ACIT, CHENNAI V. M/s. Venkatanarayana Metal & Realtors Pvt. Ltd., CHENNAI

ITA 1101/CHNY/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81112 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-06-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 14-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: T BANUSEKARC A
• Keywords: Capital asset; Commercial expediency; Revenue expenditure
• Section: 143(3); 37

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL A BENCH, CH ENNAI. . , . !' !' !' !' , # # # # $ $ $ $ BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER & SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO.1101/MDS/2011 ASSESSMENT YEAR : 2008-09 & C.O. NO.115/MDS/2011 [IN I.T.A. NO.1101/MDS/2011 ] THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(4), CHENNAI 600 034. VS. M/S. VENKATANARAYANA METAL & REALTORS PVT. LTD., NO. 4, 1 ST CROSS STREET, R.A. PURAM, CHENNAI 600 028. [PAN : AAACE6589R] (APPELLANT ) (RESPONDENT/CROSS OBJECTOR ) DEPARTMENT BY : SHRI SHAJI P. JACOB, ADDL. CIT ASSESSEE BY : SHRI T. BANUSEKAR, C.A. % & / DATE OF HEARING : 04.06.2014 '( % & /DATE OF PRONOUNCEMENT : 01.08.2014 ) ) ) ) / O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJE CTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) III, CHENNAI, DATED 28.03.2011 RELEVA NT TO THE ASSESSMENT YEAR 2008-09. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S IN THE BUSINESS OF REAL ESTATE AND MANUFACTURER OF STEEL. THE ASSESSEE HAD FILED ITS RETURN OF INCOME I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 2 BY DECLARING TOTAL INCOME OF .64,16,380/-. THE RETURN FILED BY THE ASSESSEE WAS PROCESSED INITIALLY UNDER SECTION 143(1) OF THE ACT. SUBSEQUENTLY, AFTER DUE PROCESS, THE ASSESSMENT WAS COMPLETED UNDER SEC TION 143(3) OF THE ACT BY DETERMINING TOTAL INCOME OF THE ASSESSEE AT .47,74,16,380/-. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER HAS ASKED THE ASSESSEE TO FURNISH VARIOUS DETAILS PARTICULARLY, T HE COSTING OF LAND FOR WHICH DEBENTURES WERE ISSUED AND THE AMORTIZATION EXPENSE S OF PREMIUM ON DEBENTURES. THE ASSESSEE HAS FILED ALL THE DETAILS BEFORE THE ASSESSING OFFICER. BY CONSIDERING THE DETAILS FIELD BY THE AS SESSEE, THE ASSESSING OFFICER HAS OBSERVED THAT (I) THERE ARE TWO DISTI NGUISHABLE TRANSACTIONS ONE IS OF SALE OF LAND FOR WHICH DEBENTURES WERE ISSUED WHEREIN OUT OF 58.44 ACRES ONLY AN EXTENT OF 10.46 ACRES WAS SOLD FOR DL F LTD. FOR .36.6 CRORES. THE SECOND TRANSACTION IS BASICALLY SALE OF LANDS T O GROUP COMPANIES OF DLF LTD. THROUGH INTERMEDIARIES. AS STATED BY THE ASSES SEE, THE TOTAL SALE TO THE DLF GROUP COMPANY WAS 148.96 ACRES FOR A SUM OF .159.44 CRORES. THUS THE TOTAL SALE WAS 195.74 CRORES AND THE ASSESSEE H AD PAID OUT .63.31 CRORES TO THE INTERMEDIARIES AND ARRIVED AT THE TOT AL SALE FIGURE OF .132.21 CRORES WHICH IS CREDITED IN THE PROFIT AND LOSS ACC OUNT; (II) THE ASSESSEE COULD NOT FURNISH THE BOOKS OF ACCOUNTS BUT ONLY SU BMISSIONS WERE MADE DURING THE COURSE OF PROCEEDINGS THAT ALL THE DETAI LS WERE EXTRACTED AND RE- CASTED FROM THE BANK ACCOUNT AND ALL OTHER AVAILABL E DOCUMENTS FOR THE PURPOSE OF ASSESSMENT PROCEEDINGS; (III) IT IS EVID ENT FROM THE ABOVE THAT THE I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 3 MAJORITY OR IN GENERAL, ALL OF THE DEBENTURES WERE ISSUED ONLY TO THE KEY MANAGEMENT PERSONNEL AND THEIR RELATIVES; AND (IV) THE ASSESSEE HAS NOT FURNISHED THE CONFIRMATION FROM THE SUB-REGISTRARS OFFICE (LAND REGISTRATION) ON THE GUIDELINE/MARKET VALUE AND ADOPTION OF COST FOR THE LANDS FOR WHICH DEBENTURES WERE ISSUED. BASED ON THE ABOVE FINDINGS , THE ASSESSING OFFICER HAS AGAIN ASKED THE ASSESSEE TO EXPLAIN THE ALLOWAB ILITY OF EXPENDITURE CLAIMED TOWARDS AMORTIZATION OF PREMIUM ON DEBENTUR ES OF .47.1 CRORES. BEFORE THE ASSESSING OFFICER THE ASSESSEE HAS RELIE D ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTR IAL INVESTMENT CORPORATION LTD. V. CIT (1997) 225 ITR 802. THE ASS ESSEE HAS ALSO SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSE SSEE HAS TO BE ALLOWED EITHER UNDER SECTION 36 OR 37 OF THE INCOME-TAX ACT , 1961. THE ASSESSING OFFICER, AFTER CONSIDERING SECTIONS 36 AND 37 OF TH E INCOME-TAX ACT, 1961, HAS OBSERVED THAT IN THE INSTANT CASE, THE IDEA IS NOT TO PAY BUT ONLY TO ACCOUNT SUCH ALLEGED EXPENSES IN ORDER TO REDUCE IT S PROFITABILITY WHICH IS AGAINST THE COMMERCIAL PRUDENCE. THE SCHEME ADOPTED BY THE ASSESSEE BY ISSUING ZERO INTEREST DEBENTURES/ COUPONS REDEEMABL E AFTER TEN YEARS, THAT TOO SUCH DEBENTURES WERE ISSUED ONLY TO THE DIRECTO RS AND HIS RELATIVES WHICH CLEARLY INDICATES THAT THE IDEA OF THE ASSESS EE IS NOT TO SPEND OR PAYOUT AND INTENDED TO DISGUISE THE TERM ASCERTAINE D LIABILITY BUT ACTUALLY IT IS OF LIABILITY OF THE FUTURE. THE ASSESSING OFFICER H AS DISALLOWED THE ENTIRE CLAIM I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 4 OF .47,10,00,000/- DEBITED IN THE PROFIT AND LOSS ACCO UNT AND COMPLETED THE ASSESSMENT BY GIVING FOLLOWING REASONS: I. IT IS NOT EXPENDITURE OF IN NATURE WHICH IS OF (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36). THE NATURE OF EXPENDITURE IS CLEARLY COVERED/DESCRIBED U/S 36 AND THE ASSESSEE DOES NOT FIT INTO IT AS DISCUSSED EARLIER. THE EMPHASIS TO BE GIVEN TO THE WORD NOT BEING THE EXPENDITURE OF THE NATURE DESCRIBED IN SEC. 30 TO 36. II. THE ASSESSEES CASE CANNOT BE ACCEPTABLE EITHE R U/S 36 OR 37. THE ASSESSEE ITSELF DOES KNOW UNDER WHAT SECTION SAID EXPENDITUR E DESERVES ALLOWANCE. III. THE AMORTIZATION OF EXPENDITURES WERE CLEARLY AND EXCLUSIVELY ENUMERATED ONLY IN OTHER PROVISIONS OF THE ACT I.E. 35D, 35DD & 35DDA AND THAT TOO FOR SPECIFIED EXPENSES DETAILED THEREIN. IV. NONE OF THE PROVISIONS OF THE INCOME TAX ACT A LLOWS SUCH AMORTIZATION AS THE ASSESSEE CLAIMED. V. IT IS EVIDENT THAT THE ASSESSEE CREATED SUCH LI ABILITY TO ADOPT SUCH HIGH PREMIUMS ON ZERO INTEREST COUPONS/DEBENTURES AND AL SO THE INTENTION IS TO FOREBEAR AND NOT TO PAY AT THE TIME OF ACCOUNTING S UCH ALLEGED EXPENDITURE. VI. THE ASSESSEES RELIANCE ON IN THE CASE OF MADR AS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CIT [1997] 91 TAXMAN 340/225 IT R 802 IS DISTINGUISHABLE FROM THE FACTS AND CIRCUMSTANCES OF THE CASE. VII. THE ASSESSEE'S INTENTION AND ACCOUNTING OF SUC H EXPENSES ARE IN CONTRADICTION IN LIGHT OF THE PRINCIPLES LAID DOWN IN THE CASE LA WS REFERRED IN 41 ITR 350 (SC)& 41 ITR 350 (SC). VIII. IN THE INSTANCE CASE, NOTHING HAD GONE IRRET RIEVABLY SINCE SUCH DEBENTURES WERE ISSUED ONLY TO THE DIRECTORS AND THEIR RELATIV ES WHO ARE SHAREHOLDERS HAVING INTEREST. THE INTENTION OF THE ASSESSEE IS N OT PAY BUT ALSO TO CLAIM EXPENDITURE TO DISGUISE THE PROVISIONS OF THE ACT. IX. IT IS IMPORTANT TO LOOK AT THE IDEA OF SPENDIN G OR PAYING OUT. IN THE INSTANCE CASE, THE IDEA IS NOT TO PAY BUT ONLY TO ACCOUNT SU CH ALLEGED EXPENSES IN ORDER TO REDUCE ITS PROFITABILITY WHICH IS AGAINST THE CO MMERCIAL PRUDENCE. THE SCHEME ADOPTED BY THE ASSESSEE BY ISSUING ZERO INTE REST DEBENTURES/COUPONS REDEEMABLE AFTER TEN YEARS, THAT TOO SUCH DEBENTURE S WERE ISSUED TO ONLY THE DIRECTORS; AND HIS RELATIVES WHICH CLEARLY INDICATE S THAT THE IDEA OF THE I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 5 ASSESSEE IS NOT TO SPEND OR PAYOUT AND INTENDED TO DISGUISE THE TERM ASCERTAINED LIABILITY BUT ACTUALLY IT IS OF LIABILI TY OF THE FUTURE. X. THE ASSESSEE'S PLEA OF PAYOUT AT THE TIME MAKIN G PROFIT DOES NOT HOLD ANY WATER SINCE THERE IS ALSO POSSIBILITY OF MAKING LOS SES. THE ASSESSEE, TREATMENT OF ISSUING DEBENTURES REDEEMABLE AFTER 10 YEARS THA T TO SHAREHOLDERS, DIRECTORS AND THEIR FAMILY MEMBERS IS ONLY TO DISGU ISE THE PROVISIONS. IF IT IS REAL INTENTION OF PASSING THE REAL BENEFITS TO THE DEBENTURE HOLDERS, THEN THE ASSESSEE WOULD HAVE RESORTED TO PROPORTIONATE EQUIT Y PARTICIPATION SINCE ALL THE INTERESTED PARTIES ARE OF SHAREHOLDERS/DIRECTOR S IN THE COMPANY OR THEIR RELATIVES. XI. IT IS IMPORTANT TO LOOK AT THE IDEA OF SPENDING OR PAYING OUT. IN THE INSTANCE CASE, THE IDEA IS NOT TO PAY BUT ONLY TO ACCOUNT SU CH ALLEGED EXPENSES IN ORDER TO REDUCE ITS PROFITABILITY WHICH IS AGAINST THE CO MMERCIAL PRUDENCE. THE SCHEME ADOPTED BY THE ASSESSEE BY ISSUING ZERO INTE REST DEBENTURES/COUPONS REDEEMABLE AFTER TEN YEARS, THAT TOO SUCH DEBENTURE S WERE ISSUED TO ONLY THE DIRECTORS AND HIS RELATIVES WHICH CLEARLY INDICATES THAT THE IDEA OF THE ASSESSEE IS NOT TO SPEND OR PAYOUT AND INTENDED TO DISGUISE THE TERM ASCERTAINED LIABILITY BUT ACTUALLY IT IS OF LIABILI TY OF THE FUTURE. XII. IT IS ALSO EVIDENT THAT THE ASSESSEE HAD SOLD ONLY A PORTION LAND FOR WHICH THE DEBENTURES WERE ISSUED. I.E. 10.46 ACRES OUT OF 58. 44 ACRES OF LAND FOR A SUM OF RS.36.6 CRORE WHEREAS THE ASSESSEE HAD CLAIMED R S.47 CRORE AS EXPENDITURE BY WAY OF AMORTIZATION WHICH CLEARLY VI OLATES THE PRINCIPLE OF MATCHING. THERE IS NO MATCHING REVENUE FOR THE EXPE NDITURE CLAIM OF THE ASSESSEE. XIII. IT IS IMPORTANT TO LOOK AT THE IDEA OF SPEND ING OR PAYING OUT. IN THE INSTANCE CASE, THE IDEA IS NOT TO PAY BUT ONLY TO ACCOUNT SU CH ALLEGED EXPENSES IN ORDER TO REDUCE ITS PROFITABILITY WHICH IS AGAINST THE CO MMERCIAL PRUDENCE. THE SCHEME ADOPTED BY THE ASSESSEE BY ISSUING ZERO INTE REST DEBENTURES/COUPONS REDEEMABLE AFTER TEN YEARS, THAT TOO SUCH DEBENTURE S WERE ISSUED TO ONLY THE DIRECTORS AND HIS RELATIVES WHICH CLEARLY INDICATES THAT THE IDEA OF THE ASSESSEE IS NOT TO SPEND OR PAYOUT AND INTENDED TO DISGUISE THE TERM ASCERTAINED LIABILITY BUT ACTUALLY IT IS OF LIABILI TY OF THE FUTURE. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFOR E THE LD. CIT(APPEALS). IT WAS SUBMITTED BEFORE THE LD. CIT(A PPEALS) THAT THE ISSUE OF DEBENTURES IS GENUINE AND THE AFORESAID CLAIM IS AL LOWABLE EXPENDITURE. THE I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 6 VALUE OF AMORTIZED PREMIUM IS COST OF BORROWING AS PER THE AS16 AND HENCE IT IS AN ALLOWABLE EXPENDITURE. HE FURTHER SUBMITTE D THAT THE ASSESSMENT IS BASED ON SURMISES AND SUSPICION ONLY AND THE ASSESS ING OFFICER SHOULD NOT HAVE DISALLOWED THE EXPENDITURE MERELY BECAUSE IT W AS INCURRED IN TRANSACTIONS WITH DIRECTOR AND HIS RELATIVES. THE L D. COUNSEL FOR THE ASSESSEE HAS STRONGLY RELIED ON THE DECISION IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CIT 225 ITR 802 (SC) . BEFORE THE LD. CIT(APPEALS), THE LD. COUNSEL FOR THE ASSESSEE HAS FURNISHED POINT-WISE REBUTTAL OF THE REASONS GIVEN BY THE ASSESSING OFFI CER IN THE ASSESSMENT ORDER AND THE SAME ARE REPRODUCED AS UNDER: S. NO. REASONS GIVEN BY AO FOR DISALLOWANCE APPELLANTS CONTENTION 1. IT IS NOT AN EXPENDITURE OF IN NATURE WHICH IS OF (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36.) THE NATURE OF EXPENDITURE IS CLEARLY COVERED/DESCRIBED U/S 36 AND THE ASSESSEE DOES NOT FIT INTO IT AS DISCUSSED EARLIER. THE EMPHASIS TO BE GIVEN TO THE WORD 'NOT BEING THE EXPENDITURE OF THE NATURE DESCRIBED IN SEC 30 TO 36. THE AO FAILED TO APPRECIATE THAT DEBENTURES WERE ISSUED PARTLY FOR PAYMENTS ACTUALLY RECEIVED AND PARTLY FOR SETTLEMENT OF DUES TOWARDS PURCHASE OF STOCK IN TRADE (LANDS).THE EXPENDITURE INCURRED TOWARDS THE DEBENTURES ISSUED AGAINST PAYMENTS RECEIVED IS CLEARLY ADMISSIBLE U/S 36 OF INCOME TAX ACT 1961 (ACT) AND FOR THE BALANCE AMOUNT IT IS ALLOWABLE U/S 37 AS DISCUSSED BELOW. 