ACIT, CC-VI, KOLKATA, KOLKATA vs. M/S. J. K. TYRE & INDUSTRIES LTD., KOLKATA

Grounds of appeal

The Assessee is a company. It is engaged in the business of manufacturing and sale of tyres. It filed return of income for A.Y.2006-07 on 14.11.2006. Assessment was completed u/s 143(3) of the Act by order dated 15.12.2008. The assessee had claimed as deduction a sum of Rs.72,53,359/-. The sum so claimed as a deduction was on 2 M/s. J.K.Tyre & Industries Ltd. A.Yr.2006-07 account of upfront premium pertaining to the period from April, 2006 to March, 2011. The nature of this upfront premium paid was the Assessee had borrowed from various Financial Institutions on Zero Coupon Non-Convertible debentures (ZCNCD) at premium rate of interest from 13.50 - 13.75%. It bargained with those financial institutions for a discounted rate of 9.00%. The financial Institutions agreed to reduce the premium rate subject to the condition that the Assessee will pay upfront premium of 50% of Net Present Value (NPV) of differential premium i.e. difference of 13.75% or 13.50% to discounted rate of 9.00%. Accordingly, during the Assessment Year - 2006- 07, the Assessee had paid upfront premium of Rs.8,06,41,668/- to various Financial Institutions out of which proportionate premium of Rs. 72,53,359/- attributable for the period from Oct.2005 to March, 2006 (i.e AY 2006-07) was claimed in the Return of Income for the current year. The remaining upfront premium of Rs.7,33,88,309/- (Rs.8,06,41,668/- minus Rs.72,53,359/-), pertaining to period from April, 2006 to March, 2011 was duly reflected in Financial Statement as on 31.03.2006 as prepaid expenses under the major head of Advances recoverable in cash or in kind or for value to be received on asset side of balance sheet and was regularly being claimed by Assessee in respective subsequent years and was also being allowed by the revenue. The details of the financial institutions to whom the upfront premium was paid is as follows: Sr.No. Name of Financial Institution Upfront Premium (Rs.) 1. IDBI - JKIL 27637168/- 2. IDBI - VTP 47189753/- 3. Life Insurance Company (LIC) 4126292/- 4. General Insurance Company (GIC) 592845/- 5. Oriental Insurance Company (OIC) 304408/- 6. New India Assurance Co.(NIAC) 545705/- 7. National Insurance Company (NIC) 245497/- Total 80641668/- It was the plea of the Assessee that the Assessee is maintaining its accounts on mercantile basis and accordingly Assessee claimed only Rs.72,53,359/- (being the 2

The claim of the Assessee was allowed by the AO in the assessment completed u/s.143(3) of the Income Tax Act, 1961 (Act) by order dated 15.12.2008. Subsequently the AO issued a notice u/s.154 of the Act for disallowing the deduction of Rs.72,53,359/- allowed in the assessment. According to the AO, since the assessee follows mercantile system of accounting therefore upfront premium paid in advance cannot be allowed. The AO accordingly passed an order u/s.154 of the Act disallowing and adding to the total income of the Assessee a sum of Rs.72,53,359/-.

It was the plea of the Assessee before the CIT(A) that it was only that portion of upfront premium of' Rs.72,53,359/- which pertains to the period from Oct, 2005 to March, 2006 was claimed by the Assessee during the year under appeal and hence the Assessing Officer ought not to have disallowed the claim for deduction. It was the pea of the Assessee that upfront premium paid by the assessee was revenue expenditure as it was in the nature of interest on loan. It was clarified that the upfront premium was not a repayment of debt i e. ZCNCD but it was paid to the various Financial Institutions in order to reduce the premium rate from 13.50 - 13.75% to the discounted rate of 9.00%; and so, the same was revenue in nature. It was also submitted that the same AO has allowed the claim of similar upfront premium of Rs.1 ,62,93,052/ - in the subsequent assessment year 2007-08 in his order u/s 143(3) dated 31-12-2009. The Assessee filed the copy of the assessment order and the computation of income for the relevant year.

The CIT(A) cancelled the order of the AO holding that the claim of the Assessee for deduction of upfront premium was correct and that the said expenditure was revenue in nature and the deduction claimed related to the previous year and was well within the 4 M/s. J.K.Tyre & Industries Ltd. A.Yr.2006-07 mercantile system of Accounting to be allowed as a deduction. The following were the relevant observations of the CIT(A). “5. I have perused the impugned order of the AO. I have also considered the submissions of the Ld. AR and the material placed by him on record. It appears that the assessee company has rearranged its debt with 6 financial Institutions in as much as the zero coupon non-convertible debentures (ZCNCD) carrying premium rate of 13.50 - 13.75% was converted to discounted rate of 9% with the agreement that 50% of the Net Present Value (NPV) of differential premium for the period from October, 2005 to March, 2012 will be paid upfront and the balance 50% premium shall be allowed as discount. The assessee company accordingly paid upfront premium of Rs.8,06,41,668/ -; and, on proportionate basis, upfront premium of Rs.72,53,359/- pertained to the relevant assessment year 2006-07. The assessee has produced letters from the financial institutions in support of its contentions. I find that the assessee has segregated on proportionate basis the upfront premium of 8,06,41,668/ - over 7 assessment years 2006- 07 to 2012- 13; and, that it has claimed sum of 72,53,359/- only in the relevant assessment year 2006-07. I also find that the upfront premium is in the nature of interest on borrowed fund; and consequently, the same is allowable as revenue expenditure. I have perused the assessment order for the subsequent assessment year 2007 -08 wherein the same AO has allowed the upfront premium of Rs.1,62,93,052/- pertaining to that year. In view of the above, I am of the opinion that the AO was not justified in rejecting the claim of the assessee on the ground that the premium paid in advance was not allowable. Ground no 2 & 3 are allowed. And, in consequence, ground no 4 there by challenging the legal validity of the order u/s 154 requires no adjudication.”

Aggrieved by the order of ld. CIT(A) the revenue has preferred the present appeal before the Tribunal.

We have heard the rival submissions. The ld. DR relied on the order of AO. The ld. Counsel for the assessee reiterated the submissions made before CIT(A) and relied on the order of CIT(A). After considering the rival submissions, we are of the view that there is no merit in this appeal by the revenue. Firstly the question whether the upfront premium on Zero coupon Non-convertible debentures to the extent of Rs.72,53,359/- which was pertaining to the period from October, 2005 to March, 2006 can be regarded as revenue expenditure or not or was in the nature of interest or was advance payment of future interest liability which cannot be allowed under the mercantile system of 4 5 M/s. J.K.Tyre & Industries Ltd. A.Yr.2006-07 accounting are matters which the AO ought to have considered while concluding the assessment u/s.143(3) of the Act. Recourse to the provisions of Sec.154 of the Act cannot and ought not to be made for such highly debatable issues which might require detailed examination of facts. Secondly the upfront premium paid was in the nature of interest on loan on borrowing, as admittedly the loans in questions were non-convertible debentures. Such expenditure was in the nature of interest expenses and had to be allowed as deduction. Further the AO has erroneously considered the sum of Rs.72,53,359/- as not pertaining to the relevant previous year and was a payment of interest in advance. The sum claimed as deduction was in relation to the period from October, 2005 to March, 2006 and therefore rightly claimed as deduction in A.Y.2006- 07 by the assessee. Thus the order of CIT(A) which is in conformity with the legal position as explained above does not call for any interference. Accordingly the same is upheld and the appeal by the revenue is dismissed.

In the result the appeal by the revenue is dismissed. Order pronounced in the Court on 08.02.2017.