GST Helpdesk   Subscription   Demo   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
What's New Case Laws Highlights Articles News Forum Short Notes Statutory TMI SMS More ...
Extracts
Home List
← Previous Next →

2015 (3) TMI 853 - SUPREME COURT

2015 (3) TMI 853 - SUPREME COURT - [2015] 372 ITR 605 (SC) - 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 th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

iture 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 [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 i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 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. Hathikha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

est payment in the sum of 2,72,25,000 paid one M/s. Maliram Makharia 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 yea .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ion of law has arisen in the following circumstances: 3) In the 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 accou .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

00.00 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 interest in the sum of 2,72,25,000 and 55,00,000 respectively. 5) The assessee follows mercantile system .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ars 1996-97 and 1997-98, it claimed the entire upfront interest 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. Inst .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

peals preferred by him before the two fora have been dismissed 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 maintai .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for the purposes of the business or profession: [Provided that 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 perio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

apital borrowed by the assessee and this borrowing was for the 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ound that rate of interest is unreasonably high or that the assessee 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 ex .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 claim .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

od of five years in its final accounts by not debiting the entire 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 peri .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ent. By allowing only 1/5th of the upfront payment actually incurred, 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ad 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 an .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

x 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 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" ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

It means payment in accordance with the method followed by the 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ained to five years, and, thus, this interest of five years was 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 y .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 deferre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ercising of this option, has arisen and this liability was to 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 ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

not make any difference if the future date on which the liability 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 deci .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

period of time and had justified the same. It was a case of 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 s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 incurred. It cannot be spread over a number of years even if the assessee has written it off in his book .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

yment to secure technical assistance and training over a number 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

inuing benefit to the business of the company over the period. 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 ' .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rmit 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. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

Latest Notifications:

    Dated      Category

20-7-2017 Cus (NT)

18-7-2017 IT

18-7-2017 CE (NT)

18-7-2017 CE

18-7-2017 GST CESS Rate

15-7-2017 Kerala SGST

14-7-2017 Andhra Pradesh SGST

14-7-2017 Cus (NT)

14-7-2017 Cus

13-7-2017 Co. Law

13-7-2017 Co. Law

13-7-2017 ADD

13-7-2017 ADD

12-7-2017 Jammu & Kashmir SGST

12-7-2017 Gujarat SGST

12-7-2017 Gujarat SGST

12-7-2017 CGST Rate

12-7-2017 UTGST Rate

12-7-2017 UTGST Rate

12-7-2017 IGST Rate

More Notifications


Latest Circulars:

19-7-2017 Income Tax

18-7-2017 Customs

17-7-2017 Customs

14-7-2017 Income Tax

13-7-2017 Central Excise

13-7-2017 Customs

13-7-2017 Central Excise

13-7-2017 Customs

7-7-2017 Income Tax

7-7-2017 Goods and Services Tax

More Circulars



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version