TaxTMI 
TaxTMI 
2026 (7) TMI 393
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.... by treating the entire discount as revenue expenditure allowable in the year of issue, ignoring that the said expenditure secures enduring benefit over the tenure of debentures and is required to be amortized over the debenture period as laid down by the Hon'ble Supreme Court in Madras Industrial Investment Corp. Ltd. v. CIT (1997) 225 ITR 802 (SC)? 2. (2015) 372 ITR 605 (SC), overlooking that the facts of the present case are distinguishable Whether the Hon'ble CIT(A) erred in law in applying the ratio of Taparia Tools Ltd. v. JCIT inasmuch as the assessee itself had accounted the discount as deferred expenditure in its books of account, thereby attracting the principle of consistency and matching concept? 3. Whether on the facts and in the circumstances of the case, the Hon'ble CIT(A) was correct in law in restricting disallowance u/s 14A to 1% of only those investments which yielded exempt income (251.25 lakh), ignoring that Rule 8D(2)(iii) requires disallowance at 1% of the average value of all investments, income from which does not or shall not form part of total income, irrespective of whether such investments have actually yielded exempt incom....
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....nable. 4.2 The Assessing Officer, however, was of the opinion that firstly, discount on debentures represent an amount paid to the issue of the debenture at a price lower than the nominal value and hence of the discount did not represent any payment made to anyone so as to constitute expenditure, secondly, the benefit arising from the debentures extended over the tenure of the debentures and, therefore, the expenditure ought to be amortized over the life of the instrument. The Assessing Officer principally relied upon the judgment of the Hon'ble Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT (supra) for the proposition that discount on debentures represents a continuing liability and, therefore, deduction should be spread over the period of debentures. The ld AO observed that assessee's contention of discount on debentures being allowable in the first year and cannot be amortized, was incorrect interpretation of the decision of the Hon'ble Supreme Court. The ld AO also distinguished the decision of Hon'ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT (Supra) relied upon by the assessee. Regarding the rule of the consistency, the AO was of the v....
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....ment Corporation Ltd. v. CIT (supra). Reliance was placed upon the subsequent judgment of the Hon'ble Supreme Court in Taparia Tools Ltd. v. JCIT (supra), wherein the Hon'ble Apex Court clarified that in Madras Industrial Investment Corporation Ltd. (supra), spreading over of expenditure was permitted only because the assessee itself had opted for such treatment and not because the law mandated amortization. The assessee submitted that where an assessee claims a revenue expenditure wholly in the year of incurrence, the Revenue cannot compel deferment of such deduction over future years. The assessee also relied upon the judgment of the Hon'ble Bombay High Court in Tata Industries Ltd. v. CIT(supra) and various other judicial precedents to contend that there exists no provision under the Act authorising deferment of a revenue expenditure, except in cases specifically contemplated by statute, such as section 35D of the Act. It was submitted that in the absence of any statutory provision mandating amortization, the action of the Assessing Officer amounted to rewriting the law, which is impermissible. The assessee also pointed out that in Note No. 26 to its financial statements, the en....
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.... debentures constituted allowable revenue expenditure deductible in the year of issuance of the debentures itself. Consequently, the disallowance of Rs. 33,23,90,083/- made by the Assessing Officer was deleted. The relevant extract of decision of ld CIT(A) is reproduced as under:- "6.2 Facts of the case and submission of the assessee have been examined. The assessee has claimed discount on debenture of Rs. 40,01,48,500/- in the computation of income filed in the ITR. The AO in the assessment order has mainly relied on the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation vs. CIT and has held that the assessee cannot claim the entire discount on the issue of debenture during the year and has restricted the discount claimed to Rs. 6,77,58,417/- for the year under consideration and has disallowed excess claim of Rs. 33,23,90,083/-. I found that the Hon'ble Supreme Court in the case of Taparia Tours Ltd. vs. JCIT (2015) 372 ITR 605 (SC) has distinguished the judgment given in Madras Industrial Corporation and observed that in Madras Industrial Investment Corporation, the proportionate deduction was allowed solely because it was the asses....
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....ly revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the a....
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....is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which up to now has been restricted to the cases of debentures. 19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be ....
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....e full amount in the year of issue. Therefore, the reliance placed by the AO on the Madras Industrial ruling is wholly misplaced and the assessee's case squarely covered by the later and binding decision in Taparia Tools Ltd. 6.2.2 Further, the Hon'ble Bombay High Court in the case of Tata Industries Limited v. CIT (ITA No. 661 of 2018), vide its order dated 08.01.2025, has reaffirmed the principle laid down by the Hon'ble Supreme Court in Taparia Tools Ltd. v. JCIT wherein it is held that when an assessee incurs a revenue expenditure, such as debenture issue expenses, and opts to claim the entire amount in the year of incurrence, the Revenue cannot compel the assessee to spread the expenditure over the tenure of the debentures. The relevant portion of decision of the Hon'ble Bombay High Court in the case of Tata Industries Limited vs. CIT (ITA No.661 of 2018) is reproduces as under: "7. With respect to question 8, it deals with whether the upfront fees and brokerage fees for issuing non-convertible debentures should be allowed fully in the assessment year 2004-05 or should be spread over two years for which non- convertible debentures were issued. There is no dis....
