1997 (4) TMI 5 - SC - Income Tax

Discount on debentures is business expenditure that must be spread over debenture life; only apportioned deduction allowed.

SC held that a discount on debentures constitutes expenditure incurred in the course of business and must be spread over the life of the debentures. The ... Expenditure - revenue expenditure - contingent liability - accrued liability - discount on issue of debentures - proportionate deduction - capital expenditure - purpose of businessDiscount on issue of debentures - expenditure - revenue expenditure - purpose of business - Characterisation of the discount on debentures as expenditure incurred for the purposes of business and whether it is revenue or capital in nature. - HELD THAT: - When debentures are issued at a discount the issuer incurs a present liability to pay, at redemption, a larger sum than that received. Such a liability, though payable in futuro, is an accrued liability incurred in praesenti for the purpose of generating funds for the business. Expenditure for income-tax purposes is not confined to amounts actually paid out; it may include liabilities incurred or amounts given up for commercial expediency, provided the liability is not merely contingent. The Court applied commercial principles and earlier precedents to hold that the discount incurred on issue of debentures constitutes expenditure and, on the facts, is not of a capital nature. The question whether the amount is of capital character must be determined by examining whether the outgoing is an integral part of the profit making process rather than acquisition of a permanent asset; on that test the discount is revenue expenditure incurred to secure the use of money for a period and so falls within allowable business expenditure.The discount of Rs. 3,00,000 on the issue of debentures is expenditure incurred for the purpose of the company's business and is revenue in character for income tax purposes.Discount on issue of debentures - proportionate deduction - accrued liability - Whether the entire amount of discount on issue of debentures is deductible in the accounting year of issue or only a proportionate part spread over the life of the debentures. - HELD THAT: - Although the liability to pay the discount is incurred in the year of issue, it is a continuing liability that secures benefit to the business over the period for which the debentures are outstanding. Allowing full deduction in the year of issue would distort the profits of that year; established accounting practice treats the discount in a 'Discount on Debentures Account' and writes it off over the period of the debentures. Prior decisions recognising spreading of lump sum payments securing multi year benefits were followed. Consequently only the proportionate part of the discount relating to the relevant accounting period is allowable in computing income for that year.Only the proportionate part of the discount relating to the accounting period ending June 30, 1967 (Rs. 12,500) is deductible in that year; the balance must be spread over the period of the debentures.Final Conclusion: The appeal is allowed insofar as the discount on issue of debentures is held to be revenue expenditure incurred for the purposes of business; however only a proportionate part of the total discount is deductible in the assessment year 1968-69 (accounting year ending June 30, 1967), and the High Court's contrary conclusion on full deduction is set aside. There will be no order as to costs. Issues Involved:1. Whether the Tribunal was justified in permitting the assessee to raise the contention that the entire amount of Rs. 3,00,000 being the discount relating to the issue of debentures for Rs. 1.5 crores during the relevant previous year was to be allowed as a permissible deduction.2. Whether the Tribunal was justified in holding that the assessee had incurred an expenditure of Rs. 3,00,000 during the relevant previous year by way of discount paid to the persons who had subscribed to the debentures issued by it for Rs. 1.5 crores during the relevant previous year and the same was allowable as a revenue expenditure.Issue 1: Tribunal's Jurisdiction to Permit New ClaimThe Tribunal allowed the assessee to raise a new claim for the deduction of Rs. 2,87,500, which was the balance amount of the total discount of Rs. 3,00,000 on the issue of debentures. The Tribunal rejected the Department's objection that it had no jurisdiction to examine this new claim. The Madras High Court upheld this decision, answering the first question in favor of the appellant-assessee.Issue 2: Nature of Discount as ExpenditureThe Madras High Court reframed the second question to determine whether the amount of Rs. 2,87,500 constituted expenditure and whether it was revenue expenditure. The High Court concluded that the discount of Rs. 3,00,000 did not represent any payment made to anyone and thus could not be considered as expenditure. Consequently, it held that no part of the Rs. 2,87,500 could be allowed as a deduction.Supreme Court Analysis:The Supreme Court first considered whether the discount on debentures could be treated as expenditure. It referred to the case of Indian Molasses Co. (Private) Ltd. v. CIT, where it was held that 'expenditure' is money laid out by calculation and intention, and it must be something that is gone irretrievably. The Court also referred to Calcutta Co. Ltd. v. CIT, which allowed the deduction of estimated expenditure for future liabilities as accrued liabilities.The Court noted that 'expenditure' covers liabilities incurred, even if payable in the future, but not contingent liabilities. It cited the case of CIT v. Chandulal Keshavlal and Co., where relinquishing part of a claim for commercial expediency was considered allowable business expenditure.The Court also referred to the Madhya Pradesh High Court's decision in M. P. Financial Corporation v. CIT, which held that the discount on bonds represents deferred interest and should be proportionately written off over the period the bonds remain outstanding.The Court concluded that issuing debentures at a discount incurs a liability to pay a larger amount than borrowed, which is a liability incurred for business purposes. This liability is a continuing one, spread over the period of the debentures.Conclusion:The Supreme Court held that the appellant correctly claimed a proportionate deduction of Rs. 12,500 for the relevant accounting period. The balance expenditure of Rs. 2,87,500 could not be deducted in the same year. The Tribunal's decision to allow the entire amount in one year was not justified. The Court agreed with the Madhya Pradesh High Court's reasoning that the liability should be spread over the period of the debentures. The appeal was disposed of accordingly, with no order as to costs.