TMI Blog2015 (3) TMI 853X X X X Extracts X X X X X X X X Extracts X X X X ..... t that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act. See Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta [1971 (8) TMI 10 - SUPREME Court] At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. Thus the assessee would be entitled to deduction of the entire expenditure of 2,72,25,000 and 55,00,000 respectively in the year in which the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res were allotted to the following parties as below: S.No. Party Amount (in lacs) 1. Maliram Makharia Stock Brokers Pvt. Ltd. dt. 29.03.1996 495.00 2. Orient Corporation, dt. 19.06.1996 1.25 3. Shree Suyog Agencies, dt. 19.06.1996 1.25 4. Shree Kyamsap Enterprises, dt. 19.06.1996 1.25 5. Shree Suraj Agencies, dt. 19.06.1996 1.25 6. Sharp Knife Co. Pvt. Ltd, dt. 19.06.1996 100.00 TOTAL 600.00 On February 14, 1996, M/s. Maliram Makharia Stock Brokers Pvt. Ltd. gave their letter of acceptance opting for upfront payment of interest. Likewise, vide letter of acceptance dated May 24, 1996, M/s. Sharp Knife Company Pvt. Ltd. exercised similar option. As these parties, mentioned at S.Nos. 1 and 6, had opted for one time upfront payment towards interest, they were paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions of the non-convertible debenture issue floated by the assessee, on the exercise of option by the aforesaid debenture holders, which occurred in the respective assessment years in which deduction of this expenditure was 8) Section 36 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') is a residual section in respect of certain deductions which are to be made from the income of the assessee while arriving at the taxable income. It is nomenclatured as 'other deductions', as some of the preceding sections provide for certain deductions of specific nature, with which we are not concerned in the present case. One of the deductions, apart from many other kinds of deductions stipulated in the section, relates to the amount of interest paid in respect of capital borrowed for the purpose of business or profession. This is provided in clause (iii) of sub-section (1) of Section 36 and reads as under: S.36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 xx xx xx (iii) the amount of the interest paid in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the first year itself as per the option to be exercised by the debenture holder. In nutshell, the AO did not dispute that the expenditure on account of interest was genuinely incurred. Therefore, there is no dispute that interest has, in fact, been 'paid' during the year of accounting. Definition of 'paid' is contained in Section 43(ii) of the Act to mean actually paid or incurred according to the method of accounting. To be precise, this definition is couched in the following language: S.43 In sections 28 to 41 and in this section, unless the context otherwise requires xx xx xx (2) paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head Profits and gains of business or profession ; xx xx xx As per the aforesaid definition, even if the amount is not actually paid but 'incurred', according to the method of accounting, the same would be treated as 'paid'. Since the assessee was following mercantile system of accounting, the amount of interest could be claimed as deduction even if it was not actually paid but simply 'incurred'. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of accounts is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of accounts. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfiled and, thus, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred. 14) The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act. 15) Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures itself. The Court found that the assessee could stil be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: 15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of ₹ 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. 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 incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta (1972) 3 SCC 252; Tuticorin Alkali Chemicals Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras (1997) 6 SCC 117; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta (1978) 4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta (1999) 8 SCC 338]. 20) At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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