2006 (5) TMI 72 - HC - Income Tax

Expenditure u/s 37 - proportionate allowance of premium payable on redemption of debentures - whether Tribunal was correct in law in allowing the assessee s claim for proportionate allowance of premium payable on redemption of debentures issued by it - What 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 the 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.

Summary

Issues:
- Allowance of premium payable on redemption of debentures
- Contention of liability being contingent
- Claim for proportionate allowance of premium
- Dispute over spreading liability over the years

Allowance of Premium Payable on Redemption of Debentures:
The main issue in this judgment revolves around the question of whether the Income-tax Appellate Tribunal was correct in allowing the assessee's claim for proportionate allowance of premium payable on the redemption of debentures issued by the company. The Assessing Officer had disallowed the deduction claimed by the assessee towards premium, arguing that the liability to pay premium on the debentures was contingent and could not be spread over or allowed on a proportionate basis. However, the Tribunal reversed this view, relying on the decision of the Supreme Court in a similar case. The court analyzed the nature of the liability arising from issuing debentures at a premium and held that the liability had arisen against the assessee the moment the debentures were issued, making it an expenditure allowable under the Income-tax Act.

Contention of Liability Being Contingent:
The Revenue disputed the nature of the expenditure claimed by the assessee but did not challenge that the amount raised through the debentures was used for business activities. The Revenue argued that the liability could not be spread over on a proportionate basis, as done by the assessee. However, the court referenced a previous Supreme Court decision to emphasize that the liability incurred by issuing debentures at a discount represents a continuing benefit to the business over the entire period. The liability was held to be spread over the period of debentures, regardless of whether the debentures were redeemable at will or only upon maturity.

Claim for Proportionate Allowance of Premium:
The court discussed the case law and highlighted that the liability to pay premium arises in the year of issuing the debentures and can be proportionately spread over the period prescribed for their maturity. The judgment emphasized that allowing the entire expenditure in one year might distort the profits of a particular year, and spreading the liability over the years could present a more accurate financial picture. The court concluded that the Tribunal was justified in allowing the deduction claimed by the assessee, dismissing the appeals as no substantial question of law arose for consideration.

Dispute Over Spreading Liability Over the Years:
The judgment addressed the dispute regarding spreading the liability over the years and referenced the decision of the Calcutta High Court to support the practice of spreading out lump sum payments over a number of years. The court held that issuing debentures at a discount represents a liability that secures benefits over multiple years, justifying the spreading of the liability over the period of the debentures. The judgment reiterated that the liability to pay premium arises at the time of issuing the debentures and can be proportionately spread over the maturity period, regardless of the redemption terms.

In conclusion, the judgment provides a detailed analysis of the issues related to the allowance of premium payable on redemption of debentures, the contention of liability being contingent, the claim for proportionate allowance of premium, and the dispute over spreading the liability over the years. The court relied on previous legal precedents and authoritative pronouncements to support its decision to uphold the Tribunal's ruling, emphasizing the principles governing the treatment of liabilities and expenditures in such cases.