Commissioner Of Income Tax vs Gujarat Guardian Limited
2009 Latest Caselaw 228 Del

*           THE HIGH COURT OF DELHI AT NEW DELHI

                                 Judgment reserved on : 09.01.2009
%                                Judgment delivered on : 23.01.2009

                           ITA No.669/2008

COMMISSIONER OF INCOME TAX                               ..... Appellant

                                       versus

GUJARAT GUARDIAN LIMITED                                ..... Respondent

Advocates who appeared in this case:

For the Appellant          :     Ms. Prem Lata Bansal
For the Respondent         :     Ms. Kavita Jha

CORAM :-

HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
    be allowed to see the judgment ?                    Yes
2. To be referred to Reporters or not ?                 Yes
3.     Whether the judgment should be reported
       in the Digest ?                                  Yes


RAJIV SHAKDHER, J

1. This is an Appeal under Section 260A of the Income Tax Act, 1961

(hereinafter referred to in short as the 'Act') against the judgment dated

05.10.2007 passed by the Income Tax Appellate Tribunal (hereinafter

referred to in short as the 'Tribunal') in ITA No. 3224/Del/2005 in respect

of the assessment year 1996-97. Before the Tribunal the Revenue as well

as the assessee, filed an appeal against the order of the Commissioner of

Income Tax (Appeals) dated 26.04.2005 [hereinafter referred to in short as

the 'CIT(A)'].

2. The Revenue being aggrieved has preferred the present appeal and

proposed the following questions of law for consideration of this Court:-

"(a) Whether ITAT was correct in law in allowing deduction of export commission of Rs 10,07,22,625/- to the assessee u/s 37(1) of the Act?

(b) Whether order passed by ITAT is perverse in law when it allowed deduction to the assessee of export commission ignoring the relevant facts recorded by the Assessing Officer in the assessment order and contrary to the provisions of Section 40A(2) of the Act?

(c) Whether ITAT was correct in law in allowing depreciation to the assessee on training fee of Rs 2,18,48,700/- paid to Guardian USA, that was capitalized by the assessee as part of Plant & machinery?

(d) Whether ITAT was correct in law in allowing deduction of lump sum prepayment premium of Rs 8 crores paid by the assessee to IDBI?

(e) Whether ITAT was correct in law in allowing entire prepayment premium of Rs 8 crores to the assessee in the instant year or the same was to be spread over the period for which, borrowing was made?

(f) Whether ITAT was correct in law in admitting the additional ground raised by the assessee and thereby directing the Assessing Officer to adjudicate upon the claim for depreciation on enhanced cost of plant & machinery due to exchange rate variation, if claimed by the assessee?

(g) Whether order passed by ITAT is perverse in law and on facts?

2.1 Having heard the learned counsel for both the Revenue, as well as,

the assessee, we are of the view that none of the questions proposed are

substantial questions of law which arise for our consideration for the

reasons given hereinafter.

3. In order to deal with the appeal we have set out separately, the

essential facts pertaining to each issue raised in the appeal.

Export Commission

4. On 05.06.1990 a collaboration agreement was executed between

Guardian International Corporation, USA, (in short 'GIC') Modi Rubber

(I) Limited, and Gujarat Alkalies and Chemicals Ltd. Consequent thereto,

the assessee was incorporated as a joint venture between GIC, Modi

Rubber (I) Limited, M/s Gujarat Mineral Development Corpn. Ltd and

Gujarat Alkalies and Chemicals Ltd. GIC with 50% stake in the equity of

the assessee was the major shareholder. The State Government through

Public Sector Undertakings jointly held a stake equivalent to 9.46% of the

total equity of the assessee. It is not disputed that both the purpose and

object of entering into the aforementioned collaboration agreement and

thereafter incorporation of the assessee, was to manufacture float glass in

India.