2. THE ASSESSEE'S CASE CANNOT BE ACCEPTABLE EITHER U/S 36 OR U/S 37. AS ALREADY MENTIONED THE INTEREST PAYABLE IN RESPECT OF ASSETS ACQUIRED BY THE ASSESSEE AND RENDERING ITSELF LIABLE FOR THE BALANCE UNPAID AMOUNT, THE INTEREST THEREON IS ALLOWABLE U/S 37 OF THE ACT AS IS LAID DOWN BY THE SUPREME COURT IN BOMBAY STEAM NAVIGATION CO (1953) VS CIT [1956] 561 ITR 52 WHICH DECISION WAS SINCE THEN FOLLOWED BY A NUMBER OF COURTS INCLUDING THE BOMBAY HIGH COURT IN (1999) 237 ITR BOM. 3. THE AMORTIZATION OF EXPENDITURE WERE CLEARLY AND EXCLUSIVELY ENUMERATED ONLY IN OTHER PROVISIONS OF THE ACT LE. 350, 3500 & 3500A AND THAT TOO FOR SPECIFIED EXPENSES DETAILED THEREIN. THE ASSESSEE SUBMITS THAT ITS CLAIM IS U/S 36 AND 37 AND NOT UNDER ANY OTHER SECTIONS REFERRED TO BY THE AO. I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 7 4. NONE OF THE PROVISIONS OF THE INCOME TAX ACT ALLOWS SUCH AMORTIZATION AS THE ASSESSEE CLAIMED. THE CLAI M OF THE APPELLANT IS ALLOWABLE UNDER THE ABOVE SECTIONS LE SECTIONS 36 & 37 AS HAD BEEN HELD BY THE SUPREME COURT IN MADRAS INDUSTRIAL INVESTMENT CORPN. LTD VS CIT 225 ITR 802 (SC) AND RESPECTIVELY FOLLOWED BY THE MADRAS HIGH COURT IN CIT V. ASHOK LEYLAND LTD, 297 ITR MAD 5. IT IS EVIDENT THAT THE ASSESSEE CREATED SUCH LIABILITY TO ADOPTING SUCH HIGH PREMIUMS ON ZERO INTEREST COUPON / DEBENTURES. ALSO, THE INTENTION IS TO FOREBEAR AND NOT TO PAY AT THE TIME OF ACCOUNTING SUCH ALLEGED EXPENDITURE. THE ASSESSEE'S RELIANCE ON THE DECISION OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS CIT[1997]9LTAXMAN 340 / 225 ITR.802 (SC) IS DISTINGUISHABLE FROM THE FACTS AND CIRCUMSTANCES OF THE CASE. THE APPELLANT SUBMITS THAT THE ISSUANCE OF DEBENTURES WAS BASED ON GENUINE BUSINESS CONSIDERATIONS AND UPON TERMS WHICH ARE REASONABLE. THE DEBENTURES WERE ISSUED IN THE EARLIER YEAR WHEN THE APPELLANT HAD NO TAX LIABILITY. THE APPELLANT COULD NOT HAVE ANTICIPATED AT THE TIME OF ISSUANCE OF DEBENTURES, THE PROFITS IT EARNED DURING THE ASST YEAR IN QUESTION (200809). THEREFORE THE AO'S CONCLUSION IN THIS REGARD IS ERRONEOUS AND IS BASED ON SURMISES AND SUSPICIONS AND NOT BASED ON FACTS. THE DECISION IN THE CASE OF MADRAS INDUSTRIAL CORPORATION LTD . VS CIT 225 ITR 802 (SC) BY THE SUPREME COURT IS SQUARELY APPLICABLE IN SO FAR AS IS APPLICABLE TO AMORTIZATION OF PREMIUM ON DEBENTURES. THIS IS PATENT AND EVIDENT. IN ANY CASE THE AO HAS NOT CHOSEN TO EXPLAIN HOW THE DECISION OF SUPREME COURT IN THE ABOVE CASE IS NOT APPLICABLE TO THE APPELLANT. THE AO ALSO OVERLOOKED THE ACCOUNTING STANDARD 16 BORROWING COSTS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE ABOVE ACCOUNTING STANDARD 'RECOGNIZES THAT FINANCE CHARGES INCURRED ARE TO BE TREATED AS BORROWING COSTS AND SHOULD BE RECOGNIZED AS EXPENDITURE IN THE PERIOD IN WHICH THEY ARE INCURRED. THE APPELLANT ALSO WISHES TO DRAW THE ATTENTION OF CIT (APPEALS) TO THE FACT THAT SECTION 2(28)(A) COVERS ALL INTEREST IN RESPECT OF ALL DEBTS INCURRED. IN VIEW OF THE FOREGOING THE APPELLANT'S CLAIM FOR ALLOWANCE OF AMORTIZATION PREMIUM SHOULD BE ALLOWED BOTH U/S 36 & 37. 6. THE ASSESSEE'S INTENTION AND ACCOUNTING OF SUCH EXPENSES ARE IN CONTRADICTION IN LIGHT OF THE PRINCIPLES LAID DOWN IN THE CASE LAWS REFERRED IN 41 ITR 350 (SC) THE CASE LAW REFERRED TO BY THE AO IS NOT RELEVANT TO THE CASE BEFORE CIT (APPEALS) BOTH IN LAW AS WELL AS ON FACTS OF THE CASE. 7. IN THE INSTANT CASE, NOTHING HAD GONE IRRETRIEVABLY SINCE SUCH DEBENTURES WERE THE AO FAILED TO APPRECIATE THAT THE ISSUANCE OF DEBENTURES IN PART SETTLEMENT OF DUES TOWARDS I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 8 ISSUED ONLY TO THE DIRECTOR S AND THEIR RELATIVES WHO ARE SHAREHOLDERS HAVING INTEREST. THE INTENTION OF THE ASSESSEE IS NOT TO PAY BUT ALSO TO CLAIM EXPENDITURE TO DISGUISE THE PROVISIONS OF THE ACT. IT IS IMPORTANT TO LOOK AT THE IDEA OF SPENDING OR PAYING OUT. IN THIS INSTANCE CASE, THE IDEA IS NOT TO PAY BUT ONLY TO ACCOUNT SUCH EXPENSES IN ORDER TO REDUCE ITS PROFITABILITY WHICH IS AGAINST THE COMMERCIAL PRUDENCE. THE SCHEME ADOPTED BY THE ASSESSEE BY ISSUING ZERO INTEREST DEBENTURES/COUPONS REDEEMABLE AFTER TEN YEARS, THAT TOO SUCH DEBENTURES WERE ISSUED ONLY TO THE DIRECTORS AND RELATIVES WHICH CLEARLY INDICATES THE IDEA OF THE ASSESSEE IS NOT TO SPEND OR PAYOUT AND INTENDED TO DISGUISE THE TERM ASCERTAINED LIABILITY BUT ACTUALLY IT IS OF LIABILITY OF THE FUTURE. THE ASSESSEE'S PLEA OF PAYOUT AT THE TIME MAKING PROFIT DOES NOT HOLD ANY WATER SINCE THERE IS ALSO POSSIBILITY OF MAKING LOSSES. THE ASSESSEE TREATMENT OF ISSUING DEBENTURES REDEEMABLE AFTER 10 YEARS THAT TO SHAREHOLDERS, DIRECTORS AND THEIR FAMILY MEMBERS IS ONLY TO DISGUISE THE PROVISIONS. IF IT IS REAL INTENTION OF PASSING THE REAL BENEFITS TO THE DEBENTURE HOLDERS, THEN THE ASSESSEE WOULD HAVE RESORTED TO PROPORTIONATE EQUITY PARTICIPATION SINCE ALL THE INTERESTED PARTIES ARE OF SHAREHOLDERS/DIRECTORS IN THE COMPANY OR THEIR RELATIVES. PURCHASE OF LANDS. THE TRANSACTIONS WERE GENUINE AND THE TERMS WERE REASONABLE. THE TRANSACTION TOOK PLACE IN THE EARLIER YEAR WHEN THERE WAS NO NECESSITY FOR THE APPELLANT TO RESORT TO ANY TAX PLANNING. THE AO ALSO FAILED TO APPRECIATE THAT THE TRANSACTION INVOLVED ACTUAL PAYMENT OF AS MUCH AS RS.47.58 CRORES. THE APPELLANT HAD ALSO REALIZED AS MUCH AS RS.36.6 CRORES BY SALE OF LANDS PURCHASED UNDER TRANSACTIONS IN QUESTION. IT IS NOT THE CONTENTION OF THE AO THAT THE TRANSACTION WAS VITIATED BY FRAUD. THE SUPREME COURT IN 1951] 020 ITR 0001 IS CLEARLY APPLICABLE TO THE CASE BEFORE US. THE SUPREME COURT IN S. A. BUILDERS LTD. V CIT ([2007] 288 ITR 0001X) HAS HELD THAT IT HAS BEEN CONSISTENTLY HELD IN THE DECISIONS RELATING TO SECTION 37 THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. 'THE MADRAS HIGH COURT HAS HELD THAT THE APPARENT IS TRUE IN THE ABSENCE OF STRONG EVIDENCES TO THE CONTRARY (1968) 068 ITR 786). THE APPELLANT HAS INCURRED SUCH A LIABILITY BASED ON THE PRINCIPLES OF ACCOUNTING AS PRONOUNCED BY THE ICAI VIDE AS 16 REFERRED TO ABOVE AS WELL AS BY THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN MADRAS INDUSTRIAL INVESTMENT CORPN. LTD VS. CIT 225 ITR 802 (SC). HE ALSO FAILED TO APPRECIATE THAT THE DEBENTURES WERE ISSUED NOT ONLY TO THE DIRECTORS AND TO THEIR RELATIVES BUT ALSO TO THE THIRD PARTIES. THE AO'S CONTENTIONS ARE BASED ON THE ASSUMPTIONS WHICH ARE CONTRARY TO THE VARIOUS FACTS SUCH AS PASSING OF THE RESOLUTION UNDER COMPANIES ACT, 1956 AND FILING OF DOCUMENTS WITH STATUTORY AUTHORITIES AND ACQUIRING OF INTEREST IN VALUABLE LANDED PROPERTIES ON COMMERCIALLY ACCEPTABLE TERMS. IN ANY CASE THE AO'S ACTIONS ON THIS REGARD BASED ON CONJECTURES AND ASSUMPTIONS IS CONTRARY TO LAW AS IS LAID DOWN BY THE SUPREME COURT IN CIT VS. RAWTMULL 87 ITR 349. WITHOUT PREJUDICE IT IS ALSO SUBMITTED THAT MERE FACT THAT SOME OF THE PARTIES INVOLVED ARE THE DIRECTORS AND RELATIVES WILL NOT BY ITSELF RENDER THE TRANSACTION INVALID. THE AO ALSO FAILED TO APPRECIATE THAT THE DIRECTORS AND THE RELATIVES ARE ONLY MINORITY SHAREHOLDERS IN THE APPELLANT COMPANY HOLDING I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 9 ONLY 5.19% OF THE TOTAL SHARE CAPITAL. THE AO FAILED TO APPRECIATE THAT THE DEBENTURES ISSUED ARE CONVERTIBLE DEBENTURES, THUS CONFERRING ONTO THE HOLDERS THE RIGHT TO CONVERT THE DEBENTURES INTO SHARES THEREBY ALLOWING THEM TO PARTICIPATE IN THE PROSPERITY OF THE COMPANY. 