Revenue deduction for debenture issue expenses upheld where funds were raised in ordinary business for lending and repayments.

Expenditure on issue of market-linked and non-convertible debentures by an NBFC already carrying on lending business was treated as revenue expenditure deductible under section 37(1), because the funds were raised in the ordinary course of business for onward lending and repayment of borrowings, not for setting up a new unit or extending the undertaking. Section 35D was held inapplicable, as it does not override an otherwise allowable deduction for debenture issue expenditure. The Tribunal applied the principle that expenditure incurred wholly and exclusively for business is deductible, and that the object of borrowing is irrelevant where the spending secures use of money for business purposes.

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Issues: Whether the expenditure incurred on issue of market linked debentures and non-convertible debentures was allowable as business expenditure under section 37(1) of the Income-tax Act, 1961, or was required to be amortised under section 35D of the Income-tax Act, 1961.

Analysis: The assessee was an NBFC already engaged in borrowing funds and lending them in the ordinary course of business. The debentures were issued to raise funds for onward lending and repayment of borrowings, and not for setting up a new unit or for extension of the undertaking. The Tribunal relied on the principle that expenditure incurred wholly and exclusively for the purpose of business is deductible as revenue expenditure, and on Circular No. 56 dated 19.03.1971, which clarifies that section 35D does not supersede an otherwise allowable deduction for debenture issue . The Tribunal also followed the ratio that the object of borrowing is irrelevant where the expenditure is incurred for securing the use of money for business purposes.

Conclusion: The expenditure on issue of debentures was held allowable as revenue expenditure under section 37(1) and not amortisable under section 35D.

Final Conclusion: The addition made by restricting deduction to one-fifth of the debenture issue was deleted and the assessee succeeded on the sole issue.

Ratio Decidendi: Where a company already in business incurs expenditure on issue of debentures for raising funds in the ordinary course of its business, and the expenditure is otherwise allowable as revenue expenditure under section 37(1), section 35D does not apply to compel amortisation.

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