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2010 (1) TMI 26 - HC - Income TaxDeduction - The assessee issued 21800 Optionally Convertible Premium Notes (OCPN) at Rs.100/- each on 15.4.1995 and raised loan of Rs.21.80 lakhs. These OCPNs were redeemable at the expiry of four years at Rs.200/- per OCPN. However, OCPN holders had an option at the end of the 4th year from the date of allotment to get redemption amount of Rs.200/- per OCPN or to convert into 20 equity shares of Rs.10/- each at par. The assessee has claimed a sum of Rs.4,47,958/- as OCPN, premium amount written off in the P/L Account on the grounds that the amount is nothing but the cost or compensation of using the borrowed money for four years and is accordingly in the nature of interest and allowable held that - there was a continuing benefit to the business of the company over the entire period and therefore premium payable on redemption of loan convertible secured debentures issued during the year should be spread over the period of the debentures and such premium payable liable to be deducted order of ITAT allowing the deduction sustained.
Issues:
- Claim of OCPN premium amount as interest for deduction in P/L Account - Allowance of claim by CIT (A) and Tribunal for assessment years 1996-97, 1999-2000, and 2000-01 - Application of decisions in Madras Industrial Investment Corpn. Ltd. Vs. C.I.T. and Universal Cables Ltd. vs. C.I.T. by Tribunal - Lack of appeal by revenue against Tribunal's order for assessment year 1996-97 - Decision based on continuing benefit to the business over the entire period Claim of OCPN Premium Amount as Interest: The appeal under section 260A of the Income Tax Act, 1961, involved the claim by the assessee company regarding the OCPN premium amount written off in the P/L Account as interest for deduction. The OCPNs issued by the company were redeemable at Rs.200/- per OCPN or convertible into equity shares. The company argued that the premium amount was the cost of using borrowed money for four years and should be treated as interest. This claim was initially disallowed for the assessment year 1996-97 but later allowed by CIT (A) and Tribunal for subsequent assessment years. Application of Legal Precedents: The Tribunal referred to decisions in the cases of Madras Industrial Investment Corpn. Ltd. Vs. C.I.T. and Universal Cables Ltd. vs. C.I.T. to support the allowance of the claim by the assessee. The Tribunal upheld the orders of CIT (A) for the assessment years under consideration based on the principle that the premium payable on redemption of debentures should be spread over the period of the debentures. The Tribunal found the facts and issues to be identical to the assessment year 1996-97 and followed its earlier decision in favor of the assessee. Lack of Revenue Appeal: The Tribunal noted that the revenue did not file any appeal against its order for the assessment year 1996-97, where the issue was decided in favor of the assessee. This lack of appeal by the revenue further supported the decision to allow the claim of the assessee for subsequent assessment years. Decision Based on Continuing Benefit: The Division Bench of the Calcutta High Court in the case of Universal Cables Ltd. v. Commissioner of Income Tax held that the premium payable on redemption of debentures should be spread over the entire period of the debentures due to the continuing benefit to the business over that period. This principle was applied in the present case to support the allowance of the claim by the assessee. The High Court, therefore, dismissed the appeal, stating that no substantial question of law required consideration. In conclusion, the judgment upheld the allowance of the claim by the assessee for the OCPN premium amount as interest deduction based on legal precedents and the principle of continuing benefit to the business over the debenture period. The lack of appeal by the revenue against the favorable decision for the assessment year 1996-97 further strengthened the position in favor of the assessee.
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