DCIT, CHENNAI vs. ITI HOLDINGS & INVESTMENT LTD., CHENNAI

Let’s first take Revenue’s appeal in I.T.A. No.647/Mds/2017. The only issue arises for consideration is disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961 (in short 'the Act').

We heard Shri AR.V. Sreenivasan, the Ld. Departmental Representative and Sh. R. Vijayaraghavan, the Ld.counsel for the assessee. The CIT(Appeals) by placing reliance on the decision of this Bench of the Tribunal in Karmen International Ltd. v. DCIT in dated 28.10.2015, found that the disallowance shall be restricted to exempted income earned by the assessee. Now, the assessee claims before this Tribunal that the Madras High Court in Redington (India) Ltd. v. Addl. CIT (2017) 77 taxmann.com 257 found that when there was no exempted income, there cannot be any disallowance. In view of this judgment of Madras High Court, we do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Now coming to assessee’s appeal in The only issue arises for consideration is disallowance of premium on redemption of debentures.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that premium on redemption of debentures has to be allowed as revenue expenditure in view of the judgment of Apex Court in Madras Industrial Investment Corporation v. CIT (1997) (225 ITR 802). The Ld.counsel has also placed reliance on the decision of this Bench of the Tribunal in & 2439/Mds/2016 dated 27.02.2017.

We heard Shri AR.V. Sreenivasan, the Ld. Departmental Representative also. The Apex Court in the case of Madras Industrial Investment Corporation Ltd. (supra) has observed at pages 812 and 813 as follows:-

“The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. 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. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. 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 [1987] 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.”

In view of the above judgment of the Apex Court, this Tribunal is of the considered opinion that the premium on redemption of debentures has to be allowed. Therefore, we are unable to uphold the order of the lower authority. Accordingly, orders of both the authorities below are set aside. The Assessing Officer is directed to allow the premium on redemption of debentures as held by the Apex Court in Madras Industrial Investment Corporation Ltd. (supra).

In the result, the Revenue’s appeal in is dismissed, whereas the assessee’s appeal in I.T.A. No.646/Mds/2017 is allowed.