4.1 The main point to be noted is that in the collaboration agreement of

05.06.1990 it has been provided that the assessee would enter into an

export sales agreement with GIC or any of its affiliates which would then

act as sole and exclusive agent for sale of float glass manufactured by the

assessee. It was also provided that the said agent would be paid

commission at the rate of 5% of the net FOB export price. This,

incidentally, at the relevant point in time was the maximum that could be

paid as commission.

5. As per the then prevalent regime, the collaboration agreement was

filed with the Government of India for approval which was duly accorded;

however, with a condition that the assessee would export a minimum of

25% of its total production; failing which, the assessee would be subjected

to a penalty.

5.1 It is also not disputed that for the purpose of setting up a plant to

manufacture float glass in India, the assessee was also permitted to import

machinery into the country under the Export Promotion Capital Goods

(EPCG) Scheme at a concessional rate of duty. Under the EPCG Scheme

it was stipulated that in the event the assessee failed to fulfill the export

application undertaken by it, it would be required to pay the differential

duty along with interest.

6. It is in this background that the assessee set up its plant which

commenced commercial production on 01.03.1993.

7. At this stage it would be important to note two other aspects on

which the Assessing Officer, as well as the Revenue, have laid great

stress, which is, that as per the collaboration agreement dated 05.06.1990

the assessee was required to pay royalty to GIC at the rate of 3% on

domestic sales and 4% on foreign sales. It seems that the financial

institutions in India had an objection to the clause on payment of Royalty,

which stood incorporated in the collaboration agreement. The financial

institutions were of the view that the obligation of the assessee to pay

royalty to GIC must necessarily be subordinate to its obligation to pay

instalments, interest and other charges under the loan agreements executed

by the assessee with the financial institutions. In order to meet the

concerns of the financial institutions the assessee gave an undertaking on

the aforementioned broad terms vide letter dated 27.02.1993, which inter

alia, subordinated the interest of GIC, with respect to, its right to receive

royalty to that of, the financial Institutions right to receive their dues under

the loan agreements.

8. On 20.07.1993, the assessee entered into an Export Sales Agency,

with one, Guardian Glass Exports Limited (in short 'GGE') an affiliate of

GIC. The said Export Sales Agency Agreement provided for payment of

commission to GGE at the rate of 12.5% of the net FOB export price as

against 5%, as indicated above, in the collaboration agreement of

05.06.1990.

8.1 Accordingly, the assessee filed its return for the assessment year

1996-97 on 29.11.1996 in which it claimed the commission paid to GGE

at the rate of 12.5% as deductible expenditure.

8.2 The Assessing Officer had selected the case of assessee for scrutiny.

A notice under Section 143(2) of the Act was issued. The Assessing

Officer after seeking the response to his queries disallowed the deduction

in entirety on the following broad grounds:-

(a) payment of commission at the rate of 12.5% to GGE which was the

affiliate of the foreign collaborator i.e., GIC did not seem prudent as the

exports were made at a price less than the cost of production. In other

words, the assessee in exporting its goods had incurred a loss;

(b) there was no evidence of the agent i.e., GGE having rendered service;

(c) the arrangement with GGE for payment of commission at an enhanced

rate of 12.5% was in reality a ruse to compensate the foreign collaborator

i.e., GIC towards loss of royalty, payment of which was impeded, on

account of assessee's undertaking given to financial institutions.

9. The assessee being aggrieved had preferred an appeal to the CIT(A).

The CIT(A) partially allowed the appeal of the assessee, inasmuch as, she

allowed the claim towards payment of commission to the extent of 5%.

Balance commission at the rate of 6.5% was disallowed. The CIT(A), in

her order held that, in respect of, the first objection of the Assessing

Officer that the assessee in exporting the goods was incurring a loss:

observed that, in view of the explanation of the assessee, that the exports

had to be made at the price prevailing in the international market even if it

was less than the cost of production keeping in mind that the domestic

demand for float glass in the country was low and the inventory with the

assessee was piling, the said objection had no merit. As regards the

second objection of the Assessing Officer that GGE had not rendered any

service the CIT(A) noted; the fact that the collaboration agreement which

was executed prior in point of time to the Export Sales Agency

Agreement, itself provided for appointment of an agent for the purposes of

carrying out exports. The agent under the collaboration agreement could

have been the foreign collaborator itself i.e., GIC or any of its affiliates.

