Delhi High Court

The Commissioner Of Income Tax, ... vs M/S. Oswal Agro Mills Ltd. on 27 October, 2010

Author: A.K.Sikri

*               IN THE HIGH COURT OF DELHI AT NEW DELHI

+                           ITA No.158/2006

%                                                    Date of Decision: 27.10.2010


The Commissioner of Income Tax,
Delhi (Central-III)                           .....Appellant

                                              through : Mr. N.P. Sawhney


                                  VERSUS

M/s. Oswal Agro Mills Ltd.                    .....Respondent

                                              through: Mr. C.S. Aggarwal,
                                                       Sr. Advocate with
                                                       Mr. Prakash Kumar

CORAM :-
   HON'BLE MR. JUSTICE A.K. SIKRI
   HON'BLE MR. JUSTICE SURESH KAIT

       1.       Whether Reporters of Local newspapers may be allowed
                to see the Judgment?
       2.       To be referred to the Reporter or not?
       3.       Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J. (Oral)

1. This appeal was admitted on the following question of law:

"Whether the Income Tax Appellate Tribunal was correct in law in allowing the expense of Rs.24,19,840/- claimed by the Assessee towards payment of premium for redemption of non-convertible secured debentures?

2. This question has arisen under the following circumstances:-

3. The respondent assessee herein had issued 13.5% secured redeemable non-

convertible debentures (hereinafter referred to as „NCDs‟). The debentures

were to be redeemed, after a period of five years, as a premium of ` 5 per

debenture. These debentures were issued some years ago and they were

redeemed in the assessment year in question, i.e., assessment year 1997-98.

The premium of ` 5 per debenture was paid along with the face value of these

debentures. Total premium paid in this manner, in the assessment year in

question, worked out to `30,24,800/-. The assessee claimed deduction of this

amount in the income-tax return filed by it. The Assessing Officer, however,

was of the view that the deduction was not allowable in full as the same was

required to be spread over the total period of debentures, i.e., five years.

Therefore, he allowed only 1/5th of the aforesaid amount thereby disallowing

claim to the extent of `24,19,840/-. The assessee preferred appeal against the

aforesaid disallowance, which was dismissed. Undeterred, the assessee

approached the Income-Tax Appellate Tribunal (hereinafter the „Tribunal) with

the contention that in the facts and circumstances of this case there was no

question of spreading over the aforesaid amount of premium as the amount was,

in fact, spent and incurred in the assessment year in question. It was further

submitted that since no such amount was spent in the previous four years, the

assessee did not claim any deduction of the said amount at the rate of 1/5 th in

the previous years. The contention of the assessee has found favour before the

Tribunal and it is for this reason, the Tribunal vide impugned judgment dated

March 31, 2005 has allowed the said claim of premium paid in its entirety.

4. We have heard the counsel for both the parties at length. The only reason for

which the Revenue wants the claim to be spread over a period of five years is

that in Madras Industrial Investment Corporation Ltd. V. CIT, 225 ITR 802

(SC), the Supreme Court has accepted the concept of spreading over in the case

of issue of debentures and therefore, the approach of the Assessing Officer and

the CIT(A) was correct. Mr. Aggarwal, learned senior counsel appearing for

the assessee, on the other hand submitted that the said judgment did not apply to

the facts of this case as rightly held by the Tribunal. He argued that admittedly

the assessee was following mercantile system of accounts and the entire amount

of premium was paid only in the year in question. Therefore, the liability,

which was incurred, had become due and paid in the assessment year in

question and not in previous years. After considering the respective arguments

we are incline to accept the submissions of the learned senior counsel for the

respondent. We may start our discussion with the judgment of the Apex Court

in the case of Madras Industrial Investment Corporation Limited (supra). In

that case the assessee company issued debentures at a discount and the total

discount on the issue was of `1.5 crores amount to `3,00,000/- and for the

assessment year in which the debenture was issued, i.e., 1968-69, the assessee

wrote off `12,500/- out of total discount of `3,00,000/- being the proportionate

amount of discount for the period of six months ending with June 30, 1967

taking into account the period of 12 years, which was the period of redemption

and dividing the discount of `3,00,000/- over the period of 12 years. The

Income Tax Officer disallowed the claim, but the Appellate Assistant

Commissioner allowed the deduction at `12,500/- and the Tribunal held that the

entire expenditure of `3,00,000/- was allowable as an expenditure incurred for

the purpose of business. On a reference the High Court noted that out of total

discount of `3,00,000/-, as amount of `12,500/- had been allowed 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 an expenditure. An appeal was filed with the Supreme Court

reversing the judgment of the High Court has held as under:-

"Ordinarily, revenue expenditure which was incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the years in which it is incurred. It cannot be spread over a number of years even if the assessee has written 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 debentures in an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures."

5. Two things emerged from the aforesaid discussion:-

(a) That was a case where the debentures were redeemed at a discount. Thus,

the assessee was required to pay less amount than the amount at which these

debentures were issued. This discounted amount, the assessee, was allowed

to be spread over. In the instant case the position is just the opposite. Here,

the debentures are redeemed at a premium and the assessee is made to cuff

out the amount which is more than the face value. The Supreme Court

clearly held that ordinarily the 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 is only in exceptional cases,

which was one before the Court, the assessee was given an option when the

assessee justifies spreading over of the claim over a period of "ensuing

years" that was to be allowed. In the present case, as noted above, the

assessee did not want this spread over. In fact, in last four years he did not

raise any claim. It is only in the year in question when the assessee made

claim of the entire amount of premium. In these circumstances, we are of

the opinion that the Tribunal rightly distinguished the judgment in the case

of Madras Industrial Investment Corporation Ltd. (supra) and made the

following observations:-

".....If we apply the spread over theory as laid down by the apex court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT (supra), all assessments earlier framed were required to be re-opened to allow the respective claim of the assessee in the relevant assessment year. If it is to be done, it results into multiplicity of litigation. We, therefore, are of the view that the ratio laid down by the judgment of the apex court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT (supra) does not apply to those cases on which NCDs were redeemed at a premium, after a specified period because the liability only incurred when it becomes due or paid. In the case of redemption of NCDs at premium, liability only becomes due when the NCDs are required to be redeemed as per the specified terms and conditions and not prior to that. For this proposition, we find support from the judgment of apex court in the case of E.D. Sasoon & Company Ltd. & Others Vs. CIT (1954) 26 ITR 27 (SC)."

6. The Tribunal also relied upon the judgment of the Calcutta High Court in CIT

v. Tungabharda Industries Ltd., 207 ITR 553 (Cal). In that case the Court has

categorically held that the expenditure incurred in respect of debentures was

revenue expenditure and the liability to pay premium arose at the expiry of the

7th year from the date of the allotment and there was no liability to pay the

premium at all if the debentures were re-purchased under the buy-back clause

and there was no further issue of debentures. The payment of premium was

clearly a contingent liability and the liability to pay the premium would arose

only if the debentures were not re-purchased by the company under clause v(b)

and were redeemed only at the end of the 7th year. The entire amount of the

premium in respect of the said debentures should be allowed as a deduction in

entirety in one year, i.e., in the year in which such liability was incurred.