Whether, the expenditure incurred by the assessee on the issuance of compulsory convertible debentures is allowable as a revenue expenditure?

Whether, the expenditure incurred by the assessee on the issuance of compulsory convertible debentures is allowable as a revenue expenditure?

Ashima Syntex Ltd. vs Assistant Commissioner Of … on 24 March, 2006

Facts of the Case-Whether, the expenditure incurred by the assessee on the issuance of compulsory convertible debentures is allowable as a revenue expenditure?

The assessee made a Public offer of 17,33,000 Compulsory convertible debentures at the rate of Rs.75 per debenture. It was consisting of two part – Part A Rs. 35 to be compulsorily converted into one equity share of the face value of Rs. 10 each at a premium of Rs. 25 per share on the date of allotment of the debenture and Part-B of Rs. 40 to be compulsorily converted into one equity share of the face value of Rs. 10 each at a premium of Rs. 30 per share on the expiry of 15 months from the date of allotment of the debenture.

He has stated that the debentures were issued for growth and development of Business.

The assessee has incurred Rs. 77,26,999 for issuing these debentures. These expenses were set off against the share premium in the books of account and was claimed as deduction for computation of income, as per Income Tax Act 1961 by depending on the supreme court judgement in the case of Indian Cements ltd VS CIT.

Court Observation– The Assessing officer disallowed the expenditure taken as deduction by the assessee ( As taken reference from Indian Cements ltd VS CIT) on the ground that the facts of the case are different when compared to Indian Cements ltd VS CIT. The case in which the assessee relied on, consisting of a loan taken by them which will be subsequently repaid but here the assessee issued compulsory convertible debentures which will be subsequently converted into Equity share capital of the company. Therefore, the Assesing officer disallowed the debenture issue expenses of Rs. 77,26,999 as it cannot be claimed as revenue expenditure. The Assesing officer also stated that the compulsory convertible debenture and issue of shares are similar in process with respect of raising of funds as in both the scenarios the subscribers will not get the money back, but it will be invested in the funds of the company.

Final Conclusion- Taking the facts of the case and reference from other case laws the Asseing Officer finally concluded that, issue of compulsory convertible debenture is similar to Issue of Equity share capital. The argument stated by the assessee that the expenditure related to conversion partly after 15 months could be considered as revenue expenditure has been ruled out , as this money received can be considered as Share Application money pending allotment.

As a Final Outcome, the assessing officer dismissed the appeal made by the assessee.