N/s Fludomat Ltd., V. The ACIT, 3(1),

ITA 788/IND/2006

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6028 (ITAT-INDORE)
• Duration Of Justice: 3 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 02-03-2010
• Assessment Year: misc
• Appeal Filed On: 28-12-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN
• Assessee Lawyers: C P RAWKA

Judgement Text

PAGE 1 OF 5 - I.T.A.NO. 788/IND/2007- FLUDOMAT LI MITED, INDORE IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI V.K. GUPTA, ACCOUNTANT MEMBER PAN NO. : N.A. I.T.A.NO.788/IND/2006 A.Y. : 2003-04 M/S.FLUDOMAT LIMITED, ACIT, 117, NAVNEET DARSHAN, VS 3(1), 16/2, OLD PALASIA, INDORE. INDORE. APPELLANT RESPONDENT APPELLANT BY : SHRI C.P.RAWKA, FCA RESPONDENT BY : SMT. APARNA KARAN, SR. DR DATE OF HEARING : 02.03.2010 O R D E R PER V.K. GUPTA, A.M. THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF ORD ER OF THE LD. CIT(A)-I, INDORE, DATED 10.11.2006, FOR THE ASSESSM ENT YEAR 2003-04. 2. WE HAVE HEARD BOTH THE PARTIES AND HAVE ALSO PERUSE D THE MATERIAL AVAILABLE ON RECORD. 3. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE D ECISION OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS. 47 ,09,230/- MADE BY THE ASSESSING OFFICER U/S 43-B ON ACCOUNT OF CONVER SION OF INTEREST ON LOAN BEING CONVERTED INTO SHARE CAPITAL OF THE ASSE SSEE. PAGE 2 OF 5 - I.T.A.NO. 788/IND/2007- FLUDOMAT LI MITED, INDORE 4. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE COMPANY HAD BORROWED FUNDS FROM I.F.C.I. WHERE ON INTEREST ON TERM LOAN AMOUNTING TO RS. 47,09,230/- HAD ORIGINALLY BEEN CLAIMED AS DEDUCTIO N IN RESPECTIVE ASSESSMENT YEARS AND HAD ALSO BEEN OFFERED AS INCOM E IN ASSESSMENT YEAR 2000-01 AS PER SETTLEMENT WITH IFCI. HOWEVER, SUBSE QUENTLY, IN ASSESSMENT YEAR 2003-04, THE TERMS AND CONDITIONS O F RE-STRUCTURING OF TERM LOAN WAS AGAIN NEGOTIATED WHICH RESULTED INTO ALLOTMENT OF EQUITY SHARES BY THE ASSESSEE TO IFCI AGAINST SUCH INTERES T PAYABLE. THE ASSESSEE DID SO AND CLAIMED THE EXPENDITURE. THE A.O. AFTER REFERRING TO EXPLANATION 3C AND 3-D HELD THAT INTEREST AMOUNT CO NVERTED INTO EQUITY COULD NOT BE EQUATED WITH THE ACTUAL PAYMENT WITHIN THE MEANING OF PROVISIONS OF SECTION 43B. HE FURTHER HELD THAT SIN CE THE PAYMENT OF INTEREST HAD BEEN WAIVED, HENCE, IT WAS A CASE OF C ESSATION OF LIABILITY. THE ASSESSEE, BEING AGGRIEVED, PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHEREIN IT WAS EMPHATICALLY ARGUED THAT THE PROVISI ONS OF EXPLANATION 3- C AND 3-D WERE NOT APPLICABLE AS IN THE PRESENT CAS E, INTEREST PAYABLE HAD BEEN CONVERTED INTO EQUITY CAPITAL OF THE COMPANY A ND SUCH SHARES HAD BEEN LISTED AND, THEREFORE, IT WAS NOT A CASE OF CO NVERSION OF INTEREST PAYABLE EITHER INTO LOAN OR BORROWING OR ADVANCE. T HE LD. CIT(A), HOWEVER, AFTER REFERRING TO THE CIRCULAR NO. 7 OF 2 006 ISSUED BY THE C. B. D. T. ON 17.7.2006, HELD THAT IN THIS CIRCULAR, THE BOARD HAD CATEGORICALLY PAGE 3 OF 5 - I.T.A.NO. 788/IND/2007- FLUDOMAT LI MITED, INDORE THAT CONVERSION OF INTEREST PAYABLE BY WHATEVER NAM E CALLED WILL BE ELIGIBLE FOR DEDUCTION IN THE YEAR IN WHICH SUCH CO NVERTED INTEREST IS ACTUALLY PAID. HE FURTHER HELD THAT IF THE APPELLAN TS CONTENTIONS WERE ACCEPTED, THEN IT WOULD BE AGAINST THE SPIRIT AND L EGISLATIVE INTENT IN ENACTING THE AFORESAID PROVISIONS OF SECTION 43-B R EAD WITH EXPLANATION 3-C & 3-D THERETO. ACCORDINGLY, THE LD. CIT(A) CONF IRMED THE ACTION OF