2012 (4) TMI 101 - AT - Income Tax

Allow ability of discount charges in respect of debentures issued by the assessee while computing income from house property - the outstanding loans which were utilized for the construction of property were converted into deep discount debentures in assessment year 2001-02 - AO observed that it was a colourable device. - AO further observed that no interest liability had accrued to the assessee as the liability on account of interest would arise only on maturity of deep discount debentures. He therefore held that the claim of deduction under section 24(b) was not allowable and accordingly he disallowed the claim in both the years which was disputed by the assessee. - CBDT in Circular No.28 F 8/8/69-IT(A-I) dated 20.8.1969 a copy of which has been placed by the assessee at page 46 of the paper book that fresh loan raised to repay the original loan used for construction of house property will be eligible for deduction under section 24(vi) which corresponds with present section 24(b) - Held that the claim has already been allowed by the Tribunal in the initial year i.e., assessment year 2001-02 and appeal filed by the department has been dismissed by the Hon ble High Court - the principle of re-judicata is not applicable in case of income tax proceedings, the rule of consistency has to be followed when there is no change in legal and factual position. In view of the judgment of Hon ble Supreme Court in the case of Madras Industrial Finance Corpn. Ltd. (1997 -TMI - 5591 - SUPREME Court), the difference between the issue price and maturity value has to be spread over the debenture holding period and only proportionate amount can be allowed as deduction in a particular year. Tax liability in the hands of director - held that - it is for the department to ensure that the director pays tax on interest income from year to year as it has power to enforce compliance and assessee can not be penalized for the failure of the department to take action in case of the director.

Summary

Issues Involved:
1. Allowability of discount charges on debentures as a deduction under section 24(b) of the Income Tax Act.
2. Inclusion of interest on interest within the discount charges.
3. Applicability of the principle of res judicata in income tax proceedings.
4. Consistency in decision-making on identical facts in subsequent assessment years.

Detailed Analysis:

1. Allowability of Discount Charges on Debentures as a Deduction Under Section 24(b):
The assessee claimed deduction of discounting charges on debentures issued in lieu of loans taken for the construction of house property under section 24(b). The Assessing Officer (AO) disallowed the claim, arguing that the liability on account of interest would arise only on the maturity of the debentures, and thus no interest liability had accrued annually. The CIT(A) allowed the deduction at a reduced rate of 15%, considering it as the rate of interest on borrowings, but disallowed the excess amount claimed. The Tribunal, referencing the Supreme Court judgment in Madras Industrial Finance Corpn. Ltd. v. CIT, held that the difference between the issue price and the maturity value of debentures should be spread over the debenture holding period and allowed proportionately from year to year as a deduction under section 24(b).

2. Inclusion of Interest on Interest Within the Discount Charges:
The AO and CIT(A) contended that the discounting charges included interest on interest, which is not allowable as per the Supreme Court judgment in Shew Kissen Bhatter v. CIT. However, the Tribunal distinguished this case, noting that in Shew Kissen Bhatter, the interest on interest arose due to the default in payment of interest, whereas, in the present case, no annual interest was payable, and the entire liability was structured to be payable at the end of the redemption period. Thus, the Tribunal concluded that the annual proportionate amount payable on deep discount debentures should be treated as interest under section 2(28A) and allowed as a deduction under section 24(b).

3. Applicability of the Principle of Res Judicata in Income Tax Proceedings:
CIT(A) held that the principle of res judicata does not apply to income tax proceedings, implying that the AO was not bound by the decisions taken in earlier assessment years. The Tribunal acknowledged this but emphasized the rule of consistency in decision-making, especially when there is no change in the legal and factual position. The Tribunal noted that the claim had been consistently allowed in earlier years, including by ITAT and the High Court, and thus should be allowed in the subsequent years as well.

4. Consistency in Decision-Making on Identical Facts in Subsequent Assessment Years:
The Tribunal highlighted the importance of consistency in decision-making, citing that the claim had been allowed in the initial year (2001-02) and subsequent years up to 2005-06. The Tribunal pointed out that the appeal filed by the department against the Tribunal's decision for the initial year was dismissed by the High Court, reinforcing the need for consistency. The Tribunal directed the AO to allow the deduction proportionately in light of the Supreme Court judgment in Madras Industrial Finance Corpn. Ltd. v. CIT, ensuring consistency in the treatment of the assessee's claims.

Conclusion:
The Tribunal partly allowed the appeals of the assessee and dismissed those by the revenue, directing the AO to allow the deduction of discounting charges on debentures proportionately over the debenture holding period in accordance with the Supreme Court judgment, ensuring consistency in decision-making and adherence to the legal provisions under section 24(b).