2015 (3) TMI 853 - SC - Income Tax

Upfront Interest on Debentures Fully Deductible in Year Paid Under Section 36(1)(iii) of Income Tax Act

Taparia Tools Limited Versus Joint Commissioner Of Income Tax

The SC held that the assessee was entitled to claim the entire upfront interest paid on debentures as a deductible expenditure in the year of payment ... Interest upfront to the debenture holder - AO treated it as the 'deferred revenue expenditure', Whether is allowable as a deduction in the first year itself or it is to be spread over a period of five years, being the life of the debentures? - assessee follows mercantile system of accounting. Held that:- In the instant case, as noticed, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act. See Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta [1971 (8) TMI 10 - SUPREME COURT] At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. Thus the assessee would be entitled to deduction of the entire expenditure of 2,72,25,000 and 55,00,000 respectively in the year in which the amount was actually paid. - Decided in favour of assessee. ISSUES: Whether the upfront payment of interest on non-convertible debentures is allowable as a deduction in the year of payment or must be spread over the life of the debentures.Whether the accounting treatment of spreading the upfront interest payment over five years estops the assessee from claiming the entire deduction in the year of payment.Whether the principle of 'Matching Concept' requires spreading of upfront interest payments over multiple years despite actual payment in one year.Whether the concept of deferred revenue expenditure applies to upfront interest payments on debentures. RULINGS / HOLDINGS: The upfront interest payment on debentures is allowable as a deduction in full in the year in which it is actually paid or incurred, as per Section 36(1)(iii) read with Section 43(2) of the Income Tax Act, since the liability arose and was discharged in that year.The accounting treatment of spreading the interest payment over five years does not estop the assessee from claiming the entire deduction in the year of payment, as assessment must be made according to the provisions of the Act and not merely on the basis of book entries.The 'Matching Concept' invoked by the High Court to justify spreading the deduction is inapplicable where the liability is discharged upfront and the payment is made in the same year; thus, the High Court erred in applying this principle to deny full deduction.There is no concept of deferred revenue expenditure under the Act applicable to upfront interest payments except where specifically provided; hence, such payments are not to be treated as deferred expenditure. RATIONALE: The Court applied the statutory framework under Section 36(1)(iii) of the Income Tax Act, which allows deduction of interest paid on capital borrowed for business purposes, and Section 43(2) defining 'paid' to include amounts actually paid or incurred according to the accounting method followed (mercantile system in this case).The Court emphasized that the Assessing Officer cannot disregard the terms of the debenture issue or the genuineness of the liability and cannot deny deduction on grounds such as the rate of interest or different accounting treatment.The Court rejected the High Court's reliance on the 'Matching Concept' as misapplied, noting that this principle is relevant only when the liability and benefit extend over multiple years and where the assessee itself seeks to spread the expenditure, which was not the case here.The Court referred to precedent establishing that a business liability that has arisen and been quantified in an accounting year is deductible in that year, even if discharge occurs later, and here the liability was both quantified and discharged in the same year.The Court distinguished this case from those where spreading expenditure is allowed at the assessee's instance due to continuing benefit over years, noting that here the assessee claimed full deduction in the return, and the revenue cannot override this claim based on accounting entries alone.The Court reaffirmed the principle that entries in books of accounts are not conclusive and the assessment must be made on the basis of the statutory provisions of the Act.