Case Law Details
Discount on deep discount debentures issued for construction of house property is allowable
ITAT held that the proportionate discount on deep discount debentures issued for construction of house property is in the nature of interest as defined under Section 2(28A) of the Income-tax Act, 1961 (the Act). Therefore, such interest would be allowable as deduction under the provisions of Section 24(b) of the Act while computing income from house property. The Tribunal relying on the Supreme Court’s decision in the case of Madras Industrial Investment Corporation Ltd. v Commissioner of Income Tax, 225 ITR 802 SC observed that the difference between the issue price and maturity value has to be spread over the debenture holding period. Accordingly, proportionate deduction should be allowed in computing income from house property.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
M/s. Litolier Properties Pvt. Ltd. Vs. Income tax Officer
ITA No.: 1278/Mum/2010 – Assessment Year : 2006-07
ITA No.: 1697/Mum/2010 – Assessment Year : 2006-07
ITA No. : 3980/Mum/2010 – Assessment Year : 2007-08
ITA No. : 4067/Mum/2010 – Assessment Year : 2007-08
Date of Pronouncement : 07.03.2012
ORDER
Per RAJENDRA SINGH (AM
These cross appeal are directed against different orders dated 21.12.2009 and 5.2.2010 of CIT(A) for the assessment years 2006-07 and 2007-08. As dispute raised is common, these cross appeals are being disposed of by a single consolidated order for the sake of convenience.
2. The common dispute in all these appeals is regarding allowability of discount charges in respect of debentures issued by the assessee while computing income from house property. The assessee during the relevant years had received rental income from house property which had been constructed from borrowed funds. The house property had been constructed in the earlier year. However, the outstanding loans were converted into deep discount debentures in assessment year 2001-02. The debenture had been issued to Shri Ashok Mittal the director of the assessee company from whom the loans had been taken earlier. The assessee had issued four lakh deep discount debentures of the face value of Rs.400/- on issue price of Rs.100/- per debenture with redemption period of 9 1/2 years. The assessee claimed discounting charges on the debentures amounting to Rs.1,24,72,500/- and Rs.1,47,98,800/- as deduction under section 24(b) for assessment years 2006-07 and 2007-08 respectively. Under the provisions of section 24(b), interest payable on capital borrowed for the purpose of acquisition/construction of house property is allowable as deduction. The AO observed that Shri Ashok Mittal to whom debentures had been issued was not crediting any income on account of interest which was contrary to the CBDT circular making it clear that the person holding deep discount bonds shall credit income on year to year basis on accrual basis. The AO therefore concluded that the assessee company and director Shri Ashok Mittal had made arrangement to avoid tax liability in both hands; the assessee by way of reducing the tax liability by claiming deduction on account of discount on debenture and director not declaring interest income for taxes. It was therefore a colourable device. Moreover, the AO further observed that no interest liability had accrued to the assessee as the liability on account of interest would arise only on maturity of deep discount debentures. He therefore held that the claim of deduction under section 24(b) was not allowable and accordingly he disallowed the claim in both the years which was disputed by the assessee.
3. The assessee submitted before CITA) that deep discount debentures had been issued in assessment year 2001-02 in which year as well as in subsequent years the claim had been allowed both by CIT(A) and ITAT. CIT(A) however observed that discounting charges also included interest on interest which could not be allowed as, under section 24(b), only the interest on borrowed capital could be allowed as deduction. CIT(A) referred to the judgment of Hon’ble Supreme Court in the case of Shew Kissen Bhatter vs. CIT (89 ITR 61), in which it was held that interest on interest was not allowable as deduction. The assessee submitted that the case of Shew Kissen Bhatter (supra), was distinguishable as in that case the interest which had become due on the principal had not been paid by the assessee and therefore, it had to pay interest on interest which was held not allowable as deduction. In the present case, no interest was payable from year to year and therefore, there was no question of default in payment of interest and consequential payment of interest on interest. The maturity value was payable at the end of redemption. It was the difference between issue price and redemption price which was claimed as deduction from year to year basis. The said difference was allowable as deduction in view of the judgment of the Hon’ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. v Commissioner of Income Tax, 225 ITR 802). Therefore, there thus was no question of paying interest on interest. The internal rate of interest (IRI), had been adopted only to compute the maturity value and no annual interest was payable to the assessee. The assessee also pointed out that, in assessment year 2001-02, the claim had been allowed by ITAT and therefore order was binding on the lower authorities.
