Regarding Issue v. Commissioner Ofincome Tax Reported In (1997) 225 Itr 0802 Wherein View Of The Observations Made In Para 4, 6, 7

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH JAIPUR DB Income Tax Appeal No.33/2006 The Commissioner of Income Tax, Alwar. vs.M/s Vijay Solvex Ltd., Bhagwati Sadan, S.D. Marg, Alwar. Date of Order: 15.11.2016 HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE MAHENDRA MAHESHWARI Mrs. Parinitoo Jain for the appellant.Mr. Sanjay Jhanwar for the respondent. 1.By way of this appeal the assessee hasassailed the judgment & order of the Tribunalwhereby the Tribunal has dismissed the appealpreferred by the department and partly allowed theappeal of the assessee. 2.This Court while admitting the matter framed following questions which read as under: “i) Whether the findings of theTribunal are perverse in deletingthe addition of Rs. 12,86,660/- onaccount of drying loss when thebooks of accounts were rejected u/s145?ii) Whether the findings of theTribunal are perverse in deletingthe addition of Rs. 3,35,777/- madeon account of deferred revenueexpenditurecontrarytotheprovisions of law?”iii) Whether the findings of theTribunal are perverse in deletingthe addition of Rs. 8,42,214/- madeon account of Section 43B by notappreciating the second proviso ofsection 43B?iv) Whether the findings of theTribunal are perverse in allowingthe deduction under Section 80I ongross total income before reducingdeduction under Section 80HH?” 3.In view of the decision of this Court in Tax Appeal No. 3/2006, the issue is answered in favour of the assessee against the department. 4. Regarding issue No.2 in view of the decisionof Supreme Court in case of Madras IndustrialInvestment Corporation Ltd. vs. Commissioner ofIncome Tax reported in (1997) 225 ITR 0802 wherein view of the observations made in para 4, 6, 7 & 9 which reads as under:- “4. The present appeal is filed by theappellant-company against the secondquestion as reframed by the Madras HighCourt and answered as above We havefirst to consider whether the discountof Rs 3,00,000 on debentures which wereissued by the appellant-company isexpenditure incurred by the appellant-company for the purposes of itsbusiness The appellant-company actuallyreceived Rs 147 crores as against whichit incurred a liability to return a sumof Rs 150 crores with interest at theend of 12 years (the date ofredemption) This liability which theassessee incurred, to pay the amount ofRs 3,00,000 in addition to what itactually received, is being written offover the period of 12 years Can it betreated as expenditure ? In the case ofIndian Molasses Co (Private) Ltd Vs CIT[1959] 37 ITR 66 this court consideredthe meaning of expenditure undersection 10(2)(xv) of the Indian Income-tax Act, 1922 The High Court wasconcerned with the sums which weretransferred by the company to thetrustees to take out an annuity policyon the life of the managing director orthe longest life policy in favour ofthe managing director and his wifeThere was a provision in the policy forsurrendering the annuity for a capitalsum after giving notice The payment bythe company to the trustees wascontingent and the liability itself wascontingent The court said thatexpenditure which is deductible forincome-tax purposes is one which istowards a liability actually existingat the time Putting aside of moneywhich may become expenditure on thehappening of an event is notexpenditure Dealing with what isexpenditure, this court said (page 78)that expenditure is equal to expenseand expense is money laid out bycalculation and intention The ideaofspending in the sense of paying outor away money is the primary meaningExpenditure is what is paid out oraway,somethingthatisgone irretrievably In the case of CalcuttaCo Ltd Vs CIT [1959] 37 ITR 1 (SC)decided in the same month, the assesseebought lands and sold them in plots forbuildingpurposesTheassesseeundertook to develop the plots bylaying out roads, providing a drainagesystem, installing lights, etc When theplots were sold the purchasers paidonly a portion of the purchase priceand undertook to pay the balance ininstalments The assessee undertook tocarry out the development of theseplots In the relevant accounting year,theassesseewhofollowedthemercantile system of accounting,actually received in cash only a sum ofRs 29,392 towards the sale price oflands; but it credited in its accountsthe sum of Rs 43,692 representing thefull sale price of the lands and at thesame time it also debited an estimatedsum of Rs 24,809 as expenditure for thedevelopment it had undertaken to carryout even though that amount was notactuallyspentTheDepartmentdisallowed this expenditure Upholdingthe claim of the assessee to deduction,this court said that the undertakinggiven by the assessee imported aliability on the assessee which accruedon the dates of the deeds of salethough that liability was to bedischarged at a future date It was thusan accrued liability and the estimatedexpenditure which would be incurred indischarging the same could be deductedfrom the profits and gains of businessThe difficulty in the estimation ofliability did not convert the accruedliability into a conditional one Thiscourt said that the expression profitsor gains in section 10(1) of the IndianIncome-tax Act, 1922, had to beunderstood in its commercial sense; andthere could be no computation of suchprofits and gains until the expenditurewhich is necessary for the purpose ofearning the receipts is deductedtherefrom, whether the expenditure isactually incurred or the liability inrespect thereof has accrued even thoughit may have to be discharged at somefuture date. Thus,expenditure is notnecessarily confined to the money whichhas been actually paid out It covers aliability which has accrued or whichhas been incurred although it may haveto be discharged at a future date.However, a contingent liability whichmay have to be discharged in futurecannot be considered as expenditure. 