Conclusion: Loss on account of issuance of debentures at premium was expenses for the borrowing and therefore, was allowable as deduction u/s 37 in computing the income however, the loss suffered had to be applied in respect of each year covered by debentures, to an appropriate extent.
Held: Assessee claimed loss on account of issuance of debentures at premium in the year of maturity. AO held premium payable on redemption of the debenture was expenses for the borrowing and therefore, was allowable as deduction u/s 37 in computing the income however, the benefit of the money borrowed through debentures was derived by assessee over a period of eight years thus, the same was allowed over a period of eight years. It was held assessee was not correct in saying that it was a liability which would happen only on maturity of debentures. The liability was certain and was already undertaken; quantum of which was also certain and known. By virtue of this, the extent of loss suffered had to be applied in respect of each year covered by the debentures, to an appropriate extent.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
Annexure C order dated 09.09.2009 passed by the Income Tax Appellate Tribunal, Cochin Bench in the appeal preferred by the assessee, virtually unsettling Annexure A order passed by the Assessing Officer and Annexure B order passed by the Commissioner of Income Tax [Appeals], both in favour of the Revenue, in respect of the assessment year 1999-’00 is put to challenge at the instance of the Revenue.
2. The assessee company engaged in the business of manufacture and sale of automotive tyres, tubes..etc. filed its return on 30.12.1999. The assessment was completed as per Annexure A order, which being detrimental to the rights and interest of the assessee, was challenged by filing an appeal before the Commissioner of Income Tax. The Commissioner passed Annexure B order dated 31.12.2004, whereby some relief was extended to the assessee, but declining it under some other heads. This made the assessee to file further appeal before the Tribunal. After considering the facts and figures, the relevant provisions of law and the precedents cited, the version of the assessee was accepted and relief was granted; which made the Revenue to feel aggrieved, who has approached this Court by filing the present appeal.
3. When the matter came up for consideration on 27.09.2010, notice was ordered on all questions of law raised by the appellant. The questions suggested by the Revenue, as involving ‘substantial questions of law’ are in the following terms :
1. Whether, on the facts and in the circumstances of the case –
i) The Tribunal is right in law in deleting the disallowance of Rs.1,07,99,770/- made towards expenditure relating to prior years in respect of issue of non-convertibale debentures and redemption premium ?
ii. is not the allowance at 1/8th of the expenses for the assessment year 1999-2000 in accord with the decision of the Supreme Court and the Tribunal is justified in allowing the entire claim.
2. Whether, on the facts and in the circumstances of the case and also considering the import of the word “due date” the Tribunal is right in law in deleting the dis allowance made under section 36 (1) (va) being delayed payment of employees and employer’s contribution to PF and ESIC ?
3. Whether the Tribunal is right in allowing 80IA deduction from gross total income ?
4. With regard to the first question, the factual aspects, as discussed in paragraph 5 of ‘Annexure A’ order, is extracted below :
“5. The assessee had issued 27,87,040 – 17% Non convertible Debenture of Rs. 100 each on 31.10.1991. The debentures are redeemable at a premium of Rs.5/- per debenture. Out of the face value of Rs. 27.87 crores Rs. 8.78 crores was redeemed in the F.Y 1997-78 and Rs. 8.50 crores in the FY 1998- ’99 The aggregate amount of premium paid on the redemption in these years was Rs. 1,25,41 ,670/-. The gross amount of premium paid was debited to the share premium account, but the same was claimed in toto as a deduction in computing the total income for the year. The premium payable on redemption of the debenture is expenses for the borrowing and therefore, is allowable as deduction u/s 37 in computing the income. But the benefit of the money borrowed through debentures was derived by the assessee over a period of eight years in this case. The main expenditure on barrowal is the interest and the same is paid over a period and deduction claimed is also over a period of eight years. Hence the premium payable on redemption which is also an expenditure in borrowal can be allowed as deduction over a period of eight years. As such Rs. 17,41,900/-(2787040 X 5/8) alone is the expenditure for the year and the remaining sum of Rs. 1,07,99,770 is expenditure relating to prior years. The facts of the case are identical with that of the case considered by apex court (225 ITR 802 Madras industrial company Vs. CIT) wherein it was held that premium payable on redemption of debentures is an expenditure allowable as revenue but it has to be spread over the period of debentures for the purposes of allowing it as a deduction. Similar view was expressed by the Madras High court in the case of Universal Cable Ltd Vs CIT (161 CTR 388). The narration given below the claim (item 15 of the total income computation statement) in the return itself indicate that a part of the claim, is in fact, prior period expenses. A disallowance of Rs.107,99,770/- is made as expenses not related to the year under consideration.”