3.1 CIT(A) however, did not accept the contentions raised. It was observed by him that the rate of interest on the borrowings was 15% whereas the rate of interest on the basis of claim made by the assessee worked out to be 31.18%. CIT(A) also observed that the discounting charges also included interest on accrued interest which could not be allowed in view of the judgment of the Hon’ble Supreme Court in the case of Shew Kissen Bhatter (supra). CIT(A) further held that the principle of res-judicata was not applicable in Income tax proceedings and therefore the AO was not bound by the decision taken in assessment year 2001-02. CIT(A), therefore, allowed deduction under section 24(b) @ 15% on borrowed capital which came to Rs.60.00 lacs and excess amounts claimed by the assessee were held not allowable in both the years. Aggrieved by the decision of CIT(A) both parties are in appeal. The assessee has challenged the part disallowance of interest whereas the revenue has challenged the relief allowed by CIT(A).
4. Before us, the ld. Authorised Representative for the assessee reiterated the submissions made before the lower authorities that deep discount debentures had been issued in lieu of the loans taken from the director for construction of house property and therefore, the discounting charges payable have to be allowed as deduction under section 24(b). It was pointed out that the judgment of Hon’ble Supreme Court in the case of Shew Kissen Bhatter (supra), was distinguishable as the same was in relation to interest on mortgage. Moreover, it was further pointed out that the said judgment was under the old Income tax Act of 1922 in which interest had not been defined. However under the new Income tax Act of 1961, the word interest has been defined under section 2(28A) to mean interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which had been utilized. The definition of interest was therefore of wide import and would also include any other charges in respect of money borrowed or debt incurred. He referred to the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Vijay Ship Breaking Corporation (261 ITR 113), in which it has been held that the amount payable on unpaid purchase price will also be of the nature of interest.
4.1 It was also submitted that allowability of discount charges was covered by the judgment of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v Commissioner of Income Tax, 225 ITR 802). Further it was also argued that non declaration of income from year to year by the director will have no impact regarding allowability of claim in case of the assessee which was settled by the judgment of Hon’ble Apex Court. Ld. Authorised Representative for the assessee pointed out that these aspects had been duly considered by the Tribunal in assessment year 2001-02 in ITA No.5223/M/2003 in which year the Tribunal allowed the claim of the assessee and the said decision of the Tribunal has become final as the appeal filed by the department has been dismissed by the Hon’ble High Court being barred by limitation. The ld. AR also submitted that in assessment year 2002-03, the AO had himself allowed the claim and in assessment years 2003-04 and 2005- 06 the Tribunal had again allowed the claim. Further, the Hon’ble Bombay High Court in assessment year 2005-06 has dismissed the appeal filed by the department in which the Hon’ble High Court observed that similar claim had been allowed by the Tribunal in assessment year 2003-04 and 2004-05 and no case was made for any contrary view. It was accordingly urged that the claim should be allowed in these years also.
5. The ld. DR on the other hand strongly supported the order of the AO. It was argued that no interest income had accrued to the assessee from year to year and therefore, disallowance of entire claim by AO was justified. Moreover, it was also pointed out that the claim also included interest on interest which could not be allowed in view of the judgment of Hon’ble Supreme Court in the case of Shew Kissen Bhatter (supra).
6. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of deduction under section 24(b) on account of discounting charges relating to deep discount debentures issued by the assessee. There is no dispute that the assessee had borrowed money from the director Shri Ashok Mittal for construction of house property and that in lieu of the said loan, the assessee had issued deep discount debentures of the face value of Rs.400 per debenture against the issue price of Rs.100 per debenture with the redemption period of 9 1/2 years. Under the provisions of section 24(b), interest payable on money borrowed for acquisition or construction of house property is allowable as deduction while computing income from house property. It has been clarified by CBDT in Circular No.28[F 8/8/69-IT(A-I)] dated 20.8.1969 a copy of which has been placed by the assessee at page 46 of the paper book that fresh loan raised to repay the original loan used for construction of house property will be eligible for deduction under section 24(vi) which corresponds with present section 24(b). Therefore any interest payable in respect of deep discount debentures will be allowable as deduction under section 24(b) of the Act. The issue is whether any amount on account of interest can be allowed from year to year when the maturity value of debenture is payable only at the end of 9 1/2 years and no annual interest is payable from year to year. This aspect has already been considered by the Hon’ble Supreme Court in the case of Madras Industrial Finance Corpn. Ltd. Vs. CIT (supra), in which the Hon’ble Supreme Court observed that though the assessee incurs the liability to pay discount in the year of issue of debenture, the payment is to secure benefit over a number of years. It was accordingly held by the Hon’ble Apex Court that the liability should be spread over the debenture holding period, otherwise it would give distorted picture of profit of a particular year. Therefore, in terms of said judgment, the excess amount payable on maturity has to be spread over the debenture holding period and proportionate amount has to be allowed from year to year.
6.1 The department has relied on the judgment of Hon’ble Apex Court in the case of Shew Kissen Bhatter (supra), to argue that the proportionate amount payable also includes interest on interest which can not be allowed in terms of said judgment. However, we agree with the argument of the ld. AR that the said judgment is distinguishable as in that case interest which had become due had not been paid by the assessee and due to this default, the assessee had to pay interest on interest and therefore, it was not held as allowable deduction while computing income from house property. In the present case, there is no interest payable from year to year. Therefore it can not be said that the assessee had to pay interest on interest due to some default. The deep discount debenture is structured loan where the assessee has to pay maturity value only at the end of redemption period and there is no interest payable from year to year. The difference between maturity value and issue price in view of the judgment of Hon’ble Apex Court in case of Madras Industrial Finance Corpn. Ltd. Vs. CIT (supra), is required to be spread over debenture holding period and has to be allowed proportionately from year to year. This annual proportionate amount payable has to be treated as interest in view of definition of interest under section 2(28A) as per which the interest is amount payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charges in respect of moneys borrowed or debt incurred. Therefore, annual proportionate amount payable in respect of debenture which is a debt has to be considered as interest which is to be allowed under section 24(b).
6.2 The authorities below have pointed out that rate of interest on which loan was taken was 15% but annual interest came to 31.18% if the difference between the issue price and maturity value is spread over the entire period. This is easily explained by the fact that interest of 15% is payable from year to year when in case of discount debentures only the maturity value is payable after 9 1/2 years and therefore, annual rate has to be higher. The authorities have also raised an argument that in case of Ashok Mittal, the director, no interest income is being declared from year to year. This aspect has already been dealt with by the Tribunal in assessment year 2001-02 (supra), in which the Tribunal observed that treatment of receipt in the hands of recipient would not have detrimental effect on allowability or otherwise of claim in the hands of the person making the payment. Therefore, merely because the director accounted the income in the year of maturity will not in any way affect the liability to pay and claim deduction on account of deduction in case pf the payee. Moreover, it is for the department to ensure that the director pays tax on interest income from year to year as it has power to enforce compliance and assessee can not be penalized for the failure of the department to take action in case of the director.
6.3 Further, we also note that the claim has already been allowed by the Tribunal in the initial year i.e., assessment year 2001-02 and appeal filed by the department has been dismissed by the Hon’ble High Court. In subsequent years also, till assessment year 2005-06, the claim has been allowed and in assessment year 2005-06, appeal of the department has again been dismissed by the Hon’ble High Court. Therefore, the rule of consistency is also in favour of the assessee as per which there has to be consistency in decision making on identical facts. Though, the principle of re-judicata is not applicable in case of income tax proceedings, the rule of consistency has to be followed when there is no change in legal and factual position. In relation to the same debentures, the claim has been allowed in the earlier years, and therefore, it can not be disallowed in subsequent years when the law remains the same. However, we may point out here that in view of the judgment of Hon’ble Supreme Court in the case of Madras Industrial Finance Corpn. Ltd. (supra), the difference between the issue price and maturity value has to be spread over the debenture holding period and only proportionate amount can be allowed as deduction in a particular year. We therefore, set aside the order of CIT(A) and direct the AO to allow the deduction proportionately in the light of the Supreme Court judgment (supra).
7. In the result, the appeals of the assessee are partly allowed and those by the revenue are dismissed.
Order pronounced in the open court on 07.03.2012
