COMMISSIONER OF INCOME TAX-III vs NIRMA INDUSTRIES LTD

C/TAXAP/209/2010 JUDGMENT DATED: 15/10/2026
(GJHC240460222010)
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 209 of 2010

FOR APPROVAL AND SIGNATURE:


HONOURABLE MR. JUSTICE BHARGAV D. KARIA

and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

==========================================================
Approved for Reporting Yes No
✓
==========================================================
COMMISSIONER OF INCOME TAX-III
Versus
NIRMA INDUSTRIES LTD
==========================================================
Appearance:
AADITYA D BHATT(8580) for the Appellant(s) No. 1
MR SN SOPARKAR SENIOR ADVOCATE WITH MR BS SOPARKAR FOR
MRS SWATI SOPARKAR(870) for the Opponent(s) No. 1
==========================================================
CORAM: HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

Date : 15/10/2026

JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1.Heard learned Senior Standing Counsel Mr.
Aaditya D Bhatt for the appellant and learned
Senior Advocate Mr. S.N. Soparkar with
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learned advocate Mr. B.S. Soparkar for the
respondent.
2.This Tax Appeal is filed by the Revenue under
section 260A of the Income Tax Act, 1961 (For
short “the Act”) against the judgment and
order dated 13.07.2009 passed by the Income
Tax Appellate Tribunal, “A” Bench, Ahmedabad
(For short “the Tribunal”) in ITA No.
3946/Ahd/2008 for Assessment Year 2004-2005.
Tax Appeal was admitted by this Court vide
order dated 04.07.2011 raising the following
substantial question of law:
“Whether the Appellate Tribunal is
right in law and on facts in reversing
the order passed by CIT(Appeals) and
thereby deleting the disallowance of
interest of Rs.10,98,52,704/- on
various DDBs/OFCPNs issued by the
appellant company?”
3.The Tribunal while allowing the appeal of the
assessee followed its order passed for
Assessment Year 2002-2003 in case of Nirma
Limited. Therefore, it would be necessary to
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refer to the facts of Nirma Limited for
Assessment Year 2002-2003 where similar
disallowance being interest relating to Deep
Discount Bonds was deleted by the
CIT(Appeals) and upheld by the Tribunal. The
facts recorded in case of Nirma Limited for
Assessment Year 2002-2003 in ITA No.
1245/Ahd/2006 as recorded by the Tribunal in
the impugned judgment and order are as under:
“5. In July 2000, the assessee-
company had offered, by way of
private placement, secured and
redeemable Deep Discount Bonds (DDB
Series "A") aggregating to Rs.350
crores to refinance the existing
short-term debt of the assessee-
company. Deemed face value and issue
price per bond were Rs.1,50,000 each
and Rs. 1,00,000 each respectively.
They were to mature at their deemed
face value after three years and six
months from the deemed date of their
allotment (i.e., 28.07,2000). It was
stipulated that the investors would
have the option to "Put" the
instrument at the end of one year
eleven months from the deemed date
of allotment. The assessee-company
also had the option to "Call" the
instrument at the end of one year
eleven months from the deemed date
of allotment. The Bonds were listed
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on Wholesale Debt Market segment of
the National Stock Exchange w.e.f.
20.09.2001. Relevant clause dealing
with the payment of interest as
contained in the Information
Memorandum relating to DDBs of "A"
Series is available at page 126 of
the paper-book filed by the assessee
before us which reads as under:
"There will be no interest
during the currency of the
Bonds. The par value of each
Bond, i.e., Rs.1,50,000/- will
be payable on maturity or the
Deemed Face Value of
Rs.1,25,000/- will be payable in
case the company exercises the
Call Option.

No interest shall accrue on the
Bond after the date of the
maturity or in case the company
exercises the Call option, after
the exercise date of the call."
6. In October 2001 also, the
assessee-company offered, by way of
private placement, secured and
redeemable Deep Discount Bonds (DDB
Series "B") aggregating to Rs.100
crores to part finance the normal
corporate expenditure of the
company. Deemed face value and issue
price per bond were Rs.1,15,000 and
Rs. 1,00,000 respectively. They were
to mature at their deemed face value
after twenty months from the deemed
date of their allotment (i.e.,
08.10.2001). Unlike DDB - Series
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"A", there was no provision in the
Information Memorandum for DDB -
Series "B" for exercise of
"Put/Call" option either by the
investors or by the assessee-
company.
7. The assessee-company repurchased
7500 DDBs of series "A" on 1.10.2001
@ Rs.1,17,000 per bond and redeemed
them on 4.10.2001. The amount of
interest allocated by the assessee
to the redeemed DDBs, as aforesaid,
works out to Rs.6,54,33,173/-. The
remaining DDBs of both the series
were not redeemed. The assessee
sought deduction amounting to
Rs.47,27,05,434/- on account of
accrued interest relating to DDBs of
both the series out of which
Rs.6,54,33,173/- relating to
redeemed portion of DDBs of "A"
Series was claimed as interest
accrued and paid while the balance
amount of Rs.40,72,70,261/- (Rs.
36,41,30,778 + Rs.4,31,39,483
relating to outstanding DDBs of
Series "A" and "B" respectively) was
claimed as interest accrued but not
paid in respect of outstanding DDBs
of both the series. Out of total
claim of Rs.47,27,05,434/-, the AO
however disallowed the claim of
Rs.40,72,70,261/- alone in the
original assessment order, which was
subsequently confirmed by the
learned CIT(A) for the reasons
stated at pp.27-35 of his appellate
order, which, in brief, are: (i) The
assessee was a cash rich company and
hence there was no need to issue the
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DDBs for raising the funds and that
there was no need of funds at the
time of issue of DDBs; (ii) The DDBs
were issued to various entities of
the Group; (iii) Interest was
claimed as deduction on accrual
basis in the hands of the assessee
while corresponding interest was not
shown as interest receipts in the
hands of the holders of DDBs; (iv)
The liability to pay interest arose
only at the end of the maturity
period and hence there was no
accrual of liability towards
interest on DDBs; (v) Since the
assessee did not deduct the tax at
source in terms of section 193, it
could not be allowed to claim
deduction on account of interest
liability; (vi) Insertion of Clause
(iiia) in section 36 made it
abundantly clear that “pro-rata
discount” could be allowed in
respect of Zero Coupon Bonds alone
issued by an infrastructure capital
company or infrastructure capital
fund or public sector company after
1.6.2005 and therefore such a
concession could not be extended in
respect of earlier assessment years
and that too to the assessee-company
which was neither an infrastructure
company nor a public sector company;
(vii) The device adopted by the
assessee was a tax avoidance device
and therefore such device was to be
ignored in view of the decision in
McDowell's case, 154 ITR 148 (SC);
and (viii) The impugned expenditure
was capital in nature.

