ORDER
K.C. Singhal, Judicial Member
1. These are the cross appeals by the assessee as well as revenue and the same were heard together and are being disposed of by the common order for the sake of convenience.
Departmental Appeals :
2. The first common issue relates to the disallowance of rural development expenses. The assessee had claimed deduction of Rs. 3,38,333, Rs. 3,27,949, Rs. 6,96,634 and Rs. 2,89,102 for assessment years 1991-92, 1992-93, 1994-95 and 1995-96 respectively. It was explained before the Assessing Officer that such expenditure was in the nature of advertisement and publicity. Since similar claim had been disallowed in earlier years, the Assessing Officer disallowed such claim in these years also. It was contended before the CIT(A) that assessee had running a rural development programme which provided medical aid to the poor in the rural areas and thereby earned a goodwill and publicity which helped in the growth of company’s product as well as its name. The CIT(A) was of the view that the expenditure was revenue expenditure and allowable as deduction in view of jurisdictional High Court judgment in the case of Addl. CIT v. Delhi Cloth & General Mills Co. Ltd. [1983] 144 ITR 275 (Delhi). Aggrieved by the same, the revenue is in appeal before the Tribunal for all the years.
3. After hearing both the parties, we find that this issue is covered by the decision of the Tribunal in assessee’s own case for assessment year 1984-85 in ITA No. 2623/Delhi/92, dated 20-4-1998 wherein vide para 10, it was held as under :
10. The next issue relevant for the assessment years 1984-85 and 1985-86 relates to the expenditure on rural development. CIT(A) directed the Assessing Officer to treat this expenditure as sales promotion and advertisement expenses. We find that the disallowance was made under Section 37(3A) by treating this expenditure as of sales promotion and advertisement. We have perused the reasonings given by the CIT(A). The disallowance was made just because approval was obtained for claiming deduction under Section 35CC of the Act. Its allowability should, therefore, be tested on the touchstone of Section 37. Since the expenditure was incurred in the interest of business it is to be allowed subject to the disallowance contemplated under Section 37(3A) to Section 37(30). We find no infirmity in the impugned order on this count.
Following the aforesaid decision, it is held that the claim of assessee is allowable deduction in full since the provisions of Section 3A to 3C of Section 37 are no more on the statute. Therefore, we uphold the order of CIT(A) on this issue.
4. The next issue which pertains to assessment year 1991-92 only relates to the claim of assessee under Section 80-I. The claim of the assessee was in respect of the income with reference to the goods got manufactured from other concerns. The Assessing Officer rejected the claim on the ground that assessee did not own those manufacturing units and, therefore, such income was not eligible for deduction under Section 80-I. On appeal, the CIT (A) directed the Assessing Officer to consider the claim of the assessee in the light of Bombay High Court decisions in the case of CIT v. Anglo French Drugs Co. (Eastern) Ltd. [1997] 191 ITR 92′ and in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 8792. Aggrieved by the same, the revenue is in appeal before the Tribunal. After hearing both the parties, we do not find any infirmity in the order of CIT(A) inasmuch as the CIT (A) had merely directed the Assessing Officer to consider the claim of the assessee. The order of the CIT (A) is, therefore, upheld on this issue.
5. The next issue common to assessment years 1992-93 and 1994-95 relates to the disallowance of expenditure on Rights Issue of fully as well as partly convertible debentures. The expenditure disallowed was Rs. 31,69,694 for assessment year 1992-93 and Rs. 46,68,886 for assessment year 1994-95. The facts as narrated in assessment year 1992-93 are that the company had offered 12.5 per cent secured convertible debentures of Rs. 300 each aggregating to Rs. 4,306.36 lakhs to the public on Rights basis and had incurred expenditure of Rs. 47,54,541 on the issue of debentures. Each debenture costing Rs. 300 was having two parts, one of Rs. 200 each which was convertible into shares after a prescribed period and Rs. 100 each was non-convertible and redeemable at par at the end of 7 years from the date of allotment. The assessee had claimed the entire expenditure as revenue expenditure. Alternatively, it was contended that deduction under Section 35D be allowed. The Assessing Officer held that the entire expenditure could not be held to be revenue expenditure. According to him, it was partly capital and partly revenue in nature. Accordingly, he considered l/3rd expenditure as revenue expenditure and the balance amount was held to be capital expenditure for which assessee was eligible for deduction under Section 35D.
