2020 (10) TMI 1159 - HC - Income Tax

Discount on issue of debenture - deduction allowed in proportion to which discount has been written off in the books of accounts over a period of five years - Whether discount was required to be spreadover in proportion to the percentage of redeeming of such debenture and to be allowed only to the extent of discount charged off in the relevant year? - as appellant following the mercantile system of accounting has incurred the expenditure of discount on issuance of debenture was it not liable to be allowed in the same year in full as revenue expenditure - HELD THAT - Assessee has not incurred an expenditure of Rs. 5 Crores but has merely issued debentures at a discount. The redemption of debenture takes place in stages over a period of time and discount on debenture results in enduring benefit during the period of debentures - expenditure incurred in creating an enduring benefit does not create any asset or add value to existing asset. There was no creation of capital asset which would result in an advantage of enduring benefit by discount on debentures. Therefore the assessee is entitled to deduction from the income for the current year only which is liable to be redeemed in the first year as against the entire discounts. The benefit of discount to the assessee is instant as assessee paid lesser amount as against the amount which was actually payable and therefore the aforesaid benefit has to be offered to tax in the same year. The tribunal therefore has rightly placed reliance on MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. 1997 (4) TMI 5 - SUPREME COURT Substantial questions of law are answered against the assessee.

Summary

Issues:
1. Whether discount on the issue of debenture should be spread over in proportion to the percentage of redeeming such debenture and allowed only to the extent of discount charged off in the relevant year?
2. Whether the appellant, following the mercantile system of accounting, should have incurred the discount on the issuance of debenture allowed in the same year in full as revenue expenditure?
3. Whether the ratio laid down by the Supreme Court in Madras Industrial Investment Corporation Ltd. Vs. CIT would apply to all cases irrespective of differences in facts and prevail over later judgment of the Supreme Court in the case of CIT VS. General Insurance Corporation?

Analysis:
1. The appeal involved the issue of whether the discount on the issue of debentures should be spread over in proportion to the percentage of redemption and allowed only to the extent of discount charged off in the relevant year. The Assessing Officer allowed a portion of the discount as a deduction for the Assessment Year 2006-07, rejecting the claim for the remaining amount. The Commissioner of Income Tax (Appeals) held that the discount on debentures is revenue expenditure and deductible in the year of its incurrence, but the tribunal overturned this decision, relying on the Supreme Court's judgment in Madras Industrial Investment Corporation Ltd. The tribunal held that the discount should be spread over the period for which the debentures were to be redeemed, upholding the Assessing Officer's decision.

2. The appellant argued that the debentures were issued for business purposes and the discount was incidental to the benefit obtained, which was also taxed. They contended that the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. did not mandate spreading the expenditure over years. However, the revenue argued that the discount was not an outflow for the assessee as they did not actually incur the expenditure but issued debentures at a discount value. The tribunal agreed with the revenue, emphasizing that there was no creation of a capital asset from the discount on debentures, entitling the assessee to deduction only for the current year.

3. The court analyzed the Supreme Court's decisions in Madras Industrial Investment Corporation Ltd. and Taparia Tools Limited to determine the treatment of discount on debentures. It noted that while revenue expenditure is typically allowed in the year of its incurrence, an exception exists for cases like discount on debentures to avoid distorting the profits of a particular year. The court found that the benefit of the discount to the assessee was instant and should be offered to tax in the same year, aligning with the principles set out in Madras Industrial Investment Corporation Ltd. The appeal was dismissed, with the substantial questions of law answered against the assessee and in favor of the revenue.