The said foreign collaboration agreement also provided for payment of

commission to such an agent albeit at the rate of 5% which had the

approval of Government of India. The CIT(A) also returned a finding that

there had been a promotion of exports which was amply demonstrated by

the fact that the assessee had achieved an export turnover of Rs 90 crores;

the details with respect to which had been supplied by the assessee. The

CIT(A) was thus of the view that there was no justification for

disallowance of the entire commission, however, she restricted the

allowable agency commission to the rate of 5%. The CIT(A) was of the

view that assessee had failed to establish by adverting to evidence that

payment of commission at the rate of 12.5% is reasonable. In this regard

the CIT(A) sustained the view of the Assessing Officer, insofar as, he had

taken resort to Section 40A(2) and Section 92 of the Act to the extent of

restricting the commission to 5% as against 12.5% claimed by the

assessee.

10. Aggrieved by the above, the assessee preferred an appeal to the

Tribunal. The Tribunal in paragraph 21 of the impugned judgment has

adverted to evidence before it, which suggests clearly that services were

rendered by GGE. It is pointedly observed that the assessee took

advantage of the huge marketing network of GIC in 40 countries across

the globe for the purposes of carrying out exports. The Tribunal in this

regard has referred to invoices, the list of customers to whom exports sales

had been made during the year, the correspondence between the assessee

and various sales agents of the GIC shipping bills, realization certificate of

export products and as also the realization certificate issued by the bank,

wherein the payment of export commission is duly reflected. Based on

appreciation of the said documentary evidence, on record, the Tribunal

came to the conclusion that there was sufficient evidence before the

Assessing Officer regarding services rendered by GGE to the assessee

which justified payment of commission. As regards the other related issue

as to whether the claim of the assessee towards payment of agency

commission should be restricted to 5% as held by the CIT(A), the Tribunal

after noting the submissions of the assessee in paragraph 23 of the

impugned judgment came to the conclusion that once it is held that

services had been rendered by the agent the quantum of commission that

has to be paid is purely the discretion of the assessee over which the

Revenue cannot sit on judgment. The Tribunal, therefore, found no basis

to restrict the claim of commission to 5%.

10.1 The Tribunal also rejected the contention of the Revenue and to that

extent disagreed with the conclusion of CIT(A) as well, that the provisions

of Section 40A(2) or Section 92 of the Act could be brought into play to

restrict the claim of the assessee towards payment of agency commission

at the rate of 5% on the ground that the same was excessive and

unreasonable. It came to the conclusion that Section 40A(2) should be

invoked only if the Revenue is able to establish that the expenditure in

issue was excessive or unreasonable having regard to fair market value of

the goods and services or facilities for which payment has been made or

the legitimate needs of the business or provision of services or benefit

derived by or accruing to the assessee from the said expenditure. In view

of the fact that the Tribunal found that no evidence was placed by the

Revenue as to what was the fair market value of the goods for which the

assessee had paid commission, the claim of the assessee could not be

restricted by resorting to the clause in the collaboration agreement in

which the agency commission had been pegged at 5%, by treating the

same as evidence of fair market value. The Tribunal also observed that

Section 92 of the Act could not be invoked in the instant case as the

Transfer Pricing Officer in assessment years 2002-03, 2003-04 and

2004-05 had accepted that the percentage of the commission paid by the

assessee as one at arms length price. The Tribunal was thus, of the view

that, the provisions of Section 92 were not attracted in the instant case. It

thus concluded that there was no justification in restricting the allowance

of commission to 5% by invoking the provisions of Section 40A(2) or

Section 92 of the Act.

