2021 (9) TMI 743 - AT - Income Tax

Claim of deduction (expenditure) on account of Premium payable on redemption of debentures - whether premium payable on redemption of debentures is allowable when which it is actually incurred in the year of redemption of the debentures or could be proportionately spread over the period prescribed for maturity of such debentures? - HELD THAT - This issue as noted by the Ld. CIT(A) is squarely covered by the decision of Hon ble High Court in the case of CIT vs. Jagatjit Industries Ltd. 2006 (5) TMI 72 - DELHI HIGH COURT wherein the Hon ble High Court relied upon the ratio and principle laid down in the case of Madras Industrial Investment Corporation Ltd. 1997 (4) TMI 5 - SUPREME COURT wherein as held that is important is that the liability to pay premium arises in the year in which the debentures were issued and could be proportionately spread over the period prescribed for maturity of such debentures. It matters little whether the debentures were redeemable at will or only upon maturity. The Tribunal was in that view perfectly justified in allowing the deduction claimed by the assessee No infirmity in the order of the Ld. CIT(A) that assessee s claim in respect of proportionate premium on redemption of debentures and in the profit and loss account on the proportionate basis is allowed. Therefore, the addition has rightly been deleted. Disallowance u/s 14A read with Rule 8D - AO had made the disallowance mainly on the computation of disallowance provided by the assessee before the AO - Non recording of satisfaction by AO - HELD THAT - Whatever exempt income was earned was from mutual fund held earlier which too was liquidated in this year and short term capital gain was offered to tax. When assessee had not made any disallowance in the computation of income AO as per mandate of section 14A(2) was required to examine the accounts of the assessee if he is satisfied with the correctness of the claim of the assessee. He has failed to even note that the investment as noted by him was not capable of yielding exempt income. This clearly shows that there was no application of mind before mechanically proceeding to make the disallowance under Rule 8D. Nowhere it is borne out that assessee had made any offer or surrender of disallowance before the AO. It is just that what should be the computation of disallowance under Rule 8D which was worked out by the assessee before the AO without even noting the fact that disallowance itself is more than the exempt income. Under these circumstances we do not find any reason for upholding the disallowance under Rule 14A because AO has failed to record his satisfaction having regard to the accounts maintained by the assessee as required u/s 14A (2). - Decided in favour of assessee.

Summary

Issues:
1. Allowability of premium payable on redemption of debentures.
2. Disallowance u/s 14A read with Rule 8D.

Issue 1: Allowability of premium payable on redemption of debentures
The case involved an appeal by the assessee and the revenue against separate impugned orders for the assessment year 2014-15. The dispute centered around the claim of ?15,99,87,681/- as a provision for payment of premium on redemption of debentures by the assessee. The Assessing Officer disallowed the claim, stating that the premium payable on redemption of debentures should only be deductible at the time of redemption, not on a provisional basis each year. However, the CIT (A) accepted the assessee's contention, citing relevant judgments, and held that the premium payable on redemption of debentures can be proportionately spread over the tenure of the debentures. The ITAT upheld the CIT (A)'s decision, referring to various judgments, including the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. v. CIT, emphasizing that the liability arises when the debentures are issued and can be proportionately spread over the maturity period. The ITAT concluded that the assessee's claim regarding the proportionate premium on redemption of debentures was valid, and the addition was rightly deleted.

Issue 2: Disallowance u/s 14A read with Rule 8D
The second issue pertained to the disallowance of ?6,01,453/- u/s 14A read with Rule 8D. The Assessing Officer computed the disallowance based on the computation provided by the assessee, as the assessee had not made any suo moto disallowance despite earning exempt income during the year. The CIT (A) confirmed the disallowance, stating that the assessee had not made any disallowance under Rule 8D and had provided a computation of disallowance before the AO. However, the ITAT found that the investment noted by the AO did not yield exempt income, and the assessee had not made any offer or surrender of disallowance before the AO. The ITAT held that the AO failed to examine the accounts of the assessee and did not record satisfaction as required under section 14A(2). Therefore, the ITAT allowed the appeals of both the revenue and the assessee, concluding that the disallowance under Rule 14A was unjustified.

In conclusion, the ITAT ruled in favor of the assessee on both issues, allowing the claim for the premium payable on redemption of debentures and overturning the disallowance u/s 14A read with Rule 8D.