6.In the case of CIT Vs Indian JuteMills Association [1982] 134 ITR 68(Cal), Sabyasachi Mukharji J, as hethen was, of the Calcutta High Court, 6.In the case of CIT Vs Indian JuteMills Association [1982] 134 ITR 68(Cal), Sabyasachi Mukharji J, as hethen was, of the Calcutta High Court, consideredthemeaningoftheexpression expenditure and said thatthe expression must be understood inthe context in which it is used TheLegislature has used the expressionallowances and depreciation in severalsections in the scheme in Chapter IV ofthe Income-tax Act, 1961 Section 37 ofthe Income-tax Act, 1961, enjoins thatany expenditure not being expenditureof the nature described in sections 30to 36 laid out or expended wholly andexclusively for the purpose of thebusiness or profession should beallowed in computing the incomechargeable under the head Profits andgains of business or profession Insections 30 to 36, the expressionsexpenses incurred as well as allowancesand depreciation have been usedTherefore, the Legislature was usingthe expression any expenditure insection 37 to cover both He interpretedsection 44A and the term expenditureincurred occurring there in the lightof sections 30 to 36 and 37(1) In thatcase, the Calcutta High Court wasrequired to consider the claim of theassessee which was a non-tradingassociationtodepreciationonfurniture, air-conditioner, etc, whichwere debited in its account TheDepartment contended that the assesseecould not claim depreciation since itwas a non-trading association TheCalcutta High Court held that havingregard to the purpose of section 44Athe depreciation claimed should beconstrued as expenditure incurred andthe assessee would be entitled to thebeneficialconstructionoftheprovision The Calcutta High Courtdiffered in that case from the viewtaken by the Madras High Court in thejudgment which is under challengebeforeus.Therefore,althoughexpenditure primarily denotes the ideaof spending or paying out, it may, ingiven circumstances, also cover anamount of loss which has not gone outof the assessee’s pocket but which isall the same, an amount which theassessee has had to give up It alsocovers a liability which the assesseehas incurred in praesenti although itis payable in futuro. A contingentliability that may arise in future is,however, not expenditure It would alsocover not just a one-time payment but aliability spread out over a number ofyears. 7.The question whether a discount onbonds should be treated as expenditure,directly arose before the MadhyaPradesh High Court in the case of MPFinancial Corporation Vs CIT [1987] 165 7.The question whether a discount onbonds should be treated as expenditure,directly arose before the MadhyaPradesh High Court in the case of MPFinancial Corporation Vs CIT [1987] 165 ITR 765 The Madhya Pradesh High Courtwas required to deal with a case wherethe State Financial Corporation hadissued bonds at a discount The courtheld that the expression expenditure asused in section 37 of the Income-taxAct, 1961, may, in the circumstances ofa particular case, cover an amountwhich is really a loss and the saidamount has not gone out from thepockets of the assessee In the case ofissue of bonds at a discount, it saidthat the same principles as areapplicable in the case of issue ofdebentures at a discount, would beattracted The amount of discount, ineffect, represents deferred interestand an assessee would not be justifiedin claiming deduction of the entireamount of discount in the accountingyear in question But it would beentitled to proportionate deductionspread over the period for which thebonds remain outstanding The High Courthas relied upon a passage in Spicer andPegler’s Book-keeping and Accounts(seventeenth edition) at page 240 whichis as follows (at page 769) :Thediscount on the issue is, in effect,deferredinterest,andshouldaccordingly be written off over theperiod having the use of the moneyraised by the debentures, unless asinking fund is created to accumulatethe full redemption price, includingthe discount. It has also relied upon aparagraph in Batliboi’s Principles andPractice of Auditing which is asfollows (at page 769) :When debenturesare issued at discount, an accountstyled‘DiscountonDebenturesAccount’, will be debited with thediscount allowed on the issue Thedebentures account will be credited inthe books at their nominal value andwill appear at that value as aliability in the balance-sheet The lossthus arising need not be completelywritten off in the year in which thedebentures are issued, since thebenefit to be derived from the amountborrowed will continue till thedebentures are redeemed Where thedebentures are redeemable at the end ofa fixed period, a proportionate amountof discount should be written off outof revenue every year during which thedebentures are outstanding. The MadhyaPradesh High Court also referred to thejudgment of the Madras High Court whichis under challenge before us anddiffered from it, preferring thedecision of the Calcutta High Court inthe case of CIT Vs Indian Jute MillsAssociation [1982] 134 ITR 68 TheMadhya Pradesh High Court held that theassessee would not be justified in claiming deduction of the entire amountof discount in the accounting year inquestion but it would nevertheless beentitled to proportionate deductionspread over the period for which thebondswouldremainoutstanding.Therefore, when a company issuesdebentures at a discount, it incurs aliability to pay a larger amount thanwhat it has borrowed, at a future dateWe need not go into the questionwhether this additional liabilityequivalent to the discount, which isincurred in praesenti but is payable infuture, represents deferred interest ornot That may depend upon the totalityof circumstances relating to the issueof debentures, including its terms Theliability, however, to pay thediscounted amount over and above theamount received for the debentures, isa liability which has been incurred bythe company for the purposes of itsbusiness in order to generate funds forits business activities The amounts soobtained by issue of debentures areused by the company for the purposes ofits business This would, therefore, beexpenditure. 9. Our attention was drawn to the caseof Lomax (Inspector of Taxes) Vs PeterDixon and Son Ltd, a decision of theEnglish Court of Appeal reported in[1944] 12 ITR (Suppl) 1, where theEnglish Court had treated discount orpremium in the hands of the recipientas a receipt of a capital nature Butthe character of payment in relation tothe payer can be different from thecharacter of that payment in the handsof the recipient In the light of theratio laid down by this court in thecase of India Cements Ltd [1966] 60 ITR52, any liability incurred for thepurpose of obtaining the loan would berevenue expenditure.” 4.1In view of the submissions, the issue isanswered in favour of the assessee against thedepartment. 5. Regarding issue No.3 in case of assesseehimself this court in Tax Appeal No. 280/2005,more particularly in para 3, 4 & 5, has observedas under:- “3. Counsel for the respondent, atthe outset, submitted that the above referred questions have beenanswered by this Court in DBIncome Tax Appeal No.177/2011(Commissioner of Income Tax Vs.M/s State Bank of Bikaner &Jaipur) and other connected casesvide judgment dt. 06/01/2014 andcontended that since identicalquestion and self same contraryhas been answered by deciding thesame in favour of the assessee andagainst the Revenue therefore, thepresent appeal filed by theRevenue deserves to be dismissedaccordingly. 4.Counsel for the appellant-Revenue, though admitted that thequestion of law in the instantappeal and in the case ofCommissioner of Income Tax Vs. M/sState Bank of Bikaner & Jaipur(supra) are identical but SpecialLeave Petition (Civil) No.16251 of2014, CIT Jaipur Vs. M/s StateBank of Bikaner & Jaipur andSpecial Leave Petition No.16242 of2014, CIT Jaipur Vs. Jaipur VidyutVitaran Nigam Ltd. have been filedby the department before theHon'ble Apex Court against thejudgment dt.06/01/2014 passed inthe case of Commissioner of IncomeTax Vs. M/s State Bank of Bikaner& Jaipur (supra) and according toher in the said SLPs, notices havebeen directed to be issued.Therefore, she contended that theinstant appeal may be kept pendingor in the alternative, the appealmay be directed to be governed bythe judgment to be delivered bythe Hon'ble Apex Court in theSpecial Leave Petition (Civil)No.16251 of 2014, CIT Jaipur Vs.M/s State Bank of Bikaner & JaipurandSpecialLeavePetitionNo.16242 of 2014, CIT Jaipur Vs.Jaipur Vidyut Vitaran Nigam Ltd.(referred to supra).5.We have heard counsel for theparties and in our view, whensimilar view has already beentaken by this Court on theidentical question of law, thenthere is no reason to deviate withthe findings and question of lawansweredinthecaseofCommissioner of Income Tax Vs. M/sState Bank of Bikaner & Jaipur(supra)andsincenodistinguishing facts have beenbrought on record, therefore, in our view, the present appeal isliable to be dismissed. However,keeping in view the fact that theSLP is pending before the Hon'bleApex Court against the judgmentpassed by this Court in the caseof Commissioner of Income Tax Vs.M/s State Bank of Bikaner & Jaipur(supra) , the judgment of theHon'ble Apex Court in the case ofCIT Jaipur Vs. M/s State Bank ofBikaner & Jaipur (supra) shallalso govern the fate of thepresent appellant.” 5.1. In that view of the matter, the same is alsoin favour of the assessee. 6.Regarding issue No. 4, in view of the decisionof this Court in Tax Appeal No. 110/2006 and thedecision of Supreme Court in case of JointCommissioner of Income Tax vs. Mandideep Eng. &PKG. Ind. (P) Ltd. reported in (2007) 292 ITR 0001and the decision of this Court in case ofCommissioner of Income Tax vs. Chokshi Contacts(P) Ltd. reported in (2001) 251 ITR 0587, evenfourth issue is also decided in favour of theassessee against the department. 6.The appeal stands dismissed. 5.1. In that view of the matter, the same is alsoin favour of the assessee. 6.Regarding issue No. 4, in view of the decisionof this Court in Tax Appeal No. 110/2006 and thedecision of Supreme Court in case of JointCommissioner of Income Tax vs. Mandideep Eng. &PKG. Ind. (P) Ltd. reported in (2007) 292 ITR 0001and the decision of this Court in case ofCommissioner of Income Tax vs. Chokshi Contacts(P) Ltd. reported in (2001) 251 ITR 0587, evenfourth issue is also decided in favour of theassessee against the department. 6.The appeal stands dismissed. (MAHENDRA MAHESHWARI),J. (K.S.JHAVERI),J. A.Sharma/42