Calcutta High Court
Commissioner Of Income-Tax vs Tungabhadra Industries Ltd. on 28 November, 1991
Equivalent citations: [1994]207ITR553(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. There are two consolidated references for the assessment year 1984-85 made by the Tribunal under Section 256(1) of the Income-tax Act, 1961, one at the instance of the assessee and the other at the instance of the Revenue. At the instance of the Revenue, the following question of law has been referred to this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 4 lakhs payable as premium is allowable revenue expenditure over a period of seven years and, therefore, for the assessment year 1984-85, one-seventh of the sum of Rs. 4 lakhs should be allowed as a deduction ?"
2. The following questions of law have been referred at the instance of the assessee :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to a deduction of Rs. 57,643 only and not of the entire amount of Rs. 4 lakhs being premium payable on debentures in computation of its income for the assessment year 1984-85 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 59,940 incurred by the assessee was a capital expenditure ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred on repairs and insurance of cars should be considered for the purpose of computing disallowance under Section 37(3A) of the Income-tax Act, 1961, and that such an expenditure is not allowable under Section 31 of the said Act ?"
3. The only question referred at the instance of the Revenue and the first question referred at the instance of the assessee relate to deduction claimed in respect of premium payable on redemption of non-convertible secured debentures. The brief facts are that in October, 1983, the assessee issued non-convertible secured debentures of the total value of Rs. 80 lakhs carrying interest at 15 per cent. per annum. The said debentures were redeemable on January 4, 1991, i.e., after the expiry of the 7th year from the date of allotment. One of the conditions of the issue of the said debentures was that they would be redeemable at a premium of 5 per cent. of the face value of the debenture. The other condition of the said debenture was that assessee undertook to repurchase the debentures at par value from any holder of the debentures if they were held by the holder for at least 12 months and to the extent the face value thereof did not exceed Rs. 40,000. The assessee had also the right to reissue the debentures so purchased from time to time and upon such reissue, the person entitled to the debenture was to have and was deemed always to have had the same rights and priorities as if the debentures had never been redeemed. In the course of the assessment proceedings for the assessment year 1984-85, the assessee claimed deduction of the sum of Rs. 4 lakhs being premium payable on the redemption of the said debentures at 5 per cent. of their face value. The Income-tax Officer disallowed the said claim on the ground that the liability for the said premium could not be said to have crystallised before expiry of the period of seven years so as to be regarded as an accrued liability either in full or in part. He further held that the assessee had the right to repurchase the debentures and reissue them from time to time and that unless the debentures were actually redeemed after the expiry of seven years it could not be said that the debentures would not be bought back by the assessee in any case and would in each and every case be redeemed in full.
4. The Income-tax Officer further held that the debenture premium did not amount to an expenditure and it was not allowable either in full or by spreading it over seven years as alternatively claimed by the assessee.
5. On the assessee's appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer and held that there was no accrual of any expenditure towards the payment of the redemption premium and that there was also no merit in the alternative claim for allowing deduction to the extent of one-seventh of the premium.
6. Against the said order of the Commissioner of Income-tax (Appeals), the assessee preferred a further appeal before the Tribunal. The Tribunal held that the expenditure should be allowed as a revenue deduction over the period of the debentures, namely, in seven years, and that one-seventh should accordingly be allowed in the assessment year involved. The Tribunal followed its decision on identical facts given in the case of Rallis India Limited.
7. The conclusion of the Tribunal is that one-seventh of the said sum of Rs. 4 lakhs should be allowed as a deduction. While the Revenue has questioned this allowance of one-seventh in this year, the assessee has claimed that the entire amount of Rs. 4 lakhs should have been allowed as a deduction in the assessment year in question.
8. The question is whether the premium payable at the time of redemption of the debentures is an allowable revenue expenditure and if so, whether the whole of it or only one-seventh thereof can be allowed as deduction in the assessment year in question.
9. Mr. R.N. Bajoria, learned counsel for the assessee, has submitted that the undisputed facts are that the assessee is following the mercantile system of accounting. The debentures issued contained a condition to the effect that they will be redeemed on January 4, 1991, at a premium of 5 per cent. of the face value of the debentures. A definite enforceable obligation to pay the premium was created by condition 3 of the said debentures.
