Madras Industrial Investment Corporation Ltd v. Commissioner Of Income Tax, Tamil,Nadu I, Madras

MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. v. COMMISSIONER OF INCOME TAX, TAMIL,NADU I, MADRAS APRIL 4, 1997 [S.C. AGRAWAL AND SUJATA V. MANOHAR, JJ.] Income Tax Act, 1961: Section 37. Income Tax-Business Expenditure-AY 1968-69-Discount on Deben-tures issued by assessee-Held : Discount on such debentures was business expenditure in the nature of revenue expenditure-Hence, an allowable deduc-tion-fl owever, since the liability to pay the discount was spread over a number of years, only prop01tionate part, and not the entire amount, of the discount could be deducted in the assessment year in question. Words and Phrases : "Expenditure''--Meaning of-In the context of S.37 of the Income Tax Act, 1961. The appellant-Company issued debentures at a discount of 2% redeemable after 12 years with interest at a stipulated rate. For AY 1968-69 the appellant wrote off Rs. 12,500 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with 30-6-1967. The Income tax Appellate Tribunal not only allowed the deduction of Rs. 12,500 but also allowed the deduction of the balance F amount of Rs. 2,87,500. The question before the High Court was 'Whether there was any expenditure in the sum of Rs. 2,87,500 and whether it was revenue expenditure"? The High Court answered the first part of the question in the negative and did not answer the second part. Hence this appeal. G Disposing of the appeal, this Court HELD : 1.1. "Expenditure" is not necessarily confined to the money, which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a H A future date. However, a contingent liability, which may have to be dis-charged in future, cannot be considered as expenditure. [600-F-G] Indian Molasses Co. (Private) Ltd. v. CIT, (1959) 37 ITR 66 and Calcutta Co. Ltd. v. CIT, (1969) 37 ITR 1, relied on. B 1.2. Although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in presenti although it is payable in C futuro. A contingent liability that may arise in future is, however not "expenditure". It would. cover not just a one-time payment but a liability spread out over a number of years. [602-B-C] CIT v. Chandulal Keshavlal & Co., (1960) 38 ITR 601, relied on. CIT v. Indian Jute Mills Association, (1982) 134 ITR 68, approved. 2.1. When a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. The company incurs such a liability for the purposes of its business in order to generate funds for its business activities. The company uses the E amounts so obtained by issue of debentures for the purposes of its busi-ness. This would, therefore, be expenditure. [603-E-G] M.P. Financial Corporation v. CIT, (1987) 165 ITR 765 (MP), ap-proved. Spicer and Pegler's: "Book-Keeping and Accounts'~ 17th Edn., P. 240 and Batliboi: "Principles and Practice of Auditing, referred to. 2.2. Whether a particular expenditure is revenue expenditure in-curred for the purpose of business must be determined on a consideration of all the facts and circumstances. And by the application of principles of G commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-making proceeds and not for acquisition of an asset or a right of a permanent character, the possession H of which is a condition of the carrying on of the business, expenditure may be regarded as revenue expenditure. [604-C] 593 594 Indian Cemel!fs Ltd. v. CIT, (1966) 60 ITR 52 and Bombay Steam Navigation Co. Ltd. v. CIT, (1965) 56 ITR 52, relied on. Texas Land and Mortgage Co. v. William Holtham, (1894) 3 Tax Cases B 255 and Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., 12 Suppl. ITR 513, referred to. 3.1. The Income Tax Appellate Tribunal's conclusion, that since the entire liability to pay the discount had been incurred in the accounting year in question, the appellant was entitled to deduct the entire amount of C Rs. 3 lakhs in that accounting year, is not 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. Ordinarily, revenue expenditure which is in-curred wholly and exclusively for the purpose of business must be allowed D 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 assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. E [605-C-E] Hindustan Aluminium Corporation Ltd. v. CIT, (1983) 144 ITR 474 (Cal.), approved. 3.2. In issuing debentures at a discount, although the assessee has incurred the liability to pay the discount in the year ofissue 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. The appellant, therefore, had, in its return, correctly claimed a deduction G only in respect of the proportionate part of discount of Rs. 12,500 over the relevant accounting period in question. The view taken herein is also in conformity with the accounting practice of showing the discount in "dis· count on debentures account" which is written off over the period of the debentures. [605-G-H, 606-A] H A proved. M.P. Fi11a11cial C01poratio11 v. CIT, (1987) 165 ITR 765 M.P., ap- 4. The balance expenditure of Rs. 2,87 ,500 cannot be deducted in the assessment year in question. The question before the High Court is answered in tho negative in so far as it relates to the deduction of Rs. B 2,87,500 in the assessment year in question though for reasons entirely different from those given by the High Court. But only a proportionate part of the discount