11. Having perused the orders of the Tribunal, we do not find that

findings returned on the said issue are perverse. The point to be noted is

that the Assessing Officer in respect of the present issue was largely

swayed by the fact that in order to get over the impediment created by the

financial institutions with respect to the payment of royalty, by seeking an

undertaking from the assessee that royalty will not be paid till such time

the assessee's obligation to make payments towards principal, interest and

other charges under the loan agreement are irregular, was sought to be

circumvented by entering into an Export Agency Sales Agreement in July,

1993 by enhancing the agency commission from 5% to 12.5%. As has

been rightly noted by the CIT(A), as well as, the Tribunal in the

collaboration agreement dated 05.06.1990, there was a subsisting

provision for appointment of an agent, to facilitate exports by the assessee.

The agent as per the collaboration agreement could have been either the

foreign collaborator itself i.e., GIC or its affiliate. Furthermore, the

collaboration agreement provided for payment of agency commission at

the rate of 5%. Therefore, it is quite evident that the appointment of an

agent by itself was not a device. The reasons given for enhancement of

commission by the assessee, were broadly: that there was very little

demand for float glass, at the relevant point in time, in the domestic

market and hence, in order to recoup its losses the assessee chose to export

the goods even though at a price which was less than the cost of

production. In achieving this end the agent extended its assistance in

various ways which the assessee in its wisdom felt ought to be

compensated by enhancing the rate of commission are reasons which were

accepted by the Tribunal on examination of evidence which demonstrated

increase in export sales. Therefore, the Tribunal, in our view, rightly,

disagreed with the conclusion of the CIT(A), which is, that while the

assessee's stand that services had been rendered, was acceptable, however,

in so far as the rate of commission was concerned it was to be allowed

only to the extent 5%. The Tribunal's dis-agreement with this line of

reasoning adopted by the CIT(A), was broadly on the ground, that once it

is accepted that services have been rendered by the agent the discretion as

to what commission has to be paid is a business decision of the assessee

which cannot be interfered with unless there is evidence to show that it is

unreasonable is, in our opinion the correct approach.

11.1 The Tribunal in the impugned judgment has returned a finding of

that no evidence had been produced by the Revenue that the agency

commission paid by the assessee at the rate of 12.5% was unreasonable.

The Tribunal also noted that the Transfer Pricing Officer in the assessment

years 2002-03, 2003-04, 2004-05 had accepted the percentage of agency

commission paid by the assessee confirmed to the arms length price.

11.2 In view of the aforesaid findings and the reasoning adopted by the

Tribunal, we find no fault with the conclusion arrived at by the Tribunal in

the impugned judgment, which is, that there was no justification on the

part of the CIT(A) in disallowing the claim of the assessee towards

payment of commission over and above the rate of 5% by invoking

Section 40A(2) or Section 92 of the Act. We concur with the view of the

Tribunal. According to us no substantial question of law arises for our

consideration.

Training Fee

12. As regards this issue in the assessment order it is noted that: the

assessee in its return had claimed expenses towards training fee of its

personnel under the personnel agreement dated 04.12.1990, even though

in the balance sheet it had been shown as deferred revenue expenditure. It

is not disputed that the assessee's personnel underwent training as per the

terms of the personnel agreement dated 04.12.1990 executed between GIC

and the assessee company at various locations between 12.09.1991 and

16.12.1992. The assessee's personnel were given training in the areas

pertaining to production, engineering, quality control and research and

development with regard to various areas dealing with glass forming, glass

melting, glass cutting and operation and maintenance of various aspects of

production and research. This training was, admittedly, imparted to the

personnel before the plant was set up. The assessee, admittedly,

maintained its books of accounts on mercantile basis. In this background

the assessee's claim for training fee in the previous year relevant to the

assessment year 1996-97 was disallowed by the Assessing Officer broadly

on the following grounds:-

(i) the services for which expenses have been incurred were rendered in

the earlier years and hence, the liability for payment of services also

arose in the years prior to the assessment year under consideration;

and

(ii) the expenditure was in the nature of pre-operative expense and had

to be capitalised. It is important to note that the Assessing Officer

while holding that the expenses for training fee had to be capitalized

did not allow the assessee depreciation in respect of the same in

view of the fact that the assessee, according to the Assessing

Officer, had failed to establish a nexus with the assets in respect of

which the expenses had been incurred.