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8. Aggrieved by the order of the
learned CIT(A), the assessee is now
in appeal before this Tribunal. At
the time of hearing, the learned
counsel for the assessee invited our
attention to the factual aspects of
the case as also to the clauses in
the Information Memorandum governing
payment of interest relating to DDBs
of both the series. We have already
narrated them earlier in this Order.
He also took us through various
findings recorded and the reasons
given in the assessment order and
the appellate order for making and
sustaining the impugned
disallowance. He also took us
thought the submissions made by the
assessee in support of its case
before the learned CIT(A) and relied
upon them in support of his case.”
4.After considering the submissions made by
both the sides, the Tribunal upheld the order
passed by CIT(Appeals) observing as under:
“16. We have carefully considered
the rival submissions. The short
issue is whether the amount of
difference between the issue price
and par value/deemed face value of
DDBs, which has been treated as
interest by the assessee as well as
by the Department, is liable to be
allowed. The case of the Department
for making the impugned disallowance
is that the expenditure has not
accrued in the year under appeal and
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that it would accrue only at the
time of maturity of the DDBs. The
case of the asessee, on the other
hand, is that the impugned
expenditure deserves to be allowed
on proportionate basis in the year
under appeal for the reason that it
not only relates to the year under
appeal but has also been incurred in
the year under appeal for the
purposes of the business and
therefore it should be allowed as
deduction. Let us consider the issue
first from the accounting point of
view and then from the legal point
of view.
17. It is not at all in dispute that
the assessee maintains its accounts
on accrual basis; rather the
Companies Act mandates the assessee
to do so. Accrual basis of
accounting (also referred to as
mercantile basis) is the method of
recording transactions by which
revenues, costs, assets and
liabilities are recognised in the
accounts in the period in which they
accrue, i.e., when transactions
occur rather than when they are
settled by receipt or payment in
cash. This results in matching the
accomplishments (i.e., revenues)
with the efforts (i.e., costs) in a
given period. Therefore, two
essential features of accrual basis
of accounting are: (a) Revenues are
recognized as they are earned; and
(b) For determining the periodic
income, costs are matched against
revenues so recognised or against
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the time period to which they
relate. The matching concept is thus
an integral part of accrual
accounting. In fact, they are often
used interchangeably. The matching
concept requires proper allocation
of costs into appropriate periods so
that relevant incomes and expenses
are matched to work out the correct
profits in a given accounting
period. This view is well fortified
by the judgment in Taparia Tools
Ltd., 260 ITR 102, 116 (Bom.) in
which the Hon'ble High Court has
explained the matching concept thus:
“...Therefore, under the mercantile
system of accounting, in order to
determine the net income of an
accounting year, the revenue and
other incomes are matched with the
cost of resources consumed
(expenses). Under the mercantile
system of accounting, this matching
is required to be done on accrual
basis. Under this matching concept,
revenue and income earned during an
accounting period irrespective of
actual cash in-flow is to be
compared with expenses incurred
during the same period irrespective
of actual out-flow of cash."
18. Pursuant to the provisions of
section 145(2), the Central
Government has notified Accounting
Standards to be followed for income-
tax purposes. According to Paragraph
6(b) of the aforesaid Notification,
"Accrual" refers to the "assumption
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that revenues and costs are accrued,
that is, recognized as they are
earned or incurred (and not as money
is received or paid) and recorded in
the financial statements of the
period to which they relate." The
aforesaid definition has now
statutory force and therefore has to
be followed. According to the said
definition, two conditions must be
satisfied to constitute "Accrual".
They are: (i) the revenues and costs
are required tis he recognized as
they are earned or incurred (and not
as money is received or paid); and
(ii) the revenues and costs so
recognized must be recorded in the
financial statements of the periods
to which they relate. Thus mere
incurrence of liability or cost is
not sufficient. The incurrence of
liability/cost should be recognized
and recorded in the financial
statements of the periods to which
they relate. The thrust of the
aforesaid definition is also on the
determination of periodic revenues
and costs in order to correctly work
out the profits in a given
accounting period for income tax
purposes.

19. The focus of accounting
principles and practices as well as
the income-tax law is to ensure that
only correct or real profits are
worked out in a given accounting
period, i.e., previous year and
brought to tax. In other words, both
the revenues and costs must match
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and relate to the accounting period.
Section 28 of the Income-tax Act
also seeks to achieve the same
object. Section 28 taxes the profits
and gains of the business or
profession of the previous year,
e.g., accounting period which, in
substance, requires matching the
accomplishments (i.e., revenues)
with efforts/costs/expenses
incurred) in a given accounting
period. Both the revenues as well as
costs/expenses relating to a
particular year must be accounted
for in that year itself to arrive
at the correct or real profits.
There is a plethora of authorities,
e.g., Kedarnath Jute Manufacturing
Co. Ltd. v. CIT, 82 ITR 363 (SC) and
Madeva Upendra Sinai v. Union of
India, 98 ITR 209 (SC), etc., for
the proposition that the profits
assessable under section 28 must be
real profits to be ascertained on
ordinary principles of trading and
commercial accounting. If the
assessee is under a liability or
liability has been incurred in
relation to a given period or is
bound to make a certain payment from
the gross profits, the profits and
gains can only be the net amount
after the said liability or amount
is deducted from the gross profits
or receipts.

