The Income Tax Appellate Tribunal ( ITAT ), Mumbai Bench held that Premium Expenses on Foreign Currency Convertible Bonds ( FCCB ) is Revenue Expenditure and hence is deductible.
The assessee, Hikal Ltd, had issuedForeign Currency Convertible Bonds in F.Y. 2005-06. These bondswere convertible at the option of the bondholder on or after01.11.2005 but prior to close of business on 10.10.2010 at a fixedexchange rate.
As the bond holders hadnot converted any bonds till 31.03.2010 and the possibility of theirexercising the option to convert @Rs. 745/- per share was remote,the assessee was certain that it would have to redeem the bonds ata premium.
In the books of account, the said premium was adjusted against theSecurities Premium Account, however, the same was claimed asrevenue expenditure in the computing the total income. In theassessment completed, the Assessing Officer disallowed the saidpremium mainly for the reason that it has not been crystallised inthe year under consideration and is just a provision and that eventhe TDS thereon has not been deducted.
Aggrieved by thedisallowance of said premium, the assessee preferred appeal beforethe CIT(A) who deleted the said disallowance. Aggrieved by thesame, revenue is in appeal before the Tribunal.
The Departmental Representative for the Revenue arguedthat the assessee has just made a provision which has not beencrystallised in the year under consideration and that no paymenthas even been made during the year.
The Counsel further submitted that the premium on bonds has been providedfrom the Securities Premium Account which reflects capital receiptsonly which had never been offered for tax in any earlier years.
The Counsel for the assessee contended that theassessee is consistently following mercantile system of accountingand the provision of premium amounts is allowable as deduction.Even if FCCBs were issued for acquisition of a new business, loan isa liability and expenses incurred in connection with the same isallowable as a deduction. Premium was contingent upto the earlier.
In Strides ShasunLimited v.ACIT ,the Tribunal ruled 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 hence the liability would be Revenue expenditure.
The Coram consisting of Om Prakash Kant, Accountant Member and Rahul Chaudhary, Judicial Member observed that “We find that identical issue of expenses of premium on FCCB are in the nature of liability whether ascertained and revenue expenditure, has been decided by the Coordinate Bench of the Tribunal in the case of Strides ShasunLimited v. ACIT.”
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