1991 (11) TMI 6 - HC - Income Tax

Redemption premium, ROC fee disallowed; motor car repairs as plant under s.31, s.37, s.43(3) allowed

HC held that premium payable on redemption of non-convertible debentures was a contingent liability arising only on expiry of seven years if debentures ... Accounting - deduction claimed in respect of premium payable on redemption of non-convertible secured debentures​​​​​​​ - Whether, the Tribunal was justified in holding that the expenditure incurred on repairs and insurance of cars should be considered for the purpose of computing disallowance u/s 37(3A), and that such an expenditure is not allowable u/s 31 of the said Act ? - HELD THAT:- It is well-settled that the taking of a loan does not lead to acquisition of any capital asset or any advantage of an enduring nature. The loan is a liability and cannot be considered as an advantage irrespective of the purposes for which the loan is utilised, namely, whether for acquisition of a capital asset or for meeting revenue disbursements. The expenditure incurred on the loan would be an allowable revenue expenditure. It is true that the company shall have the right to reissue debentures which are repurchased by it from time to time in accordance with the provisions of section 121 and other applicable sections of the Companies Act, 1956, and upon such reissue, the person entitled to the debentures shall have, and shall be deemed always to have had, the same rights and priorities as if the debentures had never been redeemed. But in the case of repurchase of debentures, no premium is payable. We are, therefore, unable to hold that the liability for payment of the premium was created at the time of issue of the debentures or the liability to pay the premium is in unqualified terms. The liability to pay the premium, in our view, clearly arises at the expiry of the seventh year from the date of allotment and there is no liability to pay the premium at all if the debentures are repurchased under the buy-back clause and there is no further issue of debentures. The payment of premium is, therefore, in our view, clearly a contingent liability and the liability to pay the premium shall arise only if the debentures are not repurchased by the company under clause 5(b) and are redeemed only at the end of seven years. In our view, therefore, the entire amount of the premium in respect of the said debenture should be allowed as a deduction in its entirety in one year, i.e., in the year in which such liability is incurred. As we have already indicated no part of the premium is deductible in the year under reference. We, therefore, answer the first question referred at the instance of the assessee and the only question referred at the instance of the Revenue by saying that no portion of the debenture premium, on the facts and in the circumstances of this case, is deductible in the year under reference. In Bombay Burmah Trading Corporation Ltd.'s case [1982 (7) TMI 34 - BOMBAY HIGH COURT], one of the questions was whether the fees paid by the assessee to the Registrar of Companies for the enhancement of capital was allowable expenditure. There, the Bombay High Court, after considering several decisions of the Supreme Court as well as other High Courts, held that the expenses incurred in connection with the issue of preference shares or additional equity share is not revenue expenditure and is not deductible. The Division Bench of this court in the case of Brooke Bond India Ltd. v. CIT [1981 (8) TMI 27 - CALCUTTA HIGH COURT] held that the expenditure incurred for raising or addition to the share capital of the company is not allowable as revenue deduction. In Union Carbide India Ltd. v. CIT [1986 (6) TMI 11 - CALCUTTA HIGH COURT], the Division Bench of this court, following the decision in Brooke Bond India Ltd.'s case, held that the fees paid to the Registrar of Companies in connection with the increase of the authorised capital of a company is capital expenditure and hence the expenditure is not allowable under section 37. Thus, we answer the question in the affirmative and in favour of the Revenue. The deduction in respect of the expenditure incurred on repairs and insurance of the motor-car which is plant as defined in section 43(3) of the Act, is allowed under section 31 of the Act and not under section 37. The expenditure in respect of which sub-section (3A) can be attracted is only that which falls under section 37 and not under section 31. Section 37(1) deals with only such expenditure which does not fall within sections 30 to 36 of the Act. Accordingly, the expenditure incurred on repairs and insurance of motor cars cannot be considered for disallowance under sub-section (3A) of section 37 of the Act. Therefore, the prohibition, restriction or limitation as contained in sections 37(3A) and 37(2B) cannot have any manner of application to the expenditure allowable otherwise and allowed under sections 30 to 36. In our view, the expenditure allowable under section 31 cannot come within the purview of section 37(3A). Only such expenditure which falls under section 37 can be brought within the net of restriction made in section 37(2B). We, therefore, answer the third question in the negative and in favour of the assessee. Issues Involved:1. Deduction of premium payable on redemption of debentures.2. Capital expenditure for increase in authorized capital.3. Disallowance of expenditure on repairs and insurance of cars u/s 37(3A).Summary:Issue 1: Deduction of Premium Payable on Redemption of DebenturesThe primary question was whether the premium payable at the time of redemption of debentures is an allowable revenue expenditure and if so, whether the whole of it or only one-seventh thereof can be allowed as a deduction in the assessment year in question. The Tribunal held that the expenditure should be allowed as a revenue deduction over the period of the debentures, i.e., seven years, and allowed one-seventh in the assessment year involved. However, the High Court concluded that the liability to pay the premium arises only at the expiry of the seventh year from the date of allotment and is contingent upon the debentures not being repurchased by the company. Therefore, no portion of the debenture premium is deductible in the year under reference. The court emphasized that in the mercantile system of accounting, the entire revenue expenditure should be allowed in the year in which the liability is incurred, not spread over multiple years.Issue 2: Capital Expenditure for Increase in Authorized CapitalThe assessee paid Rs. 59,940 as a fee for increasing its authorized capital, which was disallowed as capital expenditure by the Inspecting Assistant Commissioner (Assessment) and upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. The High Court confirmed this decision, citing precedents that expenses incurred in connection with the issue of additional equity shares or preference shares are capital expenditures and not deductible as revenue expenditures.Issue 3: Disallowance of Expenditure on Repairs and Insurance of Cars u/s 37(3A)The assessee contended that the expenditure on repairs and insurance of cars should not be considered for disallowance u/s 37(3A). The Tribunal upheld the disallowance, but the High Court disagreed, stating that such expenditures fall under section 31, not section 37. Section 37(3A) applies only to expenditures covered under section 37, not those under sections 30 to 36. Therefore, the expenditure on repairs and insurance of motor cars cannot be disallowed u/s 37(3A). The High Court answered this question in the negative and in favor of the assessee.Conclusion:- No portion of the debenture premium is deductible in the assessment year in question.- The fee for increasing authorized capital is a capital expenditure and not deductible.- Expenditure on repairs and insurance of cars is not subject to disallowance u/s 37(3A) and is allowable under section 31.