A.O. AGGRIEVED BY THIS, THE ASSESSEE IS IN APPEAL B EFORE US. 5. THE LEARNED COUNSEL FOR THE ASSESSEE NARRATED THE F ACTS, REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES, BESIDES SUBMITTING THAT SUCH SHARES HAD BEEN ISSUED FULLY P AID UP AT PAR TO M/S. I.F.C.I. LIMITED, WHICH WERE LISTED ON THE STOCK EX CHANGE AND IFCI MADE PROFIT BY DISPOSING OF SUCH SHARES IN THE OPEN MARK ET. THE LEARNED COUNSEL ALSO REFERRED TO PAGES 18 TO 23 OF THE PAPE R BOOK CONTAINING DOCUMENTARY EVIDENCES AS REGARDS TO ALLOTMENT OF SH ARES TO THE I.F.C.I ON PREFERENTIAL BASIS. 6. THE LD. SENIOR A.R., ON THE OTHER HAND, PLACED STR ONG RELIANCE ON THE ORDERS OF THE REVENUE AUTHORITIES AND POINTE D OUT SPECIFICALLY THAT SUCH DISALLOWANCE WAS JUSTIFIED FOR THE REASON THAT IT WAS NOT A CASE OF ACTUAL PAYMENT AS WELL AS THERE WAS CESSATION OF LI ABILITY. 7. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. PAGE 4 OF 5 - I.T.A.NO. 788/IND/2007- FLUDOMAT LI MITED, INDORE 8. FOR THE SAKE OF READY REFERENCE, WE REPRODUCE EXPLA NATION 3-C & 3-D AS UNDER :- EXPLANATION 3C. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY 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. (B) AFTER EXPLANATION 3C AS SO INSERTED, THE FOLLOW ING EXPLANATION SHALL BE INSERTED AND SHALL BE DEEMED T O HAVE BEEN INSERTED WITH EFFECT FROM THE 1 ST DAY OF APRIL, 1997, NAMELY :- EXPLANATION 3D. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT A DEDUCTION OF ANY SUM, BEING INTEREST PAYABLE UNDER CLAUSE ( E ) 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 ADVANCE SHALL NOT BE DEEMED TO HAVE BEEN ACTUALLY PAID. 9. THE BARE PERUSAL OF THESE EXPLANATIONS REVEALS THAT THESE EXPLANATIONS ARE APPLICABLE ONLY WITH REFERENCE TO CONVERSION OF INTEREST PAYABLE EITHER INTO LOAN OR BORROWING OR ADVANCE. H ENCE, IN OUR OPINION, THESE EXPLANATIONS ARE NOT APPLICABLE, IN THE PRESE NT CASE, BECAUSE IT IS AN UNDISPUTED FACT BEFORE US THAT INTEREST PAYABLE BY THE ASSESSEE HAS BEEN CONVERTED INTO EQUITY SHARES ALLOTTED TO IFCI ON PR EFERENTIAL BASIS. WE ARE FURTHER OF THE VIEW THAT THIS CONTROVERSY PERHAPS W OULD NOT HAVE ARISEN AT PAGE 5 OF 5 - I.T.A.NO. 788/IND/2007- FLUDOMAT LI MITED, INDORE ALL IF THE ASSESSEE WOULD HAVE ISSUED A CHEQUES TO THE IFCI FOR THE IMPUGNED AMOUNT AND THE IFCI WOULD HAVE PAID THE SA ME AMOUNT FOR ALLOTMENT OF SHARES. WE FURTHER FIND AS PER THE PRO VISIONS OF COMPANIES ACT, SHARES CAN BE ALLOTTED FOR CONSIDERATION IN KI ND. HENCE, PASSING OF A BOOK ENTRY GIVING EFFECT TO SUCH SETTLEMENT MEETS T HE REQUIREMENT OF THE PROVISIONS OF THE COMPANIES ACT. HENCE, IT CANNOT B E SAID THAT THE SUM HAS NOT ACTUALLY BEEN PAID IF THE ISSUE IS ANALYZED IN THIS MANNER AS A WHOLE. WE FURTHER FIND NO MERIT IN THE CONTENTION O F THE REVENUE THAT IT IS A CASE OF CESSATION OF LIABILITY BECAUSE IN THAT SI TUATION, THE IFCI WOULD NOT HAVE BEEN ALLOTTED SHARES OR SHOULD HAVE BEEN A LLOTTED SHARES FOR INDEPENDENT MONETARY. ACCORDINGLY, IN VIEW OF THE A BOVE FACTS AND LEGAL POSITION, WE HOLD THAT THE ORDER OF THE LD. CIT(A) IS NOT CORRECT IN LAW AND, THEREFORE, WE REVERSE THE SAME AND DIRECT THE A.O. TO ALLOW THE CLAIM OF THE ASSESSEE U/S 43-B OF THE ACT. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STA NDS ALLOWED. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 5 TH MARCH, 2010. SD/- SD/- (JOGINDER SINGH) (V. K. GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 5 TH MARCH, 2010. CPU* 233