6. The matter was carried in appeal before the CIT(A), who following the order of the Tribunal for assessment year 1983-84 held the expenditure as revenue expenditure and accordingly, deleted the addition made by Assessing Officer.
7. Regarding assessment year 1994-95, the facts are slightly different in the sense that the company had offered 15 per cent secured non-convertible debentures of Rs. 200 each aggregating Rs. 8,581 lakhs and 12% fully convertible debentures of Rs. 300 each aggregating to Rs. 7,978 lakhs on Rights basis and thus had incurred total expenditure of Rs. 96,90,659. Non-convertible debentures of Rs. 200 each were redeemable in three instalments of Rs. 66, Rs. 67 and Rs. 67 each at the end of 6th, 7th and 8th order from the date of allotment while the fully convertible debentures were convertible into shares after the prescribed time. The assessee had claimed the entire expenditure as revenue expenditure. The Assessing Officer allowed the expenditure relating to non-convertible debentures since it was revenue in nature. However, in respect of the balance amount pertaining to convertible debentures, the claim was disallowed, being capital expenditure. However, the assessee was held to be eligible for deduction under Section 35D in respect of capital expenditure. The CIT(A) deleted the disallowance made by Assessing Officer considering the decision of the Tribunal in assessment year 1983-84. Aggrieved by the aforesaid orders of the CIT(A), the revenue has preferred this appeal before the Tribunal.
8. After hearing both the parties, we are unable to uphold the order of CIT(A) on this issue. No doubt, the expenditure incurred for raising loan as such or through debentures is an allowable deduction in view of the Supreme Court judgment in the case of India Cements Ltd. v. GT[1966] 60 ITR 52. On the other hand, it is also settled legal position that expenditure incurred for raising capital through public issue of shares or otherwise is a capital expenditure not allowable as deduction in view of two judgments of Supreme Court in the cases of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798′ and Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 7922. So what is important to consider is the real purpose or intention of the assessee in raising of the funds. None of the cases mentioned above relates to a situation before us i.e., where the fund has been raised in the garb of debentures but subsequently, a major portion of it has been converted into share capital. No doubt this issue also arose in earlier years and the Tribunal has decided this issue in favour of the assessee by observing that the fact that a portion of debenture was to be converted automatically into share capital was not relevant since the fund was raised by way of debenture and conversion was only incidental. As a rule of precedence, we would have followed such decision but for the settled legal position that a document or transaction is not to be understood by its nomenclature but by the real intent of such document/transaction and if necessary, the authorities/courts can tear the veil and go behind the transaction to ascertain the real intention of the parties. Reference can be made to the judgment of Hon’ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 wherein at page 523 their Lordships observed as under :
.. . If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to income-tax authorities to go behind the transaction arid examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income-tax Officer will be entitled to consider all the relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the Income-tax Officer enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth.
Similar view has been taken by the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603. In the present case, it is an admitted position that a part of the funds raised by way of debenture was automatically converted into equity share capital and the debenture holder had no say in this regard. In assessment year 1994-95, one of the public issues related to fully convertible debentures. Though the learned counsel for the assessee initially submitted that the conversion was at the will of the debenture holder but when he was asked to produce the copy of the prospectus, he admitted that the conversion was automatic. This shows that at the initial stage itself both the assessee as well as potential investors knew well in advance that a major part of the fund or the entire fund as the case may be would be converted into share capital. In such cases, we are of the considered view that the entire expenditure could not be held to be revenue expenditure. If the contention of assessee is accepted then it would lead to absurd result and may render the judgment of Supreme Court in the case of Brooke Bond India Ltd. (supra) as redundant. For example, assessee may issue a public issue on right basis in the name of debenture in the month of February/March of a financial year. Such debenture may provide conversion of the entire fund into the share capital after a period of six months. If the contention of the assessee is accepted then the entire expenditure will have to be allowed as deduction even though the ultimate intent or purpose is to increase the capital structure. It would, therefore, result into by passing the Supreme Court judgment in the case of Brooke Bond India Ltd. (supra). Even in the present case in assessment year 1994-95, the assessee had issued fully convertible debentures after sometime and ultimately the entire amount was converted into equity share capital. In our considered opinion, such an approach cannot be allowed to prevail. The veil has to be teared and real intention of the transaction has to be ascertained by the authorities/ Tribunal. At this stage, it would be appropriate to refer that similar issue had arisen and considered recently by the Tribunal, Delhi Bench in the case of Sona Steering Systems Ltd. v. Dy. CIT [2003] 129 Taxman 152 (Mag.) to which one of us (JM) was party. In that case, it was held asunder :
It is well settled that if the expenditure is incurred for obtaining loan, the same is allowable as revenue expenditure in view of the judgment of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52. On the same analogy, the expenditure on public issue of debentures is a mode for obtaining loan. On the other hand, if the expenditure is incurred on the public issue of shares, it is capital expenditure not allowable under Section 37.
