Commissioner of Income Tax vs Sukhjit Starch and Chemicals Ltd.

Adarsh Kumar Goel, J.—The following question of law has been referred for opinion of this court by the income tax Appellate Tribunal, Amritsar Bench, Amritsar, arising out of its order dated January 19, 1988 in I.T.A. No. 45 of 1987, for the assessment year 1983-84 u/s 256(1) of the income tax Act, 1961 (in short, "the Act"): Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in holding that the expenditure incurred on the issue of debentures is an allowable expenditure u/s 37 of the income tax Act, 1961 when 20 percent, of the funds raised through debentures were to be compulsorily converted into equity share capital after one year from the date of allotment of debentures?

The assessee is a public limited company and issued secured convertible debentures. It had taken permission from the Controller of Capital Issues to convert a part of the debentures into equity capital. In the process of issuing the debentures, the assessee had incurred expenditure which was claimed as permissible deduction. The Assessing Officer did not allow the claim of the assessee by treating the expenditure as capital expenditure on the ground that the debentures will be later converted into shares. The Commissioner of income tax (Appeals) upheld the claim of the assessee holding that the same was incidental to carrying on of business. The Tribunal affirmed the said view. Reliance was, inter alia, placed on the judgment of the hon''ble Supreme Court in India Cements Ltd. Vs. Commissioner of Income Tax, Madras, , holding that it was irrelevant to consider the object for which loan was obtained by issuing debentures.

We have heard learned counsel for the parties.

Learned counsel for the assessee submits that the Rajasthan High Court in Commissioner of Income Tax Vs. Secure Meters Ltd., following the judgment of the Calcutta High Court in Commissioner of Income Tax Vs. East India Hotels Ltd., , held that any expenditure incurred for raising loan by convertible debentures was admissible. The effect of debentures being converted to shares could be taken into account in the year in which the same are converted and it has no effect on the expenditure incurred in the current year. He also refers to paragraph 8 in the judgment of the Rajasthan High Court in Commissioner of Income Tax Vs. Secure Meters Ltd., to the effect that the issuance of convertible debentures was in fact a mode of repayment by way of issuance of shares.

No contrary view has been shown on behalf of the Revenue. The expenditure on issue of debentures is incurred in the process of carrying on business as raising of funds itself is necessary for running, of business. Learned counsel for the Revenue has not been able to show any reason why the said expenditure could not be allowed merely because ultimately the debentures may be converted to shares and become part of share capital.

Accordingly the question referred is answered against the Revenue and in favour of the assessee. The reference is disposed of accordingly.