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.