Case: Taparia Tools Ltd Vs. Joint Commnr. Of Income Tax, Nasik

3. In the debenture issue of the assessee two options as regards payment of interest thereupon were given to the subscribers/debenture holders. They could either receive interest periodically, that is every half yearly @ 18% per annum over a period of five years, or else, the debenture holders could opt for one time upfront payment of Rs. 55 per debenture. In the second alternative, 55 per debenture was to be immediately paid as upfront on account of interest. At the end of five years period, the debentures were to be redeemed at the face value of Rs. 100.4. The debentures were allotted to the following parties asam Makharia Stock Brokers Pvt.p Knifen February 14, 1996, M/s.Makharia Stock Brokers Pvt.Ltd. gave their letter of acceptance opting for upfront payment of interest. Likewise, vide letter of acceptance dated May 24, 1996, M/s.ny Pvt. Ltd. exercised similar option. As these parties, mentioned at S.Nos. 1 and 6, had opted for one time upfront payment towards interest, they were paid interest in the sum of Rs. 2,72,25,000 and Rs. 55,00,000 respectively.5. The assessee follows mercantile system of accounting. Further, one time upfront interest of an amount mentioned above was actually paid as well in the Accounting Years 1995-96 and 1996-97 respectively. However, it so happened that the said upfront payment of interest on debentures were shown by the assessee as deferred revenue expenditure in the accounts to be written off over a period of five years. Notwithstanding this accounting treatment given to the payment qua interest, in the returns filed by the assessee for the assessment years 1996-97 and 1997-98, it claimed the entire upfront interest payment in the sum of Rs. 2,72,25,000 and Rs. 55,00,000 respectively as fully deductible expenditure. It may be clarified that insofar as the assessees claim for deduction of premium payable on redemption is concerned, the same was claimed in the return on a spread over basis covering a period of five years.6. In the assessment orders passed by the AO, the assessees claim for deduction of upfront interest payment was denied. Instead, the AO chose to spread it over a period of five years thereby giving deduction only to the extent of 1/5th each in the respective assessment years. The order of the AO was challenged by the assessee in appeals preferred before the Commissioner of Income Tax (Appeals). The Commissioner, however, dismissed the appeals thereby sustaining the orders passed by the AO. The assessee then approached the Income Tax Appellate Tribunal and thereafter the High Court of Bombay but was unsuccessful as the appeals preferred by him before the two fora have been dismissed maintaining the method of deduction adopted by the AO. To put it otherwise, instead of entire amount paid by the assessee in the particular assessment year, full deduction is not given and this deduction is spread over a period of five years. Thus, the question is as to whether deduction of the entire amount of interest paid should be allowed or the stance of Revenue needs to be affirmed.The appellant - Taparia Tools Limited (hereinafter referred to as the assessee) is before us, having lost in the courts below. In these six appeals, the issue involved is identical, that too between the same parties. Necessity of six appeals is because of the reason that the same dispute pertains to three assessment years, namely, assessment years 1996-97, 1997-98 andassessee had claimed deduction of revenue expenditure on account of interest payment in the sum of Rs. 2,72,25,000 paid to one M/s.a Stock Brokers Pvt.Ltd. and Rs. 55,00,000 on account of interest payment given to M/s.ny Pvt. Ltd. This was on account of upfront payments of interest given to the aforesaid two debenture holders in the assessment years 1996-97 and 1997-98 respectively. The Assessing Officer (for short, the AO), however, treated it as the deferred revenue expenditure, to be written off over a period of five years and, therefore, in these assessment years he allowed only 1/5th of the payment made, though the entire payment was made in the assessment year 1996-97.2. The question of law, in the given circumstances, which has arisen for consideration is as to whether the liability of the assessee to pay the interest upfront to the debenture holder is allowable as a deduction in the first year itself or it is to be spread over a period of five years, being the life of the debentures? This substantial question of law has arisen in the followingIn the debenture issue of the assessee two options as regards payment of interest thereupon were given to the subscribers/debenture holders. They could either receive interest periodically, that is every half yearly @ 18% per annum over a period of five years, or else, the debenture holders could opt for one time upfront payment of Rs. 55 per debenture. In the second alternative, 55 per debenture was to be immediately paid as upfront on account of interest. At the end of five years period, the debentures were to be redeemed at the face value of Rs. 100.4. The debentures were allotted to the following parties asa Stock Brokers Pvt.p Knifen February 14, 1996, M/s.a Stock Brokers Pvt.Ltd. gave their letter of acceptance opting for upfront payment of interest. Likewise, vide letter of acceptance dated May 24, 1996, M/s.ny Pvt. Ltd. exercised similar option. As these parties, mentioned at S.Nos. 1 and 6, had opted for one time upfront payment towards interest, they were paid interest in the sum of Rs. 2,72,25,000 and Rs. 55,00,000 respectively.5. The assessee follows mercantile system of accounting. Further, one time upfront interest of an amount mentioned above was actually paid as well in the Accounting Years 1995-96 and 1996-97 respectively. However, it so happened that the said upfront payment of interest on debentures were shown by the assessee as deferred revenue expenditure in the accounts to be written off over a period of five years. Notwithstanding this accounting treatment given to the payment qua interest, in the returns filed by the assessee for the assessment years 1996-97 and 1997-98, it claimed the entire upfront interest payment in the sum of Rs. 2,72,25,000 and Rs. 55,00,000 respectively as fully deductible expenditure. It may be clarified that insofar as the assessees claim for deduction of premium payable on redemption is concerned, the same was claimed in the return on a spread over basis covering a period of five years.6. In the assessment