8. IT IS ALSO EVIDENT THAT THE ASSESSEE HAD SOLD ONLY A PORTION LAND FOR WHICH THE DEBENTURES WERE ISSUED I.E. 10.46 ACRES OUT OF 58.44 ACRES OF LAND FOR A SUM OF. RS. 36.6 CRORES WHEREAS THE ASSESSEE HAD CLAIMED RS. 47 CRORES AS EXPENDITURE BY WAY OF AMORTIZATION WHICH CLEARLY VIOLATES THE PRINCIPLE OF MATCHING. THERE IS NO MATCHING REVENUE FOR THE EXPENDITURE CLAIM OF THE ASSESSEE. THE PRINCIPLE OF MATCHING THE REVENUE WITH EXPENDITURE DOES NOT APPLY TO INTEREST COSTS INCURRED FOR THE PURPOSES OF ACQUIRING WORKING CAPITAL ASSETS. THIS IS CLEARLY EVIDENT BY THE AS - 16 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WHEREBY FINANCE COSTS ARE TO BE ACCOUNTED FOR IN THE YEAR IN WHICH IT WAS ACCRUED. IT IS SUBMITTED THAT THE AO'S STAND IN THIS REGARD ARE CONTRARY TO THE PRINCIPLES OF LAW AND ACCOUNTING. 4. THE LD. CIT(APPEALS), AFTER CONSIDERING THE EXP LANATION AND ALSO PARA- WISE REASONS GIVEN BY THE ASSESSEE, ALLOWED THE GRO UND RAISED BY THE ASSESSEE AND THE RELEVANT PORTION OF THE ORDER IS E XTRACTED AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSION OF THE LD. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AO AND AR. AS REGARDS THE GENUINENESS OF THE TRANSACTIONS, THERE IS NOTHING IRREGULAR IN THE SCHEME OF ISSUE OF DEBENTURES. THE LAND PURC HASED BY THE APPELLANT CONSTITUTES ITS STOCK-IN-TRADE. THE PROFITS OFFERED TO TAXATION HAS EMANATED FROM THE SALE OF LAND WHICH WAS ACQUIRED BY THE APP ELLANT AND WITHOUT ISSUE OF DEBENTURES, IT COULD NOT HAVE ACQUIRED THE SAID LAND. THEREFORE, SUBJECTING THE RECEIPT ON SALE OF LAND TO TAX WITHOUT ACCEPTIN G THE SOURCE OF ACQUISITION OF THE STOCK-IN-TRADE IS NOT CORRECT. THOUGH SUBSTA NTIAL PORTION OF THE DEBENTURES WERE ISSUED TO THE DIRECTORS AND THEIR R ELATIVES, IT IS NOT PROPER TO TREAT THEM AS DISGUISED TRANSACTIONS ONLY ON THE GR OUND THAT THE OWNERS OF LAND HAPPENED TO BE THE DIRECTORS AND THEIR RELATIV ES. IT IS SEEN FROM THE LIST OF SHARE HOLDERS THAT THE DIRECTORS AND THEIR RELATIVE S HOLD ONLY 5.19 PER CENT OF THE TOTAL SHARES. FURTHER, ISSUE OF DEBENTURES IS A N ACCEPTED WAY OF BORROWING. THE ISSUE OF DEBENTURES TO DISCHARGE THE BALANCE AMOUNT OF PAYMENT IS NOT PROHIBITED BY ANY PROVISION OF LAW U NDER THE INCOME-TAX OR ANY OTHER ACT. THE APPELLANT HAS INFORMED THAT THE RATE ADOPTED TO ISSUE TO DEBENTURES WAS 13.5 PER CENT WHICH IS VERY REASONAB LE WHEN COMPARED WITH THE RATE OF BORROWAL FROM VARIOUS PUBLIC AND PRIVAT E FINANCIAL INSTITUTIONS. IN FACT RATES OF INTEREST CHARGED BY THE BANKS WERE MU CH HIGHER THAN THE RATE OF 13.5 PER CENT APPLIED BY THE APPELLANT. THE AO HAS NOT BROUGHT ON RECORD ANY I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 10 MATERIAL OR HAS NOT GIVEN ANY COGENT REASON THAT BY ISSUE OF THESE DEBENTURES, THE APPELLANT HAD SUPPRESSED PROFITS. THE AO'S ASSE RTION THAT THE TRANSACTION IS A TAX PLANNING / AVOIDANCE DEVICE IS THEREFORE N OT ESTABLISHED IN THE ORDER. HIS CONCLUSION IS BASED ON MERE ASSUMPTION AND SUSP ICION. THE SUPREME COURT IN THE CASE OF LALCHAND BHAGAT AMBICA RAM V. CIT, 37 ITR 288 HELD THAT THE TAXATION PROCEEDINGS CONCLUDED BY INDULGIN G IN SUSPICION, CONJECTURES AND SURMISES AND ACTED WITHOUT ANY EVID ENCE OR UPON A VIEW OF THE FACTS WHICH COULD NOT REASONABLY BE ENTERTAINED IS BAD IN LAW. THEREFORE, I AGREE WITH THE CONTENTION OF THE APPELLANT THAT T HE TRANSACTIONS WERE GENUINE AND WERE UNDERTAKEN IN THE BUSINESS INTERES T OF THE APPELLANT. 6.1 THE SECOND ISSUE INVOLVES THE CLAIM OF AMORTIZ ATION OF PREMIUM ON DEBENTURES. THE AO HAS HELD THAT DEBENTURES ARE NOT BORROWALS AND THEREFORE THE COST OF BORROWAL IS NOT ALLOWABLE EITHER U/S 36 (1)(III) OR U/S 37. SUCH A VIEW IS NOT CORRECT. IN LAW, A DEBENTURE IS A DOCUM ENT THAT EITHER CREATES A DEBT OR ACKNOWLEDGES IT. A DEBENTURE IS AN INSTRUME NT OF DEBT EXECUTED BY THE COMPANY ACKNOWLEDGING ITS OBLIGATION TO REPAY THE S UM AT A SPECIFIED DATE AND ALSO CARRYING AN INTEREST. IT IS ONLY ONE OF TH E METHODS OF RAISING THE LOAN FOR THE COMPANY. A DEBENTURE IS THUS LIKE A CERTIFI CATE OF LOAN OR A LOAN BOND EVIDENCING THE FACT THAT THE COMPANY IS LIABLE TO P AY A SPECIFIED AMOUNT WITH INTEREST AND ALTHOUGH THE MONEY RAISED BY THE DEBEN TURES BECOMES A PART OF THE COMPANY'S CAPITAL STRUCTURE, IT DOES NOT BECOME SHARE CAPITAL. IT IS, THEREFORE, CLEAR THAT DEBENTURE PARTAKES THE CHARAC TER OF LOAN AND COST OF BORROWAL IS AN ALLOWABLE EXPENDITURE. AS STATED EAR LIER, THE APPELLANT HAS ISSUED THE DEBENTURES PARTLY FOR PAYMENTS RECEIVED BY CHEQUE AND PARTLY FOR UNPAID PURCHASE CONSIDERATION. THE DIFFERENCE BETWE EN THE ISSUE PRICE AND THE REDEMPTION PRICE, BEING DISCOUNT I PREMIUM FALL S UNDER THE DEFINITION OF INTEREST AS PER SECTION 2(28A) OF THE ACT. IT READS AS UNDER: 'INTEREST MEANS INTEREST IN ANY MANNER IN RESPECT O F ANY MONEYS PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORR OWED OR DEBT INCURRED (INCLUDING A DEPOSIT, CLAIM OR OTHER SIMIL AR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER C HARGE IN RESPECT OF THE MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILIZED.' HENCE, THE CLAIM MADE BY THE APPELLANT, BEING INTER EST I CHARGE FOR DEBT INCURRED, IS COVERED UNDER THE ABOVE DEFINITION OF INTEREST AND IS ALLOWABLE U/S 36 OR 37 OF THE ACT. 6.2 THE POWER TO ISSUE DEBENTURES CAN BE EXERCISED ON BEHALF OF THE COMPANY AT A MEETING OF THE BOARD OF DIRECTORS [SEC TION 292(1)(B)] OF THE COMPANIES ACT]. A PUBLIC COMPANY MAY, HOWEVER, REQU IRE THE APPROVAL OF I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 11 SHAREHOLDERS TO BORROW MONEY IN EXCESS OF THE AGGRE GATE OF ITS PAID UP CAPITAL AND FREE RESERVES.