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TMI Blog1997 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, disallowed the claim of the appellant for deduction of Rs. 22,500 on the ground that discount on bonds and debentures was not allowable as an expenditure. On appeal, the Appellate Assistant Commissioner, by his order dated July 4, 1969, held that the discount allowed at the time of the issue of debentures was to be treated as a part of the expenditure for such issue. He upheld the claim for deduction of Rs. 12,500 but rejected the claim as regards Rs. 10,000 on the ground that it related to discount on debentures issued in an earlier year and hence it did not pertain to the relevant previous year. The assessee then preferred an appeal before the Appellate Tribunal. The assessee contended, inter alia, that (1) the Appellate Assistant Commissioner had erred in sustaining the disallowance of Rs. 10,000 on the ground that it related to an earlier year, and (2) the Appellate Assistant Commissioner having held that discount allowed at the time of issue of debentures was to be treated as part of the expenditure incurred for such issue, should have further allowed a sum of Rs. 2,87,500 being the balance amount of the total discount of Rs. 3,00,000 relating to the issue of debentures of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant-company which could be allowed as a deduction. It noted that out of the total discount of Rs. 3,00,000, a discount of Rs. 12,500 had been allowed by the Tribunal which the Department had not challenged. Hence, the High Court was concerned only with the balance amount of Rs. 2,87,500 which the High Court held could not be considered as expenditure. Therefore, the second part of the question whether it was revenue expenditure or not, did not require consideration. The present appeal is filed by the appellant-company against the second question as reframed by the Madras High Court and answered as above. We have first to consider whether the discount of Rs. 3,00,000 on debentures which were issued by the appellant-company is expenditure incurred by the appellant-company for the purposes of its business. The appellant-company actually received Rs. 1.47 crores as against which it incurred a liability to return a sum of Rs. 1.50 crores with interest at the end of 12 years (the date of redemption). This liability which the assessee incurred, to pay the amount of Rs. 3,00,000 in addition to what it actually received, is being written off over the period of 12 years. Can it be trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of business. The difficulty in the estimation of liability did not convert the accrued liability into a conditional one. This court said that the expression " profits or gains " in section 10(1) of the Indian Income-tax Act, 1922, had to be understood in its commercial sense ; and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. Thus, " expenditure " is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. In the case of CIT v. Chandulal Keshavlal and Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the term " expenditure incurred " occurring there in the light of sections 30 to 36 and 37(1). In that case, the Calcutta High Court was required to consider the claim of the assessee which was a non-trading association to depreciation on furniture, air-conditioner, etc., which were debited in its account. The Department contended that the assessee could not claim depreciation since it was a non-trading association. The Calcutta High Court held that having regard to the purpose of section 44A the depreciation claimed should be construed as " expenditure incurred " and the assessee would be entitled to the beneficial construction of the provision. The Calcutta High Court differed in that case from the view taken by the Madras High Court in the judgment which is under challenge before us. Therefore, although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro. A contingent lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten off out of revenue every year during which the debentures are outstanding. " The Madhya Pradesh High Court also referred to the judgment of the Madras High Court which is under challenge before us and differed from it, preferring the decision of the Calcutta High Court in the case of CIT v. Indian Jute Mills Association [1982] 134 ITR 68. The Madhya Pradesh High Court held that the assessee would not be justified in claiming deduction of the entire amount of discount in the accounting year in question but it would nevertheless be entitled to proportionate deduction spread over the period for which the bonds would remain outstanding. Therefore, when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. We need not go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, however, to pay the discounted amount over and above the amount received for the debenture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an asset or an advantage. This court disagreed with the English view that borrowing money by the issue of debentures was an acquisition of capital asset and that any commission or expenditure incurred in respect thereof was of a capital nature. It said : " we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv) ". The same ratio would apply here also. Our attention was drawn to the case of Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., a decision of the English Court of Appeal reported in [1944] 12 ITR (Suppl) 1, where the English Court had treated discount or premium in the hands of the recipient as a receipt of a capital nature. But the character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient. In the light of the ratio laid down by this court in the case of India Cements ..... X X X X Extracts X X X X X X X X Extracts X X X X
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