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TMI Blog2005 (4) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... nner of payment. Once that is so, it is not possible to rewrite the same and state that interest would accrue, or liability to pay interest would accrue over the entire period of debenture i.e. six years. If this is not possible, the entire interest payment made in the initial year of allotment cannot be artificially spread over the period of six years for the purposes of allowing deduction. Thus, the Tribunal was not right in holding that the assessee i.e. the payer company was not entitled to deduction of interest paid by it on the debentures issued by it in the assessment year under consideration. At this stage, it is stated by learned Advocate for the appellant company that pursuant to the impugned order of Tribunal if any claim is made by each of the payer companies in any of the subsequent years on the basis of proportionate payment in accordance with the order of the Tribunal, the respective assessee companies shall have no objection if the claims which might have been allowed are withdrawn and additions made to the said extent considering that the entire claim of deduction of interest paid is allowed in Assessment Year 1995-96. - HON'BLE D.A. MEHTA AND HARSHA DEVANI, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng period of the loan, namely, for a period of six years the borrowing was interest free. Accordingly, the claim of deduction of interest paid on debenture was proportionately allowed to the extent of Rs. 84,224/- and balance of Rs. 2,62,65,776/- was disallowed. 4. The assessee i.e. the payer company carried the matter in appeal but did not succeed. According to CIT (Appeals) the ratio laid down by the Apex Court in the case of Madras Industrial Investment Corporation Limited (supra) squarely applied to the case of the payer company and the Assessing Officer was justified in allowing deduction of only proportionate amount of interest. 5. The payer companies, four in all, carried the matter before Tribunal but the Tribunal, after setting out the facts and contentions of the parties, held that the facts of the case were similar to the facts of the case before the Apex Court in case of Madras Industrial Investment Corporation Limited (supra) and, accordingly, the orders made by the Assessing Officer and CIT (Appeals) were upheld. 6. Mr. S.N. Soparkar, learned Senior Advocate appearing on behalf of the appellant, submitted that the payer company had claimed deduction under provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 of 2000 is primarily based on the debenture issued by the company; namely, tax treatment of interest which is payable by the company and receivable by the individual debenture holder under the debenture. The relevant portion of the debenture certificate shows that debentures are issued in terms of the Debenture Trust Deed dated 31st March, 1995 in pursuance of Resolutions passed by the Board of Directors of the Company on 24th March, 1995 as well as by the general body at the Extra Ordinary General Meeting held on 24th March, 1995. Accordingly, the company has issued Secured Redeemable Non-Convertible Debentures each of Rs. 100/-; and as the specimen certificate available on record shows Amount Paid Up Per Debenture is Rs. 100/-. It is further stated in the certificate that The Debentures are issued subject to and with the benefit of the Financial Covenants and conditions endorsed hereon which shall be binding on the Company and the Debenture holders and all persons claiming by, through or under any of them and shall ensure for the benefit of the Trustees and all persons claiming by, through or under them. The Company hereby agrees and undertakes to duly and punctually pay, obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed for the purposes of business. In the present case, it is an admitted position between the parties that, the payer company is carrying on business, it had borrowed capital by way of debenture issued for such business, and it had paid interest in respect of such capital borrowing. The payer company, therefore, has satisfied all the conditions necessary for invoking Section 36(1)(iii) of the Act and is thus, entitled to deduction of interest paid while computing its income from profits and gains of business. 12. As rightly contended on behalf of the payer company, Section 43(2) of the Act which defines the term 'paid' would take within its sweep as per the definition both actual payment as well as incurring of a liability according to method of accounting on the basis of which profits and gains of business are computed. The said definition is applicable wherever the term 'paid' is used in Sections 28 to 41 of the Act, unless the context otherwise requires. In the circumstances, the term 'paid' as used in Section 36(1)(iii) of the Act would have the same meaning and as per method of accounting regularly employed, on the basis of terms of contract, the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... double advantage. Whether the transaction is entered into with the object of tax planning or not is an entirely different matter than the contract being sham or not being acted upon by parties. At the cost of repetition it requires to be stated that both the assessees, namely, the payer company as well as the recipient on one side and Revenue on the other side have relied upon the terms of the contract so as to suit their convenience while bringing to tax the interest income or while denying the deduction in hands of the payer; in bringing to tax the entire amount or while seeking spread over of such interest, but none of the parties to the dispute have stated that the contract has not been acted upon. In the circumstances, in absence of any contrary provisions under the Act, the parties are required to be governed by the terms of the contract and the transaction in question is required to be appreciated in context of the same. Hence, it is apparent that the payer company has made payment of entire amount of interest on the date of allotment and sought deduction thereof in the year of payment. There is no question of the same being denied in light of the fact that as per terms of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cantile Limited; the assessee also made similar investment in debenture issue of Mohit Marketing Limited to the tune of Rs. 4,25,00,000/-. 