5. The Assessing Officer placed reliance on the verdict passed by the Apex Court reported in Madras Industrial Investment Corporation Vs. Commissioner of Income Tax [(1997) 225 ITR 802] to the effect that the premium payable on redemption of debentures, which is to be treated as revenue expenditure, had to be spread over the period of debentures for claiming deduction. The said view was upheld by the Commissioner as discussed in paragraph 6 (iii) of Annexure B order, which reads as follows.
“ 6(iii) – I have considered the appellant’s objection. The issue in dispute is covered by the decision of the Supreme Court in the case of Madras Industrial Investment corporation In 225 ITR 802. As per the ratio of the decision in that case, the appellant is entitled to the deduction of the premium equally over the period of tenure of the debentures. The appellant has claimed in the course of the hearing that the decision of the Apex Court came much later than when the debentures were issued and and that the appellant had not made any claim during the tenure of the debentures which was the law before the Apex Court ruling”. This claim of the appellant is unsustainable because once the Supreme Court has laid down the law it applies to all pending proceedings because that law is considered to have always been the correct law. The fact that the appellant had not made any claim during the relevant assessment years as per the ratio of the above decision rendered subsequently does not entitle the appellant to claim any deviation from the correct position of law laid down by the Supreme Court. The appellant ought to have understood the provisions of law correctly earlier and raised the claim in the relevant assessment years. Therefore, the disallowance of the premium pertaining to the earlier years is upheld.”
6. Coming to the verdict passed by the Tribunal, the rival contentions have been taken note of and a finding has been rendered, as discussed in paragraphs 9, 10 and 11 of ‘Annexure C’ order. Mr. Christopher Abraham, the learned standing counsel for the appellant submits that the law declared by the Supreme Court has been wrongly applied and interpreted by the Tribunal and that the finding is not supported by any reasoning. There is no dispute to the fact that the amount claimed towards the premium has to be allowed as expenditure, but how that is to be counted is the disputed question, submits the learned standing counsel. In other words, such revenue expenditure had to be spread over to the entire period covered by the debentures, as held by the Apex Court in 225 ITR 802 [cited supra], which aspect was not correctly dealt with by the Tribunal. Hence the challenge.
7. Mr. Joseph Markos, the learned senior counsel appearing for the assessee submits that there is vital distinction between the position considered by the Apex Court and the factual situation involved in the present case. It is pointed out that the case of the assessee, as dealt with by the Apex Court, was in respect of discount on debentures and the resultant loss sustained by the assessee. The relevant portion of the said verdict, as sought to be relied on by the assessee, is extracted below :
“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 the debentures.
The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of Rs. 12, 500 over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M. P. Financial Corporation v. CIT  165 ITR 765 . The view that we have taken is also in conformity with the accounting practice of showing the discount in the “discount on debentures account” which is written off over the period of the debentures.
The appellant is, therefore, entitled to deduct a sum of Rs.12,500 out of the discount of Rs. 3,00,000 in the relevant assessment year. The balance expenditure of Rs. 2, 87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed), therefore, which is the subject-matter of appeal before us, is answered in the negative in so far as it relates to the deduction of Rs. 2,87,500 in the assessment year in question though for reasons entirely different from those given by the High Court. The second part of the reframed question is answered in the affirmative. But only a proportionate part of the discount can be deducted in the assessment year in question as set out earlier. The appeal is disposed of accordingly and the judgment of the High Court is set aside. There will be no order as to costs in the circumstances of the case.”
