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TMI Blog2009 (11) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... basis and the benefit results to the assessee in reduction of interest on account of restructuring relates to more than succeeding assessment years and not wholly pertaining to 2003-04 relevant to assessment year 2004-05? 2. Whether on the facts and in circumstances of the case, the learned CIT(A) was correct in allowing the sum of Rs. 3,80,56,306 as revenue expenditure which has been claimed under the nomenclature of the premium on debit restructuring by the assessee?." 3. In CO. No. 42/Ran/2008, the assessee has taken following grounds of cross-objections : "1. For that the learned CIT(A) deleted the addition of Rs. 340,95,561 being the amount spent on debt restructuring. The respondent had raised the substantial debts/loans from IDBI, ICICI Ltd., and UTI at 16 per cent or variable higher rate of interest. However, considering that the rate of interest has come down substantially during the financial year 2003-04 respondent approached the financial institutions to restructure the rate of interest on the various loans raised by the respondent and accordingly as per agreement an expenses of Rs. 340,95,561 was incurred against which the appellant received recurring benefit by ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount had become payable and was accordingly paid upon restructuring of interest payments. 5. The Assessing Officer, however, took the view that benefit on account of the impugned payment was to extend over 10 years and therefore was liable to be allowed over 10 years on pro rata basis. He also took note of the fact that the assessee itself had shown the impugned payments on pro rata basis in its profit or loss account. He, therefore, allowed the claim of the assessee to the extent of Rs. 39,60,745 as shown in the profit or loss account with the following observations : "The submission of the assessee is not convincing. There is no dispute that the expenditure in question is business expenditure, but whether the same should be allowed in the year in question or should it be amortized over the remaining period of debt. As per provision of Income-tax Act, the expenditure which is attributable to the financial year under question and directly related to the receipt declared is to be taken into consideration for the purpose of determining the profit of the year. In the case of the assessee, the interest to be repaid for remaining years, was restructured by the bank and interest rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 per cent from 15.56 per cent to 12.5 per cent and 15.50 per cent to 10 per cent respectively by UTI, IDBI and IFCI. Though the auditor suggested to amortize this huge payment for 10 years as claimed 1/10th this year, the learned Assessing Officer did not analyze the facts of the case as well as what circumstances, the appellant had to pay this huge total sum as premium to these financial institutions and he disallowed the claim of premiums in full. In my view, the appellant is paying the interest regularly to these institutions and claiming it also in the profit or loss account which was being also allowed by the Department. Now for its benefit on the restructuring of payments of loan and interest and in lieu to reduce rate of interest, it had to pay lump sum premium to each totalling to Rs. 3.80,56,306 which is actually revenue expenditure. This cannot be amortized since this was not spent on the establishment of a new industry or this has not been spent on extension of the existing business as provided in the law under section 35D. Therefore, in my considered view this is revenue expenditure and allowable at one go. Therefore, disallowance made by the Assessing Officer cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors, who are well conversant with the accounting and legal treatment to be given to the such expenditure have treated it to be deferred revenue expenditure in the accounts of the assessee as the benefit of the impugned expenditure was to be available to the assessee over next ten years and accordingly debited the proportionate expenditure to the profit or loss account for the year under appeal. (v)The assessee-company has not only adopted the audited accounts but also certified its correctness and accordingly forwarded it to the RoC. Appropriations have been made treating the profits worked out on the aforesaid basis as correct. The assessee company has held out to its shareholders and the public at large that the aforesaid accounts were correct and reflected its true state of affairs. 11. In the aforesaid background of facts, the short issue is whether the impugned payment should be allowed in its entirety, as claimed by the assessee, in the year of payment itself, namely, the year under appeal or should be allowed on pro rata basis over next 10 years during which the assessee would receive the benefit in the form of reduced interest rate in lieu of the impugned payment, as con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w statutory force and therefore has to be followed. There are two elements in the said assumption. They are : (i) the revenues and costs are required to be recognized as they are earned or incurred (and not as money is received or paid): and (ii) the revenues and costs so recognized must be recorded in the financial statements of the periods to which they relate. Thus mere payment or incurrence of liability or cost is not sufficient. The incurrence of liability/cost should be recognized and recorded in the financial statements of the periods to which they relate. The thrust of the aforesaid assumption is also on the determination of periodic revenues and costs in order to correctly work out the profits in a given accounting period for income-tax purposes. 15. The income from business is chargeable to income-tax under section 28 of the Income-tax Act. Sub-section (i) of section 28 brings "the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year" to the charge of income-tax. The "profit" is the difference between the revenue and the associated expenses as related to a given period of time. In a business, revenue ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee intends to reap the benefit of such expenditure. Allowing the entire expenditure in one year in such cases might give a completely distorted picture of the profits of a particular year. This proposition is authoritatively established by the judgment in Madras Industrial Investment Corporation Ltd. case (supra ). In that case, the assessee had issued debentures at a discount on 10-12-1966 redeemable after 12 years. The issue price of debenture of Rs. 100 was Rs. 98. The total amount of discount on the entire issue was Rs. 3 lakhs while the pro rata discount, i.e., the proportionate amount of discount for the period of six months ending with 30-6-1967 was Rs. 12,500, taking the period 12 years which was the period of redemption and dividing the total amount of discount by 12 years. The Hon'ble Supreme Court in the aforesaid judgment (at p. 813) has held that, by issuing the debentures at a discount, the assessee has incurred the liability to pay the discount in the year of issue of debentures but such payment is to secure a benefit over a number of years and since there is a continuing benefit to the business of the assessee over the entire period, the liability should be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment and guarantee commission for purchase of machinery were revenue expenditures. In the case before us, the issue is not whether the impugned expenses arc in the nature of revenue expenditure. It is acknowledged by the Department itself that the impugned expenditure is of revenue character. However, the Department, has allocated the impugned expenditure over the period during which the assessee would secure the benefit of the impugned expenditure. The action of the Assessing Officer is covered by the principles laid down in Madras Industrial Investment Corpn. Ltd.'s case (supra). The aforesaid principle has neither been overruled nor disapproved in Siwakami Mills Ltd.'s case (supra). In Overseas Sanmar Financial Ltd.'s case (supra ) the issue before the Bench was whether the assessee was entitled to the deduction of the foreclosure premium paid by the assessee in respect of old loans. The premium was paid in that case on account of foreclosure of existing loans. In the ease before us, the issue is entirely different in that the existing debts have not been foreclosed. It is a case of restructuring of interest rates and of payment made to secure the benefit in future through r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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