20. Individual assessee filed return of income on 30th January, 1996 declaring total income of Rs. 7,63,86,741/- which included debenture interest to the tune of Rs. 1,94,178/-. The Assessing Officer assessed the said debenture interest as returned by the assessee but also made protective assessment by making addition of a sum of Rs. 4,16,55,822/-. According to the Assessing Officer, the payer company had made payment of debenture interest of a total sum of Rs. 4,18,50,000/- as per the certificate of tax deduction which was filed along with the return of income, and hence, the assessee had incorrectly shown only interest relatable for the accounting period. It was the case of the assessee before the Assessing Officer that the debentures had been issued on 24th March, 1995 and hence only proportionate interest relatable for a period of seven days of the accounting period had been returned by the assessee while the balance would be shown as interest income in subsequent assessment years. According to the assessee, holding of debenture was nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for depriving the creditor of his capital and it, therefore, arose on a day-to-day basis only. The Tribunal also examined the transaction and came to the conclusion that the nature of the debentures was akin to Deep Discount Bonds and referring to instructions issued by the Central Board of Direct Taxes on 12th March, 1996 came to the conclusion that the entire amount was not taxable and only the proportionate amount as shown by the assessee was taxable in his hands. The Tribunal placed reliance on decision of the Hon'ble Supreme Court in case of Madras Industrial Investment Corporation Limited v. Commissioner of Income-tax, [1997] 225 ITR 802 and held that applying the ratio of the said decision what was true for expenditure was equally true for income, because according to Tribunal, the principles enunciated by the Supreme Court were based on principles of commercial accounting. 23. Mr. M.R. Bhatt, learned Senior Standing Counsel appearing on behalf of the appellant - Revenue in Tax Appeal No. 328 of 2000, assailed the impugned order of the Tribunal by inviting attention to the terms of the debenture to contend that each debenture carried interest @ Rs. 62/- payable up front ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire interest was not taxable in his hands in the assessment year in question. As held in case of the payer company, as per terms of contract entire interest was payable up front on the date of allotment only and there is no other clause in the contract which would permit the payer company to defer payment of interest. 26. The contention raised on behalf of the individual assessee based on the following decisions (i) Dr. Shamlal Narula v. Commissioner of Income-tax, Punjab, Jammu Kashmir, Himachal Pradesh Patiala, [1964] 53 ITR 151 (S.C.); (ii) Rama Bai v. Commissioner of Income-tax, Andhra Pradesh, [1990] 181 ITR 400 (S.C.); and (iii) Bikram Singh and Ors. v. Land Acquisition Collector and Ors., [1997] 224 ITR 551 (S.C.); To the effect that interest is nothing else but compensation or rent for user of the funds requires to be rejected as the said proposition is not absolute. Firstly, all the three decisions deal with enhanced compensation in land acquisition matters where there is no borrowing; secondly, there is no contract between the parties; and lastly, interest is being paid under statutory provisions of Land Acquisition Act, 1894. 27. The next contention raised on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are no outstandings not collected at the end of the accounting period so far as recipient is concerned. 28. Reliance on behalf of the assessee on the decision of the Hon'ble Supreme Court in case of Dr. Shamlal Narula v. Commissioner of Income-tax, Punjab, Jammu Kashmir, Himachal Pradesh Patiala (supra) instead of assisting the case of the assessee lays down the proposition that interest can be termed to be a compensation for deprivation of the money or the damages awarded for acquisition of land i.e. in a case where the money was due to him and was not paid or, in other words, was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights. In the present case, the position is in fact contrary, the payer company has made payment as per terms of the contract. Nothing has been withheld or retained by the payer company and the legal right of the recipient assessee stands extinguished in terms of the contract. Therefore, even on this count, it is not possible to accept the contention raised on behalf of the respondent assessee that the entire interest actually received during the year under consideration should be spread o ..... 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