[SECTION 293 (1) (D)]. CO NSENT OF THE SHAREHOLDERS WOULD ALSO BE REQUIRED FOR SELLING, LEASING OR DISP OSING OF THE WHOLE OR SUBSTANTIALLY THE WHOLE OF THE UNDERTAKING OF THE C OMPANY UNDER SECTION 293 (1) (A). DEBENTURES HAVE BEEN DEFINED UNDER SECTION 2 (12) OF THE COMPANIES ACT TO INCLUDE DEBENTURE STOCKS, BONDS AND ANY OTHE R SECURITIES OF THE COMPANY WHETHER CONSTITUTING A CHARGE ON THE COMPAN Y'S ASSETS OR NOT. 6.3 FROM THE RECORDS PRODUCED BY THE APPELLANT IN THE FORM OF (I) MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF THE APP ELLANT COMPANY DATED 01.08.2006; (II) NOTICE TO CONVENE AN EGM TO RESOLV E THE ISSUE OF DEBENTURES DATED 01.09.2006; (III) MINUTES OF THE EGM OF SHARE HOLDERS DATED 01.09.2006; (IV) MINUTES OF THE MEETING OF THE BOAR D OF DIRECTORS DATED 01.09.2006; (V) COPY OF THE FORM NO23 FILED WITH R OC; (VI) MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS DATED 01.03.2007; (VII) NOTICE TO CONVENE AN EGM ON 31.03.2007 TO RESOLVE THE ISSUE OF DEBENT URES; (VIII) COPY OF THE EXTRACT OF THE MINUTES OF EGM AND MEETING OF BOARD OF DIRECTORS DATED 31.03.2007 AND; (IX) COPY OF THE FORM NO23, 23AC A ND 20B AND ITS ADDITIONAL ATTACHMENTS FILED WITH ROC, IT IS CLEAR THAT THE TRANSACTIONS INVOLVING ISSUE OF DEBENTURES HAVE FOLLOWED THE DUE PROCEDURE LAID DOWN UNDER THE COMPANIES ACT 1956. FURTHER, ALL THE ATTR IBUTES OF A DEBENTURE ARE ALSO FOUND IN THE INSTANT CASE AND, THEREFORE, THER E IS NOTHING CONTRARY TO ESTABLISH THAT THE DEBT HAD NOT BEEN CREATED. 6.4. THE AO HAD FURTHER HELD THAT IN ORDER TO CLAIM AN EXPENDITURE, THE EXPENDITURE NEEDS TO HAVE BEEN PAID OUT AND HE HAD DISALLOWED THE CLAIM OF AMORTIZATION OF PREMIUM BY TREATING IT AS ONLY A FU TURE LIABILITY TO SATISFY AN OBLIGATION BY THE ASSESSEE. SINCE IT DOES NOT INVOL VE SPENDING OR PAYING OUT OR PAYING AWAY, DRAWING STRENGTH FROM THE DECISIONS IN THE CASES OF CIT V. NAINITAL BANK LTD (1966) 62 ITR 638 (SC) , MYSORE K IRLOSKAR LTD V. CIT (1987) 30 TAXMAN 467 (KAR) AND B. K. KHANNA & CO.(P ) LTD V. CIT (2000) 113 TAXMAN 164 (DELHI), HE DID NOT ALLOW THE APPELL ANT'S CLAIM. THE CASES CITED ARE NOT DIRECTLY ON THE ISSUE AND HAVE NO REL EVANCE IN THE APPELLANT'S CASE SINCE THOSE DECISIONS WERE ADJUDICATED ON THE CLAIM OF UNASCERTAINED LIABILITY OR CONTINGENT LIABILITY. SOME OF THESE PR INCIPLES HAVE BEEN EXPLAINED BY THE HON'BLE SUPREME COURT IN INDIAN MOLASSES CO. (PRIVATE) LTD. V. COMMISSIONER OF INCOME-TAX (1959) 371TR 66, WHEREIN IT HAS BEEN OBSERVED (AT PAGES 75 AND 76): THE INCOME-TAX LAW DOES NOT ALLOW AS EXPENSES ALL THE DEDUCTIONS A PRUDENT TRADER WOULD MAKE IN COMPUTING HIS PROFITS. THE MONEY MAY BE EXPENDED ON GROUNDS OF COMMERCIAL EXPEDIENCY BUT NOT OF NECESSITY. THE TEST OF NECESSITY IS WHETHER THE INT ENTION WAS TO EARN I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 12 TRADING RECEIPTS OR TO AVOID FUTURE RECURRING PAYME NTS OF A REVENUE CHARACTER. EXPENDITURE IN THIS SENSE IS EQUAL TO DI SBURSEMENT WHICH, TO USE A HOMELY PHRASE, MEANS SOMETHING WHICH COMES OU T OF THE TRADER'S POCKET. THUS, IN FINDING OUT WHAT PROFITS THERE BE, THE NORMAL ACCOUNTANCY PRACTICE MAY BE TO ALLOW AS EXPENSE ANY SUM IN RESPECT OF LIABILITIES WHICH HAVE ACCRUED OVER THE ACCOUNTI NG PERIOD AND TO DEDUCT SUCH SUMS FROM PROFITS. BUT THE INCOME-TAX L AW DOES NOT TAKE EVERY SUCH ALLOWANCE AS LEGITIMATE FOR PURPOSES OF TAX. A DISTINCTION IS MADE BETWEEN AN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WHICH, FOR THE TIME BEING, IS ONLY CONTINGENT. THE FORMER IS DEDUCTIBLE BUT NOT THE LATTER. AS LAID DOWN IN THE CASE OF INDIAN MOLASSES CO.(PRI VATE) LTD (SUPRA) THE AMOUNT DUE TOWARDS THE VALUE OF AMORTIZATION OF PRE MIUM ON DEBENTURES IS AN ASCERTAINED LIABILITY IN PRAESENTI TO BE PAID IN FUTURO. IT IS NOT A LIABILITY DE FUTURO, AND THEREFORE NEEDS TO BE ALLOWED IN MERCAN TILE SYSTEM OF ACCOUNTING. RELIANCE IS PLACED ON THE DECISION OF THE APEX COUR T IN THE CASE OF CALCUTTA CO. LTD. V. CIT (1959) 37 ITR 1 WHICH HELD AS UNDER : 'INASMUCH AS THE LIABILITY WHICH HAD THUS ACCRUED D URING THE ACCOUNTING YEAR WAS TO BE DISCHARGED AT A FUTURE DA TE THE AMOUNT TO BE EXPENDED IN THE DISCHARGE OF THAT LIABILITY WOUL D HAVE TO BE ESTIMATED IN ORDER THAT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING THE AMOUNT COULD BE DEBITED BEFORE IT WAS ACTUALLY DISB URSED. THE HON'BLE SUPREME COURT IN THE WELL KNOWN CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD V. CIT (1997) 225 ITR 80 2 HAD DELIBERATED ON THE SAME ISSUE AND HELD THAT 'EXPENDITURE' IS NOT NECESSARILY CONFINED TO THE MO NEY 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. HOWEVER, A CONTINGENT LIABILITY WHICH MAY HAVE TO B E DISCHARGED IN FUTURE CANNOT BE CONSIDERED AS EXPENDITURE. IN THE APPELLANT'S CASE SINCE THE LIABILITY IS ASCE RTAINED AND HAS ACCRUED ALTHOUGH NOT DISCHARGED, IT NEEDS TO BE CONSIDERED AS AN ALLOWABLE EXPENDITURE. 6.5 THE OTHER DECISIONS RELIED ON BY THE AO IN THE CASES OF SREE MEENAKSHI MILLS LTD V. CIT (1963) 49 ITR 156 (MADRA S) AND HAJI AZIZ & ABDUL SHAKOOR BROS V. CIT (1961) 41 ITR 350 (SC) AR E OF NO RELEVANCE SINCE THE AO HAS NOT BROUGHT ANYTHING ON RECORD THAT THE LIABILITY WAS NOT FOR THE I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 13 PURPOSE OF BUSINESS. AS STATED EARLIER THE APPELLAN T WOULD NOT BE OWNER OF THE STOCK-IN TRADE (BEING LAND IN THE PRESENT CASE) IF DEBENTURES WERE NOT ISSUED SINCE IT DID NOT POSSESS THE NECESSARY SOURCES TO A CQUIRE THE LAND. WITHOUT BEING THE OWNER, IT COULD NOT HAVE SOLD THE LAND AN D REALIZED THE CONSIDERATION. FURTHER, WITHOUT PAYMENT OF PREMIUM, DEBENTURES COULD NOT HAVE BEEN ISSUED. THEREFORE, THE BUSINESS TRANSACTI ONS AND THE DEBENTURE ISSUE ARE INTER-TWINED AND INEXTRICABLY LINKED TO E ACH OTHER. IT CAN NOT BE STATED THAT THE PAYMENT TOWARDS AMORTIZATION OF PRE MIUM WAS NOT COMMERCIALLY EXPEDIENT. IT WAS CERTAINLY LAID OUT W ITH AN AIM TO CONTINUE AND FURTHER OF THE BUSINESS AND WAS FOR GENERATION OF P ROFITS. THE SCHEME INVOLVED IN