Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8
PETITIONER:
M/S MADRAS INDUSTRIAL INVESTMENTCORPORATION LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME TAX,TAMIL NADU I, MADRAS
DATE OF JUDGMENT: 04/04/1997
BENCH:
S.C. AGRAWAL, SUJATA V. MANOHAR
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
Mrs. Sujata V. Manohar, j.
The appellant is public limited company. The present
appeal filed by it pertains to the accounting year ending
June 30, 1967 relevant to the assessment year 1968-89.
On December 10, 1966 a public issue of the debentures
of the appellant company was made. The total value of the
debentures was Rs. 1.5 crores repayable with interest at the
rate of 5-3/4% per annum. The debentures were issued at a
discount of 2%, redeemable after 12 years. The issue price
of a debenture of Rs. 100/- was Rs. 98/-. The total discount
on the issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For
the Rs. 10,000/- written off as discount on the previous
issue.
The Income-tax offer by his assessment order dated
January 31, 1969 disallowed the claim of the appellant for
deduction of Rs. 22,500/- on the ground that discount on
bonds and debentures was not allowable as an expenditure. On
appeal, the Appellate Assistant Commissioner by his order
dated July 4, 1969 held that the discount allowed at the
time of the issue of debentures was to be treated as a part
of the expenditure for such issue. He upheld the claim for
deduction of Rs. 12,500/- But rejected the claim as regards
Rs. 10,000/- on the ground that it related do discount on
debentures issued in an earlier year and hence it did not
pertain to the relevant previous year.
The assessee then preferred an appeal before the
Appellate Tribunal. The assessee contended. Inter alia, that
(1) The Appellate Assistant Commissioner had erred in
sustaining the disallowance of Rs. 10,000/- on the ground
that it related to an earlier year and (2) The Appellate
Assistant Commissioner having held that discount allowed at
the time issued of debentures was to be treated as part of
the expenditure incurred for such issue, should have further
allowed a sum of Rs. 2,87,000/- being balance amount of the
total discount of Rs. 3,00,000/- relating to the issue of
debentures of Rs. crores. Before the Tribunal the department
contended that the appellant-company had, for the first
time, made a new claim before the Tribunal for deduction of
Rs. 2,87,500/- and the Tribunal had no jurisdiction to
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8
examine this claim. This objection was rejected by the
Tribunal. The Tribunal held that the expenditure of Rs.
3,00,000/- was incurred during the relevant previous year
although it was proportionately written of over a period of
12 years. The expenditure of Rs. 3,00,000/- was allowable as
expenditure incurred for accountancy purposes this amount
was spread over 12 year and only Rs. 12,500/- was written
off, being the proportionate amount for 6 months ending with
June 30, 1967, cannot make difference. Therefore, the
Tribunal allowed a deduction of Rs. 2,87,500/- also. On the
application of the Department, the Tribunal stated as case
under Section 256(1) of the Income-tax Act, 1961 to be
decided by the Madras High Court. The following two
questions were referred to the Madras High Court:-
"(1) Whether on the facts and in
the circumstances of the case, the
Tribunal was justified in
permitting the assessee to raise
the contention that the entire
amount of Rs. 3,00,000/- being the
discount relating to the issue of
debentures for Rs. 1.5 crores
during the relevant previous year
was to be allowed as a permissible
deduction?
(2) Whether on the facts and in the
circumstances of the case, the
Tribunal was justified in holding
that the assessee had incurred an
expenditure of Rs. 3,00,000/-
during the relevant previous year
by was of discount paid to the
persons who had subscribed to the
debentures issued by it for Rs. 1.5
crores during the relevant previous
year and the same was allowable as
a revenue expenditure?"
The Madras High Court by its judgment and order dated
November 5, 1987 (reported in 1980 124 ITR 454) answered the
first question in favour of the appellant-assessee. The High
Court reframed the second question as follows:
"Whether there was any expenditure
in the sum of Rs. 2,87,500/- and
whether it was revenue
expenditure?"
It held that the discount of Rs. 3,00,000/- did not
represent any payment made to any one so to constitute
expenditure. It held that no expenditure was laid out or
incurred by the assessee/appellant company which could be
allowed as a deduction. It noted that out of the total
discount of Rs. 3,00,000/- a discount of Rs. 12,500/- had
been allowed by the Tribunal which the Department ha not
challenged. Hence the High Court was concerned only with the
balance amount of Rs. 2,87,500/- which the High Court held
could not be considered as expenditure. Therefore, the
second part of the question whether it was revenue
expenditure or not, did not require consideration.
The present appeal is filed by the appellant-company
against the second question as reframed by the Madras High
Court and answered as above. We have first to consider
whether the discount of Rs. 3,00,000/- on debentures which
were issued by the appellant company is expenditure incurred
by the appellant company for the purposes of its business.
