MICROSEC RESOURCES PRIVATE LIMITED,KOLKATA vs. DCIT,C.C-2(3),KOL, KOLKATA

Present for: Appellant by : Shri Giridhar Dhelia, FCA Respondent by : Shri Sanjiv Kumar Paul, Addl. CIT Date of Hearing : 14.06.2023 Date of Pronouncement : 21.06.2023 O R D E R

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

Microsec Resources Pvt. Ltd., AY: 2014-15 total income of Rs.19,14,110/-. Assessee had issued Deep Discount debentures (DDD), details of which are tabulated as under:

2.1. Assessee worked out an amortization table of discount portion of DDD on the implicit interest rate on these debentures. The said amortization table is reproduced as under:

Microsec Resources Pvt. Ltd., AY: 2014-15 2.2. Based on this amortization table of DDD, assessee had been charging the discount to its P&L Account every year since FY 1999-2000. In the year under consideration, assessee has charged a sum of Rs.1,30,73,310/- as discount on DDD. The accounting methodology adopted by the assessee towards this transaction is reported as under:

“a. The difference between redemption value and the issue price of debentures is the amount of discount which the issuer has to claim as expenses over the tenure of Debentures. Accordingly on an annual basis, discount on DDDs is being written off by the issuer. b. Discount on DDDs is an expense in the hands of the Issuer Company and this principle has been clearly upheld by the Hon'ble Supreme Court in the case of Madras Industrial investment Corporation Ltd. 225 ITR 802 (SC), copy of which was duly provided to the Assessing Officer. The Hon'ble Supreme Court has clearly established that such discount on DDDs has to be allowed over the tenure of the DDDs.”

2.3.In the course of assessment, Ld. AO disallowed this claim by holding that it is covered u/s. 40A(2) since the relation between the assessee and the debenture-holder falls within the provisions of sec 40A(2)(b) of the Act being related party. Assessee contended before the Ld. AO that the issue is squarely covered by the decision of coordinate Bench of ITAT, Kolkata in assessee’s own case for AY 2005-06 in vide order dated 13.02.2009 which was followed for AY 2003-04 and 2006-07, vide order dated 10.06.2011. It was also submitted the Hon’ble Coordinate Bench while allowing the claim of the assessee has placed reliance on the decision of Hon’ble Supreme court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT 225 ITR 802 (SC). However, Ld. AO completed the assessment by making the disallowance and assessed the Microsec Resources Pvt. Ltd., AY: 2014-15 total income at Rs.1,49,87,420/-. Aggrieved, assessee went in appeal before the Ld. CIT(A).

2.4. Ld. CIT(A) dismissed the appeal on a technical ground by holding that there is a delay in filing the appeal. Before Ld. CIT(A), assessee had submitted that appeal was filed manually on 16.03.2016 for which the appeal filing fees of Rs. 1000/- was deposited vide challan no. 10354 dated 12.03.2016. Appeal was filed within thirty days of passing of the assessment order. Thereafter, in order to ensure on-line filing of the same appeal in the Tax Portal, Form 35 was filed again electronically on 11.06.2016. Ld. CIT(A) considered the on-line filing of Form 35 dated 11.06.2016 and arrived at a conclusion that it is a delayed filing, since there was no petition on record for condonation of delay and dismissed the same.

2.5. Before the Ld. CIT(A), assessee had furnished its office copy of Form 35. It was filed manually which did not bear the signature of the appellant. Ld. Counsel had submitted that it is a general practice that in the office copy, signatures of the appellant are generally not taken. However, in the copy, which has been filed manually, the signatures are placed and to corroborate the same, a copy of manually filed Form 35 with proper acknowledge stamp of the office of Commissioner of Income Tax (Appeals)-20, Kolkata dated 16.03.2016 was also furnished. Thus, it was claimed that assessee has filed its appeal within the prescribed limitation and Ld. CIT(A) is wrong in dismissing the appeal on a technical ground on account of delay in filing. Aggrieved, assessee is in appeal before the Tribunal.

