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2015 (10) TMI 2372 - ITAT HYDERABAD

2015 (10) TMI 2372 - ITAT HYDERABAD - TMI - Claiming the balance amount of discount also as expenditure of the year u/s 37(1) - Held that:- Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Vs. CIT [1997 (4) TMI 5 - SUPREME Court], which is directly applicable to the facts of the case as considered by the Ld. CIT(A). Moreover, the judgment in the case of Taparia Tools Limited Vs. JCIT, Nasik (2015 (3) TMI 853 - SUPREME COURT) is under the provisions of Section 36(1)(i .....

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, we uphold the spreading over of the discount on debentures over period of debentures i.e., five years. Accordingly, we uphold the allowance of 1/5th of the discount only in the year under consideration - Decided against assessee.

Issue of claim of ‘premium’ which was disallowed U/s. 40(a)(ia) - Held that:- Even if the amount is credited to Suspense A/c, but is claimed in the Books of Accounts of the person liable to pay such income, such crediting shall be deemed to be credit of suc .....

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disallowable under the provisions of Section 40(a)(ia). - Decided against assessee. - I.T.A. No. 878/HYD/2014 - Dated:- 24-9-2015 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Shri Deepak Chopra and Ms. Manasvani Bajpai, ARs For The Revenue : Shri S.V.S.S. Prasad, CIT-DR ORDER PER B. RAMAKOTAIAH, A.M. : This is an assessee s appeal against the order of Commissioner of Income Tax (Appeals)-IV, Hyderabad dated 14-02-2014. Assessee has raised .....

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no specific provision under the Act to defer the expenditure which is in nature of discount on issue of debentures. 4. a) The Ld. CIT(A) and AO erred in law in disallowing the premium on unsecured loans of ₹ 32,46,671/- U/s. 40(a)(ia) of the Act, on the ground that no tax has been deducted on the same under the provisions of Chapter XVII-B of the Act. b) The Ld. CIT(A) and AO erred in not appreciating the fact that premium on loan outstanding is not covered under the provisions of Chapter .....

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d the Paper Book placed on record. 2. Briefly stated, assessee is engaged in the business of manufacturing of cement. In the course of assessment proceedings, Assessing Officer (AO) noticed that assessee claimed deduction of ₹ 2,55,60,000/- in the P&L A/c and further claimed an amount of ₹ 9,20,16,000/- in the computation of income. Assessee submitted that it has raised a sum of ₹ 112.78 Crores by issue of debentures at a discount of ₹ 12.78 Crores, that the debenture .....

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5 ITR 765 (MP)]. It was further submitted that the primary principle of law was that revenue expenditure was deductible in the year in which the expenditure was incurred irrespective of its benefit being spread over on long period of time and that wherever the intent of Legislature was to amortize/defer the deductibility of a particular expense, a specific provision was made in the Act, for example U/s. 35D, U/s. 35DD and U/s. 35DDA. Assessee relied on various principles established in various c .....

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debentures by way of discount. Even though there were certain mistakes committed by the AO in disallowing the amount, Ld. CIT(A) gave directions to the AO to adopt the correct amount which is not in dispute now. The dispute is only with reference to whether the amount is allowable entirely in the year of discount or has to be spread over the period of debentures i.e., five years in this case. 3. Ld. CIT(A) considering the detailed submissions of assessee however, agreed with the AO and allowed o .....

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0,000 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 i .....

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ncurred 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 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. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the propo .....

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r of incurrence irrespective of its benefit extending over a longer period. This principle has been acknowledged in a number of judicial decisions including those cited by the appellant. However, the nature of expenditure in these decisions were entirely different. For example, in the case of Madras Auto Services Pvt. Ltd, the expenditure was incurred on demolition and rebuilding of lease premises. In the case of Associated Cement Company Ltd, the expenditure was incurred on construction of a ro .....

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entical in nature with that incurred by the appellant. The appellant had sought to plead that this decision should be ignored, firstly, because the. Supreme Court had not taken note of an earlier decision and secondly, because a subsequent decision of the Supreme Court appeared to be at variance from it. However, the appellant has not brought to my notice any subsequent decision of the Supreme Court to the effect that its decision in the case of Madras Industrial Investment Corporation was no lo .....

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fferent. Assessee had borrowed funds earlier from M/s IL&FS. Due to corporate debt restructuring (CDR), assessee was liable to pay an amount of ₹ 16.62 Crores (which included accrued interest). As per the terms of CDR an upfront payment of ₹ 10 Crores was made on March, 2005 and balance amount of ₹ 6.62 Crores was converted into an unsecured subordinate loan carrying 0% rate of interest payable by March, 2010. By end of March 2011, assessee is liable to pay premium of ͅ .....

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, assessee relied on the same principles as in the case of discount on debentures to hold that the amount is allowable as deferred revenue expenditure and it can be spread over for a period of six years ie. period of loan. Assessee relied on various case law as extracted by the CIT(A) in para 7.3 of the order. Ld. CIT(A) following the principles laid down by the Hon ble Calcutta High Court in the case of National Engineering Industries Ltd., Vs. CIT [236 ITR 577] (Cal) considered that there is n .....

