Commissioner Of Income Tax, Chennai v. M/S. First Leasing Company Of India Ltd., 749 Mount Road, Chennai – 600 002

In the High Court of Judicature at Madras The Honourable Mr. JUSTICE P.D.DINAKARANandThe Honourable Mr. JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.209 of 2006 and 1099 of 2004 Commissioner of Income Tax,Chennai..... Appellant in TC(A)209/2006Commissioner of Income Tax-IChennai..... Appellant in TC(A)1099/2004 Vs. M/s. First Leasing Company of India Ltd.,749 Mount Road, Chennai – 600 002. .... Respondent in both Tcs Tax Case Appeals filed under Section 260A of the Income Tax Actagainst the order of the Income Tax Appellate Tribunal 'A' Bench dated30.08.2005 in ITA No.1168/Mds/97 for the assessment year 1993-94. and'C' Bench dated 19.7.2004 in ITA No.351/Mds/98 for the assessment year1994-95 against the order dated 21.3.97 in I.T.Apeal No.81/96-97 on thefile of the Commissioner of Income - Tax (Appeals)-II Madras-34 for theassessment year 1993-94 in G.I/P.A.No. 47-065-CY-3961 and against theorder dated 29.12.1997 in IT/WT/GT/Appeal.No.143/97-98 on the file ofthe Commissioner of Income Tax (Appeals) Madras-34 for the assessmentyear 1994-95 in G.I/P.A.No.47-055-CV-3961. Against the assessment order dated 29.3.1996 in PAN, GIR.No.47-065-CY-3961/93-94 of the Assistant Commissioner of Income Tax, CentralCircle II (5) Madras-34 for 1993-94. Against the assessment order dated 31.3.97 in PAN.GIR.No.47-055-CV-3961 for assessment year 1994-95 by the Assistant Commissioner ofIncome Tax, Central Circle I(5), Madras-34. For Appellant : Mrs. Pushya Sitaraman For Respondent: Mr. V.S.Jayakumar J U D G M E N T(Judgment of the Court was delivered by P.D.DINAKARAN,J) Mr. V.S.Jayakumar, learned counsel takes notice on behalf of therespondent. The above tax case appeals are directed against the orders of theIncome Tax Appellate Tribunal dated 30.08.2005 and 19.07.2004 made inITA No.1168/Mds/97 and ITA No.351/Mds/98 for the assessment years1993-94 and 1994-95. 2. The brief facts are as follows: The Revenue is the appellant. The relevant assessment years are1993-94 and 1994-95. For the said assessment years, the assesseeclaimed deduction of amount paid towards provision for premium payableon redemption of debentures in future years. The assessing officerdisallowed the same and also disallowed the amount claimed on thedebenture issue expenses. Aggrieved by the order of the assessingofficer, the assessee preferred appeals before the Commissioner ofIncome-Tax (Appeals), who confirmed the order of the assessing officerrelying on the earlier orders in the assessee's own case for theassessment year 1988-89. On further appeals before the Income TaxAppellate Tribunal at the instance of the assessee, the Tribunalallowed the appeals following the assessee's own case and also thedecision of the Supreme Court in the case of Madras IndustrialInvestment Corporation Ltd. V. Commissioner of Income Tax reported in225 ITR 802. Hence, the present appeals by the Revenue raising thefollowing substantial questions of law: T.C.(A) Nos.209/06 and 1099/04: 1. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that the premiumpayable on actual redemption of debentures in future yearsis to be spread over and part of it is allowable as adeduction in this Assessment year? T.C.(A) No.209/06: 2. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theexpenditure incurred for issue of debentures in earlieryears is to be spread over and allowed as a deduction inthis year? 3. While the first question is related to the deduction of thepremium payable on actual redemption of debentures and spreading overthe period of the debentures, the second question relates to thededuction of the expenditure incurred for issuing debentures and which is to be spread over the period of debentures and thus both are inter-related. Hence, both the questions are dealt with jointly. T.C.(A) No.209/06: 2. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theexpenditure incurred for issue of debentures in earlieryears is to be spread over and allowed as a deduction inthis year? 3. While the first question is related to the deduction of thepremium payable on actual redemption of debentures and spreading overthe period of the debentures, the second question relates to thededuction of the expenditure incurred for issuing debentures and which is to be spread over the period of debentures and thus both are inter-related. Hence, both the questions are dealt with jointly. 4.1. It is a settled law that the discount on debenture is arevenue expenditure and hence the same is deductible under Section 37of the Income- Tax Act. 4.2. It is apt to refer Section 37 of the Income Tax Act, whichreads as follows: 37. (1) Any expenditure (not being expenditure of thenature described in sections 30 to 36 and not being in thenature of capital expenditure or personal expenses of theassessee), laid out or expended wholly and exclusively forthe purposes of the business or profession shall beallowed in computing the income chargeable under the head"Profits and gains of business or profession." 