The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) in the case of Strides Shasun Ltd. v. The ACIT held that the expenditure of premium of redemption of foreign currency convertible bonds is revenue in nature.
The issue before the present Tribunal is against the order of Assessing Officer (AO) w.r.t. disallowing the expenditure of premium of redemption of foreign currency convertible bonds (FCCB).
The facts of the case are that the assessee company issued FCCB which carried an interest rate of 0.5% p.a. An additional amount which is payable on redemption was provided for under the Debenture Redemption Reserve with a corresponding adjustment to Securities Premium. The liability is crystallized in the year of issue however discharged in the year of redemption.
The AO disallowed the expenditure on the ground that such expenditure is capital in nature and that the premium on FCCBs are equivalent to interest on loans and the FCCB funds were utilized wholly and exclusively for the purpose of business. The AO noticed from the annual report of the assessee that it had adjusted an amount under the head expenses related to issue of FCCB in the balance sheet against securities premium for which explanation was demanded. The AO was of the view that premium of redemption is neither due nor incurred during the year and is just a provision for liability arising in future and disallowed the claim. Aggrieved, now the assessee is in appeal before the Tribunal.
The tribunal after keeping in mind the relevant factual matrix of the case was of the view that “when a Company issues FCCB, it incurs a liability to pay a larger amount than what is borrowed and such higher amount payable by the Company will be for the purpose of its business in order to generate funds for its business activities. The amounts so obtained are used by the Company for the purposes of its business. Hence the liability to pay the additional amount would therefore be revenue expenditure.”
Hence the Tribunal holding in favor of the assessee adjudged that the assessee has rightly claimed the liability as expense and allowed the same.
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