AMORTIZATION OF PREMIUM ON DEBENTURES SPREAD OVE R THE PERIOD TILL THE DATE OF REDEMPTION IS AN ACCEPTED PRINCIPLE OF CLAIM OF EXPENDITURE. THE HON'BLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVE STMENT CORPORATION LTD V. CIT(L997) 225ITR802 HAD CONFIRMED THIS VIEW BY C ONCLUDING AS 'ISSUING DEBENTURES AT A DISCOUNT IS ANOTHER SUCH I NSTANCE WHERE, ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABILITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES, THE PAYMENT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE IS A CONTINUING BENEFIT TO THE BUSINESS OF THE COMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SHOUL D, THEREFORE, BE SPREAD OVER THE PERIOD OF THE DEBENTURES' 6.6. THIS DECISION COVERS ALL THE ISSUES DISPUTED B Y THE AO BECAUSE THE FACTS IN THE APPELLANT'S CASE AND THAT OF THE CASE CITED SUPRA ARE SIMILAR. THE AO WAS, THEREFORE, NOT INCORRECT IN HOLDING THAT TH E SCHEME OF AMORTIZATION OF PREMIUM ON DEBENTURES DOES NOT HAVE SANCTITY UNDER THE LAW. THE LAW DECLARED BY THE HON'BLE SUPREME COURT BECOMES THE L AW OF LAND AND IS BINDING ON ALL COURTS AND TRIBUNALS IN VIEW OF ARTI CLE 141 OF THE CONSTITUTION. DISCOUNT ON REDEEMABLE DEBENTURES IS ADMISSIBLE PRO PORTIONATELY DURING THE LIFE OF THE DEBENTURES AS HELD BY THE SUPREME COURT IN MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD V. CIT (1997) 225 ITR 80 2 (SC). THE DISTINCTION SOUGHT TO BE MADE BETWEEN DISCOUNT AND PREMIUM ON T HE GROUND THAT THE DISCOUNT WAS GIVEN AT THE TIME OF ISSUE, WHILE PREM IUM WILL MATERIALIZE ONLY ON REDEMPTION IS ALSO FOUND TO BE ERRONEOUS, SINCE IN EITHER CASE, THE AMOUNT INVOLVED WAS THE COST OF SERVICING THE LOAN RAISED IN THE FORM OF DEBENTURES. MERELY BECAUSE IT IS PAYABLE LATER, IT DOES NOT BEC OME CONTINGENT. IT WAS SO FOUND BY THE DELHI HIGH COURT IN CIT V. JAGATJIT IN DUSTRIES LTD (2006) 287 ITR 46 (DELHI) FOLLOWING THE RATIONALE OF THE SUPRE ME COURT DECISION IN MADRAS INDUSTRIAL INVESTMENT CORPORATION'S CASE (SU PRA). THE RATIONALE OF THE DECISION WOULD EXTEND TO PREMIUM AS WELL. IN FA CT, EVEN IN RESPECT OF SUCH PREMIUM, THERE IS ALREADY A DECISION FROM THE CALCU TTA HIGH COURT IN NATIONAL ENGINEERING INDUSTRIES LTD V. CIT (1999) 2 36 ITR 577 (CAL), SO THAT THE PRESENT DECISION OF THE DELHI HIGH COURT ACCORD S WITH THE VIEW TAKEN BY I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 14 THE CALCUTTA HIGH COURT AND ON THE RATIONALE OF THE DECISION OF THE SUPREME COURT. FURTHER, THE HON'BLE JURISDICTIONAL HIGH COURT IN T HE CASE OF CIT V. FIRST LEASING CO. OF INDIA LTD, 292 ITR 110 (MAD), FOLLOW ING THE DECISION OF THE SUPREME COURT IN MADRAS INDUSTRIAL INVESTMENT INDUS TRIES LTD V. CIT, 225 ITR 802 (SC) AND NATIONAL ENGINEERING INDUSTRIES LT D V. CIT, 236 ITR 557 (CAL) HAS HELD THAT THERE IS NO DISTINCTION BETWEEN DISCOUNT AND PREMIUM AND PREMIUM PAYABLE ON REDEMPTION OF. DEBENTURES ARE OF REVENUE NATURE ENTITLED FOR DEDUCTION. THE SAME IS REPRODUCED HEREUNDER FOR READY REFERENCE AND CLARITY: APPLYING THE RATIO LAID DOWN IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD V. CIT REPORTED IN (1997 ) 225 ITR 802 (SC) AND IN THE CONTEXT OF THE RATIO LAID DOWN IN T HE CASE OF NATIONAL ENGINEERING INDUSTRIES LTD V. CIT REPORTED IN (1999 ) 236 ITR 57 (CAL), WHEREUNDER IT IS HELD THAT THERE IS NO DISTI NCTION BETWEEN DISCOUNT AND PREMIUM, THE DISCOUNT ON DEBENTURES AS WELL AS THE PREMIUM PAYABLE ON ACTUAL REDEMPTION ON DEBENTURES IN FUTURE YEARS AND THE EXPENDITURE INCURRED FOR ISSUE OF SUCH DEBE NTURES ARE ALL HELD TO BE REVENUE EXPENDITURE ENTITLED TO BE SPREAD OVE R THE PERIOD OF DEBENTURES AND CONSEQUENTLY, ALLOWABLE AS DEDUCTION IN A PARTICULAR ASSESSMENT YEAR'. FURTHER THE HON'BLE MADRAS HIGH COURT IN THE CASE O F CIT V. ASHOK LEYLAND LTD (2008) 297 ITR 110 (MAD) HAS HELD AS UNDER: 'AS REGARDS THE THIRD QUESTION ON THE PREMIUM PAYAB LE ON REDEMPTION OF DEBENTURES IN FUTURE YEARS IS TO BE SPREAD OVER AND PART OF IT AI/OWED AS A DEDUCTION IN THIS YEAR, THE SAME IS CO VERED BY THE DECISION OF THE APEX COURT REPORTED IN MADRAS INDUS TRIAL INVESTMENT CORPORATION LTD V. CIT (1997)225 ITR 802 AND THE DE CISION OF THIS COURT REPORTED IN CIT V. FIRST LEASING CO. OF INDIA LTD. (2007) 292 ITR 110 AND IS THEREFORE ANSWERED AGAINST THE REVEN UE.' IN VIEW OF THE ABOVE FACTUAL POSITION AND AUTHORITA TIVE PRECEDENTS, IT IS HELD THAT CLAIM OF EXPENDITURE TOWARDS AMORTIZATION OF P REMIUM ON DEBENTURES IS AN ALLOWABLE EXPENDITURE. ACCORDINGLY, THE AO IS DI RECTED TO ALLOW THE CLAIM OF THE APPELLANT SUBJECT TO THE FOLLOWING ADJUSTMEN T. 5. ON BEING AGGRIEVED, THE REVENUE IS IN APPEAL BE FORE THE TRIBUNAL. 6. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 15 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE HAS STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(APPEALS) AND SUBMITTED THAT THE ORDER PASSED BY THE ASSESSING OFFICER IS BASED ON S URMISES AND SUSPICION AND THEREFORE, IT CANNOT BE SURVIVED. HE ALSO RELIE D ON THE FOLLOWING DECISIONS: (I) MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD.V. CIT [1997] 225 ITR 802 (SC) (II) CIT V. FIRST LEASING CO. OF INDIA LTD. [2007] 292 ITR 110(MAD) (III) DCIT V. GUJARAT NARMADA VALLEY FERTILIZERS CO . LTD. [2013] 33 TAXMANN.COM 265 (GUJ) (IV) DCIT V. ATUL PRODUCTS LTD. [2014] 42 TAXMANN.C OM 198 (GUJ) (V) CIT V. S.M. HOLDING & FINANCE (P) LTD. [2003] 2 64 ITR 370 (BOM.) 8. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THIS CA SE, THE ASSESSEE IS IN THE BUSINESS OF REAL ESTATE AND MANUFACTURER OF STEEL H AD ACQUIRED 58.44 ACRES OF LAND RELEVANT TO THE ASSESSMENT YEAR UNDER CONSI DERATION FOR .204.54 CRORES. THE ASSESSEE HAD PAID ONLY .47.58 CRORES TO THE LAND OWNERS. THE BALANCE VALUE OF PURCHASE CONSIDERATION OF .156.96 CRORES WAS DISCHARGED BY ISSUE OF DEBENTURES TO THE SELLERS OF LAND. THE ASSESSEE COMPANY HAS AMORTIZED THE PREMIUM ON DEBENTURES AMOUNTING TO .47.10 CRORES AND CLAIMED THE SAME AS REVENUE EXPENDITURE. IN THE ASS ESSMENT ORDER, THE ASSESSING OFFICER HAS NOT DOUBTED THE SALE TRANSACT ION AND THE PAYMENTS MADE TO THE PARTIES. THE ASSESSING OFFICER HAS ONLY DOUBTED THAT THE DEBENTURES WERE ISSUED TO THE KEY MANAGEMENT PERSON NEL AND THEIR I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 16 RELATIVES AND THE ASSESSING OFFICER HAS FURTHER DOU BTED THAT THE ASSESSEE HAS NOT FURNISHED THE CONFIRMATION FROM THE SUB-REG ISTRAR OFFICE ON THE GUIDELINE VALUE/MARKET VALUE FOR ADOPTION OF COST O F LAND FOR WHICH DEBENTURES WERE ISSUED. FURTHER, THE ASSESSING OFFI CER HAS DENIED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEES C LAIM NEITHER COMES UNDER SECTION 36 OR SECTION 37 OF THE INCOME-TAX AC T, 1961. ON APPEAL, THE ASSESSEE HAS GIVEN A DETAILED EXPLANATION BEFORE TH E LD. CIT(APPEALS). THE LD. CIT(APPEALS), IN RESPECT OF DOUBT RAISED BY THE ASSESSING OFFICER WITH REGARD TO DEBENTURES ISSUED TO THE DIRECTORS AND RE LATIVES, GAVE A FINDING THAT THE TRANSACTION IS GENUINE, THERE WAS NOTHING IRREGULAR IN THE SCHEME OF DEBENTURES. THE LAND PURCHASED BY THE ASSESSEE, THU S, CONSTITUTES ITS STOCK IN TRADE. THE PROFIT OFFERED TO THE TAXATION HAS EM ANATED FROM THE SALE OF LAND, WHICH WERE ACQUIRED BY THE ASSESSEE AND WITHO UT ISSUE OF DEBENTURES, IT COULD NOT HAVE ACQUIRED THE SAID LAND. HE ALSO G AVE A FINDING IN RESPECT OF THE SHARE HOLDINGS, IT IS SEEN FROM THE LIST OF SHA RE HOLDERS THAT THE DIRECTORS AND THEIR RELATIVES HOLD ONLY 5.19% OF THE TOTAL SH ARES AND HELD THAT THE TRANSACTIONS WERE GENUINE AND WERE UNDERTAKEN IN TH E BUSINESS INTEREST OF THE ASSESSEE. BEFORE US, NO MATERIAL WAS BROUGHT TO OUR NOTICE BY THE DEPARTMENT TO CONTRADICT THE FINDINGS OF THE LD. CI T(APPEALS). IN SO FAR AS SUSPICION EXPRESSED BY THE A.O. WITH REGARD TO GUID ELINE VALUE/MARKET VALUE IS CONCERNED, EITHER A.O. HAS TO ASK ASSESSEE SPECI FICALLY TO PRODUCE GUIDELINE VALUE FROM THE SUB-REGISTRAR OFFICE OR A. O. HAS EVERY POWER TO ASK I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 17 THE SUB-REGISTRAR TO FURNISH THE GUIDELINE VALUE. THE A.O. NEITHER SPECIFICALLY ASKED THE ASSESSEE TO FURNISH THE GUID ELINE VALUE FROM THE SUB- REGISTRAR OFFICE NOR CALLED THE REPORT FROM THE SUB -REGISTRAR OFFICE. THE A.O. ONLY RAISED SUSPICION ABOUT THE GUIDELINE VALU E. ON THE BASIS OF SUSPICION OF THE A.O., THE CLAIM OF THE ASSESSEE CA NNOT BE DISALLOWED. 9. IN SO FAR AS AMORTIZATION OF PREMIUM ON DEBENTU RES IS CONCERNED, THE LD. CIT(APPEALS) HAS GIVEN A FINDING THAT THE DEBEN TURES ARE AN INSTRUMENT OF DEBT EXECUTED BY THE COMPANY ACKNOWLEDGING ITS OBLI GATION TO REPAY THE SUM AT A SPECIFIED DATE AND ALSO CARRYING AN INTERE ST. IT IS ONLY ONE OF THE METHODS OF RAISING THE LOAN FOR THE COMPANY. A DEBE NTURE IS THUS LIKE A CERTIFICATE OF LOAN OR A LOAN BOND EVIDENCING THE F ACT THAT THE COMPANY IS LIABLE TO PAY A SPECIFIED AMOUNT WITH INTEREST AND ALTHOUGH THE MONEY RAISED BY THE DEBENTURES BECOMES A PART OF THE COMPANYS C APITAL, IT DOES NOT BECOME SHARE CAPITAL. THEREFORE, THE DEBENTURE PART AKE THE CHARACTER OF LOAN AND COST OF BORROWAL IS AN ALLOWABLE EXPENDITU RE. THE ASSESSEE HAS ISSUED DEBENTURES PARTLY FOR PAYMENTS RECEIVED BY C HEQUE AND PARTLY FOR UNPAID PURCHASE CONSIDERATION. THE DIFFERENCE BETWE EN THE ISSUE PRICE AND THE REDEMPTION PRICE, BEING DISCOUNT/PREMIUM FALLS UNDER THE DEFINITION OF INTEREST AS PER SECTION 2(28A) OF THE ACT, IT READS AS UNDER: 'INTEREST MEANS INTEREST IN ANY MANNER IN RESPECT O F ANY MONEYS PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORR OWED OR DEBT INCURRED (INCLUDING A DEPOSIT, CLAIM OR OTHER SIMIL AR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER C HARGE IN RESPECT OF I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 18 THE MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILIZED.' IN VIEW OF THE ABOVE, THE LD. CIT(APPEALS) HAS HELD THAT AS THE CLAIM MADE BY THE ASSESSEE BEING INTEREST/CHARGE FOR DEBT INCU RRED, IS COVERED UNDER THE ABOVE DEFINITION OF INTEREST AND IS ALLOWABLE U NDER SECTION 36 OR 37 OF THE INCOME-TAX ACT, 1961. FURTHER, THE LD. CIT(APPEALS) , BY FOLLOWING VARIOUS DECISIONS INCLUDING THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CI T (SUPRA), HAS HELD THAT THE CLAIM OF EXPENDITURE TOWARDS AMORTIZATION OF PR EMIUM ON DEBENTURES ARE AN ALLOWABLE EXPENDITURE. IN THE CASE OF MADRAS IND USTRIAL INVESTMENT CORPORATION LTD. V. CIT (SUPRA), THE HONBLE SUPREM E COURT HAS HELD AS UNDER: EXPENDITURE' IS NOT NECESSARILY CONFINED TO THE MO NEY 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. HOWEVER, A CONTINGENT LIABILITY WHICH MAY HAVE TO B E DISCHARGED IN FUTURE CANNOT BE CONSIDERED AS EXPENDITURE. ALTHOUG H EXPENDITURE PRIMARILY DENOTES THE IDEA OF SPENDING OR PAYING OU T, IT MAY, IN GIVEN CIRCUMSTANCES, ALSO COVER AN AMOUNT OF LOSS WHICH H AS NOT GONE OUT OF THE ASSESSEE'S POCKET BUT WHICH IS ALL THE SAME, AN AMOUNT WHICH THE ASSESSEE HAS HAD TO GIVE UP. IT ALSO COVERS A LIABI LITY WHICH THE ASSESSEE HAS INCURRED IN PRAESENTI ALTHOUGH IT IS PAYABLE IN FUTURE. 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. THEREFORE, WHEN A COMPANY I SSUES DEBENTURES AT A DISCOUNT, IT INCURS A LIABILITY TO PAY A LARGE R AMOUNT THAN WHAT IT HAS BORROWED, AT A FUTURE DATE. ONE NEED NOT GO INT O THE QUESTION WHETHER THIS ADDITIONAL LIABILITY EQUIVALENT TO THE DISCOUNT, WHICH IS INCURRED IN PRAESENTI BUT IS PAYABLE IN FUTURE, REP RESENTS DEFERRED INTEREST OR NOT. THAT MAY DEPEND UPON THE TOTALITY OF CIRCUMSTANCES RELATING TO THE ISSUE OF DEBENTURES, INCLUDING ITS TERMS. THE LIABILITY, I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 19 HOWEVER, TO PAY THE DISCOUNTED AMOUNT OVER AND ABOV E THE AMOUNT RECEIVED FOR THE DEBENTURES, IS A LIABILITY WHICH H AS BEEN INCURRED BY THE COMPANY FOR THE PURPOSES OF ITS BUSINESS IN ORD ER TO GENERATE FUNDS FOR ITS BUSINESS ACTIVITIES. THE AMOUNTS SO OBTAINE D BY ISSUE OF DEBENTURES ARE USED BY THE COMPANY FOR THE PURPOSES OF ITS BUSINESS. THIS WOULD, THEREFORE, BE EXPENDITURE. THE CHARACTE R OF PAYMENT IN RELATION TO THE PAYER CAN BE DIFFERENT FROM THE CHA RACTER OF THAT PAYMENT IN THE HANDS OF THE RECIPIENT. ANY LIABILIT Y INCURRED FOR THE PURPOSE OF OBTAINING THE LOAN WOULD BE REVENUE EXPE NDITURE. 