ITAT, DELHI BENCH ‘H’ : NEW DELHI SRF Ltd. v. DCIT

Interest liability discharged by way of issuance of shares is not an allowable expenditure



By issuance of shares the assessee cannot be said to have incurred any expenditure and hence, issuance of shares in lieu of interest liability cannot be considered to have been payment towards expenditure.



ITAT, DELHI BENCH ‘H’ : NEW DELHI

SRF Ltd.

v.

DCIT

ITA NO. 4357/Del/2002

June 26, 2009

RELEVANT EXTRACTS:

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20. We have considered the rival submissions. The claim is in respect of interest on amount borrowed by the erstwhile company namely Flowmore Polyesters Ltd., which amalgamated with the appellant company during the year. There is no dispute to the fact that interest payable by the erstwhile company was not claimed and allowed in terms of section 43B(d) since the amount was not paid by the said company. In view of the scheme of amalgamation Flowmore Polyesters Ltd. Has merged into the assessee company. Therefore, if the assessee company discharged such liability of nterest, it will amount to payment thereof and hence in terms of section 43 B will be allowed in computing the income of that previous year in which such sum is actually paid. It is stated that the liability for payment of interest has been discharged by way of issuance of shares. As per Explanation 3C to section 43B, if any part of interest liability is converted into a loan or a borrowing, it will not amount to actual payment thereof. Explanation 3C to section 43 B has been inserted with retrospective effect from 1.4.1989 and hence is applicable to the year in appeal also. Therefore, we primarily agree with the assessee if the amount is paid by the assessee, the same will be an allowable deduction. However, in the present case it is seen that the liability is discharged by way of issuance of shares and not actual payment by way of legal tender. What is allowable under section 43B is in respect of deduction otherwise allowable under this Act. The deduction allowable under the act is in respect of various sums referred to in sections 30 to 37 of the Act, Interest on any loan or borrowing is one such sum referred in section 36(l)(iii) of the Act. Therefore, for the purpose of allowability, the amount should be in the nature of expenditure. The word "expenditure" is not defined under the Act. Hon'ble Supreme Court in the case of Indian Molasses Company P. Ltd. Vs. CIT, 37 ITR 66 held that expenditure is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when one speaks of a joke of another's expense. But the idea of "spending' in the sense of 'paying out or away' money is the primary meaning which is relevant. "Expenditure' is thus, what is 'paid out or away' and is something which has gone irretrievably.

Once again Hon'ble Supreme Court in the case of CIT vs. Nainital Bank Ltd., 62 ITR 638, held that in its normal meaning, the expression 'expenditure' denotes 'spending' or 'paying out or away', i.e. something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not 'expenditure'. It is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims-one by the assessee against a stranger and the other by the stranger against the assessee - and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed 'expenditure' within the meaning of sec. 37(1). However, a mere forbearance to realize a claim is not 'expenditure'.

Hon'ble Delhi High Court in the case of B.K. Khanna & Co. P. Ltd. Vs. CIT, 247 ITR 705 held that 'spending' in the sense of 'paying out or away' of money is the primary meaning of 'expenditure'. The word 'expenditure' means what is paid out or away and is something which is gone irretrievably. Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. Vs. CIT, 242 ITR 659, was considering the claim of assessee towards expenditure on technical know-how. In the said case the assessee was a joint venture between an American company and an Indian company. The authorized capital of the assessee company was Rs.100 lacs. Each of the promoters agreed to subscribe Rs.4,70,000/- out of which each would have to pay initially a sum of Rs.2,80,000/- towards its contribution. The share of American promoter was contributed by way of technical know-how valued at a sum of Rs.2,35,000/- and in lieu of which the assessee allotted equity shares. The same was considered as capital expenditure. The Hon'ble Supreme Court held –

"That what in effect was done by the appellant in allotting equity shares of Rs.2,80,000 to Eimco, was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It was not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. The High Court had rightly concluded that allotment of equity shares by the appellant to Eimco, in the circumstances of the case, could not be termed as expenditure, much less revenue expenditure”

Similar view was held by the Hon'ble Delhi High Court in the case of CIT vs. Reinz Talbros Pvt. Ltd., 252 ITR 637 wherein the Hon'ble Delhi High Court speaking through Shri Arijit Pasayat, Hon'ble Chief Justice (as his Lordship then was), held -

"A similar question came up before the apex court in Eimco K.C.P. Ltd v. CIT [2000] 242 ITR 659. It was held that where a foreign company gives a technical know-how and obtains equity shares in the new company, the amount attributable to technical know-how was not revenue expenditure under section 37 of the Act. However, it was treated to be of capital nature. It is clearly borne out from the various orders that the assessee was a new company. That being the position, the Tribunal was not justified in holding that the expenditure in question was revenue in character."

In the present case it is seen that the liability was discharged by way of issuance of shares. When the assessee issues shares the assessee does not incur any expenditure as the assessee is not to make any payment legally towards shares issued. The shares cannot be equated with debentures, which is purely by way of loan and the same are required to be repaid on maturity. However, in respect of shares the company is under no obligation to make any payment in respect of such shares where share holders except payment of pro rata dividend when such dividend is declared. Thus by issuance of shares the assessee cannot be said to have incurred any expenditure and hence issuance of shares in lieu of interest liability cannot be considered to have been payment towards expenditure. Accordingly the interest liability discharged is not an allowable expenditure. This ground is accordingly dismissed.

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