In the instant case, the public issue was in respect of partly convertible debentures. The scheme of the public issue had been perused. The object of the issue was to raise the finance for expansion and diversification of business. Twenty-three lakh debentures of the face value of Rs. 40 each were issued to the existing shareholders which carried interest rate of 14 per cent per annum. Every shareholder holding 2 equity shares was entitled to 1 such debenture. The debentures were in two parts. Part A was convertible part of Rs. 25 lakhs which was compulsorily and automatically to be converted into one equity share of Rs. 10 each at the end of 6 months from the date of allotment and, consequently, face value of the debenture was to be reduced to Rs. 15. It further provided that equity shares allotted as a result of conversion shall rank pari passu in all respects with the existing equity shares. The same result could have been achieved by the assessee by public issue of shares and debentures separately. It was only because of convenience and from economic point of view that a combined public issue was made. It is settled legal position that nomenclature of a document is not relevant. What is relevant is the true nature of the transaction. It was apparent from the scheme that the assessee had incurred expenditure for raising capital of the company as well as loans. The Part A of debentures was to become permanent part of the capital structure of the company within a short period of 6 months from the date of allotment. It was only Part B which was to be returned on redemption. Merely because single issue was made for shares and debentures in the guise of debenture, the entire expenditure did not part tike of the character of the revenue expenditure. The proportionate expenditure should be allowed as revenue expenditure.
9. In view of the above discussion, we set aside the orders of the CIT(A) on this issue and restore the orders of Assessing Officer.
Assessee’s Appeal:
10. The first issue arising out of these appeals relates to the computation of deduction under Section 80HHC. The contention of the learned counsel for the assessee is that the Assessing Officer had failed to deduct the clement of excise duty and taxes recovered from the customers from the gross turnover while computing such relief. Reliance has been placed on the decision of Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769′, decision of Calcutta High Court in CIT v. Chloride India Ltd. [2002] 256 ITR 625 and the decision of Special Bench of the Tribunal in the case of IFB Agro Industries Ltd. v. Dy. CIT [2002] 83 ITD 96 (Cal.) wherein it has been held that the total turnover would not include the clement of excise duty and sales tax. It has been further argued that Assessing Officer should have also deducted the clement of cash discount and commission on sales from the total turnover. However, we find that Assessing Officer had not applied his mind to this issue since auditors had not deducted the element of cash discount and commission. We further find that issue regarding the clement of excise duty and sales tax was never raised before the Assessing Officer in assessment years 1992-93 and 1994-95 though this issue was raised in assessment year 1995-96. It is the settled legal position that assessee can raised the legal issue at the appellate stage even though it was not raised before the lower authorities. Therefore, the assessee is justified in raising such issue before us. As far as the component of excise duty and taxes is concerned, the legal position is in favour of the assessee in view of the decisions relied upon by assessee’s counsel. Regarding the cash discount and commission on sales, factual aspects are not before us. A deduction from the gross turnover can be claimed only if it is part of the total turnover. Whether a deduction from the turnover is allowable or not would depend upon the facts of each case. All these aspects require deep consideration with reference to the materials on record. Since the lower authorities did not adjudicate the issue, it requires fresh adjudication by Assessing Officer in the light of the materials which may be placed before him. Accordingly, we set aside this entire issue for afresh consideration to the file of Assessing Officer in the light of observations made above.