Microsec Resources Pvt. Ltd., AY: 2014-15 3. Before us, ld. Counsel reiterated the facts already narrated above which are not repeated for the sake of brevity. Ld. Counsel referred to the decision of Coordinate Bench of ITAT. Kolkata in its own case for AY 2005-06 (supra) wherein the issue in the present appeal has been elaborately dealt with. In the said decision, reliance has been placed on the decision of Hon’ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. (supra). The observations and findings given by the Coordinate Bench in this respect is reproduced as under:

“5. We have carefully considered the submissions of the Ld. Representatives of both the parties and the authorities below. There is no dispute to the fact that the assessee-company has issued DDDs as per details mentioned hereinabove, The assessee- company has worked out an amortization, table of DDDs with implicit interest rate, the details of which are given by the A.O. at page 3 of the assessment order. The department has not disputed the said facts. On the basis of the said amortization schedule, the assessee-company has spread over the difference in the redemption value of the debentures and the issue price of debentures over the period of twenty years. We observe that the fund raised by the assessee is used for its business purposes. Therefore, the fund raised by the assessee is an integral part of profit making process and accordingly the expenditure on such debentures ahs to be treated as revenue expenditure. Thus such an expenditure is an allowable expenditure. With regard to year of allowability, it is evident that the payment of the premium payable by the assessee i.e. the difference between the issue price and the maturity price is the benefit to be derived over a number of years i.e. over a period of twenty years, the period for which debentures have been issued, We are of the considered view that the decision of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. squarely applies to the facts of the case before us. The Hon'ble Apex Court in the Head Note has made the following observation:- "When a Company issues debentures at a discount, it incurs a liability to pay larger amount than what it has borrowed. 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 are used by the company for the purposes of its business, This would, therefore, be expenditure."

Microsec Resources Pvt. Ltd., AY: 2014-15 Further, the above issue has also been considered by the ITAT, Delhi Bench in the case of Escorts Ltd. -vs- ACIT [104 ITD 427], In the said case, the assessee raised funds by way of issuance of secured premium notes (hereinafter to be referred to in short SPNs) which are redeemable at a premium partly at the end of 4th, 5th, 6th and 7th year. It was held that, the liability to pay the premium amount over and above the face value of SPNs on redemption is a liability incurred by the assessee for the purposes of its business by generating funds, which were utilized for its business activities. Thus, such an expenditure is an allowable expenditure, It was held that with regard to year of allowability, the payment of premium results in securing of benefit over a number of years. The benefit is spread over the, entire period of seven years. Therefore, the expenditure is allowable over the entire period of SPNs till redemption. It was held that the assessee has correctly claimed deduction only in respect of the proportionate premium relatable to the year in question. Further, the similar issue has also been considered by the ITAT, Bangalore Bench in the case of DCIT -vs- Insotex (India) Ltd. [103 ITD 211]. In the said case, it was held that provision for interest on Deep Discount Bonds issued by the assessee-company tenable for a period of 25 years, the provision made by the assessee on such incremental value is an accrued liability and the same is allowable as business expenditure.

6. Since the issue involved before us is covered by the aforesaid decisions, we hold that the Ld. CIT(A) has rightly allowed the expenditure of Rs.43,35,306/- as revenue expenditure in respect of the Deep Discount Debentures issued by the assessee company. Accordingly, we reject the ground of appeal

taken by the Department by upholding the order of the Ld. CIT(A).”

4. This decision of the Coordinate Bench was subsequently followed in assessee’s own case for AY 2003-04 and 2006-07 in & 649/Kol/2010 dated 14.06.2011 allowing the claim of the assessee. On this, Ld. Sr. DR could not bring anything to controvert the same.

Microsec Resources Pvt. Ltd., AY: 2014-15 Accordingly, respectfully following the decision of the Coordinate Bench stated above and considering the facts on record, we allow the claim of the assessee. Grounds taken by the assessee in this respect are allowed.