8. The learned senior counsel submits that, when debentures are issued on discount in a given year, the loss has already sustained, to the extent the discount is offered. This is because of the fact that, over and above the interest offered to the beneficiary/debenture holder, the amount covered by the debentures will have to be offered on par, on maturity and the liability is certain, the loss/expenditure having already been incurred/suffered by the assessee. It is for this reason, that the Apex Court held that the spreading of loss over the entire period covered by the debentures, as done by the assessee, was liable to be sustained. Unlike issuance of debentures on discount, in the instant case, the debentures were issued by the assessee company ‘on premium‘, even though such debentures were issued in the given year, and the maturity value was to be paid including the premium on conclusion of the period covered by the debentures. This being the position, the actual loss/expenditure suffered by the assessee was only at the time of satisfying the amount covered by the debentures. This occurred only in the
relevant year, as claimed by the assessee and it was for this reason, that the said amount was claimed by way of deduction, which however came to be rejected by the Assessing Officer and confirmed by the Commissioner of Income Tax [Appeals]. On pointing out the facts and figures and the relevant provisions of law, besides applicability of the Apex Court judgment on the point, the position was correctly analysed by the Tribunal and hence deduction was allowed as per Annexure C order, which is not assailable under any circumstances, submits the learned senior counsel. Reliance is sought to be placed on the subsequent ruling rendered by the Bombay High Court as well, where the issuance of debentures ‘on premium’ [as in the instant case] is involved and that the entire amount/expenditure met by the assessee for the relevant year was declared as eligible to be claimed as deduction in the particular year. The said finding has been rendered after placing reliance on the verdict passed by the Apex Court in 225 ITR 802 [cited supra]; submits the learned counsel.
9. Even though the above submission made on behalf of the assessee appears to be of some force, on a deeper scrutiny, we find it difficult to persuade ourselves to accept the said proposition. The discussion made by the Apex Court with regard to the issuance of debentures and the liability incurred by the assessee with reference to the loss stands on a different pedestal. In the case of debentures issued on discount in a particular year, it is sure and certain that there is liability, in so far as the amount covered by the debentures has to be satisfied on completion of the period of debentures. The debenture is issued so as to procure funds for the business of the company/assessee and this business is spread over the period of years covered by the debenture. This being the position, the loss incurred by issuance of such debentures issued ‘at a discount’ also requires to be segregated for the period covered by debentures and it was accordingly held that the deduction claimed by the assessee spreading over the loss for the entire tenure/period covered by the debentures was to be sustained. The law was declared accordingly. Applying the same logic and reasoning in the case of issuance of debentures ‘on premium‘, the liability has already been undertaken and loss has suffered by the assessee, in so far as the payment of the value covered by the debentures at premium has to be effected, on maturity. This loss, payment though effected only on maturity of debentures, has to be taken care of and necessary quantum of funds, in respect of the different years covered by the debentures has to be identified. This being the position, this loss also ought to have been spread out for the entire period covered by the debentures, from the year in which debentures were issued. The law declared by the Supreme Court came to be wrongly understood and applied by the Tribunal while passing Annexure C order.
