Lawyer

My photo
New Delhi, New Delhi, India
Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense...
Powered By Blogger

Monday, September 17, 2012

issuance of shares in lieu of interest liability is not an allowable expenditure

summary: The  liability  was  discharged  by way  of  issuance  of  shares.  When  the  assessee  issues  shares  the assessee  does  not  incur  any  expenditure  as  the  assessee  is  not  to make  any  payment  legally  towards  shares  issued.  The  shares cannot be equated with debentures, which is purely by way of loan and  the  same  are  required  to  be  repaid  on  maturity.  However,  in respect  of shares  the  company  is  under  no  obligation  to  make  any payment  in  respect  of  such  shares  where  share  holders  accept payment  of  pro  rata  dividend  when  such  dividend  is  declared. Thus  by issuance  of  shares  the  assessee  cannot  be  said  to  have incurred  any  expenditure  and  hence  issuance  of  shares  in  lieu  of interest  liability  cannot  be  considered  to  have  been  payment towards expenditure. Accordingly the interest liability discharged is  not  an  allowable  expenditure.


IN THE INCOME TAX APPELLATE TRIBUNAL, 
KOLKATA ‘A’ BENCH, KOLKATA 

Before Shri Pramod Kumar (Accountant Member),  
and Shri George Mathan (Judicial Member) 

I.T.A. No.: 1069/ Kol. / 2010 

Assessment year : 2005-06 

Income Tax Officer,……………………….…………. Appellant 


      -Vs.- 

M/s. Glittek Granites Ltd,……………….......……… Respondent


O R D E R 

Per Pramod Kumar:          
1.  By  way  of  this  appeal,  the  Assessing  Officer  has  called  into question correctness of Commissioner of Income Tax (Appeals)’s order dated  9th February,  2010,  in  the matter  of  assessment  u/s. 143(3) of the Income Tax Act, 1961 for the assessment year 2005-06, on the following grounds :- 

(1) Ld. CIT(A) erred on law and facts by deleting addition of Rs.68,18,318/- u/s. 43B of the I.T. Act. 

(2)  Ld.  CIT(A)  erred  on  law  and  facts  by  stating  that conversion of interest payable in equity shares can be treated as actual payment u/s. 43B. 

2.  The issue in appeal lies in a narrow compass of material facts. In the course of the assessment proceedings, the Assessing Officer noticed that  while  the  assessee  has  claimed  deduction  of Rs.68,18,318/-  in respect of interest paid  to  the  IDBI, no  such  amount was  actually paid though  these interest  dues  were  converted  into  equity  shares  of  the assessee-company.  The  Assessing  Officer  was  of  the  view  that  since “the  interest  of  Rs.68,18,318/-  was  neither  paid  during  the  financial  year relevant  to  the  assessment  year,  nor  within  the  due  date”,  the  interest cannot be allowed as deduction under section 43B. Aggrieved, assessee carried the matter in appeal before the CIT(Appeals), who reversed the stand of the Assessing Officer and observed as follows :- 

