M/S SHETRON LIMITED vs. THE DEPUTY COMMISSIONER

5 ITR 802 (SC) held that discount on debentures was revenue expenditure but had to be allowed for a period of five years in proportion in which debentures were to be redeemed by the assessee. The Assessing Officer allowed a sum of Rs.50 Lakhs as deduction for the Assessment Year 2006-07 and claim for deduction for a sum of Rs.4.5 Crores was rejected by the Assessing Officer. 3. The assessee thereupon approached the Commissioner of Income Tax (Appeals) who by an order dated 21.02.2011 inter alia held that there was no fresh flow of funds in case of assessee and therefore, the discount on the debentures is revenue expenditure and is deductible in the year of its incurrence. The appeal preferred by the assessee was allowed. Being aggrieved, the revenue filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 02.08.2013 inter alia held that reliance placed by

6 Commissioner of Income Tax (Appeals) on the decision of the Supreme Court in the case of 'COMMISSIONER OF INCOME-TAX, MUMBAI VS. GENERAL INSURANCE CORPORATION', (2006) 156 TAXMAN 96 (SC) is not justified as the aforesaid decision relates to expenses on the issue of bonus shares and the aforesaid decision deals with the issue whether the expenditure is capital or revenue in nature and has no application to the fact situation of the case. It was also held that the Supreme Court in MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. supra no where dealt with the requirement of fresh flow of funds by issue of debentures. It was thus, held that the Assessing Officer rightly relied on the decision of the Supreme Court in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra and allowed a portion of discount on the issue of debentures equaled to the portion for the period for which the debentures were to be redeemed. The tribunal therefore, quashed

7 the order passed by the Commissioner of Income Tax (Appeals) and restored the order of the Assessing Officer. In the aforesaid factual background, assessee is in appeal before us. 4. Learned counsel for the assessee submitted that the tribunal failed to appreciate that the debentures were issued towards fund raising for business purposes and the funds were utilized for the discharge of the loan taken for business purposes, by which substantial benefit was availed by the assessee. It was further submitted that discount given was incidental to the benefit being obtained, which also incidentally suffered the tax. It is also argued that Supreme Court in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra has not held that in all cases where the expenditure incurred on debenture is redeemable after over a period of time, the expenditure should be spread over. Our attention has also been invited to decision of the Supreme Court in 'TAPARIA TOOLS LIMITED VS.

8 JOINT COMMISSIONER OF INCOME TAX', (2015) 372 ITR 605 (SC). 5. On the other hand, learned counsel for the revenue submitted that the assessee has not actually incurred expenditure of Rs.5 Crores and has merely issued the debentures at a discount. It is further submitted that the decision relied upon by the assessee in case of TAPARIA TOOLS LIMITED supra has no application to the fact situation of the case as in the aforesaid decision, the Supreme Court was dealing with actual payment of interest in the form of upfront payment, whereas, in the instant case, the assessee has only offered / issued debentures at discount value and discount is not an outflow for the assessee and is not allowable expenditure. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The cardinal issue, which arises for consideration

9 in this appeal is whether the claim of the assessee for deduction of entire amount of Rs.5 Crores should be accepted or deduction should be allowed in proportion to which discount has been written off in the books of accounts over a period of five years. The Supreme Court in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra held that ordinarily, 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 and that it cannot be spread over a number of years even if the assessee had written it off in its books over a period of years, has however, carved out an exception to the aforesaid rule and held that discount on debentures if allowed to be deducted in entirety in one year might give a distorted picture of the profits of a particular year and therefore, the accounting treatment given by the assessee spreading out the discount on debentures and claiming deduction of a proportionate deduction over the life of

10 the debentures was a proper accounting method and should be accepted in the matter of allowing discount on the issue of debentures as a deduction. In TAPARIA TOOLS LIMITED supra, the Supreme Court in paragraph 17 of the decision held that it is conscious of the principle that normally revenue expenditure is to be allowed in the same year, in which it is incurred at the instance of the assessee who wants spreading over the court can allow the assessee that benefit when it is found that there was a continuing benefit to the business of the company over the entire period and the aforesaid benefit can only be applied if the principle of matching concept is satisfied. 7. In the instant case, the assessee has not incurred an expenditure of Rs.5 Crores but has merely issued debentures at a discount. The redemption of debenture takes place in stages over a period of time and discount on debenture results in enduring benefit during the period of debentures. However, expenditure

11 incurred in creating an enduring benefit does not create any asset or add value to existing asset. There was no creation of capital asset, which would result in an advantage of enduring benefit by discount on debentures. Therefore, the assessee is entitled to deduction from the income for the current year only which is liable to be redeemed in the first year as against the entire discounts. Therefore, the tribunal in our opinion has placed reliance on the decision in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra and the decision in the case of TAPARIA TOOLS LIMITED supra is not applicable in the case of the assessee as the assessee has failed to satisfy the principle of matching concept as the instant case is a case of financial transaction and test of matching principle cannot be made applicable as in the case of real estate following percentage completion method. The benefit of discount to the assessee is instant as assessee paid lesser amount as against the amount which was

12 actually payable and therefore, the aforesaid benefit has to be offered to tax in the same year. The tribunal therefore, has rightly placed reliance on MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. Supra. In view of preceding analysis, the substantial questions of law are answered against the assessee and in favour of the revenue. In the result, the appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss