TaxTMI 
TaxTMI 
2012 (4) TMI 101
X X X X Extracts X X X X
X X X X Extracts X X X X
....en earlier. The assessee had issued four lakh deep discount debentures of the face value of Rs. 400/- on issue price of Rs. 100/- per debenture with redemption period of 9 ½ years. The assessee claimed discounting charges on the debentures amounting to Rs. 1,24,72,500/- and Rs. 1,47,98,800/- as deduction under section 24(b) for assessment years 2006-07 and 2007-08 respectively. Under the provisions of section 24(b), interest payable on capital borrowed for the purpose of acquisition/construction of house property is allowable as deduction. The AO observed that Shri Ashok Mittal to whom debentures had been issued was not crediting any income on account of interest which was contrary to the CBDT circular making it clear that the person holding deep discount bonds shall credit income on year to year basis on accrual basis. The AO therefore concluded that the assessee company and director Shri Ashok Mittal had made arrangement to avoid tax liability in both hands; the assessee by way of reducing the tax liability by claiming deduction on account of discount on debenture and director not declaring interest income for taxes. It was therefore a colourable device. Moreover, the AO f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iscounting charges also included interest on accrued interest which could not be allowed in view of the judgment of the Hon'ble Supreme Court in the case of Shew Kissen Bhatter (supra). CIT(A) further held that the principle of res-judicata was not applicable in Income tax proceedings and therefore the AO was not bound by the decision taken in assessment year 2001-02. CIT(A), therefore, allowed deduction under section 24(b) @ 15% on borrowed capital which came to Rs. 60.00 lacs and excess amounts claimed by the assessee were held not allowable in both the years. Aggrieved by the decision of CIT(A) both parties are in appeal. The assessee has challenged the part disallowance of interest whereas the revenue has challenged the relief allowed by CIT(A). 4. Before us, the ld. Authorised Representative for the assessee reiterated the submissions made before the lower authorities that deep discount debentures had been issued in lieu of the loans taken from the director for construction of house property and therefore, the discounting charges payable have to be allowed as deduction under section 24(b). It was pointed out that the judgment of Hon'ble Supreme Court in the case of Shew Kisse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O. It was argued that no interest income had accrued to the assessee from year to year and therefore, disallowance of entire claim by AO was justified. Moreover, it was also pointed out that the claim also included interest on interest which could not be allowed in view of the judgment of Hon'ble Supreme Court in the case of Shew Kissen Bhatter (supra). 6. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of deduction under section 24(b) on account of discounting charges relating to deep discount debentures issued by the assessee. There is no dispute that the assessee had borrowed money from the director Shri Ashok Mittal for construction of house property and that in lieu of the said loan, the assessee had issued deep discount debentures of the face value of Rs. 400 per debenture against the issue price of Rs. 100 per debenture with the redemption period of 9 ½ years. Under the provisions of section 24(b), interest payable on money borrowed for acquisition or construction of house property is allowable as deduction while computing income from house property. It has been clarified by CBDT in Circular No.28[F 8/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pex Court in case of Madras Industrial Finance Corpn. Ltd. v. CIT (supra), is required to be spread over debenture holding period and has to be allowed proportionately from year to year. This annual proportionate amount payable has to be treated as interest in view of definition of interest under section 2(28A) as per which the interest is amount payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charges in respect of moneys borrowed or debt incurred. Therefore, annual proportionate amount payable in respect of debenture which is a debt has to be considered as interest which is to be allowed under section 24(b). 6.2 The authorities below have pointed out that rate of interest on which loan was taken was 15% but annual interest came to 31.18% if the difference between the issue price and maturity value is spread over the entire period. This is easily explained by the fact that interest of 15% is payable from year to year when in case of discount debentures only the maturity value is payable after 9 ½ years and therefore, annual rate has to be higher. The authorities have also raised an argument that in case of Ashok....