10. Clause 3 of the said conditions provides as follows :
"The debentures will be redeemed on January 4, 1991, i.e., the expiry of the seventh year from the date of allotment (together with interest accrued thereon) at a premium of 5 per cent. of the face value of the debenture."
11. It would thus be seen that a definite unqualified obligation was undertaken by the assessee to pay the said premium. Accordingly, the liability to pay premium arose at the time of the issue of the debentures, i.e., in the relevant assessment year, although such liability was to be discharged seven years hence. It is well settled that in the mercantile system of accounting, deduction has to be allowed in the year in which the liability is incurred irrespective of whether the payment is made in such year or in later years. The premium agreed to be paid is part of the consideration for the debenture loan like the interest payable at 15 per cent., the only difference being that the consideration so far as it related to the interest at 15 per cent. was payable half yearly in each year whereas the consideration by way of premium was payable at the time of maturity. The time of payment of the premium did not alter its nature and character as being a part of the consideration for taking the debenture loan. It is well-settled that the taking of a loan does not lead to acquisition of any capital asset or any advantage of an enduring nature. The loan is a liability and cannot be considered as an advantage irrespective of the purposes for which the loan is utilised, namely, whether for acquisition of a capital asset or for meeting revenue disbursements. The expenditure incurred on the loan would be an allowable revenue expenditure. Reliance was placed on the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, at page 63. There the Supreme Court observed at page 63 :
"To summarise this part of the case, 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)."
12. The Revenue relied upon a decision of this court in the case of Hindustan Gas and Industries Ltd. v. CIT , for the proposition that the expenditure incurred for debentures was in the nature of capital expenditure and was not a revenue expenditure. In Hindustan Gas and Industries Ltd.'s case , this court was considering the case of expenditure incurred on the issue of redeemable preference shares and not a case of issue of the debentures. The decision of the Supreme Court in the case of India Cements Ltd's [1966] 60 ITR 52, which was cited before this court was distinguished on the ground that the said case related to the issue of debentures, whereas the said case of Hindustan Gas and Industries Ltd. was of redeemable preference shares. It was held by this court in Hindustan Gas and Industries Ltd.'s case of the report as follows :
"There is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. A debenture-holder as a creditor has a right to sue the company, whereas a shareholder has no such right."
13. At page 554 of the reports, the distinction between the case of capital obtained on issue of redeemable preference shares and loan obtained on debentures was discussed. This decision does not support the contention of the Revenue. A share is clearly distinct and different from a debenture. The contention of the Revenue that the expenditure incurred in respect of the debentures is capital expenditure cannot be sustained.
14. The other ground urged on behalf of the Revenue against the allowance of the said sum was that the assessee could repurchase the debentures and if it did so then there would be no question of any liability to pay any premium at the time of redemption seven years hence. Clause 5 of the conditions of the debenture issue to which reference has been made by the Revenue is as under :
"5(a) Repurchase and reissue of debenture.--The company shall have the right to repurchase the debentures and reissue them from time to time in accordance with the provisions of Section 121 and other applicable sections, if any, of the Companies Act, 1956, and upon such reissue, the person entitled to the debentures shall have and shall be deemed always to have had the same rights and priorities as if the debentures had never been redeemed."
"5(b) Buy-back of debentures.--Without prejudice to the rights reserved hereunder the company undertakes to repurchase the debentures at par value plus accrued interest up to the date of the receipt of the debentures by acquisition, from any holder of the debentures (hereinafter referred to as "the debenture holder") provided the following conditions are fulfilled ;
(i) the debentures are held by the debenture holder(s) for at least twelve months, and
(ii) the face value of the total holding of such debenture holder(s) does not exceed Rs. 40,000."
