2000 (10) TMI 204 - AT - Income Tax

Issues Involved:
1. Disallowance of up-front fee paid on Non-Convertible Debentures (NCDs).
2. Applicability of the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. v. CIT.
3. Allegation of the transaction being a colourable device to avoid tax.
4. Enhancement of income by the CIT(A) without giving statutory opportunity.
5. Interest charged under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Disallowance of Up-front Fee Paid on NCDs:
The primary issue in ITA No. 944/PN/99 for the assessment year 1996-97 was the disallowance of the up-front fee of Rs. 2,72,25,000 paid by the assessee on NCDs subscribed by M/s Maliram Makharia Stock Brokers Pvt. Ltd. The assessee argued that the up-front fee was a deductible expenditure as it was accrued and paid in the assessment year 1996-97. The Assessing Officer (AO) disallowed this claim, reasoning that the funds were to be used over five years, hence the interest should be spread over this period. The CIT(A) upheld the AO's decision, stating that the transaction was a colourable device to avoid tax and treated the up-front fee as repayment of capital.

2. Applicability of the Supreme Court's Decision in Madras Industrial Investment Corpn. Ltd. v. CIT:
The AO and CIT(A) relied on the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. v. CIT, which held that liability for discount on debentures should be spread over the period of debentures. The assessee contended that this decision was not applicable as it involved discount on debentures payable after 12 years, whereas in their case, it was a one-time up-front interest payment. The Tribunal, however, found that the principle laid down by the Supreme Court applied to any payment related to debentures, including up-front interest, and should be spread over the period of the debentures.

3. Allegation of the Transaction Being a Colourable Device to Avoid Tax:
The CIT(A) held that the transaction with Maliram Makharia Stock Brokers (P.) Ltd. was a colourable device to avoid tax, referencing the Supreme Court's decision in McDowell & Co. Ltd. v. Commercial Tax Officer. The Tribunal agreed, noting that the assessee received Rs. 100 per debenture but returned Rs. 55 on the same day, effectively raising only Rs. 45. This was seen as a non-prudent business decision and a colourable device to reduce taxable income by creating an artificial liability.

4. Enhancement of Income by the CIT(A) Without Giving Statutory Opportunity:
The assessee argued that the CIT(A) enhanced the income by Rs. 40,838 without giving a statutory opportunity to show cause against such enhancement as required under section 251(2) of the Act. The Tribunal agreed with the assessee, finding no merit in the CIT(A)'s enhancement of income without providing the required statutory opportunity.

5. Interest Charged Under Sections 234A, 234B, and 234C:
The Tribunal held that the interest charged under sections 234A, 234B, and 234C was consequential in nature. The AO was directed to recompute the interest after considering the relief allowed by the Tribunal's order.

Conclusion:
The Tribunal upheld the disallowance of the up-front fee paid on NCDs, agreeing with the lower authorities that the liability should be spread over the period of the debentures as per the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. The Tribunal also concurred with the CIT(A) that the transaction was a colourable device to avoid tax. However, the Tribunal found merit in the assessee's argument regarding the enhancement of income without statutory opportunity and directed the AO to recompute the interest under sections 234A, 234B, and 234C accordingly.

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