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was accepted in principle. There is no dispute on this issue. 5.1 However, the Ld. CIT(A) did not allow the amount as the same is liable to be disallowed u/s. 40(a)(ia). The order of Ld. CIT(A) in para 7.7 is as under: 7.7 However, the appellant has admittedly not deducted any tax on this sum. The appellant has sought to argue that obligation to deduct tax arose only when the payee acquired a right to enforce/receive payment from the payer and not on the basis of mere credit by the payer in, th .....

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ere is no denying that the appellant has credited the payee s account and debited the expense account in its books. Having done so, it was liable to deduct tax and having failed to do so, it becomes liable to disallowance u/s. 40(a)(ia). The disallowance of the premium of ₹ 32,46,671/- is therefore, upheld and the fourth ground of appeal is dismissed . Assessee is aggrieved and raised Ground Nos. 4 & 5. 6. Ld. Counsel reiterated arguments made before the Ld. CIT(A) and also relied on t .....

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e premium payable, it was the submission that there is no liability to deduct tax on the above amount and relied on the Board Circular No. 4/2004 dt. 13-05-2004 given in the case of Deep Discount Bonds to submit that there is no obligation to withhold tax on the premium amount claimed by assessee during the year under consideration. It was further submitted that so much of amount has not accrued to the payee,therefore, there is no liability to deduct tax. 6.2 Ld. DR however, relied on the princi .....

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fact that Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Vs. CIT [225 ITR 802 (SC)] (supra), has considered the issue in detail which was extracted by the Ld. CIT(A) in the order. Therefore, since the principles established by the Supreme Court in the above said case fully applies to the facts of the case, we are convinced that the discount of the debentures is to be spread over the period of holding period of debentures i.e., in this case five years. 8. Ld. Couns .....

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Limited Vs. JCIT, Nasik in Civil Appeal Nos. 6366-6368/2003 dt. 23-03-2015 (supra) are that assessee claimed deduction of revenue expenditure on account of interest payment of the sum of ₹ 2,72,25,000/- paid to 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 above said two debenture holders in the AYs. 1996-97 & 1997-98 r .....

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and went on to analyse amount incurred / paid and then came to the conclusion that since assessee had paid the entire interest amount upfront, the same was allowable in the year of payment. In fact, Hon ble Supreme Court also held that by allowing only 1/5th of the upfront payment, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payments at par which is clearly unsustainable. In coming to conclusion, the Hon ble Supre .....

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issue which was beyond his domain. However, there is no claim for debenture interest payable half yearly as that interest has not accrued and was also not claimed. The Hon ble Supreme Court in the said judgment also considered the judgment in the case of Madras Industrial Investment Corporation Vs. CIT [225 ITR 802 (SC)] (supra). vide para 17 of the judgment, the Hon ble Supreme Court considered as under: 17. Thus, the first thing which is to be noticed is that though the entire expenditure was .....

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istinguished issue on facts, however did not overrule the judgment of the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Vs. CIT [225 ITR 802 (SC)], which is directly applicable to the facts of the case as considered by the Ld. CIT(A). Moreover, the judgment in the case of Taparia Tools Limited Vs. JCIT, Nasik in Civil Appeal Nos. 6366-6368/2003 dt, 23-03-2015 (supra) is under the provisions of Section 36(1)(iii) whereas the decision of the Hon ble Supreme Court in .....

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r period of debentures i.e., five years. Accordingly, we uphold the allowance of 1/5th of the discount only in the year under consideration. The grounds 2 & 3 raised by assessee are accordingly rejected. 10. Coming to the issue of claim of premium which was disallowed U/s. 40(a)(ia), there is no dispute with reference to the claim of premium spread over the period of six years. This claim is in accordance with the principles laid down by the Supreme Court in the above referred case i.e., Mad .....

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er. The contentions of assessee before the CIT(A) are in contrast to the contentions raised on the above issue of discount on debentures. Be that as it may, as far as the principles of law are concerned, both the discount as well as premium are to be spread over as there is a continuing benefit or a continuing liability over the period of debenture or the loan period. Therefore, keeping the consistency principle also, the discount on debentures as well as the premium on loan taken are to be allo .....

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vision to consider the amount for the purpose of TDS under Chapter-XVIIB. We are not convinced with the arguments of assessee and its contentions. Assessee admits that there is a liability to pay the premium, that the reason why assessee has claimed 1/6th of the amount as a deduction in the year. Once there is liability to pay, automatically, provisions of Chapter-XVIIB will apply. As stated, this amount is not a discount on debentures nor a discount on deep discount bonds. As admitted by assess .....

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nterest as per the Income Tax Act is as under: Section 2(28A) - interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;] 10.2. Thus, as can be seen, the interest includes any service fee or other charge in respect of the moneys bor .....

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ions of Section 194A- interest other than interest on securities do apply to the facts of the case. Another contention of assessee is that amount has not accrued to the payee and therefore, assessee is not liable to deduct tax. However, , provisions of Section 194A has this Explanation . Section 194A : Interest other than Interest on securities .- ………………………………….……………&hell .....

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