9911796707
TMI Blog2000 (10) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... s regards payment of interest on debentures, the debenture holder had the option of either periodically receiving interest half-yearly @ 18% p.a. for five years or a one-time up-front payment of Rs. 55 per debenture. The option in respect of the payment of interest was to be exercised within 30 days of the date of allotment. (c) The debentures could be redeemed at par alongwith 10% redemption premium at any time after the end of the 5th year but not beyond the 7th year. (d) The debentures shall be secured by way of Second charge on the assets of the Company. Ultimately, the debentures were allotted to the following parties on the date indicated against each: ---------------------------------------------------------------------------------------------- Party Amount Date of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures at serial No. 1 were allotted in the accounting year 1995-96 relevant to the assessment year 1996-97 (under appeal) and the others in the accounting year 1996-97 relevant to assessment year 1997-98. 4. The parties at serial Nos. 1 and 6, namely, Maliram Makharia Stock Brokers (P.) Ltd. and Sharp Knife Co. (P.) Ltd. respectively opted for onetime up-front payment of Rs. 55 per debenture payable immediately on allotment, a term which was modified at the instance of debenture holders. Accordingly, one-time up-front interest payment of Rs. 2,72,25,000 was made to Maliram Makharia Stock Brokers (P.) Ltd. and Rs. 55,00,000 to Sharp Knife Co. (P.) Ltd. respectively. 5. The Parties at serial Nos. 2 to 5 opted for payment of interest @ 18% per annum payable half-yearly. A Trust Deed was executed with SBI on 29-6-1996, after having previously made enquiries with various banks to act as Trustees. In its return for assessment year 1996-97, the assessee claimed the entire up-front interest payments of Rs. 2,72,25,000 to Maliram Makharia (P.) Ltd. as fully deductible expenditure. The reasons given before the Assessing Officer were as follows: (i) The amount of Rs. 2,72,25,000 was accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98. Why the same concept was not followed for the payment of NCDs, which, in fact accrues at 18% p.a. payable half-yearly, beats the common logic. Surely discretion is always better part of valour. (iv) Assessee's claim to deduction of the entire interest of Rs. 2.72 crores would have merited consideration had it credited to the P&L account, say amount equal to its G.P. on the amount of total funds (Rs. 4.95 crores) for each of the succeeding 5 years. Just as it would be too for fetched to tax in this year the income of succeeding 5 years corresponding to the funds borrowed (Rs. 4.95 crores) it is equally far fetched to claim the entire expenses pertaining to the cost of fund for the succeeding 5 years. In support of the above, the Assessing Officer placed reliance on the judgment of the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802. 7. The assessee appealed to the CIT(A) who confirmed the action of the Assessing Officer. He held that no prudent business-man will pay a sum of Rs. 55 to raise a loan of Rs. 45 and that the whole transaction with Maliram Makharia Stock Brokers (P.) Ltd. was a colourable device the assessee-company durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, in support of the proposition that the up-front fee is the interest on the borrowings, the learned counsel drew our attention to the definition of the word "interest" in section 2(28A) which states that "interest" means interest payable in any manner in respect of money borrowed. He submitted that in view of this definition, the up-front fee constituted interest under section 26(1)(iii) and hence, it was allowable in the year of payment. In support of this contention, he placed reliance on the decision of the Madras Tribunal in EID Parry (India) Ltd. v. Dy. CIT [1993] 46 ITD 387. 9. According to the learned counsel, the decision of the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd.'s case is not applicable to the assessee's case on the following counts: (a) In that case, the Supreme Court was concerned with the deductibility of discount on debentures having a life of 12 years and where the discount amount was payable after twelve years, whereas in the assessee's case, the assessee was claiming deduction of one time actual lump-sum payment of discounted interest involving surrogation of the annual interest that would have been payable had the debenture holde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um payable on redemption of its debentures on a spread over basis stretched over five years, inasmuch as, just as discount in the case before the Supreme Court, premium is a continuing liability and has to be discharged at the time of redemption. The assessee submits the foregoing bring out the uniformity and consistency in the assessee's stand. (f) In Madras Industrial Investment Corpn. Ltd.'s case, the Supreme Court itself has observed as under at page 813 : 'Ordinarily revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years." In fact, if the assessee had not claimed the deduction in the first year it may not, in law, be entitled for deduction in the subsequent years on the score that the liability for payment cannot be said to have arisen in the subsequent years as it was neither paid in such subsequent year nor any such event has taken place in the subsequent year which would give rise to its accrual in the subsequent year. In this connection, attention was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C [1993] 44 ITD 99, 112, 113, 114 (Mad.), (g) Addl CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.), (h) Addl CIT v. Bajaj Tempo Ltd. [IT Appeal Nos. 271 and 272 (Pune) of 1985] (Pune Tribunal). 13. Coming to the Comments of the Assessing Officer about the entries made in the books of account, the learned counsel submitted that entries concerning a particular expenditure in the books of an assessee is not conclusive or decisive of the matter regarding deductibility for Incometax purposes. Merely because the assessee has treated the up-front payment as deferred revenue expenditure in its account, it cannot be denied deduction of the said expenditure in its entirety in the first year of its incurrence/accrual. In support of this contention, he relied upon the following judgments : (a) Kedarnath Jute Mfg. Co. v. CIT [1971] 82 ITR 363 (SC), (b) CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 (SC), (c) India Cements Ltd. v. CIT [1966] 60 ITR 52, 55 (SC), (d) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), (e) United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), (f) CIT v. Gujarat Mineral Dev. Corpn. [1981] 132 ITR 377 (Guj.), (g) Dy. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of law and falls within the ken of tax planning laid down in the main judgment of four Judges delivered by Justice Ranganath Mishra. According to him, this line of thinking has been reiterated by the Hon'ble Supreme Court in CWT v. Arvind Narottam (Individual) [1988] 173 ITR 479; Union of India v. Playworld Electronics (P.) Ltd. [1990] 184 ITR 308 quoting observations from Arvind Narotham (Individual)'s case with approval. In similar vein, the learned counsel drew our attention to the decision of the Gujarat High Court in Banyan &Berry v. CIT [1996] 222 ITR 831 and M.V Valiappan v. CIT [1988] 170 ITR 238 (Mad.). 17. Shri Dastur submitted that the mode of raising finance employed by the assessee is commercially acceptable and recognised in the financial market and is also employed by National Housing Bank, ICICI and IDBI. He drew our attention to a sample copy of Schemes of NHB and ICICI which was duly furnished during the course of hearing. According to the learned counsel, this by itself establishes and lends the much-needed commercial angle to the whole transaction under scrutiny. 18. Coming to the observations of the learned CIT(A) that the assessee company had made huge pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to pay interest cannot be computed in advance and hence the discounted value of interest cannot be computed. Therefore, according to the learned D.R., Rs. 55 cannot represent the discounted value of interest, and it has to be he ld that Rs. 55 represents the return value of the debenture and the value of the debenture gets reduced to Rs. 45. He submitted that it is interesting to note that the assessee received Rs. 100 per debenture on 29-3-1996 and refunded Rs. 55 on the same day. According to the learned D.R., in other words, the assessee received only Rs. 45. Therefore, the assessee raised a loan of Rs. 45 which is used for the purpose of business. The sum total of the transaction entered into by the assessee on 29-3-1996 is that the assessee received only Rs. 45. Therefore, as has been held by the Madras High Court in CIT v. Harveys Ltd. [1940] 8 ITR 307, the interest need not be paid on the notional value of the debenture. The learned D.R. emphasised that in the present case, real value of the debenture is only Rs. 45 and, therefore, interest has to be calculated only at Rs. 45. 21. The learned DR. relied upon the judgment of the Hon'ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest on debentures: "When debentures are issued at discount, an account styled "Discount on Debenture Account", will be debited with the discount allowed on the issue. The debentures account will be credited in the books at their nominal value and will appear that that value as a liability in the balance-sheet. The loss thus arising need not be completely written off in the year in which the debentures are issued, since the benefit to be derived from the amount borrowed will continue till the debentures are redeemed. Where the debentures are redeemable at the end of a fixed period, a proportionate amount of discount should be written off out of revenue every year during which the debentures are outstanding." 23. Following passage in Spicer and Pegler's Book-keeping and Accounts (Seventeenth edition) at page 240 further fortifies the above position: "The discount on the issue is, in effect, deferred interest, and should accordingly be written off over the period having the use of the money raised by the debentures, unless a sinking fund is created to accumulate the full redemption price, including the discount." Relying upon the above accepted principles of accountancy, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread but a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question." The Hon'ble Supreme Court further observed: "Issuing debentures at a discount is another such instance, where although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 25. As stated above, the assessee issued debentures for a period of 5 years. The loan raised by way of debentures was to be utilised by the assessee for a period of 5 years and accordingly, the assessee was to get a benefit for 5 years. Applying the aforesaid ratio laid down by the Hon'ble Supreme Court, the action of the authorities below in allowing proportionate interest is justified. The above decision of the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmarized in para 9 where he has tried to distinguish the judgment of the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. His first contention was that the Supreme Court was concerned with the deductibility of discount on debentures having a life of 12 years, where the discount amount was payable after twelve years, whereas in the assessee's case, the assessee was claiming deduction of one-time actual lump sum payment of discounted interest involving surrogation of the annual interest that would have been payable had the debenture holders not opted for the up-front option. In our view, the period whether it is 12 years or 5 years is immaterial and the Hon'ble Supreme Court has laid down the general proposition that interest payable on debentures has to be spread over period of debenture. His second point was that the Hon'ble Supreme Court was not concerned with up-front payment of interest, but with an issue of debenture at a discount and that the Supreme Court was leaving open the question whether discount is deferred interest and, therefore, the ratio of Madras Industrial Investment Corpn. Ltd. is not applicable. We have pointed out to the observations of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prudent decision and this one-sided action on the part of the assessee cannot lead to the conclusion that the judgment of the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd.'s case is distinguishable on facts. 28. As regards the argument of the learned counsel that discounted interest paid up-front in the first year by the assessee is not a contingent liability inasmuch as the liability has been liquidated in the first year itself by way of payment of one-time up-front payment, we do not find any merit in this contention, because as has been held by the Calcutta High Court in Hindustan Aluminium Corpn. Ltd. v. CIT [1983] 144 ITR 474, the decision which has been approved by the Supreme Court in Madras Industrial Investment Corpn. Ltd. case even though the liability might have been liquidated in the first year itself, yet the liability has to be allowed and spread over a number of years. 29. In view of the above discussion, we do not agree with the learned counsel that the judgment of the Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd.'s is distinguishable on facts from the case of the assessee. 30. Coming to the argument of the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee approached M/s Maliram Makharia Stock Brokers (P.) Ltd. and by mutual benefit, the assessee reduced its profit by up-front fee of Rs. 2,72,25,000 and M/s Maliram Makharia Stock Brokers (P.) Ltd. showed nominal income. As pointed out in sub-para (iv), though M/s Maliram Makharia Stock Brokers (P.) Ltd. claimed to have shown an amount of Rs. 2,72,25,000 (received as up-front fee on 29-3-1996 from the assessee) as its income for the year under consideration, but as evidenced from record, it has returned its taxable income only at Rs. 34,91,164 for the assessment year 1996-97 as against Rs. 2.72 crores received from the assessee. Thus, M/s Maliram Makharia Stock Brokers (P.) Ltd. adjusted their losses in one stroke by readily agreeing to and becoming party to the said scheme conceived by the assessee. 31. Shri Dastur admitted that M/s Maliram Makharia Stock Brokers (P.) Ltd. had losses, but stated that the department ignores the fact that by setting off the interest income against the losses, M/s Maliram has lost right to carry forward losses, which otherwise it would be entitled to, had it not offered the interest income for tax. We do not find merit in this contention because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Assessing Officer is directed to allow interest at the rate of 18% per annum on the capital borrowed for a period of 12 months. 35. We do not find any merit in the action of the CIT(A) in enhancing the income by an amount of Rs. 47,85,225 as agitated by the assessee in ground No. 1. 36. The next ground relates to interest charged under sections 234A, 234B and 234C. This ground is consequential in nature. The Assessing Officer is directed to recompute interest under the above sections after taking into consideration the relief allowed by this order. ITA No. 946/PN/99-assessment year 1998-99: 37. The first grievance of the assessee is that the CIT(A) is not justified in confirming the disallowance of up-front fee paid by the assessee on NCDs and further the CIT(A) is not justified in enhancing income by an amount of Rs. 58,90,500 without giving a statutory opportunity of showing cause against such enhancement as required under section 251(2) of the Act. 38. The facts and arguments of the parties are same as those discussed in the assessee's appeal relating to assessment year 1996-97 above. Accordingly, our decision given above for assessment year 1996-97 will apply mutatis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Department was approved by the Supreme Court in the aforesaid case. Considering the facts of that case and the ruling delivered by the Supreme Court, the argument advanced by Mr. Dastur cannot be accepted since there was no circuitous transaction in that case and still it was held that the scheme adopted by the assessee was a colourable device to evade the tax. 43. In this connection, it would be useful to refer to the following observations of the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, at page 523: "We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee issued debentures at the fag-end of the year to a private person with face value of Rs. 100 giving option to the lender either to have interest at the rate of 18% per annum with return of Rs. 100 after five years or in the alternative to get back Rs. 55 as up-front fee immediately and to receive Rs. 100 after five years. From perusal of the scheme, it appears clearly that end result of the scheme is the same which would have been in the normal transaction i.e., borrowing of Rs. 45 with an undertaking to return Rs. 100 at the end of five years (on the basis of compound rate of interest of 18%). By adopting this method, the sole purpose of the assessee was to claim one-time deduction to avoid the huge tax liability of the present year which otherwise would have been payable by it. In the normal transaction, the assessee would have been entitled to deduction of very negligible amount as money was utilised for the purpose of business only for 3 days, but by adopting the scheme, the assessee has tried to get huge deduction of Rs. 2,72,25,000 in order to avoid the tax liability of the year under consideration. Considering the facts that profits of the assessee-company had sudde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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