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Taparia Tools Limited Versus Joint Commissioner Of Income Tax

Interest upfront to the debenture holder - AO treated it as the 'deferred revenue expenditure',whether is allowable as a deduction in the first year itself or it is to be spread over a period of five years, being the life of the debentures? - assessee follows mercantile system of accounting - Held that:- In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid .....

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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 abandon .....

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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 amount was actually paid. - Decided in favour of assessee. - CIVIL APPEAL NOS. 6366-6368 OF 2003, CIVIL APPEAL NOS. 6946-6948 OF 2004 - Dated:- 23-3-2015 - A.k. Sikri And Rohinton Fali Nariman JJ For the Appellant : Mr. Rustom B. Hathikhanawala,Adv. Mr. B. V. Balaram Das,Adv. For Respondent : Rr-ex .....

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akharia Stock Brokers Pvt. Ltd. and 55,00,000 on account of interest payment given to M/s. Sharp Knife Company Pvt. Ltd. This was on account of upfront payments of interest given to the aforesaid two debenture holders in the assessment years 1996-97 and 1997-98 respectively. The Assessing Officer (for short, the 'AO'), however, treated it as the 'deferred revenue expenditure', to be written off over a period of five years and, therefore, in these assessment years he allowed only .....

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he debenture issue of the assessee two options as regards payment of interest thereupon were given to the subscribers/ debenture holders. They could either receive interest periodically, that is every half yearly @ 18% per annum over a period of five years, or else, the debenture holders could opt for one time upfront payment of 55 per debenture. In the second alternative, 55 per debenture was to be immediately paid as upfront on account of interest. At the end of five years period, the debentur .....

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a 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 interest in the sum of 2,72,25,000 and 55,00,000 respectively. 5) The assessee follows mercantile system of accounting. Further, one time upfront interest of an amoun .....

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st payment in the sum of 2,72,25,000 and 55,00,000 respectively as fully deductible expenditure. It may be clarified that insofar as the assessee's claim for deduction of premium payable on redemption is concerned, the same was claimed in the return on a spread over basis covering a period of five years. 6) In the assessment orders passed by the AO, the assessee's claim for deduction of upfront interest payment was denied. Instead, the AO chose to spread it over a period of five years th .....

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d maintaining the method of deduction adopted by the AO. To put it otherwise, instead of entire amount paid by the assessee in the particular assessment year, full deduction is not given and this deduction is spread over a period of five years. Thus, the question is as to whether deduction of the entire amount of interest paid should be allowed or the stance of Revenue needs to be affirmed. 7) As pointed out above, the assessee maintains its accounts on mercantile basis. Further, the entire amou .....

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, 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 amou .....

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at any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] Explanation. Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Soci .....

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e purpose of business or profession. There is no quarrel, in the present case, that the money raised on account of issuance of the debentures would be capital borrowed and the debentures were issued for the purpose of the business of the assessee. In such a scenario when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, on the application of this statutory provision, on incurring of such interest, the assessee would be entitled to deduction of .....

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ssessee had himself charged a lower rate of interest on the monies which he lent. In the instant case, the AO did not dispute that the non-convertible debentures were issued and money raised for business purposes. The AO did not even dispute the genuineness of clause relating to upfront payment of interest in 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. Ther .....

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ccounting 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 & .....

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tire amount in the first year to the Profit and Loss account and it has, in fact, debited 1/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion. 11) Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. W .....

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ncurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging .....

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f 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 f .....

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it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfiled and, thus, it was exercising the statutory right which could not be denied. 13) We find that the High Court has taken into consideration the provisions of Section 36(1)(iii) of the Act and the conditions which are to be fulfiled for allowing the deduction on this account in the following words: "...The term "interest" has been defined under Section 2(28A) of the Act. Briefly, inte .....

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e assessee. In the present case, therefore, the word "Paid" in Section 36(1)(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting..." Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercan .....

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as paid in the first year. We are of the opinion that it is here the High Court has gone wrong and this approach resulted in wrong application of Matching Concept. It is emphasized once again that as per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well a .....

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n 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 .....

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pay the interest @ 55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax (2000) 6 SCC 645, this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction sho .....

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lity shall have to be disharged is not certain." The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year. 16) Judgment in Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax (1997) 4 SCC 666 was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court catego .....

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issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures 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 f .....

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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 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. However, the facts may justify an a .....

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er of years and allowed a proportionate deduction in the accounting year in question. 16. 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 a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 17) Thus, th .....

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. 18) What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been r .....

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