HON'BLE SUPREME COURT IN INDIAN MOLASSES CO. (P.) LTD. (SUP RA) HAS DESCRIBED 'EXPENDITURE' TO MEAN WHAT IS 'PAID OUT OR AWAY' AND IS SOMETHING WHICH HAS GONE IRRETRIEVABLY. HOWEVER, IT IS PERTINENT TO NOTE THAT THIS SECTION DOES NOT RESTRICT PAYING OUT OF EXPENDITURE IN CASH ALONE. SECTION 43 CONTAINS THE DEFINITION OF CERTAIN TERMS RELEVANT TO INCOME FROM PROFITS OF BUSINESS OR PROF ESSION COVERING SECTIONS 28 TO 41. SECTION 37 OBVIOUSLY FALLS UNDER CHAPTER IV-D. SUB-SECTION (2) OF SECTION 43 DEFINES 'PAID' TO MEAN: 'ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING UPON THE BASIS OF WHICH THE PROFITS OR G AINS ARE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. ' WHEN WE READ THE DEFINITION OF THE WORD 'PAID' U/S 43(2) IN JUXTAPOSITION TO SECTI ON 37(1), THE POSITION WHICH EMERGES IS THAT IT IS NOT ONLY PAYING OF EXPENDITUR E BUT ALSO INCURRING OF THE EXPENDITURE WHICH ENTAILS DEDUCTION U/S 37(1) SUBJE CT TO THE FULFILMENT OF OTHER CONDITIONS. AT THIS JUNCTURE, IT IS IMPERATIVE TO N OTE THAT THE WORD 'EXPENDITURE' HAS NOT BEEN DEFINED IN THE ACT. HOWEVER, SEC. 2(H) OF THE EXPENDITURE ACT, 1957 DEFINES 'EXPENDITURE' AS : 'ANY SUM OF MONEY OR MONEY'S WOR TH SPENT OR DISBURSED OR FOR THE SPENDING OR DISBURSING OF WHICH A LIABILITY HAS BEEN INCURRED BY AN ASSESSEE'. WHEN SECTION 43(2) OF THE ACT IS READ IN CONJUNCTION WITH SECTION 37(1), THE MEANING OF THE TERM 'EXPENDITURE' TURNS OUT TO BE THE SAME AS IS THERE IN THE AFOREQUOTED PART OF THE DEFINITION UNDER SECTIO N 2(H) OF THE EXPENDITURE ACT, 1957, VIZ., NOT ONLY 'PAYING OUT' BUT ALSO 'INCURRI NG'. COMING BACK TO OUR CONTEXT, IT IS SEEN THAT BY UNDERTAKING TO ISSUE SHARES AT DISC OUNTED PREMIUM, THE COMPANY M/S GARWARE CHEMICALS LTD. 21 | P A G E DOES NOT PAY ANYTHING TO ITS EMPLOYEES BUT INCURS O BLIGATION OF ISSUING SHARES AT A DISCOUNTED PRICE ON A FUTURE DATE IN LIEU OF THEIR SERVICES, WHICH IS NOTHING BUT AN EXPENDITURE U/S 37(1) OF THE ACT. 9.2.8 THOUGH DISCOUNT ON PREMIUM IS NOTHING BUT AN EXPEN DITURE U/S 37(1), IT IS WORTH NOTING THAT THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 HAS GONE TO THE EXTENT OF COVERING 'LOSS' IN CERTAIN CIRCUMSTANCES WITHIN THE PURVIEW OF 'EXPENDITURE' AS USED IN SECTION IN 37(1). IN THAT CASE, THE ASSESSEE INCURRED ADDITIONAL LIABILITY DUE TO EXCHANGE RATE FLUCTUATI ON ON A REVENUE ACCOUNT. