Income Tax, Issue Update

Expenditure on issuance of shares, debentures, bonus issue, rights issue, Foreign Currency Convertible Bonds and any other type of financing activity: Allowance/disallowance under section 37

Case: Mahindra and Mahindra Ltd. Vs. Addl. CIT, Mumbai ITAT

Outcome: Partial


  • The Assessing Officer disallowed the expenditure of Rs.3.77 crores incurred by the Assessee Company in relation to issue of Foreign currency bond which were fully convertible into the equity shares of the company owing to the fact that such expenses were to be treated as capital expenditure as such expenditure lead to enhancement of the capital structure of the company.

Key points

  • Reliance was placed on the decision of Mumbai Tribunal in Assessee’s own case for assessment year 2006-07, wherein reliance was placed on the decision of the Hon’ble Rajasthan High Court in the case of Secure metres Ltd., and it was concluded that the debentures, when a shoot is a loan, and, therefore, whether was convertible, or nonconvertible, did not militate against the nature of the debenture, being loan, and, therefore, the expenditure incurred would be admissible as revenue expenditure.
  • Hence, it was inferred that the expenditure incurred in connection with the issue of convertible debentures was allowed as deduction.

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