“I have considered the above submission  of the assessee. It is seen that the provision of section 43B(e) clearly mentions that  any  interest  payable  by  the  assessee  on  loan  taken  from  a scheduled  bank  can  be  allowed  only  when  it  is  actually  paid. However,  as  per  the  proviso  u/s.43B  deduction  can  be  allowed in  the  previous  year  in  which  the  liability  to  pay interest  was incurred even if the actual payment is made before the due date of filing the return. In the case of the assessee the real question to consider  is  whether  conversion  of  ‘interest  payable’  into equity share can be considered as actual payment of interest or not.  In  this  respect  it  may  be  noted  that  u/s.43B  an Explanation 3D has been introduced by Finance Act,2006 with retrospective  effect  from  1.4.1997  which  says  that  conversion of interest payable into loan or advance shall not be deemed as actual  payment.  It  can  be  seen  that  this restriction  is  for conversion  to  loan  or  advance.  However,  in  case  of  conversion into  shares the position is little different,  When the  shares are allotted  by  a  company  to  a  shareholder  it  means  that  the company gives to the shareholder something in lieu of the share application  money  given  by  him.  This  something  is  a  share  in the  ownership  of  the  company.  On  the  other hand, in case  of  a loan  the  loanee  only  takes  the  money  from  the  lender  but  does not  give  him,  anything  in  return..  This  shows  that  when interest  payable  has  been  converted  into  equity  shares  of  the assessee-company  it  means  in  lieu  of  the  interest  payable  the assessee  has  given  a  part  of  the  ownership  of  the  company  to the lender. Thus the payment of interest may not be in cash but it  is  in  kind  that  is  in  terms  of  the  equity  shares  of  the company which have been  accepted by the lending bank. It can also  be  seen  that  to  the  extent  of  interest  payable  converted into equity the lending bank has reduced the interest receivable from  the  assessee.  From  all  this  discussion  it  can  be  said  that conversion of interest payable into equity shares can be treated as  actual payment  and it  can  qualify  for  deduction u/s.43B.  It may  be  noted  that  if  the  deduction  for  interest  payment  by conversion  into  equity  shares  is  not  allowed  to  the  assessee-company  at  this  moment  it  will  not  be  allowable  at  any  other time which will be injustice. Hence  I  am  of  the  opinion  that  the  assessee  can  be allowed  deduction  for  interest  on  term  loan  amounting  to Rs.68,18,318/-  and  disallowance  by  the  A.O.  in  this  regard  is deleted”

3.  Aggrieved  by  the  relief  so  granted  by  the  CIT(Appeals),  the Assessing Officer is in appeal before us. 

4.  Learned  counsel’s  basic  contention  is  that  conversion  of  interest payable  into  equity  is  a  mode  of  payment,  and  that,  in  the  light  of Hon’ble  Supreme  Court’s  judgment  in  the  case  of  Raja  Mohan  Raja Bahadur –vs.-  CIT  (66  ITR 378), transfer  of  approved securities  should be  taken  as  actual  payment  for  cash.  A  reference  is  also  made  to Hon’ble Madras High Court’s judgment in the case of CIT –vs.- Vellore Electric  Corporation  Ltd.  (235  ITR  289)  in  support  of  the  same proposition.  She  has  also  relied  upon  CBDT  Circular  No.  7  dated  17th July,  2006  in  support  of  the  stand  that  such   a  discharge  of  interest liability,  i.e.  by  way  of  issuance  of  equity  capital  thereof,  will  also  be covered  by  the  expression  ‘actual  payment’  for  the  purpose  of  section 43B.  However,  when  her  attention  is  drawn  to  a  coordinate  bench decision in the case of SRF Ltd. –vs.- DCIT (39 SOT 1), which holds that “by  issuance  of  shares  the  assessee  cannot  be  said  to  have  incurred  any expenditure  and  hence  issuance  of  shares  in  lieu  of  interest  liability  cannot be  considered  to  have  been  payment  towards  expenditure”,  she  merely reiterate  her  submissions.  She,  however,  fairly  admits  that  the  said 
decision of the coordinate bench has not been reversed, nor there is any other  judicial  precedent  from  a  higher  forum  directly  on  the  issue. Learned  Departmental  Representative,  on  the  other  hand,  points  out that all these arguments are not relevant as the issue is covered against the assessee by a direct decision of the coordinate bench in the case of SRF Ltd. (supra). He also points out that there is significant difference in discharging a debt by transferring securities held by an assessee and discharging a debt by issuing own capital. While the former, according to  the  learned  Departmental  Representative,  could  be  treated  as  an expenditure  inasmuch  as  asset  of  the  assessee  is  diminished,  in  the later  situation  there  is  nothing  being  given  by  the  assessee  at  all-  it’s only an increase of equity capital.  