10. IN THE CASE OF CIT V. FIRST LEASING CO. OF IND IA LTD. (SUPRA), THE HONBLE MADRAS HIGH COURT HAS HELD THAT THE EXPENDI TURE INCURRED ON THE ISSUE OF DEBENTURES AS WELL AS PREMIUM PAYABLE ON R EDEMPTION OF DEBENTURES ARE REVENUE EXPENDITURE AND ARE ENTITLED TO BE SPREAD OVER THE PERIOD OF DEBENTURES. 11. IN THE CASE OF DCIT V. GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. (SUPRA), THE HONBLE GUJARAT HIGH COURT HAS CONSIDE RED THE VERY SAME ISSUE BY FOLLOWING THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CI T (SUPRA) AND ALSO THE DECISION IN THE CASE OF CIT V. GUJARAT V. ANIL STAR CH PRODUCT LTD. VIDE ORDER DATED 1 ST FEBRUARY 1998 IN INCOME TAX APPLICATION NO. 259 OF 1998, WHEREIN, IT WAS OBSERVED AS UNDER: 4. THE QUESTION AROSE FOR CONSIDERATION BEFORE THE IR LORDSHIP IN SUPREME COURT IN MADRAS INDUSTRIAL INVESTMENTS CORP ORATION LIMITED V. COMMISSION OF INCOME TAX 225 ITR 802, IT WAS A C ASE WHERE THE APPELLANT COMPANY HAD ISSUED DEBENTURES IN DECEMBER 1966, AT A DISCOUNT. THE TOTAL DISCOUNT ON THE ISSUE OF RS. 1. 5 CRORES AMOUNTED TO RS.3.00 LAKH. FOR THE ASSESSMENT YEAR 1968-69, THE COMPANY WROTE OFF RS.12,500 OUT OF THE TOTAL DISCOUNT OF RS.3 LAKHS B EING THE PROPORTIONATE AMOUNT OF DISCOUNT FOR THE PERIOD OF SIX MONTHS ENDING I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 20 WITH JUNE 30, 1967, TAKING INTO ACCOUNT THE PERIOD OF 12 YEARS WHICH WAS THE PERIOD OF REDEMPTION AND DIVIDING THE AMOUN T OF RS. 3 LAKHS OVER THE PERIOD OF 12 YEARS. THE INCOME-TAX OFFICER DISALLOWED THE CLAIM BUT THE APPELLATE ASSISTANT COMMISSIONER ALLO WED THE DEDUCTION OF RS. 12,500. THE TRIBUNAL HELD THAT THE ENTIRE EX PENDITURE OF RS.3,00,000 WAS ALLOWABLE AS EXPENDITURE FOR THE YE AR OF ISSUE INCURRED FOR THE PURPOSE OF BUSINESS. ON A REFERENCE, THE HI GH COURT NOTED THAT OUT OF THE TOTAL DISCOUNT OF RS.3,00,000 AN AMOUNT OF RS.12,500 HAD BEEN ALLOWED WHICH THE DEPARTMENT HAD NOT CHALLENGE D. HENCE, THE HIGH COURT WAS CONCERNED ONLY WITH THE BALANCE AMOU NT OF RS:2,87,500 WHICH THE HIGH COURT HELD, COULD NOT BE CONSIDERED AS EXPENDITURE. ON APPEAL TO THE SUPREME COURT, THE SU PREME COURT HELD THAT THE LIABILITY TO PAY THE DISCOUNTED AMOUNT OVE R AND ABOVE THE AMOUNT RECEIVED FOR THE DEBENTURES WAS A LIABILITY INCURRED BY THE COMPANY FOR THE PURPOSES OF BUSINESS IN ORDER TO GE NERATE FI.MDS OF ITS BUSINESS. IT WAS THEREFORE REVENUE EXPENDITURE. 5. THUS, ACCORDING, TO THE LAW LAID DOWN BY THE SUP REME COURT, WHERE THE COMPANY UNDERTAKES TO PAY MORE AMOUNT THAN WHAT IT HAS BORROWED, AND LIABILITY TO PAY THE EXCESS AMOUNT UN DERTAKEN TO BE PAID BY THE COMPANY TO FULFIL ITS NEEDS FOR BORROWED MON EY IS AN ALLOWABLE EXPENDITURE UNDER SECTION 37 OF THE INCOME TAX ACT. 12. FURTHER, IN THE CASE OF CIT V. S.M. HOLDING & FINANCE (P) LTD., THE HONBLE BOMBAY HIGH COURT HAS CONCLUDED AS UNDER: DEBENTURES BEING REDEEMABLE AFTER TEN YEARS AT HUN DRED PER CENT, PREMIUM, ASSESSEE WAS ENTITLED TO DEDUCTION OF 1/10 TH OF THE TOTAL PREMIUM PAYABLE ON REDEMPTION OF DEBENTURES IN THE RELEVANT ASSESSMENT YEAR. 13. THE DEPARTMENT HAS NEITHER DISTINGUISHED THE C ASE LAW RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE NOR BROUGHT ANY OT HER CASE LAW IN FAVOUR OF THE REVENUE. THE DEPARTMENT HAS ALSO NOT PLACED ANY MATERIAL TO SHOW THAT THE CASE LAW RELIED ON BY THE LD. COUNSEL FOR THE A SSESSEE SUBSEQUENTLY NEITHER MODIFIED NOR REVERSED BY ANY HIGHER COURT. KEEPING IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND NO INF IRMITY IN THE ORDER PASSED I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 21 BY THE LD. CIT(APPEALS) AND ACCORDINGLY, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED. 14. SO FAR AS CROSS OBJECTION FILED BY THE ASSESSE E RELATING TO RATE OF INTEREST PAYABLE ON DEBENTURES. THE LD. CIT(APPEALS ) HAS OBSERVED THAT THE AR OF THE ASSESSEE HAS STATED TO HAVE BEEN WORKED O UT THE RATE OF INTEREST AT THE RATE OF 13.5%. ON THE BASIS OF THE SUBMISSIO NS OF THE AR OF THE ASSESSEE, THE LD. CIT(APPEALS) CAME TO A CONCLUSION THAT THE ASSESSEE HAD PAID AN AMOUNT OF .2.70 CRORES AND DIRECTED TO DISALLOW THE SAME. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE H AS FILED AN AFFIDAVIT BEFORE US IN TERMS OF RULE 10 OF THE INCOME-TAX (APPELLATE TRIBUNAL) RULES, 1963 AND SUBMITTED THAT THE LD. COUNSEL SHRI G. KUMAR, W HO APPEARED BEFORE THE LD. CIT(APPEALS) HAS STATED BEFORE THE LD. CIT(APPE ALS) THAT THE RATE WOULD BE AROUND 13.5% TO 14% AND NOT AS 13.5% AND HE HAS FILED DETAILS OF DEBENTURES ISSUED AND AMORTIZATION OF PREMIUM AND I NTEREST RATE PER ANNUM AS CALCULATED BY THE ASSESSEE. ACCORDING TO THE CAL CULATION SHEET SUBMITTED BY THE ASSESSEE, THE RATE OF INTEREST PAYABLE PER A NNUM IS COMING TO 13.94%. THIS CALCULATION SUBMITTED BY THE ASSESSEE WAS NEITHER DISPUTED BY THE REVENUE NOR BROUGHT ANYTHING TO SHOW THAT THIS CALCULATION WAS NOT CORRECT. ONCE THE CLAIM OF THE ASSESSEE ON THE ISSU E OF DEBENTURE IS ALLOWED AS GENUINE CLAIM, SO FAR AS THE RATE OF INTEREST, I T CANNOT BE DENIED RESTRICTING THE RATE OF INTEREST TO 13.5%, WITHOUT ANY BASIS, P ARTICULARLY WHEN THE I.T I.TI.T I.T. .. .A. A.A. A. NO. NO. NO. NO.11 1111 1101 0101 01/M/ /M/ /M/ /M/11 & 11 & 11 & 11 & C.O.NO. C.O.NO. C.O.NO. C.O.NO. 115 115115 115/M/11 /M/11 /M/11 /M/11 22 ASSESSEE HAS SUBMITTED DETAILS IN RESPECT OF THE CA LCULATION OF INTEREST. IN VIEW OF THE ABOVE, WE FIND THAT THE LD. CIT(APPEALS ) WAS NOT CORRECT IN REDUCING THE RATE OF INTEREST BY STATING THAT AS PE R THE SUBMISSIONS OF THE ASSESSEE, THE RATE OF INTEREST PAYABLE IS ONLY 13.5 %. THEREFORE, THE RATE OF INTEREST WOULD BE AT THE RATE OF 13.94%, ROUNDED OF F TO 14%. IN VIEW OF THE ABOVE, THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON FRIDAY, THE 1 ST OF AUGUST, 2014 AT CHENNAI. SD/- SD/- (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER CHENNAI, DATED, THE 01.08.2014 VM/- ) % *#&+, -,(& /COPY TO: 1. ./ / APPELLANT, 2. *0./ / RESPONDENT, 3. 1 ( ) /CIT(A), 4. 1 /CIT, 5. ,2! *#&# /DR & 6. !3' 4 /GF.