The appellant-company actually received Rs. 1.47 crores as
against which it incurred a liability to return a sum of
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8
Rs. 1.50 crores with interest at the end of 12 years (the
date of redemption). This liability which the assessee
incurred to pay the amount of Rs. 3,00,000/- in addition to
what it actually received, is being written off over the
period of 12 years. Can it be treated as expenditure? In the
case of Indian Molasses Co. (Private) Ltd. v. commissioner
of Income-tax, West Bengal (1959 37 ITR 66) this Court
considered the meaning of "expenditure" under Section 10(2)
(xv) of the Income-tax Act 1922. The High court was
concerned with sums which were transferred by the company to
trustees to take out an annuity policy on the life of the
managing director or the longest life policy in favour of
the managing director and his wife. There was a provision in
the policy for surrendering the annuity for a capital sum
after giving notice. The payment by the company to the
trustees was contingent and the liability itself was
contingent. The Court said that expenditure which is
deductiable for income tax purposes is one which is towards
a liability actually existing at the time. Putting aside of
money which may become expenditure on the happening of an
event is not expenditure. Dealing with what is expenditure,
this Court said (page 78) that "expenditure" is equal to
"expense and "expense" is money laid out by calculation ad
intention. The idea of spending in the sense of "paying out
or away" money is the primary meaning. Expenditure is what
is paid out or away, something that is gone irretrievably.
In the case of Calcutta Co. Ltd. v. commissioner of Income-
tax, West Bengal (1969 37 ITR 1) decided in the same month,
the assessee bought lands and sold them in plots for
building purposes. The assessee undertook to develop the
plots by laying out roads, Providing a drainage system,
installing lights etc. when the plots were sold the
purchasers paid only a portion of the purchase price and
undertook to pay the balance in instalments. The assessee
under took to carry out the development of these plots. In
the relevant accounting year, the assessee who followed the
mercantile system of accounting, actually received in cash
only a sum of Rs. 29,392/- towards the sale price of lands;
but it credited in its accounts the sum of Rs. 43,692/-
representing the full sale price of land and at the same
time it also debited an estimated sum of Rs. 24,809/- as
expenditure for the development it had undertaken to carry
out even though that amount was not actually spent. The
Department disallowed this expenditure. Upholding the claim
of the assessee to deduction, this Court said that the
undertaking given by the assessee imported a liability on
the assessee which accrued on the dates of the deeds of sale
though that liability was to be discharged at a future date.
It was thus an accrued liability and the estimated
expenditure which would be incurred in discharging the same
could be deducted from the profits and gains of business.
The difficulty in the estimation of liability did not
convert the accrued liability into a conditional one. This
Court said that the expression ’profits or gains’ in Section
10(1) of the Income-tax Act, 1922 had to be understood in
its commercial sense; and there could be no computation of
such profits and gains until the expenditure which is
necessary for the purpose of earning the receipt is deducted
therefrom, whether the expenditure is actually incurred or
the liability in respect thereof has accrued even though it
may have to be discharged at some future date.
Thus "expenditure" is not necessarily confined to the
money which has been actually paid out. It covers a
liability which has accrued or which has been incurred
although it may have to be discharged at a future date.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8
However, a contingent liability which may have to be
discharged in future cannot be considered as expenditure.
In the case of Commissioner of Income-tax, Bombay North
v. Chandulal Keshawalal and Co. (1960 38 ITR 601) the
assessee-firm was the managing agent of a company. In
accordance with the managing agency agreement the commission
for the relevant accounting year was a sum of Rs. 3,09,114/-
. But at the request of the managed company the assessee
agreed to accept a sum of rupees one lakh only as its
commission. The Appellate Tribunal found that (i) the
financial position of the managed company was rather
unsatisfactory, (ii) that the assessee had been remitting a
part of whole of its commission in that past whenever the
profits of the managed company were unsatisfactory, (iii)
that the waiver was neither a bounty nor mala fide and (iv)
that the business of the assessee was so linked up with the
managed company that if the latter was put on a sounder
position the assessee would get a larger commission in the
future. It held that the part of the commission remitted by
the assessee was given up for reasons of commercial
expediency and was business expenditure allowable under
Section 10(2)(xv) of the Income-tax Act 1323. In deciding
whether a payment of money is deductible expenditure, one
has to take into consideration questions of commercial
expediency and the principles of ordinary commercial
trading. What is relevant to note in this case is that the
assessee had not paid out any amount but had relinquished a
part of its claim.
In the case of Commissioner of Income-tax, tax, West
Bengal v. Indian Jute Mills Association (1982 134 ITR 68),
Sabyasachi Mukharji, J. as he then was, in the Calcutta High
Court, considered the meaning of the expression
"expenditure" and said that the expression must be
understood in the context in which it is used. The
Legislature has used the expression "allowances and
depreciation" in several sections in the scheme in Chapter
IV of the Income-tax Act, 1961. Section 37 of the Income-tax
Act, 1961, enjoins that any expenditure not being
expenditure of the nature described in Section 30 to 36 laid
out or expended wholly and exclusively for the purpose of
the business or profession should be allowed in computing
the income chargeable under the head "Profits and gains of
business or profession". In Sections 30 to 36 the expression
"expenses incurred" as well as "allowances and depreciation"
has been used. Therefore, the Legislature was using the
expression "any expenditure " in Section 37 to cover both.
