B.L. Chhibber, A.M. - (1.) A short but important issue raised in this appeal by the assessee is whether public issue expenses incurred on issue of partly convertible debentures is allowable as revenue expenditure.
(2.) The assessee-company offered 3 lakhs equity shares of Rs. 10 each and 1,00,000 15 per cent partly convertible debentures of Rs. 100 each to the Public during the year under appeal. The objects of the public issue specified in the Prospectus issued by the assessee-company were as follows : (1) To finance the capital expenditure of the company; (2) To supplement the company's long-term resources for working capital; and (3) To obtain listing of the equity shares and debentures of the company on the stock exchange. The assessee incurred aggregate expenditure of Rs. 8,00,132 on these public issues. The entire expenditure of Rs. 8,00,132 was bifurcated in the ratio of the amount of shares and debentures to the total public issue. The ratio worked out to 77 : 23 and accordingly 77 per cent of the expenditure was apportioned to debentures and 23 per cent of the expenditure was apportioned to equity shares. The expenditure relating to debentures amounting to Rs. 3,78,233 was claimed as deduction permissible under s. 37(1) of the IT Act and the expenditure relating to equity shares amounting to Rs. 1,12,979 was considered as preliminary expenditure. It was submitted before the AO that in respect of each debenture of the face value of Rs. 100, Rs. 30 was convertible into 3 shares of Rs. 10 each on 30th June, 1987, and the balance portion of Rs. 70 was non-convertible and was redeemable in the 6th, 7th and 8th years of issue. The AO while completing the assessment, disallowed the debenture issue expenditure of Rs. 3,78,233 on the ground that the expenditure was incurred to increase the share capital of the company and hence the same was not allowable as deduction. The assessee appealed to the CIT(A). Relying on the principles laid down by the Supreme Court in the case of India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC), the assessee's representative submitted that the apex Court had observed in the aforesaid case that procuring of capital by way of issue of shares was different from obtaining loans through debentures. Reliance was further placed on the following High Court decisions : (1) Hindustan Gas & Industries Ltd. vs. CIT (1979) 117 ITR 549 (Cal); (2) Brooke Bond India Ltd. vs. CIT (1983) 140 ITR 272 (Cal); (3) CIT vs. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar); (4) Mohan Meakin Breweries Ltd. vs. CIT (1979) 117 ITR 505 (HP); (5) Bharat Carbon & Ribbon Mfg. Co. Ltd. vs. CIT (1981) 127 ITR 239 (Del) and (6) Vazir Sultan Tobacco Co. Ltd. vs. CIT. The learned CIT(A) held that the expenditure incurred on the convertible portion of Rs. 30 each was in the nature of capital expenditure because 30 per cent of the debenture issue would go to augment the share capital of the company and the balance 70 per cent could be treated as loan. In support of his findings, he relied upon the following decisions : (a) CIT vs. Aditya Mills (1990) 181 ITR 195 (Raj); (b) Mohan Meakin Breweries Ltd. vs. CIT (supra); (c) Bharat Carbon & Ribbon Mfg. Co. Ltd. vs. CIT (supra) and (d) Bombay Burmah Trading Corpn. Ltd. vs. CIT (1984) 145 ITR 793 (Bom). Thus, the learned CIT(A) gave part relief.
(3.) SHRI S. N. Soparkar, the learned counsel for the assessee submitted that it was true that part of the borrowed funds were going to be converted into equity shares at a future date. That by itself, however, cannot change the characteristics of the receipts. Borrowings continued to remain borrowings till the end of the year. If that be so, expenditure incurred by the assessee would certainly be regarded as expenditure incurred on borrowing the funds. According to the learned counsel for the assessee what might happen at a future date is an issue which is not relevant for the purpose of deciding this controversy. It was true that at the end of the specific period (10 months), part of the debentures would be, as a matter of fact, were converted into shares. However, till the date of conversion the said amount was only a debt. Relying upon the judgment of the Supreme Court in the case of India Cement Ltd. vs. CIT (supra), the learned counsel for the assessee submitted that the assessee was entitled to the deduction of the entire expenditure attributable to the issue of partly convertible debentures (PCDs). According to the learned counsel the Hon'ble Supreme Court in the case of India Cement Ltd. (supra) categorically laid down that such an expenditure incurred for creating a debt would be allowable expenditure. And hence it is irrespective of the length for which the debt would be available. The learned counsel for the assessee further submitted that whenever a term loan is raised, the benefit of the same is available for a number of years, and even then the Department does not hold the expenditure for raising the term loan as a capital expenditure or whenever such attempt is made by the Department the Courts have always held that such an expenditure is revenue expenditure. In support of his arguments he relied upon the following decisions : (1) Jeevanlal (1929) Ltd. vs. CIT (1969) 74 ITR 563 (SC); (2) Orissa Cement (P) Ltd. vs. CIT (1969) 73 ITR 14 (Del); (3) Addl. CIT vs. C. S. Thacker (1983) 142 ITR 438 (Pat); (4) CIT vs. Oswal Spg. & Wvg. Mills (1986) 160 ITR 426 (P&H) and (5) CIT vs. Tumes Corpn. Ltd. (1989) 179 ITR 219 (MP).;