2005 (8) TMI 286 - AT - Income Tax

Assessee's Provision for Deep Discount Bonds Interest Upheld

The Tribunal concluded that the provision made by the assessee for the interest on Deep Discount Bonds is an accrued liability and not contingent. The ... Business Expenditure Issues Involved:1. Deletion of disallowance of interest payable on deep discount bonds issued by the assessee-company.Issue-Wise Detailed Analysis:1. Deletion of Disallowance of Interest Payable on Deep Discount Bonds:Facts and Background:The assessee, a company, issued Deep Discount Bonds (DD Bonds) with a maturity period of 25 years and varying redemption values at intervals of 5, 10, 15, and 20 years. The bonds, used for business purposes, accrue interest compounded yearly at 18.33%. The assessee provided for the incremental interest in its books, but the Assessing Officer (AO) disallowed the claim of Rs. 2,79,76,080 for the assessment year 1995-96, labeling it as a contingent liability. Similar disallowances were made for the assessment years 1997-98 and 1999-2000. However, for the assessment year 1994-95, the interest was allowed, and for 1995-96 and 1998-99, the claims were accepted under section 143(1)(a) of the Act.Assessing Officer's Findings:The AO argued that DD Bonds and regular bonds are distinct, with the former not specifying payable interest. Unlike fixed deposits, the interest on DD Bonds is not quantifiable until maturity. The AO held that since the bonds are redeemable only at the company's option at the end of 5 years, the interest does not accrue until then, making the liability contingent and not an ascertained or accrued liability. Consequently, the provision for interest was disallowed.Commissioner of Income-tax (Appeals) [CIT(A)] Findings:The CIT(A) deleted the disallowance, referencing the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd v. CIT [1997] 225 ITR 802, which allowed spreading the discount on debentures over their life. The CIT(A) held that the DD Bonds issued by the assessee are comparable to debentures, and the interest claim of Rs. 2,79,76,080 is an admissible deduction under section 37. The CIT(A) relied on the CBDT clarification that the difference between the issue price and redemption price is treated as interest in the hands of the bondholder, thus should be similarly treated for the issuer.Revenue's Arguments:The CIT-DR argued that no interest is payable until 5 years from the issue date, making the liability contingent. The Supreme Court decision in Madras Industrial Investment Corpn. Ltd.'s case was deemed inapplicable as the bonds were not issued at a discount, and the liability arises only upon the company's option to redeem the bonds.Assessee's Arguments:The assessee's counsel contended that the interest payable on the bonds is ascertained and not contingent, as the liability is fixed and quantifiable annually. The interest rate of 18.31% was aligned with market rates, and similar bonds were issued by other financial institutions. The liability was argued to be an accrued liability, not contingent.Tribunal's Analysis:The Tribunal referenced the Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI) and the Supreme Court's acceptance of these standards in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. It distinguished between a provision and a contingent liability, emphasizing that a provision is for a known liability, even if its exact amount is uncertain. The Tribunal cited the Supreme Court's principles in BEML v. CIT [2000] 245 ITR 428, stating that an accrued liability, though to be discharged in the future, is deductible if it is certain and can be reasonably estimated.Conclusion:The Tribunal concluded that the provision made by the assessee for the interest on DD Bonds is an accrued liability and not contingent. The interest liability was rationally spread over the bond's life as per the terms of issue. Thus, the provision for interest payable was allowable, and the appeals by the Revenue were dismissed.Result:The appeals were dismissed, upholding the CIT(A)'s deletion of the disallowance of interest payable on the Deep Discount Bonds.