2014 (12) TMI 1232 - HC - Income Tax

Allowability of premium paid on premature redemption of debentures - Held that - The premium was paid on premature redemption of debentures. The expenditure was incurred in the previous year and was termed to be a allowable deduction. The Tribunal held that in the case of Madras Industrial Investment Corporation Ltd. vs. Commissioner of Income Tax (1997 (4) TMI 5 - SUPREME Court ), which was the other Judgment relied upon by the Revenue, the facts were that the Assessee issued debentures at a discount and was bound to repay them at face value value, after a period of 12 years. The question that arose for consideration was as to whether the entire discount had to be paid in the year of redemption or whether the same had to be spread over, namely, the period for which the debentures were issued. The findings and conclusions of the Hon ble Supreme Court were distinguished by the Tribunal and in our opinion, rightly. That was done to deal with the two contentions of the Revenue, namely that the expenditure was capital in nature and alternatively even if it is considered to be revenue expenditure, it should have been spread over the duration or the entire period of the debentures. Meaning thereby, the date on which the debentures could become redeemable as per its terms. The Tribunal held that if the debentures were redeemed by the Assessee prior to the period for which they were issued and there was a mutual arrangement for premature redemption thereof, then, the amount of premature redemption or premature redemption premium cannot be said to be a capital expenditure and need not be spread over. - Decide against revenue

Summary

Issues:
1. Whether the order passed by the Tribunal raises substantial questions of law.
2. Whether the addition of Rs. 65,80,000 as a disallowance of premium paid on redemption of debentures constitutes capital expenditure.

Analysis:
1. The judgment addresses the issue of substantial questions of law raised by the Tribunal. The Court notes that a prior Division Bench decision had already dealt with a similar issue in favor of the Assessee. The Court, following the precedent, held that the Appeal did not raise any substantial question of law in relation to the first question.

2. The second issue pertains to the addition of Rs. 65,80,000 as a disallowance of premium paid on redemption of debentures. The Revenue argued that the payment was capital expenditure as it resulted in a benefit to the Assessee by reducing interest liability. However, the Assessee contended that the expenditure did not result in any enduring benefit to the business and merely reduced revenue expenditure for specific financial years.

3. The Court analyzed the facts presented by both parties and examined the Tribunal's order. It highlighted that the premature redemption of debentures was done to save interest costs and not for any capital advantage. The Court referred to a Supreme Court judgment and distinguished the facts to support its conclusion that the expenditure need not be considered as capital in nature.

4. Ultimately, the Court dismissed the Appeal, stating that the expenditure on premature redemption of debentures did not raise any substantial question of law. The Court found the Tribunal's decision reasonable and valid based on the specific circumstances of the case. The judgment emphasized that the premature redemption did not create any enduring obligation for the Assessee, leading to the dismissal of the Appeal.