10. Coming to the verdict passed by the Division Bench of the Bombay High Court, it was, of course, a case where debentures were issued ‘on premium’. ‘Question (E)’ raised by the Bench alone is relevant, so as far as the present case is involved and the same is extracted below :
“(E) Whether on the facts and in the circumstances of the case and in the circumstances of the case and in law, the ITAT is right in allowing the actual premium paid on redemption of debentures as revenue expenditure;”
11. The discussion in relation to the said question has been made in ‘paragraph 6’, wherein the factual points have been narrated. The stand taken by the Assessing Officer was that, the premium which was paid, related to capital payment and hence could not be allowed as revenue expenditure. The Commissioner of Income Tax [Appeals] held it in favour of the assessee, placing reliance on his own order for the previous assessment year, which by itself was based on the verdict passed by the Culcutta High Court in Commissioner of Income Tax Vs. Tungabhadra Industries Ltd. [(1994) 207 ITR 553]. The Commissioner directed the Assessing Officer to allow the deduction for premium actually paid during the previous year, provided that no part of the same was allowed as a deduction on pro-rata basis in the earlier years. The scope and applicability of the verdict passed by the Apex Court in 225 ITR 802 [cited supra], as discussed in paragraphs 6 and 7 is extracted below:
“6. Question E is now taken up for consideration. The assessee had issued Non Convertible Debentures during the year ending on 31 March 1985. In the previous year relevant to Assessment Year 1992-93 the assessee repaid an amount of Rs.450 lakhs, at a premium of Rs.15 lakhs on account of the Non Convertible Debentures. The Assessing Officer took the view that the premium which was paid related to Capital Repayment and could not be allowed as revenue expenditure. The CIT (A) held in favour of the assessee relying upon his order for AY 1991 -92 which in turn was based on the judgment of the Calcutta High Court in Commissioner of Income Tax Vs. Thngbhadra Industries Ltd.  207 ITR 553. The CIT(A) directed the Assessing Officer to allow the deduction for premium actually paid during the previous year provided that no part of the said premium has been allowed as a deduction on a pro rata basis in the earlier years. In appeal, the Tribunal noted that the Non Convertible Debentures which were issued in the. amount of Rs.300 lakhs during the year ending 31 March 1985 were to be repaid after seven years of allotment on 9 February 1992 at a premium of 5 per cent. The assessee paid the entire amount due on the redemption of the Debentures along with the premium in the previous year relevant to AY 1992-93 and claimed a deduction for the payment made of Rs.15 lakhs. The Tribunal followed the decision of the Calcutta High Court in ‘Thungabhadra Industries’ and accepted the claim of the assessee.
7. In the decision of the Supreme Court in Madras Industrial Investment Corporation Ltd. Vs. Commission of Income Tax  225 ITR 802 the assessee had made a public issue of debentures. The debentures were issued at a discount of 2 per cent and were redeemable after twelve years. The total discount on the issue of Rs.15 crores amounted to Rs. 3 lakhs. For Assessment Year 1968-69 the assessee wrote off Rs.12500 out of a total discount of Rs. 3 lakhs, being the proportionate amount of the discount. The Assessing Officer disallowed the claim of the appellant on the ground that the discount on the debentures was not allowable as expenditure. The AAC however, upheld the claim for deduction of Rs. 12,500/-. The Tribunal held that the expenditure of Rs.3 lakhs was incurred during the relevant previous year although it was proportionately written off over a period of twelve years. The Tribunal allowed the entire deduction in the amount of Rs.2,87,500/-. Among the questions which were referred to the High Court for decision, was whether the Tribunal was justified in holding that the assessee had incurred an expenditure of Rs. 3 lakhs, by way of discount paid to the persons who had subscribed to the debentures, during the relevant previous year and whether the same was allowable as revenue expenditure. The High Court held that the discount of Rs.3 lakhs did not represent any payment made to anyone so as to constitute expenditure. The High Court held that of the total discount of Rs.3 lakhs, a discount of Rs.12,500/ had been allowed by the Tribunal which the Department had not challenged. The High Court held that the balance of Rs.2,87,500/could not be considered as expenditure.”
12. Applying the ratio of the said decision to the given case, the Bombay Bench held that non-convertible debentures were issued for the financial year ending on 31.03.1985, which were liable to be redeemed in the financial year 1991 – ’92 at a premium of Rs. 15 lakhs. The Bench also observed that the amount which was spent by the assessee towards the said premium of Rs. 15 lakhs was a liability, which was incurred by the assessee for its own business, in order to obtain the use of funds for the period covered by the issue of non-convertible debentures. The relation and co-relation between the loss incurred in the case of ‘discount on loss’ and in the case of ‘issuance on premium’ is mentioned in the following lines:
“8…………… The Supreme Court held that when the assessee had issued debentures at a discount, it had incurred a liability to pay a large amount than what it had borrowed, at a future date. The Court held that the liability to pay the discounted amount over and above the amount received for the debentures is a liability which has been incurred by the company for the purpose of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures were used by the assessee for the purpose of its business and was, therefore, held to constitute expenditure.”