5.  Having  regard  to  the  rival  contentions,  and  having  perused  the material on record, we find that the issue in appeal is squarely covered in favour of the Assessing Officer by a coordinate bench decision in the case of SRF Ltd. (supra) which, inter alia, observes as follows :-  

“20.  We  have  considered  the  rival  submissions.  The  claim  is  in respect of interest on amount borrowed by the erstwhile company namely  Flowmore  Polyesters  Ltd.,  which  amalgamated  with  the appellant  company  during  the  year.  There  is  no  dispute  to  the fact  that  interest  payable  by  the erstwhile  company  was  not claimed and allowed in terms of section 43B(d) since the amount was  not  paid  by  the  said  company.  In  view,  of  the  scheme  of amalgamation  Flowmore  Polyesters  Ltd.  has  merged  into  the assessee  company.  Therefore,  if  the  assessee  company  discharges such  liability  of interest, it  will  amount  to  payment  thereof  and hence  in  terms  of  section  43B  will  be  allowed  in computing  the income of that previous year in which such sum is actually paid. It  is  stated  that  the  liability  for  payment  of  interest  has  been discharged  by  way  of  issuance  of  shares.  As  per  Explanation  3C to  section 43B,  if any part  of  interest  liability  is  converted into a  loan  or  a  borrowing,  it  will  not  amount  to  actual  payment thereof.  Explanation  3C  to  section  43B  has  been  inserted  with retrospective  effect  from  1.4.1989  and  hence  is  applicable  to  the year  in  appeal  also.  Therefore,  we  primarily  agree  with  the assessee  if  the  amount  is  paid  by  the  assessee,  the  same  will  be an allowable  deduction.  However,  in  the  present  case  it  is  seen that  the liability is discharged  by  way  of  issuance  of  shares  and not  actual  payment  by  way  of  legal  tender.  What  is  allowable under section 43B is in respect of deduction otherwise allowable under  this  Act.  The  deduction  allowable  under  the  act  is  in respect  of  various  sums  referred  to  in  sections  30  to  37  of  the Act. Interest on any loan or borrowing is one such sum referred in  section  36(i)(iii)  of  the  Act.  Therefore,  for  the  purpose  of allowability, the amount should be in the nature of expenditure. The  word  “expenditure”  is  not  defined  under  the  Act.  Hon’ble Supreme  Court  in  the  case  of  Indian  Molasses  Company  P.  Ltd. Vs.  CIT,  37  ITR  66  held  that  expenditure  is  equal  to  ‘expense’ and  ‘expense’  is  money  laid  out  by  calculation  and  intention though  in  many  uses  of  the  word  this  element  may  not  be present,  as  when one  speaks  of  a  joke  of  another’s  expense.  But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning which is relevant. ‘Expenditure’ is thus, what  is  ‘paid  out  or  away’  and  is  something  which  has  gone irretrievably. Once  again  Hon’ble  Supreme  Court  in  the  case  of  CIT  vs. Nainital  Bank  Ltd.,  62  ITR  638,  held  that  in  its  normal meaning,  the  expression  ‘expenditure’  denotes  ‘spending’  or ‘paying  out  or  away’,  i.e.  something  that  goes  out  of  the  coffers of  the  assessee.  A  mere  liability  to  satisfy  an  obligation  by  an assessee  is  undoubtedly  not  ‘expenditure’.  It  is  only  when  he satisfies  the  obligation  by  delivery  of  cash  or  property  or  by settlement  of  accounts,  that  there  is  expenditure.  But expenditure  does  not  necessarily  involve  actual  delivery  of  or parting with money or property. If there are cross-claims-one by the  assessee  against  a stranger  and  the  other  by  the  stranger against  the  assessee  and  as  a  result  of  accounting  the  balance due  only  is  paid,  the  amount  which  is  debited  against  the assessee  in  the  settlement  of accounts  may  appropriately  be termed ‘expenditure’ within the meaning of sec. 37(1). However, a mere forbearance to realize a claim is not ‘expenditure’. Hon’ble  Delhi  High  Court  in  the  case  of  B  K  Khanna  & Co. P Ltd Vs CIT, 247 ITR 705 held that ‘spending’ in the sense of  “paying  out  or  away  of money  is  the  primary  meaning  of ‘expenditure’. The word ‘expenditure’ means what is paid out or away and is something which is gone irretrievably. 