5.1. The questions whether the discount on debenture is therevenue expenditure or capital expenditure and the same could be spreadover and that whether the expenditure incurred for the issue ofdebenture in earlier years has to be spread over and allowed as adeduction in future years came for consideration before the Apex Courtin the case of Madras Industrial Investment Corporation Ltd. V.Commissioner of Income Tax reported in 225 ITR 802, wherein the ApexCourt observed that when a company issues debentures at a discount, itincurs a liability to pay a larger amount than what is borrowed. Theliability to pay the discounted amount over and above the amountreceived for the debentures, is a liability which has been incurred bythe company for the purposes of its business in order to generate fundsfor its business activities. The amounts so obtained by issue ofdebentures are used by the company for the purposes of its business.Hence, the liability to pay the discount would therefore be a revenueexpenditure. 5.2. The issue whether a particular expenditure should be treatedas capital expenditure or revenue expenditure incurred for the purposeof business must be determined on consideration of all facts andcircumstances of the case and by application of the principles ofcommercial trading, in the context of business necessity or expediency.If the outgoing or expenditure is so related to the carrying on, orconduct of the business, that it may be regarded as an integral part ofthe profit-making process and not for acquisition of an asset or aright of a permanent character, the possession of which is a conditionof the carrying on of the business, the expenditure may be regarded asrevenue expenditure. Any liability incurred for the business ofobtaining a loan would be revenue expenditure. 6. Then the question arises whether the deduction of such revenueexpenditure could be spread over. The revenue expenditure, which is incurred wholly and exclusively for the purpose of business, must beallowed in its entirety in the year in which it is incurred and itcannot be spread over a number of years, even if the assessee haswritten it off in his books over a period of years, but it was held bythe Apex Court in the decision cited supra that issuing debentures isan instance where, although the assessee has incurred the liability topay the discount in the year of issue of debentures, the payment is tosecure a benefit over a number of years, there is a continuing benefitto the business of the company over the entire period, and theliability should, therefore, be spread over the period of thedebentures. incurred wholly and exclusively for the purpose of business, must beallowed in its entirety in the year in which it is incurred and itcannot be spread over a number of years, even if the assessee haswritten it off in his books over a period of years, but it was held bythe Apex Court in the decision cited supra that issuing debentures isan instance where, although the assessee has incurred the liability topay the discount in the year of issue of debentures, the payment is tosecure a benefit over a number of years, there is a continuing benefitto the business of the company over the entire period, and theliability should, therefore, be spread over the period of thedebentures. 7. In the instant case, the issue is with reference to theallowability of premium payable on actual redemption of debentures asdeduction in future years. 8. A Division Bench of this Court in the case of Commissioner ofIncome-tax V. Tube Investments of (India) Ltd. reported in 261 ITR 753,held that pro-rata annual allocation of premium payable on redemptionof debentures allowed by the Tribunal is in accordance with the lawlaid down by the Apex Court in the case of Madras Industrial InvestmentCorporation Ltd. V. Commissioner of Income Tax reported in 225 ITR 802. 9. Similar view was also taken by the Calcutta High Court in thecase of National Engineering Industries Ltd., V. C.I.T. reported in 236ITR 577, wherein it has been held as follows: There is no distinction between a discount and apremium. The result in both is that something over andabove the face value and the specified interest is paid,the accounting procedure in one case being by way of apreliminary deduction from the mentioned amount, and theaccounting procedure is the other case being an additionat the end over the prescribed and mentioned face valueamount. The extra premium is to be spread over all theyears which are occupied between the date of issue andthe date of ultimate redemption. (emphasis supplied) 10. Applying the ratio laid down in the case of Madras IndustrialInvestment Corporation Ltd. V. Commissioner of Income Tax reported in225 ITR 802 and in the context of the ratio laid down in the case ofNational Engineering Industries Ltd., V. C.I.T. reported in 236 ITR577, where under it is held that there is no distinction betweendiscount and premium, the discount on debentures as well as the premiumpayable on actual redemption on debentures in future years and theexpenditure incurred for issue of such debentures are all held to bethe revenue expenditure, entitled to be spread over the period of debentures and consequently, allowable as deduction in a particularassessment year. 11. For the foregoing reasons, we do not see any question of lawmuch less substantial question of law arises for consideration. Hence,finding no reason to interfere with the orders of the Tribunal, boththe appeals stand dismissed. No costs. Sd/Asst.Registrar /true copy/ Sub Asst.Registrar sl To 1. The Assistant Registrar,Income Tax Appellate Tribunal Rajaji Bhavan, Besant Nagar, Chennai-90.2. The Commissioner of Income Tax (Appeals-II), Chennai-343. The Assistant Commissioner of Income-tax, Central Circle-I(5), Madras-600 034.one cc to Mr.V.S.Jayakumar, advocate SR.No.8163.two ccs to M/s.Pushya Sitaraman, Sr.SC for IT Cases SR.Nos.8353,8355 T.C.(A) Nos.209/06&1099/04 sky/4/5