2017 (3) TMI 73 - AT - Income Tax

Rectification of mistake - Upfront premium on Zero Coupon Non-Convertibility debenture - method of accounting followed - selection of assessment year - Held that - No merit in this appeal by the revenue. Firstly the question whether the upfront premium on Zero coupon Non-convertible debentures to the extent of ₹ 72,53,359/- which was pertaining to the period from October, 2005 to March, 2006 can be regarded as revenue expenditure or not or was in the nature of interest or was advance payment of future interest liability which cannot be allowed under the mercantile system of accounting are matters which the AO ought to have considered while concluding the assessment u/s.143(3) of the Act. Recourse to the provisions of Sec.154 cannot and ought not to be made for such highly debatable issues which might require detailed examination of facts. Secondly the upfront premium paid was in the nature of interest on loan on borrowing, as admittedly the loans in questions were non-convertible debentures. Such expenditure was in the nature of interest expenses and had to be allowed as deduction. Further the AO has erroneously considered the sum of ₹ 72,53,359/- as not pertaining to the relevant previous year and was a payment of interest in advance. The sum claimed as deduction was in relation to the period from October, 2005 to March, 2006 and therefore rightly claimed as deduction in A.Y.2006- 07 by the assessee. Thus the order of CIT(A) which is in conformity with the legal position as explained above does not call for any interference. Accordingly the same is upheld and the appeal by the revenue is dismissed.

Summary

Issues involved:
- Allowance of upfront premium paid by the assessee as a deduction
- Disallowance of upfront premium paid in advance under the accrual method of accounting

Analysis:

Issue 1: Allowance of upfront premium as a deduction
The Assessee, a company engaged in manufacturing and sale of tyres, claimed a deduction of ?72,53,359/- as upfront premium on Zero Coupon Non-Convertible debentures for the period from April 2006 to March 2011. The Assessee had paid upfront premium to various Financial Institutions to reduce the premium rate from 13.50-13.75% to 9.00%. The Assessee maintained accounts on a mercantile basis and claimed only the portion of upfront premium pertaining to the period from Oct 2005 to March 2006 in AY 2006-07. The Assessing Officer (AO) allowed the claim initially but later disallowed it under Section 154 of the Income Tax Act, stating that upfront premium paid in advance cannot be allowed under the mercantile system of accounting.

Issue 2: Disallowance of upfront premium under accrual method
The Assessee contended that the upfront premium was a revenue expenditure, akin to interest on a loan, and not a repayment of debt. The CIT(A) upheld the Assessee's claim, stating that the expenditure was revenue in nature and well within the mercantile system of accounting. The CIT(A) noted that the Assessee had segregated the upfront premium over multiple assessment years and had claimed only the relevant portion for AY 2006-07. The Tribunal concurred with the CIT(A), emphasizing that the upfront premium was akin to interest on borrowing and had to be allowed as a deduction. The Tribunal held that the AO should have considered such debatable issues during the assessment process under Section 143(3) rather than resorting to Section 154 for disallowance.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to allow the deduction of the upfront premium as a revenue expenditure under the mercantile system of accounting. The Tribunal emphasized that the upfront premium was akin to interest on borrowing and was rightly claimed as a deduction for the relevant assessment year.