11. The next and the last issue relates to the disallowance of expenditure incurred on issue of global depository shares (in short CDS) for assessment year 1995-96. In the year under consideration, the company issued 51,61,290 equity shares called CDS having face value of Rs. 10 each at a value of US $ 19.375 (equivalent to Rs. 604.89) per share on June 29, 1994 to the non-residents. On such issue the assessee had incurred an expenditure of Rs. 11,74,39,364 while computing the income no deduction was claimed but the following note was appended to the computation of income :
As a matter of abundant precaution, no deduction in respect of expenditure of Rs. 11,74,39,364 incurred on issue of Global Depository Shares in terms of i(s offering circular dated 29th June, 1994 has been claimed while computing taxable income. It is claimed that while completing assessment, the said expenditure be allowed under Section 37 of the Income-tax Act, 1961 and in terms of various judicial pronouncements made by Supreme/High Courts including judgment made in the case of India Cements Ltd. v. CIT 60 ITR 52 (SC) and CIT v. Modi Industries Ltd. 200 ITR 341 (Delhi).
However, the Assessing Officer did not consider this issue while assessing the income of the assessee. Before the CIT (A), it was claimed that such expenditure was allowable as revenue expenditure under Section 37. Alternatively, it was claimed that deduction be allowed under Section 35D. The CIT(A) rejected the claim under Section 37 by holding that it was capital expenditure. The claim under Section 35D was also rejected by observing that the expenditure was neither incurred in connection with the extension of its industrial undertaking nor for setting up of a new industrial undertaking. Further, provisions of Sub-section (2) were not attracted. Aggrieved by the same, the assessee is in appeal before the Tribunal.
12. The assessee has raised contentions challenging the order of CIT(A) on both the aspects as is apparent from the grounds of appeal. However, in the course of hearing, the learned counsel for the assessee has not pressed the claim of assessee under Section 37 and restricted his arguments in respect of the claim under Section 35D. It was argued by him that claim under Section 35D can be allowed if it is incurred even after the commencement of the business with reference to extension of existing business. For this purpose, he drew our attention to the objects for which such proceed to be utilized. On the other hand, the learned DR has relied on the order of CIT (A) and contended that there is no material on record to show that the expenditure was incurred for extension of its industrial undertaking or for setting up a new industrial undertaking.
13. After hearing both the parties, we are unable to accept the contentions of the learned counsel for the assessee. The provisions of Section 35D are attracted only if the expenditure is incurred (z) before the commencement of business; (if) if incurred after the commencement of business, it is incurred either for extension of its industrial undertaking or for setting up of a new industrial undertaking. The expenditure incurred for other purposes of business is not allowable deduction under Section 35D. The Prospectus of the Issue under the heading “Use of Proceeds” states as under:
The net proceeds from the offerings, estimated at US $ 96.13 million (US $ 120.34 million if the Purchasers’ over-allotment option is exercised in full), after deducting underwriting discounts and estimated offering expenses, will be used primarily (£) to expand the Company’s international operations through direct investment or investment in existing and new joint ventures, wholly-owned subsidiaries or affiliated companies, (ii) to fund research and development, (iii) to construct new facilities and to upgrade and expand existing facilities and (iv) to expand marketing and distribution channels. The remainder will be used for general corporate purposes. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Liquidity and Capital Resources”. Pending such uses, the net proceeds will be invested in marketable securities, short term loans and investments.
The perusal of the above shows that the expenditure was not to be incurred either in connection with the extension of any industrial undertaking or for setting up a new industrial undertaking, Any Capital expenditure for existing business for extension of existing business does not fall within the ambit of Section 35D. There is no material on record to establish that share capital raised was utilized for setting up of a new unit or in connection with the extension of its industrial undertaking. It is the settled legal position that burden is on the assessee to prove that the expenditure incurred falls within the parameter of the provisions allowing the deduction. It is not the case of the assessee that it was prevented from furnishing any evidence or that sufficient opportunity was not given. On the basis of the prospectus, it cannot be said that the expenditure was in connection with the extension of its industrial undertaking or for setting up of a new industrial unit. Accordingly, we do not find any merit in the claim of the assessee. The order of the CIT(A) is, therefore, upheld on this issue.
14. In the result, all the appeals are partly allowed.