2003 (9) TMI 22 - HC - Income Tax

Deduction of liability to pay premium on non-convertible debentures - Tribunal has allowed the claim of the assessee in a modified form. It held the liability to pay premium to be not contingent but a revenue expenditure. However it found that the amount is to be allowed proportionately over the period of redemption of debentures i.e. to say during the period the funds generated by issue of debentures are to be utilised by the company for its benefit - Tribunal is justified in law in holding that the premium payable on debentures was not a contingent liability and that it is allowable revenue expenditure - Tribunal is justified in law in directing to allow the claim of premium though proportionately over the period of redemption Revenue appeal dismissed

Summary

Issues Involved:
1. Contingent Liability
2. Revenue Expenditure
3. Proportionate Deduction
4. Repurchase and Reissue of Debentures

Issue-wise Detailed Analysis:

1. Contingent Liability:
The primary issue was whether the liability to pay a premium on the issue price of debentures by a company is a contingent liability. The Assessing Officer and the Commissioner of Income-tax (Appeals) held that the liability was contingent, relying on the decision of the Calcutta High Court in CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553. They reasoned that the company's right to repurchase and reissue debentures made the liability contingent until the 7th year when redemption would commence. However, the Tribunal disagreed, holding that the liability to pay the premium was not contingent but a revenue expenditure. The Tribunal's decision was based on the Supreme Court's ruling in Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802, which established that a liability incurred for business purposes, even if payable in the future, is not contingent.

2. Revenue Expenditure:
The Tribunal found that the liability to pay the premium on debentures was a revenue expenditure. This conclusion was drawn by applying the Supreme Court's principles in Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802, which stated that the difference between the amount received on the issue of debentures and the amount payable at redemption is an expenditure incurred for generating business funds. The Tribunal also noted that the expenditure was not capital in nature, aligning with the Supreme Court's earlier decision in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 (SC).

3. Proportionate Deduction:
The Tribunal directed that the premium payable on debentures should be allowed proportionately over the period of redemption. This approach was supported by the Supreme Court's approval of the principle in Batliboi's Principles and Practice of Auditing, which suggests spreading the discount or premium on debentures over the life of the debentures. The Tribunal's decision was further reinforced by the Madhya Pradesh High Court's ruling in M. P. Financial Corporation v. CIT [1987] 165 ITR 765, which was approved by the Supreme Court.

4. Repurchase and Reissue of Debentures:
The provision allowing the company to repurchase and reissue debentures was scrutinized. The Tribunal found that this provision did not make the liability contingent. The company's obligation to pay the premium was certain unless it opted to repurchase the debentures, which would be a contingent event. The Tribunal clarified that the liability was incurred in praesenti and was not contingent on future events. This interpretation was consistent with the statutory provisions under section 121 of the Companies Act, which allows companies to keep debentures alive for reissue, thereby not discharging the security or trust created for the debentures.

Conclusion:
The appeal was dismissed, affirming the Tribunal's decision that the liability to pay the premium on debentures was not contingent but a revenue expenditure. The premium was to be allowed proportionately over the period of redemption. The Tribunal's findings were in line with the Supreme Court's rulings in Madras Industrial Investment Corporation Ltd. v. CIT and other relevant case law.