INCOME TAX OFFICER Vs. VXL INDIA LIMITED

JUDGEMENT

(1.) FOLLOWING substantial question of law arises for our consideration in these appeals and therefore, we dispose of both these appeals by a common judgment.

(2.) ASSESSEE company is engaged in the manufacture of woolen fabrics and also engaged in job -work of woolen tops. We are in these cases concerned with the Assessment Years 1984 -85 and 1985 -86. For the assessment year 1984 -85, return of income was filed on 26.6.1984 declaring a total income of Rs. 44,63,351/ -, whereas for the assessment year 1985 -86, the return of income was filed on 23.12.1985 declaring a total income of Rs. 21,84,440/ -. Income Tax Officer computed the income for Assessment Year 1984 -85 at Rs. 40,47,870/ - and for the year 1985 -86 at Rs. 6,50,740/ -. Assessee claimed that company had issued convertible debentures of Rs. 125/ - each of which Rs. 45/ - each was to be converted into three shares on 1.7.1983 during the accounting year in respect of assessment year 1984 -85 and stated that assessee had incurred expenses to the tune of Rs. 19,00,925/ -. Assessee company had also got interest from bank on application money kept in short term deposits of Rs. 2,45,613/ - and the same was adjusted against the expenses incurred in respect of issuance of convertible debentures. For the assessment year 1985 -86, assessee had incurred an expenditure of Rs. 16,156/ - for conversion of debentures into shares and had claimed the said amount as revenue expenditure. The Assessing Authority noticed that the assessee for the assessment year 1984 -85 had incurred a total expenditure of Rs. 19,16,923/ - for issuing debentures. It was also noted that out of which Rs. 16,000/ - was paid to Amarchand and Mangaldas and Hiralal Shroff and Co., Bombay which had not been debentures. The Assessing Authority disallowed Rs. 6,90,093/ - out of legal expenditure of Rs. 19,16,925/ - incurred for issuing debentures. For the assessment year 1985 -86, the assessee claimed that it had incurred an expenditure of Rs. 16,156/ - for conversion of debentures into shares and claiming the same as revenue expenditure. Assessing Authority, on verification found out that major items of Rs. 15,156/ - was the stamp duty paid for issuance of equity shares and also a sum of Rs. 1,000/ - being conversion charges paid to Controller of Capital Issues, New Delhi. The Assessing Authority therefore, disallowed the claim for deduction holding that the expenses incurred for conversion of debentures into equity shares would have an enduring effect and the same has to be treated as capital expenditure and hence the claims for deduction made under Section 35D for both the years were disallowed.

(3.) ASSESSEE took the matter in appeal before the Commissioner (Appeals) stating that Income Tax Officer has erred in law as well as in facts in treating a part of the gross expenditure on issue of debentures as capital expenditure. According to the assessee the real nature of expenditure was revenue expenditure and the conversion of part value of debenture into equity shares in the next accounting year was a mode of repayment of borrowed funds. According to the assessee, borrowing funds for the purpose of business and subsequent conversion of part of value of debentures into equity shares is a mode of repayment of borrowed funds, and that the mode of repayment, namely conversion into equity shares has no relevance in deciding allowability of expenditure incurred when borrowing was made. Commissioner (Appeals) did not accept the claim of the assessee, after having noticed that a portion of convertible debentures was converted into equity shares and company had got enduring benefits. Commissioner (Appeals) placed reliance on the decision of the Apex Court in India Cements v. Commissioner of Income Tax, Madras, 1966 60 ITR 52, took the view that expenditure incurred by the assessee company on convertible debentures has to be treated as capital expenditure. Holding so, appeal preferred by the assessee was dismissed.