TMI Blog1991 (11) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in holding that the assessee was entitled to deduction of Rs. 57,643 only and not of the entire amount of Rs. 4 lakhs being premium payable on debentures in computation of its income for the assessment year 1984-85 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 59,940 incurred by the assessee was a capital expenditure ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred on repairs and insurance of cars should be considered for the purpose of computing disallowance under section 37(3A) of the Income-tax Act, 1961, and that such an expenditure is not allowable under section 31 of the said Act ?" The only question referred at the instance of the Revenue and the first question referred at the instance of the assessee relate to deduction claimed in respect of premium payable on redemption of non-convertible secured debentures. The brief facts are that in October, 1983, the assessee issued non-convertible secured debentures of the total value of Rs. 80 lakhs carrying interest at 15 per cent. per annum. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction over the period of the debentures, namely, in seven years, and that one-seventh should accordingly be allowed in the assessment year involved. The Tribunal followed its decision on identical facts given in the case of Rallis India Limited. The conclusion of the Tribunal is that one-seventh of the said sum of Rs. 4 lakhs should be allowed as a deduction. While the Revenue has questioned this allowance of one-seventh in this year, the assessee has claimed that the entire amount of Rs. 4 lakhs should have been allowed as a deduction in the assessment year in question. The question is whether the premium payable at the time of redemption of the debentures is an allowable revenue expenditure and if so, whether the whole of it or only one-seventh thereof can be allowed as deduction in the assessment year in question. Mr. R. N. Bajoria, learned counsel for the assessee, has submitted that the undisputed facts are that the assessee is following the mercantile system of accounting. The debentures issued contained a condition to the effect that they will be redeemed on January 4, 1991, at a premium of 5 per cent. of the face value of the debentures. A definite enforceable ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a decision of this court in the case of Hindustan Gas and Industries Ltd. v. CIT [1979] 117 ITR 549, for the proposition that the expenditure incurred for debentures was in the nature of capital expenditure and was not a revenue expenditure. In Hindustan Gas and Industries Ltd.'s case [1979] 117 ITR 549, this court was considering the case of expenditure incurred on the issue of redeemable preference shares and not a case of issue of the debentures. The decision of the Supreme Court in the case of India Cements Ltd.'s [1966] 60 ITR 52, which was cited before this court was distinguished on the ground that the said case related to the issue of debentures, whereas the said case of Hindustan Gas and Industries Ltd. [1979] 117 ITR 549 (Cal) was of redeemable preference shares. It was held by this court in Hindustan Gas and Industries Ltd.'s case [1979] 117 ITR 549 (at page 555) of the report as follows : "There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and upon such reissue, the person entitled to the debentures shall have, and shall be deemed always to have had, the same rights and priorities as if the debentures had never been redeemed. But in the case of repurchase of debentures, no premium is payable. We are, therefore, unable to hold that the liability for payment of the premium was created at the time of issue of the debentures or the liability to pay the premium is in unqualified terms. The liability to pay the premium, in our view, clearly arises at the expiry of the seventh year from the date of allotment and there is no liability to pay the premium at all if the debentures are repurchased under the buy-back clause and there is no further issue of debentures. The payment of premium is, therefore, in our view, clearly a contingent liability and the liability to pay the premium shall arise only if the debentures are not repurchased by the company under clause 5(b) and are redeemed only at the end of seven years. A contention has also been raised by the Revenue that, in any event, having regard to the decision of the Madhya Pradesh High Court in M.P. Financial Corporation v. CIT [1987] 165 ITR 765, the deduction for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed against the profits earned and it is no answer to the claim for a deduction that part of those expenses produced no return in that year because all the trees were not yielding rubber in that year." This decision was followed by this court in CIT v. Kusum Products Ltd. [1984] 149 ITR 250. In that case, the assessee had spent a sum of over Rs. 10,00,000 for the purchase of import entitlements to make import of raw materials and in the accounting year in which such purchase was made it claimed deduction of the said entire sum as business expenditure. The Income-tax Officer disallowed a portion of such expenditure on the ground that import entitlements to the extent of Rs. 9.54 lakhs was not utilised during the year of account. According to the Income-tax Officer, the deduction could be allowed only in respect of the benefit actually derived by utilising the import entitlements during the year in question proportionately. This court rejected the said stand of the income-tax authorities and followed the decision of the Supreme Court in Travancore Rubber and Tea Co. Ltd.'s case [1961] 41 ITR 751. By way of an illustration, the case of advertisement and publicity expenses can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not allowable under section 37. Following the aforesaid decisions, we answer the second question in the affirmative and in favour of the Revenue. The facts relating to the third question are that the assessee submitted before the Inspecting Assistant Commissioner (Assessment) that while computing disallowance under section 37(3A) the expenditure on repairs of the car and insurance of the car should not be considered. The Inspecting Assistant Commissioner (Assessment) rejected the assessee's contention which was upheld by the Commissioner of Income-tax (Appeals). The Tribunal, however, held that the expenditure on repairs of car and car insurance fell within the mischief of section 37(3A). Accordingly, the order of the Commissioner of Income-tax (Appeals) on this point was upheld. Section 37(3A) of the Act, inter alia, provides that "notwithstanding anything contained in sub-section (1)" (emphasis added) 20 per cent. of any expenditure in excess of Rs. 1,00,000 incurred by an assessee in respect of one or more of the items specified in sub-section (3B) shall not be allowed as a deduction in computing the business income. Sub-section (3B) in sub-clause (ii) specifies one such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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