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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 ..... e debentures was ₹ 1.5 crores repayable with interest at the rate of 5-3/4% per annum. The debentures were issued at a discount of 2%, redeemable after 12 years. The issue price of a debenture of ₹ 100/- was ₹ 98/-. The total discount on the issue of ₹ 1.5 crores amounted to ₹ 3 lakhs. For the ₹ 10,000/- written off as discount on the previous issue. The Income-tax Officer by his assessment order dated January 31, 1969, disallowed the claim of the appellant for deduction of ₹ 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 ₹ 12,500 but rejected the claim as regards ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and order dated November 5, 1979 (CIT v. Madras Industrial Investment Corporation Ltd. [1980] 124 ITR 454) answered the first question in favour of the appellant-assessee. The High Court reframed the second question as follows : Whether there was any expenditure in the sum of ₹ 2,87,500 and whether it was revenue expenditure ? It held that the discount of ₹ 3,00,000 did not represent any payment made to any one so as to constitute expenditure. It held that no expenditure was laid out or incurred by the assessee/appellant-company which could be allowed as a deduction. It noted that out of the total discount of ₹ 3,00,000, a discount of ₹ 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 ₹ 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 conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only a sum of ₹ 29,392 towards the sale price of lands ; but it credited in its accounts the sum of ₹ 43,692 representing the full sale price of the lands and at the same time it also debited an estimated sum of ₹ 24,809 as expenditure for the development it had undertaken to carry out even though that amount was not actually spent. The Department disallowed this expenditure. Upholding the claim of the assessee to deduction, this court said that the undertaking given by the assessee imported a liability on the assessee which accrued on the dates of the deeds of 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961. Section 37 of the Income-tax Act, 1961, enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed in computing the income chargeable under the head Profits and gains of business or profession . In sections 30 to 36, the expressions expenses incurred as well as allowances and depreciation have been used. Therefore, the Legislature was using the expression any expenditure in section 37 to cover both. He interpreted section 44A 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 ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued at discount, an account styled ' Discount on Debentures Account ', will be debited with the discount allowed on the issue, The debentures account will be credited in the books at their nominal value and will appear at that value as a liability in the balance-sheet. The loss thus arising need not be completely written off in the year in which the debentures are issued, since the benefit to be derived from the amount borrowed will continue till the debentures are redeemed. Where the debentures are redeemable at the end of a fixed period, a proportionate amount of discount should be written 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard are somewhat different from those of the Indian Income-tax Act. It referred to the English case of Texas Land and Mortgage Co. v. William Holtham [1894] 3 TC 255, 260, where a mortgage company had raised money by the issue of debentures and debenture stock and incurred expenses in this connection. The English High Court said that the expenses could not be deducted as trading expenses because the amount paid was for raising capital. Differing from the observations made therein, this court observed that a loan is a liability and has to be repaid and in its opinion it is erroneous to consider a liability 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of ₹ 12,500 over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M. P. Financial Corporation v. CIT [1987] 165 ITR 765. The view that we have taken is also in conformity with the accounting practice of showing the discount in the discount on debentures account which is written off over the period of the debentures. The appellant is, therefore, entitled to deduct a sum of ₹ 12,500 out of the discount of ₹ 3,00,000 in the relevant assessment year. The balance expenditure of ₹ 2,87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed), therefore, which is the subject-matter of appeal before us, is answered in the negative in so far as it relates to the deduction of ₹ 2,87,500 in the assessment year in question though for rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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