20. It is evident on bare perusal of
the Information Memorandum of both
the series of DDBs that the
liability towards discount or
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interest was incurred in that very
year in which the DDBs were issued.
The assessee was contractually bound
to discharge it at the time of
maturity of DDBs. The assessee had
no element of discretion in this
behalf. By issuing the debentures at
a discount, the assessee-company
incurred the liability in the year
of issue of debentures to pay the
discount at the time of maturity but
such payment was to secure the
benefit over a number of years. And
therefore such liability was not to
be allowed in its entirety in the
year of issue of DDBs as the entire
liability did not relate to that
year. Here comes the relevance of
matching principle. Since there was
a continuing benefit to the business
of the assessee over the entire
period, the liability was required
to be spread over the entire period
of the DDBs. Besides, there is no
dispute that the funds borrowed
through DDBs were used for the
purposes of the business in the year
under appeal and hence the expenses,
e.g., discount/interest, etc.,
relating thereto would deserve to be
accounted for in and allocated to
the year under appeal on pro-rata
basis. Tested on the aforesaid
principles, the assessee is entitled
to succeed in its claim as the
discount/interest worked out on
proportionate basis not only related
to the accounting period under
appeal but was also incurred to
achieve the accomplishments, i.e.,
the profits of the year under
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appeal. The mere fact that the
impugned liability was to be
discharged at the time of
maturity/redemption of DDBs will not
defeat the claim of the assessee as
the factum of actual payment is
irrelevant in deciding upon the
claim under the accrual system of
accounting
21. Now let us turn to the specific
provisions of law governing the
claim. The focus of Section 37 of
the Income-tax Act is to allow
deduction in respect of any
expenditure not being (i)
expenditure of the nature described
in sections 30 to 36 (ii) personal
expenditure or (iii) capital
expenditure laid out or expended
wholly and exclusively for the
purposes of the business. It is
well-established principle of law
that the claim of the assessee is
liable to be allowed if it satisfies
all the ingredients of the section
which allows the deduction. The
judgment in Madras Industrial
Investment Corporation, 225 ITR 802
(SC) comprehensively examines all
the aforesaid aspects of the case
and lays down the principles
governing such claims. In that case,
the assessee had issued debentures
at a discount on 10th December 1966,
redeemable after 12 years. The issue
price of debenture of Rs.100/- was
Rs.98. The total amount of discount
on the entire issue was Rs.3 lakhs
while the pro-rata discount, i.e.,
the proportionate amount of discount
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for the period of six months ending
with June 30, 1967 was Rs.12,500/-,
taking the period of 12 years which
was the period of redemption and
dividing the total amount of
discount by 12 years. Relevant
propositions laid down by the
Hon'ble Supreme Court in the
aforesaid judgment can be summed up
as under:
(i) 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. The
liability 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.
(ii) The Hon'ble Supreme Court
cited, with approval, the
observations made in India Cements
Ltd., 60 ITR 52 (SC), that (a) the
loan obtained is not an asset or
advantage of an enduring nature; (b)
the expenditure was made for
securing the use of money for a
certain period; and (c) it is
irrelevant to consider the object
with which the loan was obtained.

(iii) By issuing the debentures at a
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discount, the assessee incurs the
liability to pay the discount in the
year of issue of debentures but such
payme is to secure a benefit over a
number of years. Since there is a
continuing benefit to the business
of the assessee over the entire
period, the liability should be
spread over the period of the
debentures.

22. The factual matrix of the case
before us is almost identical with
the one in Madras Industrial
Investment Corporation Ltd. (supra).
In this view of the matter, the law
as laid down in the aforesaid
judgment would squarely cover the
issue involved in the case before us
as well. In the case before us, the
assessee has issued DDBs at a price
lower than their par value/deemed
face value, i.e., the value at which
they were required to be redeemed
upon expiry of redemption period.
The liability towards proportionate
discount incurred by the assessee
was a liability not only in praesen
although it was payable in future
but also related to the accounting
period under appeal. Besides, it was
not only quantifiable but was also
actually quantified by the assessee,
which has not been disputed by the
Department. The matching principle
of accounting also requires that the
expenditure relatable to a
particular year must be allocated to
that year otherwise it would lead to
distortion in profits. The assessee
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is therefore entitled to the
deduction of proportionate amount of
discount in the year under appeal in
terms of the principles laid down in
the aforesaid judgment and for the
reasons aforesaid.
23. Section 36(1)(iii) deals with
the deductibility of interest on
capital borrowed for the purposes of
the business. The only condition
required to be satisfied for
claiming the deduction u/s 36(1)
(iii) is that the claim of interest
should be with reference to the
capital borrowed for the purposes of
the business. As already stated
earlier, there is not even an
allegation by the Department that
the capital was not borrowed for the
purposes of the business. Therefore
the claim of the assessee, which
remans uncontroverted by the
Department, that the capital was
borrowed for the purposes of the
business has to be accepted and is
accordingly accepted. Since the
liability incurred by the assessee
towards interest is with reference
to the borrowed capital utilized for
the purposes of its business in the
year under appeal and also that it
relates to the year under appeal,
the assessee, in our view, is
entitled to succeed in its claim for
deduction on pro-rata basis. We hold
accordingly.

