2003 (3) TMI 44 - HC - Income Tax

Premium on the redeemable debentures - Whether, Tribunal has erred in deleting the addition of Rs. 54,75,000 made on account of 1/5th (sic) of premium on the redeemable debentures without considering the fact that no liability had accrued during the year under appeal and it was a contingent liability which was payable only after the expiry of ten years? - There is nothing to indicate alterations of terms and conditions during the subsistence of the issued convertible debentures during the assessment year in question. Secondly, in the annual reports of the company and also in the audit reports given by the auditors, it has been certified that zero interest unsecured redeemable convertible debentures of Rs. 100 each redeemable after ten years at a premium of 100 per cent. had been issued during the assessment year in question. There is no reason for us to discard this note of the auditor. Even in the assessment order, no reasons have been given by the Assessing Officer for discarding this note of the auditors. Lastly, we may point out that even assuming for the sake of argument that the borrower had a discretion to change the terms of the issued debentures, there is nothing in the record to show that during the assessment year in question the borrower had exercised such a discretion - we answer the above quoted question in the affirmative, i.e., in favour of the assessee and against the Department

Summary

Issues:
- Whether the Income-tax Appellate Tribunal erred in deleting the addition of Rs. 54,75,000 made on account of premium on the redeemable debentures?
- Whether the liability was ascertainable during the accounting year ending March 31, 1995, or was it a contingent liability?
- Whether the terms of the issued debentures were altered during the life of the issued debentures?
- Whether the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 is applicable in this case?

Analysis:

The judgment of the High Court of Bombay dealt with two appeals concerning the assessment years 1995-96 and 1996-97, both preferred by the Department. The central question revolved around the deletion of an addition of Rs. 54,75,000 on account of premium on the redeemable debentures. The facts of the case involved an assessee-company issuing zero interest unsecured redeemable convertible debentures at a premium of 100% redeemable after ten years. The Assessing Officer disallowed the deduction claimed by the assessee, considering it a contingent liability. The Commissioner of Income-tax (Appeals) upheld this decision, but the Tribunal overturned it citing a Supreme Court judgment. The Department appealed to the High Court challenging this decision.

During the arguments, the Department contended that the terms of the issued debentures were altered during their life, making the Supreme Court judgment inapplicable. However, the High Court found no merit in this argument. It reviewed the records and proceedings, noting no alterations in the terms during the assessment year. The court emphasized that the company's annual and audit reports confirmed the issuance of debentures as claimed. It further highlighted the absence of evidence showing the borrower's exercise of discretion to change terms during the assessment year. The High Court concluded that the judgments of both the Supreme Court and its own previous ruling applied to the case, upholding the Tribunal's decision.

In the final order, the High Court answered the question in favor of the assessee, ruling against the Department. Both appeals were disposed of with no order as to costs. The judgment reaffirmed the applicability of the Supreme Court precedent and upheld the Tribunal's decision in favor of the assessee, emphasizing the lack of evidence supporting the Department's arguments.