12.1 The assessee being aggrieved had preferred an appeal to the CIT(A),

in respect of, this issue as well. The CIT(A) agreed with the reasoning

given by the Assessing Officer. The assessee took the matter further, in

appeal, to the Tribunal. The Tribunal in paragraph 28 of the impugned

order observed, and in our view rightly, that the item of expenditure in

question was admittedly incurred prior to the setting up of the plant and,

therefore, had to be capitalized as part of plant and machinery. The

Tribunal observed, the fact that, the payment had been made during the

previous year or that tax at source had been deducted during the previous

year would not convert a capital expenditure into one which is revenue in

nature. It further observed that the provisions of Section 40(a)(i) are

provisions which enable the Revenue to make a disallowance. The

assessee cannot seek to rely on those provisions when the item of

expenditure was admittedly a capital expenditure. The Tribunal thus

permitted the training fee to be capitalized as part of plant and machinery

with depreciation to be allowed to the assessee on the said capitalized

amount.

12.2 We agree with the line of reasoning adopted by the Tribunal. It is

well settled that pre-operative expenses incurred for setting up of a plant

are to be capitalized. See observations in Challapalli Sugar Ltd vs CIT;

(1975) 98 ITR 167 at pages 174-175. Thus, in our view, no substantial

question of law arises for our consideration.

Depreciation on adjusted cost of asset

13. This issue pertains to liberty granted to the assessee to make his

claim before the Assessing Officer for allowance of depreciation in terms

of Section 43A of the Act by taking into account the rate of exchange at

the year-end vis-a-vis, the rate of exchange prevailing at the time the asset

was purchased/loan was obtained in foreign currency. In other words, the

assessee was given liberty by the Tribunal to lay claim for depreciation on

the cost of assets adjusted for fluctuation in the rate of exchange of foreign

currency.

13.1 We find upon perusal of paragraph 33 of the impugned judgment

that the assessee had not claimed any depreciation. It was only during the

course of hearing of the appeal before the CIT(A) in respect of assessment

year 1996-97 that the Assessing Officer vide letter dated 28.03.2000 made

a request that depreciation be allowed to the assessee. On receiving a

copy of the said letter of the Assessing Officer the assessee vide his letter

dated 11.05.2000 in the first instance objected to the depreciation being

thrust on him in the absence of claim made by it in this regard. However,

subsequently by a letter dated 28.10.2003 the assessee withdrew his

objection and accepted the contention of the Assessing Officer that he be

allowed depreciation. It seems that the CIT(A) disposed of the appeal

pertaining to the assessment year 1996-97 without adverting to this aspect

of the matter. This propelled the assessee to file an application under

Section 154 of the Act before the CIT(A), wherein he averred that failure

on the part of the Assessing Officer to deal with the stand taken by him

with regard to depreciation would constitute a mistake apparent on the

face of the record. From the order of the Tribunal it is noted that the said

application under Section 154 is pending. We have not been told

otherwise, that is, that the position with regard to pendency of the said

application has changed since then. It is in this background in paragraph

34 of the impugned judgment that assessee's claim for depreciation was

allowed. The Revenue in the present appeal has not raised any objection

to the direction of the Tribunal allowing depreciation to the assessee.

Upon perusal of the proposed question of law which is extracted

hereinabove it seems that the Revenue is aggrieved by the fact that the

Tribunal admitted the additional ground raised by the assessee pertaining

to claim of depreciation on actual cost of assets after they were adjusted

for fluctuation in the rate of exchange, in terms of Section 43A of the Act.

