Debenture premium spreading, sales-tax deferment fiction, and employee-asset depreciation under tax rules

Rule 6D was applied on a trip-wise basis for each employee, so the travelling-expense disallowance was sustained. Sales-tax liability was not treated as actually paid under section 43B because the BIFR arrangement showed only instalment payment and the statutory conversion of liability into loan, with the required eligibility certification, was not completed. Debenture redemption premium was treated as borrowing cost and allowable proportionately over the life of the debentures. Guest-house rent and repairs remained disallowed on binding precedent, while the ad hoc hospitality disallowance was deleted. Depreciation on household-use assets given to employees was allowed because the assets were used in the course of employment.

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Issues: (i) Whether the disallowance under rule 6D of the Income-tax Rules was sustainable; (ii) whether the sales-tax liability could be treated as actually paid under section 43B of the Income-tax Act, 1961 on the basis of the BIFR scheme and State Government arrangement; (iii) whether the premium payable on redemption of debentures was allowable on a spread-over basis; (iv) whether the disallowance of guest-house rent and repairs and hospitality expenses was justified; and (v) whether depreciation was allowable on household-use assets given to employees.

Issue (i): Whether the disallowance under rule 6D of the Income-tax Rules was sustainable.

Analysis: The travelling expenses were examined on the basis of each journey undertaken by an employee, and the computation followed the principle applied by the Andhra Pradesh High Court that the ceiling under rule 6D is to be worked out with reference to each trip of the individual employee rather than on an aggregate basis. The assessee's reliance on contrary Tribunal decisions was not accepted because the issue was treated as covered by binding High Court authority.

Conclusion: The disallowance was upheld and the issue was decided against the assessee.

Issue (ii): Whether the sales-tax liability could be treated as actually paid under section 43B of the Income-tax Act, 1961 on the basis of the BIFR scheme and State Government arrangement.

Analysis: The scheme and the accompanying certificates showed only that the arrears were permitted to be paid in instalments. The statutory provision relied upon required a deferment arrangement backed by the prescribed eligibility conditions and a conversion of the tax liability into a loan liability by the specified agency, with an eligibility certificate under the State scheme. Mere instalment facility under the BIFR rehabilitation scheme did not amount to such conversion, and the assessee had not completed the statutory steps required for the deeming fiction to operate. Circulars of the CBDT and the cited precedents were treated as supporting only cases where the statutory conversion mechanism had been fulfilled.

Conclusion: The claim under section 43B was rejected and the issue was decided against the assessee.

Issue (iii): Whether the premium payable on redemption of debentures was allowable on a spread-over basis.

Analysis: The liability attached to the debentures was held to be part of the borrowing cost and, following the principle applied in cases on debenture discount and premium, the expenditure was treated as one having enduring business relevance over the life of the debentures. The proper treatment was to spread the premium over the period between issue and redemption rather than defer allowance until redemption alone.

Conclusion: The assessee was entitled to proportionate allowance and the issue was decided in favour of the assessee.

Issue (iv): Whether the disallowance of guest-house rent and repairs and hospitality expenses was justified.

Analysis: The guest-house rent and repairs disallowance was followed on the basis of the earlier special bench view, while the ad hoc hospitality disallowance was found unsustainable on the facts and was deleted. The Tribunal did not accept the Revenue's challenge to the deletion of the hospitality disallowance, but accepted the challenge concerning guest-house expenditure because that item was covered against the assessee by binding precedent.

Conclusion: The guest-house rent and repairs disallowance was upheld, while the hospitality disallowance was deleted, resulting in mixed relief on this issue.

Issue (v): Whether depreciation was allowable on household-use assets given to employees.

Analysis: The assets were treated as having been given to employees for use in the course of employment and the issue was governed by the earlier Tribunal view allowing depreciation on such assets. The Revenue's objection that the assets were not used for business purposes was not accepted.

Conclusion: Depreciation was allowable and the issue was decided in favour of the assessee.

Final Conclusion: The order resulted in mixed relief, with some additions sustained and others deleted, and both cross-appeals were allowed only in part.

Ratio Decidendi: A tax liability can be treated as actually paid under the sales-tax deferment fiction only when the statutory scheme for conversion into loan liability and the prescribed eligibility conditions are satisfied; and a debenture redemption premium is deductible proportionately over the life of the debentures as a business expenditure.

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