Hon’ble Supreme Court in the case of Eimco K C P Ltd Vs CIT, 242 ITR 659, was considering the claimof assessee towards expenditure on technical know-how. In the said case the assessee was  a  joint  venture  between  an  American  company  and  an Indian company.  The  authorized capital of the  assessee company was  Rs.100  lacs.  Each  of  the  promoters  agreed  to  subscribe Rs.4,70,000/-  out  of  which  each  would  have  to  pay  initially  a sum  of  Rs.2,80,000/-  towards  its  contribution.  The  share  of American  promoter  was  contributed  by  way  of  technical  know-how  valued  at  a  sum  of Rs.2,35,000/-  and  in  lieu  of  which  the assessee  allotted  equity  shares.  The  same  was  considered  as capital expenditure. The Hon’ble Supreme Court held - 

“That  what  in  effect  was  done  by  the  appellant  in allotting equity shares of Rs.2,80,000 to Eimco, was to reimburse  the  contribution  by  Eimco  by  way  of  know-how,  which  could  never  be  treated  as  expenditure, much  less  an  expenditure  laid  out  wholly  and exclusively  for  purposes  of  the  business  of  the appellant.  It  was  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.  The  High  Court  had  rightly concluded  that  allotment  of  equity  shares  by  the appellant  to  Eimco,  in  the  circumstances  of  the  case, could not be termed as expenditure, much less revenue expenditure.” Similar  view  was  held  by  the  Hon’ble  Delhi  High  Court  in  the case of CIT vs. Reinz Talbros Pvt. Ltd, 252 ITR 637 wherein the Hon’ble Delhi High Court speaking through Shri Arijit Pasayat, Hon’ble Chief Justice (as his Lordship then was), held - 

“A  similar  question  came up before  the  apex  court  in  Eimco  K C  P  Ltd  vs  CIT  [2000]  242  ITR  659.  It  was  held  that  where  a foreign  company  gives  a  technical  know-how  and  obtains equity shares  in  the  new  company,  the  amount  attributable  to technical  know-  how  was  not  revenue expenditure  under section  37  of  the  Act.  However,  it  was  treated  to  be  of  capital nature. It is clearly borne out from the various orders that the assessee  was  a  new  company.  That  being  the  position,  the  Tribunal  was  not  justified  in  holding  that  the  expenditure  in question was revenue in character.” 

In  the  present  case  it  is  seen  that  the  liability  was  discharged  by way  of  issuance  of  shares.  When  the  assessee  issues  shares  the assessee  does  not  incur  any  expenditure  as  the  assessee  is  not  to make  any  payment  legally  towards  shares  issued.  The  shares cannot be equated with debentures, which is purely by way of loan and  the  same  are  required  to  be  repaid  on  maturity.  However,  in respect  of shares  the  company  is  under  no  obligation  to  make  any payment  in  respect  of  such  shares  where  share  holders  accept payment  of  pro  rata  dividend  when  such  dividend  is  declared. Thus  by issuance  of  shares  the  assessee  cannot  be  said  to  have incurred  any  expenditure  and  hence  issuance  of  shares  in  lieu  of interest  liability  cannot  be  considered  to  have  been  payment towards expenditure. Accordingly the interest liability discharged is  not  an  allowable  expenditure.  This  ground  is accordingly dismissed”.       
   
6.  The  aforesaid decision  is neither reversed  by  a  higher  forum nor there is any other binding judicial precedent to the contrary. We are in respectful agreement with the views so stated by the coordinate bench. As  regards  learned  counsel’s  erudite  agreements,  suffice  to  say  that there is indeed a significant difference in discharging a debt by giving away an asset, such as securities, and  by issuing capital. The latter, in our  considered  view,  would  not  amount  to  payment.  As  regards  her reliance  on  CBDT  Circular  No.  7  also,  we  find  no  substance.  While  it recognizes  the  fact  that  liability  can  be  discharged  in  a  number  of ways,  it  does  emphasize  the  fundamental  principle  that  unless  ‘actual payment’  is  made,  the  restriction  placed  in  section  43B  will  hold  good and deduction cannot be allowed. In view of these discussions, as also bearing  in  mind  entirety  of  the  case,  we  uphold  the  grievance  of  the Assessing Officer and restore the disallowance of Rs.68,18,318/-. 

7.  In the result, the appeal filed by the Revenue is allowed. 

Order pronounced in the open Court on 14th day of September, 2012.


No comments:

Post a Comment

Followers