A bare perusal of paragraph 36 of the impugned judgment would show

that the Tribunal as a matter of fact rejected the application of the assessee

raising the additional ground for the reason that it did not arose out of the

order of the CIT(A). All that the Tribunal has done is that, it has granted

liberty to the assessee, to make its claim before the Assessing Officer who

has been permitted to adjudicate upon the same in accordance with law.

According to us this direction of the Tribunal cannot be found fault with.

No substantial question of law has arisen for our consideration.

Pre-payment premium

14. Briefly, the assessee in its profit and loss account has debited a sum

of Rs 8 crores as pre-payment premium which is classified as an

extraordinary item. The Assessing Officer sought justification from the

assessee for claiming the entire amount as deduction in the previous year

relevant to the assessment year under consideration in view of the

judgment of the Supreme Court in the case of Madras Industrial

Investment Corporation Ltd vs CIT; (1997) 225 ITR 802. The Assessee

responded to the query of the Assessing Officer by submitting that it had

made a proposal to IDBI for restructuring its debt with respect to rupee

term loan aggregating to Rs 170.76 crores. The IDBI vide letter dated

19.03.1995 agreed to the proposal and inter alia reduced the rate of

interest on the rupee term loan to 15% p.a. effective from 01.04.1995 upon

the assessee paying IDBI a lump sum pre-payment premium of Rs 8

crores.

15. It is not disputed that the said pre-payment premium of Rs 8 crores

has been paid by the assessee during the previous year relevant to the

assessment year under consideration and accordingly debited to the profit

and loss account. The assessee, thus, claimed the aforementioned pre-

payment premium as a business expenditure. The assessee has justified

the same on the ground that it represented nothing but up-front payment,

that is, present value of the differential rate of interest that would have

been due on loan if no restructuring of loan had taken place. The assessee

also justified the claim on the basis of the provisions of Section 43B(d) of

the Act which, inter alia, provides for deduction of interest payable to

public financial institutions only in the year in which the same is paid, as

against the year, in which, the liability to pay the same was incurred

according to the method of accounting followed by the assessee. It was,

thus, submitted that since the assessee had made the payment during the

previous year relevant to the assessment year 1996-97, that is, the

assessment year under consideration, the same was admissible as

deduction in terms of Section 43B(d) of the Act.

15.1 The Assessing Officer relied upon the judgment of the Supreme

Court in the case of Madras Industrial Investment Corporation (supra)

and directed that the pre-payment premium of Rs 8 crores be amortized

over a period of 10 years. Accordingly, the Assessing Officer allowed the

deduction of Rs 80 lakhs in the year under consideration.

15.2 The assessee being aggrieved had carried the matter in appeal to the

CIT(A). The CIT(A) very curiously, while noting that the facts in Madras

Industrial Corporation (supra) were not identical to the ones that

obtained in the present case held that, the principle of law laid down in

Madras Industrial Corporation (supra) is applicable to the present case

and hence, did not find any error in the approach of the Assessing Officer

in relying upon the said decision. The assessee carried the matter further,

in appeal, to the Tribunal. The Tribunal in paragraph 31 of the impugned

judgment has returned a finding of fact that the pre-payment premium paid

by the assessee, in lieu of which IDBI reduced the rate of interest on the

rupee term loan, represented present value of the differential rate of

interest that would have been due had no restructuring of the loan had

taken place. The relevant observations of the Tribunal are extracted

hereinbelow:-

"The prepayment premium paid by the assessee to IDBI is in lieu of IDBI agreeing to reduce the rate of interest on the rupee loan aggregating to Rs 170.76 crores. The same, in other words, represents upfront payment (present value) of differential rate of interest that would have been due on the loan if no restructuring of the debt had taken place. In terms of S. 36(1)(ii) read with S. 2(28A) of the Act pre payment charges being interest paid on moneys borrowed for purposes of business, is to be allowed deduction as revenue expenditure. The prepayment premium being revenue expenditure, is to be allowed deduction in the year of accrual thereof, since the Act does not recognize the concept of deferred revenue expenditure."

