4 Section 37 – Expenditure incurred by the assessee in connection with the issue of FCCB is revenue in nature.

 DCIT vs. Reliance
Natural Resources Ltd.
(Mumbai)

Members : B. R. Baskaran (AM) and Ravish Sood (JM)

ITA No. 6712/Mum/2012

A.Y.: 2009-10.         Date
of Order: 11^th August, 2017

Counsel for revenue / assessee: Darse S. / Jitendra Sanghavi

FACTS 

The
assessee was engaged in the business of providing fuel and facilitation
services in various forms to power plants and also engaged in the joint venture
operations for exploration and production of coal based Methane blocks.  The assessee incurred expenses aggregating to
Rs. 13,85,96,004 in connection with the issue of foreign currency convertible
bonds (FCCB). These expenses comprised of – Agency Fees (Barclays Bank) : Rs.
10,58,188; Commission & Fronting Fees (Paid to Barclays Bank) : Rs.
13,73,38,456; and   Trustee   Maintenance  
Fees    (Deutsche Bank) :Rs.
1,99,360.

The
Assessing Officer (AO) disallowed the expenses on the ground that identical
expenses incurred in earlier years were treated as capital expenses by the AO.
He held that the expenses have been incurred in connection with increasing the
capital base of the company and not for carrying on day-to-day business
activities. He treated the expenditure of Rs. 13,85,96,004 so incurred by the
assessee as capital expenditure.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who, following the orders passed
in earlier years, allowed the appeal filed by the assessee.

Aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD 

The
Tribunal noted that the co-ordinate Bench had considered identical issue in ITA
No. 1425/Mum/2011 dated 08.07.2016 relating to AY 2007-08 and also in ITA No.
6711/Mum/2012 dated 24.08.2016 relating to AY 2008-09. It observed that while
deciding the appeal filed by the revenue for AY 2007-08, the co-ordinate bench
has followed the decision rendered by the Tribunal in the case of Prime
Focus Ltd. vs. DCIT (ITA No. 836/Mum/2011 dated 04.02.2016). In the case of
Prime Focus Ltd., the Tribunal observed that the FCCB is akin to borrowings
made by issuing debentures and both of them are different types of debt
instruments only.

Accordingly,
in the case of Prime Focus Ltd, the Tribunal held that the expenses incurred in
connection with FCCB are revenue in nature. Further, in the instant case, the
FCCB holders never had any voting rights as the same were not converted into
equity shares during that year.

Since
there was no change in facts as regards claim of the assessee and also
considering that none of the FCCB has been converted into shares during this
year also, the Tribunal, following the view taken in earlier years, held that
the CIT(A) was justified in holding that the expenditure incurred in connection
with the issue of FCCB is deductible as revenue expenditure.

As
regards the second ground of the revenue that the assessee had issued FCCB for
the purpose of meeting its working capital requirement, but the same has been
issued in a manner contrary to the permitted use, the Tribunal held that since
it has already held that the expenses incurred in connection with the issue of
FCCB is revenue in nature, it is not necessary to adjudicate the alternative
contention of the revenue.

This
ground of appeal filed by the revenue was allowed.