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Case Law Details

Case Name : SRF Ltd. Vs DCIT (ITAT Delhi 'H' Bench)
Appeal Number : ITA NO. 4357/Del/2002
Date of Judgement/Order : 26/06/2009
Related Assessment Year :


20. We have considered the rival submissions. The claim is in respect of interest on amount borrowed by the erstwhile company namely Flowmore Polyesters Ltd., which amalgamated with the appellant company during the year. There is no dispute to the fact that interest payable by the erstwhile company was not claimed and allowed in terms of section 43B(d) since the amount was not paid by the said company. In view of the scheme of amalgamation Flowmore Polyesters Ltd. Has merged into the assessee company. Therefore, if the assessee company discharged such liability of nterest, it will amount to payment thereof and hence in terms of section 43 B will be allowed in computing the income of that previous year in which such sum is actually paid. It is stated that the liability for payment of interest has been discharged by way of issuance of shares. As per Explanation 3C to section 43B, if any part of interest liability is converted into a loan or a borrowing, it will not amount to actual payment thereof. Explanation 3C to section 43 B has been inserted with retrospective effect from 1.4.1989 and hence is applicable to the year in appeal also. Therefore, we primarily agree with the assessee if the amount is paid by the assessee, the same will be an allowable deduction. However, in the present case it is seen that the liability is discharged by way of issuance of shares and not actual payment by way of legal tender. What is allowable under section 43B is in respect of deduction otherwise allowable under this Act. The deduction allowable under the act is in respect of various sums referred to in sections 30 to 37 of the Act, Interest on any loan or borrowing is one such sum referred in section 36(l)(iii) of the Act. Therefore, for the purpose of allowability, the amount should be in the nature of expenditure. The word “expenditure” is not defined under the Act. Hon’ble Supreme Court in the case of Indian Molasses Company P. Ltd. Vs. CIT, 37 ITR 66 held that expenditure is equal to `expense’ and `expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when one speaks of a joke of another’s expense. But the idea of “spending’ in the sense of ‘paying out or away’ money is the primary meaning which is relevant. “Expenditure’ is thus, what is ‘paid out or away’ and is something which has gone irretrievably.

Once again Hon’ble Supreme Court in the case of CIT vs. Nainital Bank Ltd., 62 ITR 638, held that in its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’, i.e. something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’ . It is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims- one by the assessee against a stranger and the other by the stranger against the assessee – and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed ‘expenditure’ within the meaning of sec. 37(1). However, a mere forbearance to realize a claim is not ‘expenditure’ .

Hon’ble Delhi High Court in the case of B.K. Khanna & Co. P. Ltd. Vs. CIT, 247 ITR 705 held that ‘spending’ in the sense of ‘paying out or away’ of money is the primary meaning of ‘expenditure’ . The word ‘expenditure’ means what is paid out or away and is something which is gone irretrievably. Hon’ble Supreme Court in the case of Eimco K.C.P. Ltd. Vs. CIT, 242 ITR 659, was considering the claim of assessee towards expenditure on technical know-how. In the said case the assessee was a joint venture between an American company and an Indian company. The authorized capital of the assessee company was Rs.100 lacs. Each of the promoters agreed to subscribe Rs.4,70,000/ – out of which each would have to pay initially a sum of Rs.2,80,000/ – towards its contribution. The share of American promoter was contributed by way of technical know-how valued at a sum of Rs.2,35,000/ – and in lieu of which the assessee allotted equity shares. The same was considered as capital expenditure. The Hon’ble Supreme Court held –

“That what in effect was done by the appellant in allotting equity shares of Rs.2,80,000 to Eimco, was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It was not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. The High Court had rightly concluded that allotment of equity shares by the appellant to Eimco, in the circumstances of the case, could not be termed as expenditure, much less revenue expenditure”

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