2015 (10) TMI 2372 - AT - Income Tax

Claiming the balance amount of discount also as expenditure of the year u/s 37(1) - Held that - Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Vs. CIT 1997 (4) TMI 5 - SUPREME Court which is directly applicable to the facts of the case as considered by the Ld. CIT(A). Moreover the judgment in the case of Taparia Tools Limited Vs. JCIT Nasik (2015 (3) TMI 853 - SUPREME COURT) is under the provisions of Section 36(1)(iii) whereas the decision of the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Vs. CIT 1997 (4) TMI 5 - SUPREME Court is directly U/s. 37(1) and that too on the issue of discount on debentures. Since there is a direct judgment of the Hon ble Supreme Court covering the facts of the case we do not see any reason to interfere the order of the Ld. CIT(A). This is also in tune with the claim of premium considered in later grounds principles being same. Accordingly we uphold the spreading over of the discount on debentures over period of debentures i.e. five years. Accordingly we uphold the allowance of 1/5th of the discount only in the year under consideration - Decided against assessee. Issue of claim of premium which was disallowed U/s. 40(a)(ia) - Held that - Even if the amount is credited to Suspense A/c but is claimed in the Books of Accounts of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of payee and the provisions of this Section shall apply accordingly. There is no dispute that assessee has provided the amount in the Books of Accounts and also claimed in the P&L A/c as an expenditure. Consequently the credit of such in books of account shall be deemed to be income to the account of payee and provisions of Section 194A do apply to the facts of present case. Consequently for the failure of deduction of tax at source we are of the opinion that amount is disallowable under the provisions of Section 40(a)(ia). - Decided against assessee.

Summary

Issues Involved:
1. Deduction of discount on issue of debentures under Section 37 of the Income Tax Act.
2. Disallowance of premium on unsecured loans under Section 40(a)(ia) of the Income Tax Act.

Issue 1: Deduction of Discount on Issue of Debentures

The assessee claimed the entire discount amount of Rs. 12.78 Crores on the issue of debentures as a deduction under Section 37 of the Income Tax Act. The Assessing Officer (AO) allowed only 1/10th of the discount amount, citing the Supreme Court decision in Madras Industrial Investment Corporation Vs. CIT [225 ITR 802 (SC)], and disallowed Rs. 9.20 Crores. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, agreeing that the discount should be spread over the period of the debentures, which is five years in this case. The CIT(A) referenced the Supreme Court's ruling that although the liability was incurred in the accounting year, it was a continuing liability over the period of the debentures. The assessee argued that revenue expenditure should be deductible in the year it is incurred, but the CIT(A) found that spreading the discount over the period of the debentures was justified to avoid a distorted picture of profits.

Issue 2: Disallowance of Premium on Unsecured Loans

The assessee had borrowed funds from M/s IL&FS, and due to corporate debt restructuring, a premium of Rs. 1.95 Crores was to be paid by March 2011. The assessee amortized this premium over six years and claimed Rs. 32,46,671 as deductible expense. The AO disallowed this amount, reasoning that the liability to pay the premium had not occurred during the year and no tax had been deducted at source. The CIT(A) agreed with the AO, stating that the liability to deduct tax arises on the mere credit of any such amount to the party's account, and since the assessee credited the payee's account and debited the expense account, it was liable to deduct tax. The CIT(A) upheld the disallowance under Section 40(a)(ia).

Detailed Analysis:

1. Deduction of Discount on Issue of Debentures:

The assessee issued debentures at a discount and claimed the entire discount amount as a deduction under Section 37(1). The AO allowed only 1/10th of the discount, citing the Supreme Court decision in Madras Industrial Investment Corporation Vs. CIT, which held that the liability to pay the discount is a continuing liability over the period of the debentures. The CIT(A) upheld this view, stating that spreading the discount over the period of the debentures avoids a distorted picture of profits. The CIT(A) referenced various judicial decisions and found that the nature of the expenditure in those cases was different from the discount on debentures. The CIT(A) concluded that the decision of the Supreme Court in Madras Industrial Investment Corporation was applicable and upheld the proportionate allowance of the discount.

2. Disallowance of Premium on Unsecured Loans:

The assessee had a liability to pay a premium on a restructured loan, which was amortized over six years. The AO disallowed the claimed amount, citing the absence of tax deduction at source. The CIT(A) agreed, stating that the liability to deduct tax arises on the credit of the amount to the payee's account, irrespective of the accrual of liability. The CIT(A) referenced the provisions of Section 194A and the definition of interest under Section 2(28A), concluding that the premium was considered interest and subject to tax deduction. The CIT(A) upheld the disallowance under Section 40(a)(ia).

Conclusion:

The Tribunal upheld the CIT(A)'s decision on both issues. For the discount on debentures, it confirmed that the discount should be spread over the period of the debentures, in line with the Supreme Court's decision in Madras Industrial Investment Corporation. For the premium on unsecured loans, it agreed that the premium was considered interest under Section 2(28A) and subject to tax deduction at source, thus upholding the disallowance under Section 40(a)(ia). The assessee's appeal was dismissed.