1997 (4) TMI 5 - SC - Income Tax

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

Madras Industrial Investment Corporation Limited Versus Commissioner of Income-Tax

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 ... Claim for deduction u/s 37 - discount on bonds and debentures - treated as a part of the expenditure - meaning of 'expenditure' under section 10(2)(xv) - whether a discount on bonds should be treated as 'expenditure' - HELD THAT:- When a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. We need not go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, however, to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. Issuing debentures at a discount is another such 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 a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M. P. Financial Corporation v. CIT [1985 (12) TMI 36 - MADHYA PRADESH HIGH COURT]. The view that we have taken is also in conformity with the accounting practice of showing the discount in the 'discount on debentures account' which is written off over the period of the debentures. The appellant is, therefore, entitled to deduct a sum out of the discount in the relevant assessment year. The balance expenditure cannot be deducted in the assessment year in question. 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.