The Delhi High Court has held that the legal position regarding the tax treatment of premium payable on redemption of Foreign Currency Convertible Bonds (FCCBs) is already well settled.
The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta ruled that no substantial question of law arose for consideration since the issue had been conclusively decided by earlier judicial precedents.
The dispute revolved around the tax treatment of the premium payable on redemption of FCCBs issued by the assessee. During assessment proceedings, the Assessing Officer noticed that the company had claimed deduction of approximately ₹28.59 crore towards the redemption premium payable on FCCBs issued during the financial year 2005-06.
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The Assessing Officer treated the premium as capital expenditure, disallowed the deduction, and added the amount back to the taxable income. However, the Commissioner of Income Tax (Appeals) reversed the disallowance, observing that the mere fact that the bonds were convertible into equity shares did not alter the character of the expenditure. The CIT(A) relied on the Delhi High Court’s earlier decision in CIT v. Jagatjit Industries Ltd., which held that such expenditure is revenue in nature.
The ITAT subsequently affirmed the appellate authority’s findings, noting that in an earlier assessment year the Assessing Officer himself had accepted the redemption premium as revenue expenditure and therefore there was no justification for taking a contrary stand.
Before the High Court, the Income Tax Department accepted that judicial precedents had treated FCCB-related expenditure as revenue expenditure. However, it advanced a narrower argument that the entire expenditure could not be claimed in the first year. According to the Revenue, the premium should instead be spread proportionately over the five-year life of the FCCBs rather than being allowed immediately.
The assessee relied upon the Delhi High Court’s decision in CIT v. Havells India Ltd., where the Court had examined similar expenditure incurred in connection with convertible debentures. In that judgment, the Court held that expenditure incurred for issuing debentures constitutes revenue expenditure, even where the instruments are convertible into equity at a later stage.
The High Court in the present case also referred to several earlier decisions, including India Cements Ltd. v. CIT, Madras Industrial Investment Corporation Ltd. v. CIT, CIT v. Jagatjit Industries Ltd., and CIT v. Secure Meters Ltd., all of which consistently recognize that expenditure incurred for raising loans through debentures or similar instruments is revenue in nature.
The Court observed that expenditure incurred for issuing debentures or obtaining loans has long been recognized as revenue expenditure because the borrowing merely creates a liability and does not result in acquisition of a capital asset.
It emphasized that once FCCBs are issued and the funds are deployed for business purposes, the liability relating to redemption premium is incurred. Consequently, the expenditure falls within the scope of Section 37 of the Income Tax Act, 1961, subject to established judicial principles.
Addressing the Revenue’s argument regarding spreading the expenditure over five years, the Court observed that this aspect too had already been settled in Jagatjit Industries.
The earlier judgment had clarified that while the liability to pay redemption premium arises in the year in which the debentures are issued, the expenditure may be proportionately spread over the maturity period of the debentures. The Court noted that this principle had already been authoritatively laid down and therefore did not give rise to any fresh legal issue.
Importantly, the Bench further noted that the Revenue had never raised this specific contention during the assessment proceedings, nor before the Commissioner (Appeals) or the ITAT. Having failed to urge the issue before the lower authorities, the Department could not seek to introduce it for the first time before the High Court.
Holding that the controversy was fully governed by settled law and that no substantial question of law survived for consideration, the Delhi High Court dismissed both appeals filed by the Revenue along with all pending applications.
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