The AO and the learned CIT(A) have
made various other observations in
their respective orders for denying
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the deduction claimed by the
assessee. These are:
(i) The assessee-company is a cash-
rich company;
(ii) There was no need to raise the
funds through DDBs;
(iii) The investors in the DDBs
belong to the same group to which
the assessee belongs;
(iv) The investors in DDBs have not
offered corresponding income to tax
in their respective hands;
(v) Since the assessee did not
deduct the tax at source in terms of
section 193, it could not be allowed
to claim deduction on account of
interest liability;
(vi) Insertion of Clause (iiia) in
section 36 made it abundantly clear
that "pro- rata discount" could be
allowed in respect of Zero Coupon
Bonds alone issued by an
infrastructure capital company or
infrastructure capital fund or
public sector company after 1.6.2005
and therefore such a concession
could not be extended in respect of
earlier assessment years and that
too to the assessee-company which
was neither an infrastructure
company nor a public sector company;
(vii) The device adopted by the
assessee was a tax avoidance device
and therefore such device was to be
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ignored.
25. It is submitted on behalf of the
assessee that all the aforesaid
observations have no direct bearing
on the issue and therefore are not
relevant in deciding upon the claim
of the assessee under section 36(1)
(iii)/37 of the Income-tax. We are
in agreement with the aforesaid
submissions. In our view, the
assessee is entitled to succeed in
its claim for deduction under
section 36(1)(iii)/37 so long as he
fulfils all the conditions
prescribed therein. We have already
held earlier that the assessee not
only satisfies all the conditions
stipulated by the aforesaid
provisions but also that the case of
the assessee is covered by the
principles laid down by the Hon'ble
Supreme Court in Madras Industrial
Investment Corporation (supra).
26. Having held that the assessee is
entitled to proportionately claim
the expenditure towards
discount/interest on the DDBs on
accrual basis in the year under
appeal, we direct the AO to
correctly work out the amount of
deduction to the extent it relates
to the year under appeal. In view of
the foregoing, ground no.3 taken by
the assessee is allowed subject to
the aforesaid observations.”
5.The Hon’ble Supreme Court in case of Madras
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Industrial Investment Corpn. Ltd. v.
Commissioner of Income Tax reported in (1997)
225 ITR 802 (SC) in similar facts has held as
under:
“12. Section 37 (1) further requires
that the expenditure should not be
of a capital nature. In the case of
India Cements Ltd. V/s. Commr. 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/-
towards stamp duty, registration
fees, lawyer's 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. Ltd. V/s.
Commr. 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 in the larger context
of business necessity or expediency.
If the outgoing or expenditure is so
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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 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/s.
William Holtham, (1894) 3 Tax Cas
255, 260 where a mortgage 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 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)
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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 also.
13. Our attention was drawn to the
case of Lomax (Inspector of Taxes)
V/s. Peter Dixon and Son Ltd., a
decision of the English Court of
Appeal reported in (1944) 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 ratio laid down by this Court
in the case of India Cements Ltd.
(AIR 1966 SC 1053) (supra) any
liability incurred for the purpose
of obtaining the loan would be
revenue expenditure.
14. 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. 3,00,000.00 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
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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/s. Commr. of
Income-tax, calcutta -i, (1983) 144
ITR 474 : (1982 Tax LR 2097) 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.
15. Issuing 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
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period. The liability should,
therefore, be spread over the period
of the debentures.
16. The appellant, therefore, had,
in its return, correctly claimed a
deduction only in respect of the
proportionate part of discount of
Rs. 12,500.00 over the relevant
accounting period in question. In
this connection, we agree with the
reasoning and concussion of the
Madhya Pradesh High Court in the
case of M. P. Financial Corporation
V/s. Commissioner of Income-tax,
(1986 Tax LR 171) (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.
17. The appellant is, therefore,
entitled to deduct a sum Rs.
12,500.00 out of the discount of Rs.
3,00,000.00 in the relevant
assessment year. The balance
expenditure of Rupees 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
far as it relates to the deduction
of Rs. 2,87,500.00 in the assessment
year in question though for reasons
entirely different from those given
by the High Court. The second part
of reframed question is answered in
the affirmative. But only a
proportionate part of the discount