orders passed by the AO, the assessees claim for deduction of upfront interest payment was denied. Instead, the AO chose to spread it over a period of five years thereby giving deduction only to the extent of 1/5th each in the respective assessment years. The order of the AO was challenged by the assessee in appeals preferred before the Commissioner of Income Tax (Appeals). The Commissioner, however, dismissed the appeals thereby sustaining the orders passed by the AO. The assessee then approached the Income Tax Appellate Tribunal and thereafter the High Court of Bombay but was unsuccessful as the appeals preferred by him before the two fora have been dismissed maintaining the method of deduction adopted by the AO. To put it otherwise, instead of entire amount paid by the assessee in the particular assessment year, full deduction is not given and this deduction is spread over a period of five years. Thus, the question is as to whether deduction of the entire amount of interest paid should be allowed or the stance of Revenue needs to be affirmed.

Court's reasoning:
9. Ignoring the proviso and the Explanation in clause (iii) above, with which we are admittedly not concerned in this case, it is clear that as per the aforesaid provision any amount on account of interest paid becomes an admissible deduction under Section 36 if the interest was paid on the capital borrowed by the assessee and this borrowing was for the purpose of business or profession. There is no quarrel, in the present case, that the money raised on account of issuance of the debentures would be capital borrowed and the debentures were issued for the purpose of the business of the assessee. In such a scenario when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, on the application of this statutory provision, on incurring of such interest, the assessee would be entitled to deduction of full amount in the assessment year in which it is paid. While examining the allowability of deduction of this nature, the AO is to consider the genuineness of business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. Once the genuineness is proved and the interest is paid on the borrowing, it is not within the powers of the AO to disallow the deduction either on the ground that rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent. In the instant case, the AO did not dispute that the non-convertible debentures were issued and money raised for business purposes. The AO did not even dispute the genuineness of clause relating to upfront payment of interest in the first year itself as per the option to be exercised by the debenture holder. In nutshell, the AO did not dispute that the expenditure on account of interest was genuinely incurred. Therefore, there is no dispute that interest has, in fact, been paid during the year of accounting. Definition of paid is contained in Section 43(ii) of the Act to mean actually paid or incurred according to the method of accounting.The only reason which persuaded the AO to stagger and spread the interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of account, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited 1/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of Matching Concept to support this conclusion.11. Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as one time payment. By allowing only 1/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowedthe submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfiled and, thus, it was exercising the statutory right which could not be denied.The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act.Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in theAt the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.Ignoring the proviso and the Explanation in clause (iii) above, with which we are admittedly not concerned in this case, it is clear that as per the aforesaid provision any amount on account of interest paid becomes an admissible deduction under Section 36 if the interest was paid on the capital borrowed by the assessee and this borrowing was for the purpose of business or profession. There is no quarrel, in the present case, that the money raised on account of issuance of the debentures would be capital borrowed and the debentures were issued for the purpose of the business of the assessee. In such a scenario when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, on the application of this statutory provision, on incurring of such interest, the assessee would be entitled to deduction of full amount in the assessment year in which it is paid. While examining the allowability of deduction of this nature, the AO is to consider the genuineness of business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. Once the genuineness is proved and the interest is paid on the borrowing, it is not within the powers of the AO to disallow the deduction either on the ground that rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent. In the instant case, the AO did not dispute that the non-convertible debentures were issued and money raised for business purposes. The AO did not even dispute the genuineness of clause relating to upfront payment of interest in the first year itself as per the option to be exercised by the debenture holder. In nutshell, the AO did not dispute that the expenditure on account of interest was genuinely incurred. Therefore, there is no dispute that interest has, in fact, been paid during the year of accounting. Definition of paid is contained in Section 43(ii) of the Act to mean actually paid or incurred according to the method of accounting.e only reason which persuaded the AO to stagger and spread the interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of account, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited 1/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of Matching Concept to support this conclusion.11. Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as one time payment. By allowing only 1/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowede submission of learned counsel for the assessee was that there is no such estoppel, inasmuch as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(1)(iii) of the Act as all the conditions thereof were fulfiled and, thus, it was exercising the statutory right which could not be denied.The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act.Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in theAt the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.