15. On a construction of the aforesaid clauses it appears to us that the premium is payable to the debenture holders at the rate of 5 per cent. of the face value of the debentures on the expiry of the seventh year from the date of allotment. It is true that the company shall have the right to reissue debentures which are repurchased by it from time to time in accordance with the provisions of Section 121 and other applicable sections of the Companies Act, 1956, and upon such reissue, the person entitled to the debentures shall have, and shall be deemed always to have had, the same rights and priorities as if the debentures had never been redeemed. But in the case of repurchase of debentures, no premium is payable. We are, therefore, unable to hold that the liability for payment of the premium was created at the time of issue of the debentures or the liability to pay the premium is in unqualified terms. The liability to pay the premium, in our view, clearly arises at the expiry of the seventh year from the date of allotment and there is no liability to pay the premium at all if the debentures are repurchased under the buy-back clause and there is no further issue of debentures. The payment of premium is, therefore, in our view, clearly a contingent liability and the liability to pay the premium shall arise only if the debentures are not repurchased by the company under Clause 5(b) and are redeemed only at the end of seven years.
16. A contention has also been raised by the Revenue that, in any event, having regard to the decision of the Madhya Pradesh High Court in M.P. Financial Corporation v. CIT [1987] 165 ITR 765, the deduction for the premium payable on the debentures to the extent of one-seventh should only be allowed in the assessment year in question. We are unable to hold that there can be any spreading over of the revenue expenditure. The revenue expenditure should be allowed in the year in which it is incurred. In a case where the assessee follows the mercantile system of accounting the deduction should be allowed for the entire revenue expenditure in the year in which such liability is incurred although the payment is made in later years. In case the assessee follows the cash system of accounting the entire amount should be allowed as a deduction in the year in which the actual payment is made. The concept of spreading over is not applicable to revenue expenditure. The spreading over may be with reference to capital expenditure and such spreading over is achieved by allowing depreciation during the life of the asset. Reliance is placed on the decision of the Supreme Court in Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I. T. [1961] 41 ITR 751 in this behalf. In that case, which was under the Agricultural Income-tax Act, the question arose whether the amount spent for the upkeep and maintenance of the immature rubber plants could be allowed as a deduction in the year in which such expenditure was incurred since according to the Revenue the benefit of such expenditure resulted in the future years and the agricultural income earned during the year of the expenditure did not arise out of such expenditure. While rejecting the said contention the Supreme Court followed the decision in the case of Vallambrosa Rubber Co. Ltd., v. Farmer [1910] 5 TC 529, in which case a rubber company had an estate in which in the year of assessment only one-seventh rubber was produced and the other six-sevenths were in the process of cultivation for the production of rubber and the rubber trees did not yield any rubber until they were about six years old. In the said case of Vallambrosa [1910] 5 TC 529, the Revenue's stand that only one-seventh of the expenditure should be allowed was rejected. The Supreme Court in Travancore Rubber's case [1961] 41 ITR 751 quoted with approval the finding of the Lord President at page 534 of [1910] 5 TC 529 and held at page 755 of the report as under ;
"In our opinion the amount expended on the superintendence, weeding, etc., of the whole estate should have been allowed against the profits earned and it is no answer to the claim for a deduction that part of those expenses produced no return in that year because all the trees were not yielding rubber in that year."
17. This decision was followed by this court in CIT v. Kusum Products Ltd. [1984] 149 ITR 250. In that case, the assessee had spent a sum of over Rs. 10,00,000 for the purchase of import entitlements to make import of raw materials and in the accounting year in which such purchase was made it claimed deduction of the said entire sum as business expenditure. The Income-tax Officer disallowed a portion of such expenditure on the ground that import entitlements to the extent of Rs. 9.54 lakhs was not utilised during the year of account. According to the Income-tax Officer, the deduction could be allowed only in respect of the benefit actually derived by utilising the import entitlements during the year in question proportionately. This court rejected the said stand of the income-tax authorities and followed the decision of the Supreme Court in Travancore Rubber and Tea Co. Ltd.'s case [1961] 41 ITR 751. By way of an illustration, the case of advertisement and publicity expenses can be taken. The benefit of such expenditure is derived mostly in the subsequent years but on that ground the deduction cannot be proportionately reduced.