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION U/S 37. W HEN THE MATTER FINALLY REACHED THE HON'BLE SUPREME COURT, THEIR LORDSHIPS NOTICED THAT THE WORD 'EXPENDITURE' HAS NOT BEEN DEFINED IN THE ACT. THEY HELD THAT : ' THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND E XCLUSIVELY FOR THE PURPOSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE INC OME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. IN SECTIONS 30 TO 36 THE EXPRESSION 'EXPENDITURE INCURRED', AS WELL AS ALLOW ANCE AND DEPRECIATION, HAS ALSO BEEN USED. FOR EXAMPLE DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTION 32, THEREFORE, THE PARLIAMENT HAS USED EXPRESSION 'ANY EXPENDITURE' IN SECTION 37 TO COVER BOTH. THEREFORE, THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MADE IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVERS AN A MOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM T HE POCKET OF THE ASSESSEE'. FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SU MMIT COURT, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TERM 'EXPENDITURE' IN CER TAIN CIRCUMSTANCES CAN ALSO ENCOMPASS 'LOSS' EVEN THOUGH NO AMOUNT IS ACTUALLY PAID OUT. EX CONSEQUENTI, THE ALTERNATIVE ARGUMENT OF THE LD. DR THAT DISCOUNT ON SHARES IS 'LOSS' AND HENCE CAN'T BE COVERED U/S 37(1), ALSO DOES NOT HOLD WATER IN T HE LIGHT OF THE ABOVE JUDGMENT. IN VIEW OF THE ABOVE DISCUSSION, WE, WITH UTMOST RE SPECT, ARE UNABLE TO CONCUR WITH THE VIEW TAKEN IN RANBAXY LABORATORIES LTD. (SUPRA) . 16. THUS IT IS A SETTLED PROPOSITION THAT AN EXPENDIT URE IS ALLOWABLE WITHOUT AN OUTLAY OR OUTGOING OF MONEY FROM THE ASSESSEE IF THE SAME IS INCURRED FOR THE BUSINESS OF THE ASSESSEE. IN CASE OF CABLE CORP ORATION OF INDIA LTD. VS. DCIT (SUPRA), THIS TRIBUNAL HAS CONSIDERED AND DECIDED A N IDENTICAL ISSUE IN PARA 5 AS UNDER:- M/S GARWARE CHEMICALS LTD. 22 | P A G E 5. WE HAVE HEARD THE RIVAL SUBMISSIONS QUA THE ISS UE OF VALIDITY OF REOPENING THE ASSESSMENT U/S 147 AS RAISED IN GROUND NO. 1. AS PE R THE TERMS OF OTS, THE INTEREST LIABILITY ON LOAN OF 4.33 CRORES HAS BEEN DISCHARGE D BY MAKING THE PAYMENT OF RS.2.17 CRORES AND THE BALANCE SUM OF RS.2.16 CRORE S HAVE BEEN DISCHARGED BY ALLOTTING EQUITY SHARES WITH FACE VALUE OF RS.10/-. THE DISCHARGE OF THIS INTEREST LIABILITY HAS BEEN MADE DURING THE PREVIOUS YEAR RE LEVANT TO THE A.Y. 2005-06 WHICH HAS BEEN CLAIMED AS DEDUCTION U/S 43B. FROM T HE PERUSAL OF THE REASONS RECORDED IT IS SEEN THAT ASSESSING OFFICER HAS ENT ERTAINED THE REASONS TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED, ASSESSME NT ON THE GROUND THAT THE PAYMENT THROUGH ALLOTMENT OF EQUITY SHARES TO IDBI IS NOT THE ACTUAL PAYMENT AND THEREFORE, DEDUCTION CLAIMED BY THE ASSESSEE IS NOT