He intrepreted Section 44A and the term "expenditure
incurred" occurring there in the light of Sections 30 to 36
(1). In that case, the Calcutta High Court was required to
consider the claim of the assessee which was a non-trading
association to depreciation on furniture, air-conditioner
etc. which were debited in its account. The Department
contended that the assessee could not claim depreciation
since it was a none-trading association. The Calcutta High
Court held that having regard to the purpose of Section 44A
the depreciation claimed should be construed as "expenditure
incurred" and the assessee would be entitled to the
beneficial construction of the provision. The Calcutta High
Court differed in that case from the view taken by the
Madras High Court in the judgment which is under challenge
before us.
Therefore, although expenditure primarily denotes the
idea of spending or paying out, it may, in given
circumstances, also cover an amount of loss which has not
gone out of the assessee’s pocked but which is all the same,
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8
an amount which theassessee has had to give up. It also
covers a liability which the assessee has incurred in
presenti although it is payable in futuro. A contingent
liability that may arise in future is, however, not
"expenditure". It would also cover not just a one-time
payment but a liability spread out over a number of years.
The question whether a discount on bounds should be
treated as "expenditure", directly arose before the Madhya
Pradesh High Court in the case of M.P. Financial Corporation
v. Commission of Income-tax (1987 165 ITR 765. The Madhya
Predesh High Court was required to deal with a case where
State Financial Corporation had issued bonds at a discount.
The Court held that the expression "expenditure" as used in
Section 37 of the Income-tax Act, 1961 may, in the
circumstances of a particular case, cover an amount which is
really loss and the said amount has not gone out from the
pockets of the assessee. In the case of issue of bonds at a
discount, it said that the same principles as are applicable
in the case of issue of debentures at a discount, would be
attracted. The amount of discount, in effect, represents
deferred interest and an assessee would not be justified in
claiming deduction of the entire amount of discount in the
accounting year in question. But it would be entitled to
proportionate deductions spread over the period for which
the bonds remain outstanding. The High Court has relied upon
a passage in Spicer and Pegler’s "Book-Keeping and Accounts"
(seventeenth edition) at page 240 which is as follows:-
"The discount on the issue is, in
effect, deferred interest, and
should accordingly be written off
over the period having the use of
the money raised by the
debentures, unless a sinking fund
is created to accumulate the full
redemption price, including the
discount."
It has also relied upon a paragraph in Batliboi’s
"Principles and Practice of Auditing" which is as follows:-
"When debentures are issued at
discount, an account styled
’Discount on Debentures Account’,
will be debited with the discount
allowed on the issue. The
debentures account will be credited
in the books at their nominal value
and will appear at that value as a
liability in the balance-sheet. The
loss thus arising need not be
completely written off in the year
in which the debentures are issued,
since the benefit to be derived
from the amount borrowed will
continue till be debentures are
redeemed. Where the debentures are
redeemable at the end of a fixed
period, a proportionate amount of
discount should be written of out
of revenue ever year during which
the debentures are outstanding."
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 Commissioner of
Income Tax v. Indian Jute Mills Association (supra). The
Madhya Pradesh High Court held that the assessee would not
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8
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
outstanding.
Therefore, 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 presenti 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 expenditure.
Section 37(1) further requires that the expenditures
should not be of a capital nature. In the case of India
Cements ltd. v. Commissioner of Income-tax, Madras (1966 60
ITR 52) 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/-, 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.
Ltd. v. Commissioner of Income-tax (1965 56 ITR 52 at 59)
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 i 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 t 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 Taxes Land and mortgage Co. V. William
Holtham (1894 3 Tax cases 255, 260) where a mortage company
had raised money by the issue of debentures and debentures
stock and incurred expenses in this connection. The English
High Court said that the expenses would 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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8
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 also.
Our 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 (12 Suppl. ITR 513)
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 ration laid down by this
Court in the case of India Cements Ltd. (supra) any
liability incurred for the purpose or obtaining the loan
would be revenue expenditure.
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 entirity in the
year in which it is incurred. It cannot be spread over a
number of year 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 very distorted picture of the profits of
a particular year. Thus in the case of Hindustan Aluminium
Corporation Ltd. v. Commissioner of Income-tax, Calcutta-I
(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 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 agreed
with the reasoning and conclusion of the Madhya Pradesh High
Court in the case of M.P. Financial Corporation v.
Commissioner of Income-tax (supra). The view that we have
taken is also in conformity with accounting practice of
showing the discount in "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 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 for as it related to the deduction of Rs. 2,87,500/- in
the assessment year in question though for reasons entirely
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8
different from those given by the High Court. The second
part of the reframed question is answered in the
affirmative. But only proportionate part of the discount can
be deducted in the assessment year in question. Question No.
(as reframed) therefore, which is the subject matter of
appeal before us, is answered in the negative in so for 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
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.