From the above, it is clear that the issue projected, argued, considered and decided by the Bombay Bench was with regard to the correctness of the stand taken by the Revenue in declining to treat the amount as ‘revenue expenditure’, but for holding it as a ‘capital expenditure’. The verdict passed by the Apex Court in 225 ITR 802 [cited supra] was relied only to resolve the said issue and the question whether the amount had to be spread over the entire period covered by the debenture was never an issue projected or decided by the Bombay Bench.
13. The Tribunal, while granting benefit to the assessee, also placed reliance on the course pursued by the Revenue in respect of the subsequent year where the entire amount spent by the assessee stated as loss in respect of issuance of debentures at premium [as claimed by the assessee] was allowed, without raising any objection as to the necessity to have it spread out during the entire period. It may be true that the Revenue had not filed any appeal in respect of the said assessment year, but the question is whether non- filing of appeal can be taken as the ‘law’; the answer of which is only in the ‘negative’. There is no estoppel to law and the law is the one as declared by the Apex Court in 225 ITR 802 [cited supra]. As such, the said reasoning does not support the finding rendered by the Tribunal.
14. The law declared by the Apex Court that the liability already incurred in the case of debentures issued at a discount for making necessary funds available for utilization during the entire period covered by the debentures has been highlighted in the above verdict as well, to give exactly similar application for the issuance of debentures as well. It is not a judgment to support the case projected by the assessee and to sustain the relief granted by the Tribunal. Applying the dictum in 225 ITR 802 [cited supra], the liability incurred by the assessee to discharge the liability covered by the debentures at premium is in the year of issuance and this, naturally, has to be spread over the period covered by debentures. The assessee is not correct in saying that it is a liability which would happen only on maturity of debentures. The liability is certain and is already undertaken; quantum of which is also certain and known. By virtue of this, the extent of loss suffered has to be applied in respect of each year covered by the debentures, to an appropriate extent. In the said circumstances, we are of the view that the Tribunal went wrong in passing Annexure C order, upsetting Annexures A and B orders passed by the Assessing Officer and the Commissioner of Income Tax [Appeals]. The first question raised by the Revenue involves a substantial question of law and it stands answered in favour of the Revenue.
15. Coming to the second question, the discussion made by the Assessing Officer to decline the relief to the assessee, as discernible from paragraph 11 of Annexure A order, is with reference to the various statutory payments like Provident Fund, ESI etc.
There was a short delay in effecting the payment, considering the due date and the date of payment. The deduction sought for by the assessee in this regard was totally disallowed by the Assessing Officer, as the payment effected was not on or before the due date, but belated. The Tribunal considered the case projected by the assessee and held that the deduction claimed as such was allowable and granted relief accordingly, in the following terms:
13. Ground No. 10 is regarding disallowance of PF/ESI payment after the prescribed statutory period but within the period specified under section 43B, Rs. 19,47,571/–. This ground relates to disallowance of the amount of Rs. 1,94,757/- being delayed payment of employees and employers contribution to PF and ESI for the months of June 1998, November 1998and March 1999 under section 36(1)(va) of the Income Tax Act. The Id. Counsel for the assessee submitted that since the said payments were made by the assessee company prior to the date of filing of its return of income for the year under assessment the same is an allowable expenditure. For this proposition, the Id. Counsel for the assessee relied on the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Sabari Enterprises and others, 298 ITR 463.
13 (a) After considering the rival submissions, we find that the decision of Honourable Supreme Court in the case of CIT Vs. Vinay Cemets Ltd., 213 CTR 268 (SC) is applicable in the case wherein it was held that these payments are business expenditure. Respectfully, following the decision of the Hon’ble Supreme Court, cited supra, we allow the claim of the assessee on this issue.