can be deducted in the assessment
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year in question as set out earlier.
The appeal is disposed of
accordingly and the Judgement of the
High Court is set aside. There will
be no order as to costs in the
circumstances of the case.”
6. The Hon’ble Supreme Court in case of Taparia Tools
Ltd. v. Joint Commissioner of Income-tax, Nasik
reported in (2015) 372 ITR 605 while considering
similar question 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, after referring to the decision in case
of Madras Industrial Investment Corporation Limited
(supra) has held as under:
“17. 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.
18. What follows from the above is that normally the
ordinary rule is to be applied, namely, revenue
expenditure incurred in a particular year is to be
allowed in that year. Thus, if the assessee claims
that expenditure in that year, the IT Department
cannot deny the same. However, in those cases where
the assessee himself wants to spread the expenditure
over a period of ensuing years, it can be allowed
only if the principle of 'Matching Concept' is
satisfied, which upto now has been restricted to the
cases of debentures.
19. In the instant case, as noticed above, the
assessee did not want spread over of this
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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
accounts 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 accounts are not
determinative or conclusive and the matter is to be
examined on the touchstone of provisions contained
in the Act [See - Kedarnath Jute Manufacturing Co.
Ltd. v. Commissioner of Income Tax (Central),
Calcutta, (1972) 3 SCC 252 ; Tuticorin Alkali
Chemicals & Fertilizers Ltd., Madras v. Commissioner
of Income Tax, Madras, (1997) 6 SCC 117 ; Sutlej
Cotton Mills Ltd. v. Commissioner of Income Tax,
Calcutta, (1978) 4 SCC 358 ; and United Commercial
Bank, Calcutta v. Commissioner of Income Tax, WB-
III, Calcutta, (1999) 8 SCC 338
20. At the most, an inference can be drawn that by
showing this expenditure in a spread over manner in
the books of accounts, 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.
21. In view of the aforesaid discussion, we are of
the opinion that the judgment and the orders of the
High Court and the authorities below do not lay down
correct position in law. The assessee would be
entitled to deduction of the entire expenditure of
Rs. 2,72,25,000 and Rs. 55,00,000 respectively in
the year in which the amount was actually paid. The
appeals are allowed in the aforesaid terms with no
orders as to costs.”
7. In view of above dictum of law and considering the
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findings of fact arrived at by the Tribunal, it is
not in dispute that both the series of Deep Discount
Bonds stipulates that liability towards discount or
interest was incurred in the very year in which such
bonds were issued and the assessee was bound to
discharge it at the time of maturity as per the
contract. It is also not in dispute that the
assessee had no element of discretion and the
liability was incurred in the year of issue of
debentures to pay the discount/interest at the time
of maturity but such payment was to secure the
benefit over a number of years. Therefore, such
liability was rightly claimed by the assessee by
spreading over the entire period of debentures by
applying the matching principle relating to the year
under appeal on pro-rata basis. Accordingly, the
Tribunal has allowed the appeal of the assessee by
allowing the claim of discount/interest worked out
on proportionate basis. Therefore, merely because
the liability was to be discharged at the time of
maturity/redemption of the debentures would not
defeat the claim of the assessee as the factum of
actual payment is irrelevant in deciding upon the
claim under the accrual system of accounting.
8. The Tribunal for the year under consideration has
followed its findings given for the Assessment year
2002-2003 wherein in similar facts, the Tribunal has
applied the decision in case of Taparia Tools Ltd.
(supra) which is reversed by the Hon’ble Apex Court
in facts of the said case but in view of the
decision of Apex Court in case of Madras Industrial
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Investment Corpn. Ltd. (supra), the Tribunal was
justified in holding that the factual matrix of the
case is almost identical with one in case of
Madras Industrial Investment Corpn. Ltd. and as per
the law laid down in the said decision, the
liability towards proportionate discount incurred by
the assessee was a liability not only in present
although it was payable in future but also related
to accounting period under consideration and was
quantified by the assessee. The Tribunal therefore,
followed the matching principle of accounting which
requires that any expenditure relatable to a
particular year must be allocated to that year
otherwise it would lead to distortion in profits and
therefore, held that the assessee was entitled to
deduction of proportionate amount of discount in the
year under appeal.
9. In view of above facts, we are of the opinion that
there is no legal infirmity in the impugned decision
of the Tribunal and the question of law is therefore
answered in favour of the assessee and against the
Revenue.
10. Tax Appeal is accordingly dismissed.
(BHARGAV D. KARIA, J)
(NIRZAR S. DESAI,J)
RAGHUNATH R NAIR
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