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....le Bombay High Court in the case of Tata Industries Ltd. as referred above, it is held that discount on issue of debenture is a revenue expenditure and is therefore allowable in the year in which the debentures were issued. Accordingly, disallowance of Rs. 33,23,90,083/- made by the AO on account of discount on debenture is deleted. " 5. We have heard the rival submissions and carefully examined the material available on record. The short issue arising for adjudication is whether the assessee, having incurred liability towards discount on issue of debentures during the year under consideration, is entitled to claim the entire amount as deduction in the same year, or whether such deduction is required to be spread over the tenure of the debentures. 5.1 According to the assessee entire discount is allowable in the year of issue of the debentures, whereas, according to the AO proportionate deduction should be allowed over the life of the debentures. The AO has relied on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT, [supra], wherein Hon'ble Supreme Court observed as under: "6. The said assessee had issued ....
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....rred. It cannot be spread over a number of years even if the assessee had written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus, in the case of Hindustan Aluminium Corpn. Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question." 9. The above findings of the Hon'ble Supreme Court clearly show that revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It could not be spread over a number of years if the assessee has shown in return and in its books over a period of years. The Hon'ble Supreme Court also declared the legal position that discount on debentures constitutes a liability incurred i....
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.... this expenditure, and therefore, it had deduction in the year of incurrence of the liability. Accordingly the said expenditure was entirely allowable in the year of the appeal. The Hon'ble Supreme Court, referring to its decision in case of Madras Industrial Investment Corporation Ltd. (supra), observed that even in the said decision the Hon'ble Court had held that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. Distinguishing the facts in that case, the Hon'ble Court held that in case of Madras Industrial Investment Corporation Ltd.(supra), it was the assessee who wanted spreading of the expenditure over the period of time. It was on those facts, the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra)had held that the deduction be allowed over the life of debenture issued. 5.5 Thus, the case of Madras Industrial Investment Corporation Ltd v. CIT (supra) was clearly distinguished on the ground that the principle of proportionate allowance of deduction can be considered only if the assessee choose to....
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.... of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, [1982] 30 CTR (Cal) 363; (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. 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 t....
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....he ratio of the earlier decision rendered in Madras Industrial Investment Corporation Ltd. v. CIT. The Apex Court categorically held that the ordinary rule is that revenue expenditure incurred wholly and exclusively for the purposes of business is allowable in the year in which the liability is incurred. Spreading over of such expenditure can be permitted only where the assessee itself seeks such treatment and where the matching concept so justifies. The Revenue cannot compel an assessee to defer a revenue expenditure over future years contrary to the claim made by the assessee in accordance with law. 5.8 The distinction drawn by the Hon'ble Supreme Court between the two decisions is of considerable significance. In Madras Industrial Investment Corporation Ltd. v. CIT, the assessee itself had opted to spread the expenditure over the life of the debentures and sought proportionate deduction. It was in those peculiar circumstances that the Court approved amortization of the expenditure. Conversely, in Taparia Tools Ltd. v. JCIT, the assessee claimed the entire expenditure in the year of incurrence and the Hon'ble Supreme Court held that such claim could not be denied merely becaus....
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....lly untenable is the contention of the Revenue that the accounting treatment adopted in the books of account should govern the allowability under the Act. It is a settled principle of law that entries in the books of account are not determinative of tax liability. The allowability of deduction must be tested on the touchstone of the statutory provisions and not on the basis of accounting presentation. 5.13 In view of the foregoing discussion and respectfully following the ratio laid down by the Hon'ble Supreme Court in Taparia Tools Ltd. v. JCIT(supra) as well as the decision of the Hon'ble Bombay High Court in PCIT v. Tata Industries Ltd.(supra), we find no infirmity in the order of the Ld. CIT(A) deleting the disallowance of Rs. 33,23,90,083/- made on account of discount on issue of debentures. Accordingly, Ground Nos. 1 and 2 raised by the Revenue are dismissed 6. Ground Nos. 3 and 4 relate to the disallowance made under section 14A read with Rule 8D of the Rules. The Assessing Officer observed that the assessee tendered shares of Anand Rathi Housing Finance Limited under the buyback scheme floated by the said company. The buyback consideration received was Rs. 1,85,48,400....
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....nt previous year. The assessee drew attention to Note No. 8 of the audited financial statements to demonstrate that, except for the investment in Anand Rathi Housing Finance Ltd., none of the other investments had generated any exempt income during the year. It was specifically pointed out that no dividend income, tax-free interest or any other exempt income had arisen from the remaining investments. According to the assessee, the average value of investments yielding exempt income worked out only to Rs. 51.25 lakhs as against Rs. 5,308.19 crores considered by the Assessing Officer. Accordingly, it was pleaded that the disallowance, if any, ought to be restricted to Rs. 51,250/-, being 1% of the average value of investments which had actually yielded exempt income. In support of the aforesaid submissions, reliance was placed upon the judgments of the Hon'ble Calcutta High Court in REI Agro Ltd. vs. PCIT (ITAT No.416 of 2017) and PCIT vs. Shalimar Pellet Feeds Ltd. [(2022) 138 taxmann.com 124 (Cal)/(2022) 287 taxmann 134 (Cal)/(2023) 453 ITR 547 (Cal)], as well as the decisions of the Hon'ble Delhi High Court in PCIT vs. Times Internet Ltd. [(2023) 156 taxmann.com 577 (Delhi)/(2024)....