16. It is brought to the notice of this Court that the relevant provisions in the Statute were amended by the Government, based on the grievance raised from different corners. The amended Section 43B, stipulates that the payment effected by the assessee before filing the return could be claimed as valid deduction. The learned senior counsel appearing for the assessee submits that no interference is called for with regard to Annexure C order passed by the Tribunal, in so far as the same is in conformity with the law declared by the Apex Court in Commissioner of Income Tax Vs. Alom Extrusions Ltd. [(2009) 319 ITR 306] holding that the deduction of contribution made to the Provident Fund is a business expenditure.
17. The learned standing counsel for the Revenue submits that the above verdict does not come to the rescue of the appellant and that the scope of the said judgment has been considered in detail by a Division Bench of this Court in the decision rendered in Commissioner of Income Tax Vs. Merchem Ltd. [(2015) 378 ITR 443]. Reference to the observations made in paragraphs 26 and 29 of the said decision will be apposite in this context and hence they are extracted below :
“26. Therefore, in our view, when section 43B, as it stood prior to the amendment, and section 36(1)(va) Explanation thereto read with section 2(24)(x) are considered together, it as clear that they operate in different fields. So far as the employees‘ contribution received is concerned, it should have been paid on or before the due date prescribed under the relevant statutes. Then again the learned counsel contended that on a reading of section 43B(b), any sum “payable by the assessee as an employer” by way of contribution to any provident fund meant payment of both the employees contribution and the employer‘s contribution, by the employer and, therefore, the assessee was entitled to pay both contributions together on or before the filing of the return under section 139 (1) of the Act. We are unable to accept the said contention advanced by the learned counsel. If such a contention is accepted, that would make section 36(1)(va) and the Explanation thereto otiose. According to us, there was no indication in section 43B, as it stood prior to the amendment and thereafter also to deface section 36(1)(va) and the Explanation thereto from the Income-tax Act. Thus, it means that both provisions are operative and the contributions have to be paid in accordance with the mandate contained under section 36(1)(va) and the Explanation thereto and under section 43B respectively.
29. In that view of the matter, we are of the considered Opinion that the view taken by the Tribunal which affirmed the decision of the first appellate authority that the respondent was entitled to get deduction of the contributions received from the employees if paid on or before the filing of the return under section 139(1) was not correct. We are inclined to agree with the judgment of the Gujarat High Court in Gujarat State Road Transport Corporation’s case (supra). We are also of the opinion that the judgments of the other High Courts referred to by the learned counsel for the respondent do not lay down the law correctly.”
18. The gist of the finding and declaration of the law is to the effect that the law laid down by the Supreme Court [granting the benefit of reduction] could be claimed only in respect of Employer’s contribution and not applicable in the case of Employee’s contribution. This vital distinction has been carved out by the Division Bench of this Court in (2015) 378 ITR 443 [cited supra]. We are in full agreement with the view expressed by the Division Bench and we answer the substantial question of law to the said extent in favour of the Revenue and against the Assessee, holding that the Employees’ Contribution amounting to Rs.51668/- requires to be disallowed.
18. In relation to the 3rd question projected in the appeal, the Tribunal, as per Annexure C order, caused the matter to be reconsidered by the Assessing Officer, by ordering remand. It is pointed out that, after the remand, the Assessing Officer virtually re-iterated the stand taken earlier and it was answered against the assessee. There is no case for the assessee that the matter has been taken up any further and hence it has attained finality. As it stands so, there is no substantial question of law in relation to the said issue.
19. In the above circumstances, we answer the questions as aforesaid and hold that the Revenue is justified in approaching this Court seeking interference under Section 260A of the I.T. Act. The appeal stands allowed to the extent mentioned above.
No cost. It is for the Assessing Officer to take further steps to take the proceedings to a logical conclusion in view of the declaration of law.