Case: M/S Madras Industrial Investmentcorporation Ltd Vs. The Commissioner Of Income Tax,Tamil Nadu I, Madras

used by the company for the purposes of its business. This would, therefore, be expenditureSection 37(1) further requires that the expenditure should not be of a capital nature. In the case of India Cements Ltd. v. CIT (SC) the appellant-company had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection with this loan it spent a sum of Rs. 84, 633 towards stamp duty, registration fees, lawyers fees, etc., and claimed this amount as business expenditure. This court considered whether the expenditure so incurred was business expenditure or whether it was capital expenditure. This court quoted with approval the observations of Shah J. in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT that whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. This court went on to observe that the provisions of the English Income-tax Act in this regard are somewhat different from those of the Indian Income-tax Act. It referred to the English case of Texas Land and Mortgage Co. v. William Holtham [1894] 3 TC 255, 260, where a mortgage company had raised money by the issue of debentures and debenture stock and incurred expenses in this connection. The English High Court said that the expenses could not be deducted as trading expenses because the amount paid was for raising capital. Differing from the observations made therein, this court observed that a loan is a liability and has to be repaid and in its opinion it is erroneous to consider a liability as an asset or an advantage. This court disagreed with the English view that borrowing money by the issue of debentures was an acquisition of capital asset and that any commission or expenditure incurred in respect thereof was of a capital nature. It said : " we are of the opinion that (a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv) ". The same ratio would apply here alsoOur attention was drawn to the case of Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., a decision of the English Court of Appeal reported in, where the English Court had treated discount or premium in the hands of the recipient as a receipt of a capital nature. But the character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient. In the light of the ratio laid down by this court in the case of India Cements Ltd., any liability incurred for the purpose of obtaining the loan would be revenue expenditure. 11. 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, 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 questionIssuing 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. 12. 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. 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. 13.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]The Madhya Pradesh High Court also referred to the judgment of the Madras High Court which is under challenge before us and differed from it, preferring the decision of the Calcutta High Court in the case of CIT v. Indian Jute Mills Association. The Madhya Pradesh High Court held that the assessee would not be justified in claiming deduction of the entire amount of discount in the accounting year in question but it would nevertheless be entitled to proportionate deduction spread over the period for which the bonds would remain outstandingTherefore, when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. We need not go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, however, 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 purposes 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 expenditureSection 37(1) further requires that the expenditure should not be of a capital natureThe 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. 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