1997 (4) TMI 5 - SC - Income Tax

Tribunal hold that the assessee had incurred an expenditure of ₹ 3,00,000 during the relevant previous year by way of discount paid to the persons who had subscribed to the debentures issued by it for ₹ 1.5 crores during the relevant previous year and the same was allowable as a revenue expenditure - Held that appellant is, entitled to deduct a sum of ₹ 12,500 out of the discount of ₹ 3,00,000 in the relevant assessment year

Issues Involved:
1. Whether the Tribunal was justified in permitting the assessee to raise the contention that the entire amount of Rs. 3,00,000 being the discount relating to the issue of debentures for Rs. 1.5 crores during the relevant previous year was to be allowed as a permissible deduction.
2. Whether the Tribunal was justified in holding that the assessee had incurred an expenditure of Rs. 3,00,000 during the relevant previous year by way of discount paid to the persons who had subscribed to the debentures issued by it for Rs. 1.5 crores during the relevant previous year and the same was allowable as a revenue expenditure.

Issue 1: Tribunal's Jurisdiction to Permit New Claim
The Tribunal allowed the assessee to raise a new claim for the deduction of Rs. 2,87,500, which was the balance amount of the total discount of Rs. 3,00,000 on the issue of debentures. The Tribunal rejected the Department's objection that it had no jurisdiction to examine this new claim. The Madras High Court upheld this decision, answering the first question in favor of the appellant-assessee.

Issue 2: Nature of Discount as Expenditure
The Madras High Court reframed the second question to determine whether the amount of Rs. 2,87,500 constituted expenditure and whether it was revenue expenditure. The High Court concluded that the discount of Rs. 3,00,000 did not represent any payment made to anyone and thus could not be considered as expenditure. Consequently, it held that no part of the Rs. 2,87,500 could be allowed as a deduction.

Supreme Court Analysis:
The Supreme Court first considered whether the discount on debentures could be treated as expenditure. It referred to the case of Indian Molasses Co. (Private) Ltd. v. CIT, where it was held that "expenditure" is money laid out by calculation and intention, and it must be something that is gone irretrievably. The Court also referred to Calcutta Co. Ltd. v. CIT, which allowed the deduction of estimated expenditure for future liabilities as accrued liabilities.

The Court noted that "expenditure" covers liabilities incurred, even if payable in the future, but not contingent liabilities. It cited the case of CIT v. Chandulal Keshavlal and Co., where relinquishing part of a claim for commercial expediency was considered allowable business expenditure.

The Court also referred to the Madhya Pradesh High Court's decision in M. P. Financial Corporation v. CIT, which held that the discount on bonds represents deferred interest and should be proportionately written off over the period the bonds remain outstanding.

The Court concluded that issuing debentures at a discount incurs a liability to pay a larger amount than borrowed, which is a liability incurred for business purposes. This liability is a continuing one, spread over the period of the debentures.

Conclusion:
The Supreme Court held that the appellant correctly claimed a proportionate deduction of Rs. 12,500 for the relevant accounting period. The balance expenditure of Rs. 2,87,500 could not be deducted in the same year. The Tribunal's decision to allow the entire amount in one year was not justified. The Court agreed with the Madhya Pradesh High Court's reasoning that the liability should be spread over the period of the debentures. The appeal was disposed of accordingly, with no order as to costs.

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