Thursday, August 21, 2014

Exp. on issue of FCCBs were allowable as holders had no compulsion but an option to convert them into equity shares

Expenses on issue of Foreign Currency Convertible Bonds (FCCBs) couldn’t be disallowed just because they were issued with an option to convert them into equity shares within a period of one month.


a)Assessee issued Foreign Currency Convertible Bonds (FCCBs) with an option to convert them into equity shares within a period of one month from the date of issue of such bonds.

b)Assessing Officer (AO) allowed assessee's claim for deduction of expenditure incurred on issue of FCCBs. The CIT disallowed assessee’s claim by revising the order of AO.

c)Further, the Tribunal set aside the order of CIT. Revenue contended that once the FCCBs were capable of being converted, then, the expenditure incurred in relation thereto, could not be said to be revenue expenditure and, therefore, the expenditure ought to have been classified as capital expenditure. The Aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under-

1)The conclusion reached by the AO was that the conversion of FCCBs was not automatic. Thus, the CIT could not have concluded on same material that the FCCBs, in real sense, were equity shares right from the beginning and that the conversion of bonds was only a routine technical compliance as per the Regulations and guidelines.

2)The Tribunal was justified in setting aside the revisional order of CIT as conversion of FCCBs into equity shares was not automatic as conversion was not permissible unless option for the same was exercised by the holder of FCCBs.

3)Thus, a possible view taken by AO could not be termed as prejudicial to the interest of the revenue. Therefore, Commissioner was not justified in exercising his powers under section 263. -CIT vs. Tata Teleservices (Mah) Ltd. [2014] 47 238 (Bombay)