18. In our view, therefore, the entire amount of the premium in respect of the said debenture should be allowed as a deduction in its entirety in one year, i.e., in the year in which such liability is incurred. As we have already indicated no part of the premium is deductible in the year under reference.
19. We, therefore, answer the first question referred at the instance of the assessee and the only question referred at the instance of the Revenue by saying that no portion of the debenture premium, on the facts and in the circumstances of this case, is deductible in the year under reference.
20. The facts relating to the second question referred at the instance of the assessee are that the assessee paid Rs. 59,940 being the fee for increase in the authorised capital of the assessee. The Inspecting Assistant Commissioner (Assessment) disallowed the amount as capital expenditure. This was confirmed by the Commissioner of Income-tax (Appeals). The Tribunal following the decisions of the Bombay High Court in the case of Bombay Burmah Trading Corporation Ltd. v. CIT [1984] 145 ITR 793 confirmed the action of the Commissioner of Income-tax (Appeals) on the point. In Bombay Burmah Trading Corporation Ltd.'s case [1984] 145 ITR 793 (Bom), one of the questions was whether the fees paid by the assessee to the Registrar of Companies for the enhancement of capital was allowable expenditure. There, the Bombay High Court, after considering several decisions of the Supreme Court as well as other High Courts, held that the expenses incurred in connection with the issue of preference shares or additional equity share is not revenue expenditure and is not deductible. The Division Bench of this court in the case of Brooke Bond India Ltd. v. CIT held that the expenditure incurred for raising or addition to the share capital of the company is not allowable as revenue deduction. In Union Carbide India Ltd. v. CIT [1987] 165 ITR 678, the Division Bench of this court, following the decision in Brooke Bond India Ltd.'s case , held that the fees paid to the Registrar of Companies in connection with the increase of the authorised capital of a company is capital expenditure and hence the expenditure is not allowable under Section 37. Following the aforesaid decisions, we answer the second question in the affirmative and in favour of the Revenue.
21. The facts relating to the third question are that the assessee submitted before the Inspecting Assistant Commissioner (Assessment) that while computing disallowance under Section 37(3A) the expenditure on repairs of the car and insurance of the car should not be considered. The Inspecting Assistant Commissioner (Assessment) rejected the assessee's contention which was upheld by the Commissioner of Income-tax (Appeals).
22. The Tribunal, however, held that the expenditure on repairs of car and car insurance fell within the mischief of Section 37(3A). Accordingly, the order of the Commissioner of Income-tax (Appeals) on this point was upheld.
23. Section 37(3A) of the Act, inter alia, provides that "notwithstanding anything contained in Sub-section (1)" 20 per cent. of any expenditure in excess of Rs. 1,00,000 incurred by an assessee in respect of one or more of the items specified in Sub-section (3B) shall not be allowed as a deduction in computing the business income. Sub-section (3B) in Sub-clause (ii) specifies one such expenditure as "running and maintenance of aircraft and motor cars". The deduction in respect of the expenditure incurred on repairs and insurance of the motor-car which is plant as defined in Section 43(3) of the Act, is allowed under Section 31 of the Act and not under Section 37. The expenditure in respect of which Sub-section (3A) can be attracted is only that which falls under Section 37 and not under Section 31. Section 37(1) deals with only such expenditure which does not fall within Sections 30 to 36 of the Act. Accordingly, the expenditure incurred on repairs and insurance of motor cars cannot be considered for disallowance under Sub-section (3A) of Section 37 of the Act.
24. This question came up for consideration in Income-tax Reference No. 87 of 1990 (CIT v. Molins of India Ltd.). There, this court held that Section 37(1) covers any expenditure not being expenditure of the nature described in Sections 30 to 36. Therefore, the prohibition, restriction or limitation as contained in Sections 37(3A) and 37(2B) cannot have any manner of application to the expenditure allowable otherwise and allowed under Sections 30 to 36. In our view, the expenditure allowable under Section 31 cannot come within the purview of Section 37(3A). Only such expenditure which falls under Section 37 can be brought within the net of restriction made in Section 37(2B). We, therefore, answer the third question in the negative and in favour of the assessee.
25. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
I agree.