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TMI Blog2015 (10) TMI 2372X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of debentures. 4. a) The Ld. CIT(A) and AO erred in law in disallowing the premium on unsecured loans of Rs. 32,46,671/- U/s. 40(a)(ia) of the Act, on the ground that no tax has been deducted on the same under the provisions of Chapter XVII-B of the Act. b) The Ld. CIT(A) and AO erred in not appreciating the fact that premium on loan outstanding is not covered under the provisions of Chapter XVII-B and hence there is no liability to deduct tax at source on the same. 5. Without prejudice to the ground -4 above, the Ld. CIT(A) erred in law in not appreciating the fact, that the payee has not acquired the right to receive or enforce payment from the payer and hence no income is received or accrued by the payee. Accordingly, question of deduction of tax on such premium is not applicable during the captioned Assessment Year". We have heard the Ld. Counsel and Ld. DR in detail and perused the Paper Book placed on record. 2. Briefly stated, assessee is engaged in the business of manufacturing of cement. In the course of assessment proceedings, Assessing Officer (AO) noticed that assessee claimed deduction of Rs. 2,55,60,000/- in the P&L A/c and further claimed an amount of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Madras Industrial Investment Corporation held as follows: "The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred; It: cannot be spread over e. number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debenture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not brought to my notice any subsequent decision of the Supreme Court to the effect that its decision in the case of Madras Industrial Investment Corporation was no longer good law. Under the circumstances, the decisions of the Supreme Court on identical facts are to be held as applicable. The decision of the Assessing Officer to. disallow the discount on debentures on proportionate basis is, therefore, upheld". 4. Assessee is aggrieved and raised Ground Nos. 2 & 3 on the issue of claiming the balance amount of discount also as expenditure of the year u/s 37(1) of the Act. 5. Other issue which is also in dispute is on similar claim but factually little different. Assessee had borrowed funds earlier from M/s IL&FS. Due to corporate debt restructuring (CDR), assessee was liable to pay an amount of Rs. 16.62 Crores (which included accrued interest). As per the terms of CDR an upfront payment of Rs. 10 Crores was made on March, 2005 and balance amount of Rs. 6.62 Crores was converted into an unsecured subordinate loan carrying 0% rate of interest payable by March, 2010. By end of March 2011, assessee is liable to pay premium of Rs. 1.95 Crores and this premium was amortized over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit of any such amount to the party's account. There is no denying that the appellant has credited the payee's account and debited the expense account in its books. Having done so, it was liable to deduct tax and having failed to do so, it becomes liable to disallowance u/s. 40(a)(ia). The disallowance of the premium of Rs. 32,46,671/- is therefore, upheld and the fourth ground of appeal is dismissed". Assessee is aggrieved and raised Ground Nos. 4 & 5. 6. Ld. Counsel reiterated arguments made before the Ld. CIT(A) and also relied on the judgment of Hon'ble Supreme Court in the case of Taparia Tools Limited Vs. JCIT, Nasik in Civil Appeal Nos. 6366-6368/2003 dt, 23-03-2015. It was submitted that Hon'ble Supreme Court upheld the rule that revenue expenditure incurred in a particular year is to be allowed in the year. He relied on the principles laid down by the Hon'ble Supreme Court in the above said decision and submitted that entire amount is to be allowed upfront. 6.1 Coming to the issue of disallowance u/s. 40(a)(ia) on the premium payable, it was the submission that there is no liability to deduct tax on the above amount and relied on the Board Circular No. 4/2004 dt. 13-05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount in AY. 1996-97 by assessee, where the AO treated it as deferred revenue expenditure to be written off over a period of five years and allowed 1/5th of the amount, Hon'ble Supreme Court analysed the issue by considering the provisions of Section 36, which is applicable for deduction of interest vide Sub-Section 1(iii) of Section 36. Vide para 8 & 9, the Hon'ble Supreme Court analysed the provisions of Section 36(1)(iii) and went on to analyse amount 'incurred'/ 'paid' and then came to the conclusion that since assessee had paid the entire interest amount upfront, the same was allowable in the year of payment. In fact, Hon'ble Supreme Court also held that by allowing only 1/5th of the upfront payment, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payments at par which is clearly unsustainable. In coming to conclusion, the Hon'ble Supreme Court has considered two ways of payment of interest on debentures, in one method, the debenture holder was entitled to receive periodical receipts after every half year at 18% P.A. for five years or else, debenture holder accepted upfront payment of Rs. 55/- pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee are accordingly rejected. 10. Coming to the issue of claim of 'premium' which was disallowed U/s. 40(a)(ia), there is no dispute with reference to the claim of premium spread over the period of six years. This claim is in accordance with the principles laid down by the Supreme Court in the above referred case i.e., Madras Industrial Investment Corporation Vs. CIT [225 ITR 802 (SC)]. As rightly held by the Hon'ble Calcutta High Court in the case of National Engineering Industries Ltd., Vs. CIT [236 ITR 577] (Cal), there is no distinction between a discount and a premium. Therefore, assessee's claim of liability of premium on the loan, spread over in the six years is to be accepted in principle. However, the issue is not whether the amount is allowable in the first year or in the last year or is to be spread over. The contentions of assessee before the CIT(A) are in contrast to the contentions raised on the above issue of discount on debentures. Be that as it may, as far as the principles of law are concerned, both the discount as well as premium are to be spread over as there is a continuing benefit or a continuing liability over the period of debenture or the loan period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t payable over a period of loan, whatever the nomenclature given by the parties. We are of the opinion that this amount certainly comes within the purview of 'interest' as per Section 2(28A) of the Act. Therefore, the provisions of Section 194A- 'interest other than interest on securities' do apply to the facts of the case. Another contention of assessee is that amount has not accrued to the payee and therefore, assessee is not liable to deduct tax. However, , provisions of Section 194A has this 'Explanation'. "Section 194A : Interest other than "Interest on securities".- .................................................................................. .................................................................................. Explanation.-For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly". 10.3. Consequently, even if ..... X X X X Extracts X X X X X X X X Extracts X X X X
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