ALLOWABLE. SECTION 43B PER SE DOES NOT PROVIDE THE MANNER IN WHICH THE PAYMENT OF INTEREST IS TO BE MADE, IT ONLY PROVIDES THAT THE DEDUCTION IS ALLOWABLE ON THE SUM PAYABLE MENTION IN CLAUSES (A) TO (F), IF SUCH SUM IS ACTUALLY PAID BY THE ASSESSE E. THE SAID SECTION CREATES FICTION THAT CERTAIN LIABILITIES, IRRESPECTIVE OF THE METHO D OF ACCOUNTING FOLLOWED BY THE ASSESSEE, WOULD BE ALLOWED AS DEDUCTION ONLY ON ACT UAL PAYMENT. THE CLAUSE (D) OF THE SAID SECTION COVERS INTEREST PAYMENT TO THE BAN KS. THE INTEREST PAYMENT HAS TO BE MADE IN CASH OR IN ACTUAL TERMS OF MONEY HAS NOT BEEN SPECIFIED. THE ONLY RIDER GIVEN IN EXPLANATION 3C IS THAT, INTEREST PAYABLE I S ALLOWABLE WHEN THE INTEREST IS ACTUALLY PAID AND IT SHOULD NOT BE CONVERTED INTO L OAN OR BORROWINGS. THERE IS NO PROHIBITION OR EMBARGO THAT THE SUM ACTUALLY PAID W ILL NOT COVER PAYMENTS THROUGH ALLOTMENT OF SHARES. THE SHARES ARE TRADABL E COMMODITY AND HAS A VALUE WHICH CAN BE SOLD IN THE MARKET AS PER THE VALUE OF THE SHARE ON THE DATE OF SALE. IT IS EASILY CONVERTIBLE INTO MONEY AS AND WHEN REQUIR ED. ONCE THERE IS NO SUCH PROHIBITION U/S 43B FOR DISCHARGING THE PAYMENT OF INTEREST LIABILITY AND CLAIMING OF DEDUCTION THEREOF, BY CONVERTING THE PAYMENT THR OUGH ALLOTMENT OF SHARES, THEN HOW THE ASSESSING OFFICER SANS ANY LEGAL PROVISION OR ANY JUDICIAL AUTHORITY COULD HAVE ENTERTAINED REASON TO BE BELIEVE THAT SUCH A DEDUCTION IS NOT ALLOWABLE. ON THESE FACTS WE ARE OF THE OPINION THAT THE REASONS AS RECORDED BY THE AO, DO NOT CLOTHE HIM WITH THE JURISDICTION U/S 147 TO REOPEN THE COMPLETED ASSESSMENT. NO LEGAL PROVISION OR LEGAL PROPOSITION HAS BEEN BROUG HT TO OUR NOTICE IN SUPPORT THE GROUND RAISED BY THE ASSESSING OFFICER IN THE REAS ONS RECORDED FOR REOPENING THE CASE. THUS ON SUCH REASONS, WE HOLD THAT THE REOP ENING U/S 147 CANNOT BE VALIDLY INITIATED, AS PRIMA FACIE THERE IS NO REASON TO BE LIEVE THAT ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. THE VERY INITIATION OF PROCEEDING U/S 147 BY ISSUANCE OF NOTICE U/S 148 IS THUS BAD- IN- LAW AND ACCORDINGLY THE SAME IS HELD AND NULL AND VOID. ACCORDINGLY, GROUND NO. 1 IS ALLOWED 17. THERE ARE SERIES OF DECISIONS OF THIS TRIBUNAL ON TH E POINT THAT THE INTEREST LIABILITY STAND DISCHARGED BY ALLOTTING EQUIT Y SHARES AND ACCORDINGLY THE SAME IS ELIGIBLE FOR DEDUCTION U/S 43B . THE DECISION IN THE CASE OF RANBAXY LABORATORIES LTD. VS. ADDL. CIT (SUPRA), HAS BEEN DISTINGUISHED BY M/S GARWARE CHEMICALS LTD. 23 | P A G E THE SPECIAL BENCH. THE CIT(A) HAS RELIED UPON THE D ECISION IN THE