16. Furthermore, the Tribunal also accepted the plea of the assessee that

it was entitled to claim deduction under Section 43B(d) of the Act and

based its decision on the judgment delivered by its Chennai Bench in the

case Overseas Sanmar Financial Ltd vs JCIT; (2003) 86 ITD 602.

17. In view of the fact that the Tribunal has returned a finding that the

lump sum pre-payment premium of Rs 8 crores represented the present

value of the differential rate of interest that would have been payable by

the assessee if no re-structuring of loan had taken place, then in terms of

Section 36(1)(ii) read with Section 2(28A) of the Act the assessee's claim

for deduction had to be allowed. The question then is whether the

deduction towards interest be allowed in one lump sum as claimed by the

assessee or deferred over a period of time as sought to be done by the

Revenue.

17.1 According to us, as correctly held by the Tribunal, the assessee's

claim for deduction had to be allowed, in one lump sum, keeping in view

the provisions of Section 43B(d) which provides that any sum payable by

the assessee as interest on any loan or borrowing from any financial

institution shall be allowed to the assessee in the year in which the same is

paid irrespective of the provisions in which the liability to pay such sum is

incurred by the assessee according to the method of accounting regularly

applied by the assessee. Since the authorities below have not disputed that

pre-payment premium paid to IDBI, in the instant case, is nothing but

'interest' or that it was paid to a public financial institution i.e., IDBI then,

in terms of, Section 43B(d) the assessee's claim for deduction could only

have been allowed in the year in which the payment had actually been

made. It is not disputed that payment has been made in the previous year

relevant to the assessment year under consideration i.e., assessment year

1996-97. Therefore, there is no scope for spreading over the liability over

a period of 10 years as was sought to be done by the Assessing Officer

which was, according to us, erroneously sustained by the CIT(A). The

ratio of the judgment of the Supreme Court in the case of Madras

Industrial Corporation (supra) is not applicable to the present case. The

facts of the instant case are different. Madras Industrial Corporation

(supra) pertains to treatment of discount on debenture issued by the

assessee. The Supreme Court's observations that a claim for deduction by

an assessee be spread over as deduction in one year would distort the

picture of profits, cannot be applied to the instant case, as the mechanism

for claiming deduction on account of 'interest' paid on loans obtained by

the assessee from a public financial institution, is specifically provided for

in the statute under Section 43B(d) of the Act. Therefore, in terms of

Section 43B(d) once it is ascertained that the payment is in the nature of

'interest' in terms of Section 36(1)(iii) read with Section 2(28A) of the

Act, and the assessee fulfills the conditions provided in Section 43B(d),

that is, it is the interest paid in respect of loans obtained from public

institutions, it follows that, the interest will have to be allowed as a

deduction only in the year of payment, notwithstanding the fact that, the

liability to pay such sum was incurred in an earlier year based on the

method of accounting regularly employed by the assessee. In these

circumstances, in our opinion the Assessing Officer failed to appreciate

the ratio of the judgment of the Supreme Court in Madras Industrial

Corporation (supra), which is, really an application of the principle of

accountancy of matching income with expenditure, where the Act makes

no specific provision for claim of deduction. The said principle

enunciated by the Supreme Court was not contemplated to apply to

situations where the Act makes a distinct and specific provision. See

Observations made by the Supreme Court in Tuticorin Alkali Chemicals

v. CIT; (1997) 227 ITR 172 at pages 183-184. In the result, no fault can

be found with the approach of the Tribunal in respect of this issue.

18. The Tribunal has returned pure findings of fact which are not

perverse. As discussed above none of the issues raise a substantial

question of law. In the result, the appeal is dismissed. The parties to bear

their own costs.

RAJIV SHAKDHER, J

VIKRAMAJIT SEN, J January 23, 2009 da