can be deducted in the assessment year in question as set out earlier. [606-C] CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3531 of 1982. From the Judgment and Order dated 5.11.79 of the Madras High Court in T.C. No. 179/75 R. No. 162 of 1975. Ms. Janki Ramachandran for the Appellant. D Dr. V. Gaurishankar and Ms. Lakshmi Iyengar for the Respondent. The Judgment of the Court was delivered by MRS. SUJATA V. MANOHAR, J. The appellant is a public limited E company. The present appeal filed by it pertains to the accounting year ending June 30, 1967 relevant to the assessment year 1968-69. On December 10, 1966 a public issue of the debentures of the appellant-company was made. The total value of the debentures was Rs. 1.5 crores repayable with interest at the rate of 5-3/4% per annum. The F debentures were issued at a discount of 2%, redeemable after 12 years. The issue price of a debenture of Rs. 100 was Rs. 98. The total discount on the issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For the assessment year 1968-69 the appellant-company wrote off Rs. 12,500 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the G period of six months ending with June 30, 1967, taking into account the period of 12 years which was the period of redemption and dividing the discount of Rs. 3 lakhs over the period of 12 years. 596 र.22,500 र.3,00,000 र.3,22,500 Earlier the appellant had issued debentures at a discount of 1 % redeemable after 10 years. The discount relating to these debentures was H being written off periodically. For the assessment year 1968-69 the appel- MADRAS INDL INVESTMENT CORPN. LID .v. C.l.T. (MRS. SUJATA V. MANOHAR, J,)597 lant-company wrote off a discount of Rs. 10,000. Thus, in the balance- A sheet as of 30th of June, 1967, on the Liabilities side the debentures issued during the relevant accounting year were shown at the figure of Rs. 1.50 crores. On the Assets side, the discount account of these debentures was as follows : The discount of Rs. 22,500 represented Rs. 12,500 written off out of the discount of Rs. 3,00,000 and Rs. 10,000 written off as discount on the D previous issue. The Income-tax officer by his assessment order dated January 31, 1969 disallowed the claim of the appellant for deduction of Rs. 22,500 on the ground that discoµnt on bonds and debentures was not allowable as an E expenditure. On appeal, the Appellate Assistant Commissioner by his order dated July 4, 1969 held that the discount allowed at the time of the issue of debentures was to be treated as a part of the expenditure for such issue. He upheld the claim for deduction of Rs. 12,500 but rejected the claim as regards Rs. 10,000 on the ground that it related to discount on debentures issued in an earlier year and hence it did not pertain to the F relevant previous year. The assessee then preferred an appeal before the Appellate Tribunal. The assessee contended, inter alia, that (1) The Appellate Assis-tant Commissioner had erred in sustaining the disallowance of Rs. 10,000 on the ground that it related to an earlier year and (2) The Appellate G Assistant Commissioner having held that discount allowed at the time of issue of debentures was to be treated as part of the expenditure incurred for such issue, should have further allowed a sum of Rs. 2,87,500 being balance amount of the total discount of Rs. 3,00,000 relating to the issue of debentures of Rs. 1.5 crores. Before the Tribunal the department H A contended that the appellant -company had, for the first time made a new claim before the Tribunal for deduction of Rs. 2,87,500 and the Tribunal had no jurisdiction to examine this claim. This objection was rejected by the Tribunal. The Tribunal held that the expenditure of Rs. 3,00,000 was incurred during the relevant previous year although it was proportionately B [written off over a period of ][12 ][years. The expenditure of Rs. 3,00,000 was ]allowable as expenditure incurred for the purpose of business. But the mere fact that for accountancy purposes this amount was spread over 12 years and only Rs. 12,500 was written off, being the proportionate amount for 6 months ending with June 30, 1967, cannot make any difference. Therefore, the Tribunal allowed a deduction of Rs. 2,87,500 also. On the C application of the Department, the Tribunal stated a case under Section 256(1) of the Income-tax Act, 1961 to be decided by the Madras High Court. The following two questions were referred to the Madras High Court: (1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in permitting the assessee to raise the con-tention that the entire amount of Rs. 3,00,000 being the discount relating to the issue of debentures for Rs. 1.5 crores during the relevant previous year was to be allowed as a permissible deduc-tion? (2) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee had incurred an expenditure of Rs. 3,00,000 during the relevant previous year by way of discount paid to the persons who had subscribed to the debentures issued by it for Rs. 1.5 crores during the relevant previous year and the same was allowable as a revenue expendi-ture?" The Madras High Court by its judgment and order dated November 5, 1979 (reported in 1980 124 ITR 454) answered the first question in favour of the G appellant-assessee. The High Court reframed the second question as fol-lows: