1997 (5) TMI 19 - HC - Income Tax

Financial Corporation, Special Reserve, Sequence Of Deductions, Discount On Bonds, Accrual Of Income, Sticky Loans

Summary

Issues:
1. Deduction under section 36(1)(viii) of the Income-tax Act, 1961.
2. Allowability of discount on bonds and debentures as expenditure.
3. Interest claimed by the assessee on accrued basis in respect of suit filed cases.

Analysis:

Issue 1: Deduction under section 36(1)(viii) of the Income-tax Act:
The court referred to a previous judgment and held that the deduction under section 36(1)(viii) should be allowed before making deductions under other sections. It confirmed that the deduction under this section is allowable at the prescribed percentage of the total income before taking into account the deduction under the same section.

Issue 2: Allowability of discount on bonds and debentures as expenditure:
The dispute revolved around whether the discount on bonds and debentures could be claimed as allowable expenditure. The assessing authority followed a judgment of the Madras High Court, while the assessee relied on a Supreme Court decision. The court examined various precedents and concluded that the Madhya Pradesh High Court's reasoning, which allowed the proportionate amount of discount as expenditure, was in accordance with the law. It held that actual expenditure was not a prerequisite for claiming a deduction under section 37 of the Act.

Issue 3: Interest claimed by the assessee on accrued basis:
The Tribunal directed the assessing authority to determine the quantum of interest on an accrued basis in respect of suit filed cases. The court agreed with this approach, stating that interest should be deducted on a year-to-year basis, especially when accounts are maintained on a mercantile basis. It cited a Supreme Court judgment to support the method of accounting and the accrual of interest over time. The court upheld the Tribunal's decision to remand the matter for fresh assessment based on accrued interest.

In conclusion, the court provided detailed reasoning for each issue and answered them in accordance with the law and relevant precedents cited during the judgment.