CASE OF SRF LTD. VS. DCIT (SUPRA). AS WE HAVE ALREADY DISCUSSED TH AT IN THE SAID CASE THE TRIBUNAL FOLLOWED THE JUDGMENT IN THE CASE OF EIMCO K.C.P (SUPRA), WHEREIN THE ISSUE WAS ALLOWABILITY OF THE EXPENDITURE PRIOR TO THE BUSINESS OF THE ASSESSEE COMPANY CAME INTO EXISTENCE AND NOT THE ISS UE OF MODE OF PAYMENT. SIMILARLY THE JUDGMENT OF HONBLE DELHI HIGH COURT I N THE CASE OF CIT VS. REINZ TALBROS (P) LTD (SUPRA) IS ON THE ISSUE OF EQUITY SH ARES AGAINST TECHNICAL KNOW HOW IN NEW COMPANY. THE DECISION IN THE CASE OF ITO VS. GLITTEK GRANITES LTD. (SUPRA) THE KOLKATA BENCHES OF THIS TRIBUNAL SIMPL Y FOLLOWED THE DECISION IN THE CASE OF SRF LTD. VS. DCIT (SUPRA). IT IS PERTI NENT TO NOTE THAT THE DECISION IN THE CASE OF SURYALAKSHMI COTTON MILLS LTD. VS. AC IT (SUPRA) WAS THE FIRST DECISION OF THE TRIBUNAL ON THIS POINT WAS NOT CONSI DERED BY THE TRIBUNAL IN THE CASE OF SRF LTD. VS. DCIT (SUPRA) AND EVEN, OTHE RWISE, THE DECISION IN THE CASE OF EIMCO K.C.P (SUPRA), THE QUESTION BEFORE TH E HON'BLE HIGH COURT AND HON'BLE SUPREME COURT WAS ENTIRELY DIFFERENT AND NOT ABOUT THE MODE OF PAYMENT BUT IT WAS THE EXPENDITURE AT PRE OPERATIVE STAGE OF THE ASSESSEE COMPANY AND ONLY FOR FLOATING THE SHARE CAPITAL. 18. IN VIEW OF THE ABOVE DISCUSSION AS WELL AS DECISI ON OF SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF BIOCON LTD. VS. DCIT (SUPRA), WE ARE OF THE VIEW THAT THE INTEREST EXPENDITURE WHICH IS OTHERWISE ALL OWABLE DEDUCTION U/S 36(1)(III) BUT DEFFERED AS PER THE PROVISIONS OF SEC TION 43B CANNOT BE DISALLOWED BECAUSE OF THE REASON THAT THE PAYMENT IS NOT IN CASH BUT BY ISSUANCE OF SHARE CAPITAL. ACCORDINGLY, WE CONCUR W ITH THE VIEW OF THE TRIBUNAL IN THE CASE OF SURYALAKSHMI COTTON MILLS L TD. VS. ACIT (SUPRA), JSW STEEL LTD. VS. ACIT (SUPRA) AND CABLE CORPORATION OF INDIA LTD. VS. DCIT M/S GARWARE CHEMICALS LTD. 24 | P A G E (SUPRA) AND BY FOLLOWING THE DECISION OF SPECIAL BENC H IN THE CASE OF BIOCON LTD. VS. DCIT (SUPRA), IN OUR VIEW, THE EXPLANATI ON 3C CANNOT BE APPLIED IN CASE OF INTEREST PAYABLE, CONVERTED INTO SHARE CAPI TAL AS THE INTEREST LIABILITY STAND CEASED TO EXIST AND NOT DEFERRED AS IN CASE OF CON VERSION OF INTEREST LOAN OR BORROWING. THE RBI MASTER CIRCULAR WOULD NOT HELP THE CASE OF REVENUE AS IT WAS A GUIDELINE FOR THE BANKS OUGHT TO GIVE THE A CCOUNTING TREATMENT OF RESTRUCTURED LOAN AND INTEREST. BEFORE PARTING WITH THE MATTER IT IS PERTINENT TO N OTE THAT THE CIT(A) HAS TAKEN A WRONG ITEM OF DISALLOWANCE WHILE DIRECTING THE ASS ESSING OFFICER IN THE LAST PARA OF THE