Expenditure on Conversion of Convertible Debentures into Equity Shares is ‘Capital’ in Nature: ITAT [Read Order]

Expenditure - conversion of Convertible Debentures - equity shares - Capital - ITAT - Taxscan

The Income Tax Appellate Tribunal (ITAT), Ahmedabad bench has held that the expenditure incurred on conversion of convertible debentures into equity shares would amount to capital expenditure and therefore, the same cannot be deductible from the total income of the assessee under the provisions of the Income Tax Act, 1961.

The assessee approached the Tribunal challenging the decisions of the Assessing Officer and the first appellate authority disallowing the expenditure incurred in respect of “documents and stamp charges” of Rs.39,27,000/-on account of increase in authorized capital and treated the same as capital expenditure. Assessee alternatively pleaded that claim of deduction of impugned expenditure otherwise may be allowed under section 35D of the Income Tax Act, 1961.

The Tribunal bench comprising ITAT Vice President Rajpal Yadav and Accountant Member Waseem Ahmed observed that the claim of the assessee is that since capital base has been increased due to conversion of debenture for meeting working capital of the assessee-company, the expenditure for such conversion ought to be allowed as revenue expenditure.

“As observed by the CIT(A), facts of the case of the assessee clearly indicate that portion of convertible debenture was converted into equity shares and assessee company had got enduring benefits therefrom and therefore, the expenditure incurred by the assessee on conversion of convertible debentures into equity shares has to be treated as capital expenditure. For which, the CIT(A) relied upon the judgment of Hon’ble Supreme Court in the case of Brooke Bond India Ltd., 225 ITR 798. Thus, we are of the view that the Revenue authorities have taken a correct view of the matter while disallowing claim of the assessee,” the Tribunal said.

Withregard to the alternate claim of the assessee under section 35D of the Act, the Tribunal held that the Section 35D of the Act does not contemplates allowance of expenditure incurred after the commencement of business that too for the expenditure incurred for conversion of debenture into equity share capital.

“As per Section 35D, any capital expenditure incurred before the commencement of operation of specified business then such expenditure is allowable as a deduction under the income tax in 5 equal annual installments subject to the fulfilment of different conditions given under the Income Tax Act. That was not the case on our hand for the reasons narrated above. The Revenue authorities is, therefore rightly rejected this alternative claimof the assessee,” it concluded.

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