IMPUGNED ORDER AS UNDER:- 2.3.11 IN VIEW OF THE FOREGOING, I AM OF THE VIEW THAT THE APPELLANT CONTENTION CAN NOT BE ACCEPTED MAINLY ON TWO COUNTS, FIRSTLY THE R ESTRUCTURING PACKAGE NO WHERE STATES THAT THE INTEREST COMPONENT OF THE LOAN IS R ESTRUCTURED, ON THE CONTRARY FACT IS THAT LOAN IS RESTRUCTURED. SECONDLY THE SO CALLE D LIABILITY OF INTEREST DISCHARGED THROUGH THE ISSUANCE OF SHARE CAPITAL CAN NOT BE SA ID TO BE DISCHARGED IN VIEW OF AMENDMENT CARRIED OUT BY FINANCE ACT 2006, W.E.F. 1 .04.1989 INSERTING EXPLANATION 3C AND 3D TO SECTION 43B. I ALSO FIND T HAT THE LD. AO IN THE BODY OF THE MAIN ORDER U/S 143(3) OF THE ACT HAS DISALLOWED A SUM OF RS. 14 CRORES HOWEVER, WHILE COMPUTING THE INCOME HAS ADDED BACK ONLY RS. 8,82,00,000/ - ONLY. ACCORDINGLY, THE LD. AO IS DIRECTED TO MAKE. THE DI SALLOWANCES OF THE SUM OF RS. 14 CRARES ONLY AND THAT IS THE AMOUNT WHAT THE APPELLA NT IS ALSO CONTESTING BEFORE ME. 19. THE AMOUNT OF 8.82 CRORE WAS INCORRECTLY ASSUMED BY THE CIT(A) BECAUSE THE ASSESSING OFFICER HAS DISALLOWED A SUM O F RS. 8.82 CRORE ON ACCOUNT OF WRITE BACK OFF RESTRUCTURED SETTLEMENT A MOUNT WHICH WAS ALREADY DISALLOWED BY THE ASSESSEE IN THE COMPUTATION OF INC OME. APART FROM THE SAID DISALLOWANCE, THE ASSESSING OFFICER HAS ALSO DISALLO WED A SUM OF RS. 14 CRORE U/S 43B ON ACCOUNT OF CONVERSION OF INTEREST PAYAB LE INTO SHARES ISSUED TO IDBI. WE FIND THAT THESE TWO AMOUNTS OF DISALLOWANCE ARE SEPARATE AND DISTINCT AND THERE IS NO CONFUSION OR AMBIGUITY IN T HE ORDER OF ASSESSING M/S GARWARE CHEMICALS LTD. 25 | P A G E OFFICER. THE ASSESSING OFFICER TOOK THE BUSINESS IN COME AS LOSS OF RS. 8.04 CRORE PRIOR TO THE DEDUCTION OF RS. 14 CRORE. THEREF ORE, THE SAID AMOUNT WAS NOT ALLOWED IN THE COMPUTATION OF TOTAL INCOME BY T HE ASSESSING OFFICER. HENCE, WE FIND THAT THE CIT(A) HAS MISUNDERSTOOD THE COMPUTATION OF TOTAL INCOME IN THE ASSESSMENT ORDER. ACCORDINGLY, WE SET ASIDE THE DIRECTION GIVEN BY THE CIT(A) IN PARA 2.3.11 AS THE SAME IS FACTUAL LY INCORRECT. IN VIEW OF THE ABOVE FINDING WE SET ASIDE THE ORDERS OF AUTHORITIES B ELOW ON THIS ISSUE AND ALLOW THE CLAIM OF THE ASSESSEE REGARDING THE INTERE ST PAYABLE OF RS. 14 CRORE U/S 43 B. 20. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUCNED IN THE OPEN COURT ON THIS 21 ST DAY OF JANUARY 2015. SD/- SD/- ( D. KARUNAKARA RAO ) (VIJAY PAL RAO) ( ACCOUNTANT MEMBER ) (JUDICIAL MEMBER ) MUMBAI DATED 21- 01-2015 SKS SR. P.S, COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, G BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI