DCIT, Bangalore V. M/s Shetron Limited, Bangalore

ITA 698/BANG/2011

• Counselvise Citation: 69821114 RSA 2011
• Duration Of Justice: 2 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 10-06-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 30-06-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NARESH SAKA
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.698/BANG/2011 ASSESSMENT YEAR : 2006-07 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. VS. M/S. SHETRON LTD., PLOT NO.1, BOMMASANDRA, HOSUR ROAD, BANGALORE 560 099. PAN : AACCS 9650F APPELLANT RESPONDENT APPELLANT BY : SHRI NARESH SAKA, ADDL. CIT(DR) RESPONDENT BY : SHRI S. PARTHASARATHI, ADVOCATE DATE OF HEARING : 25.07.2013 DATE OF PRONOUNCEMENT : 02.08.2013 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER D ATED 21.02.2011 OF THE CIT(APPEALS)-III, BANGALORE RELATING TO ASSESSM ENT YEAR 2006-07. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ S AS FOLLOWS:- ITA NO.698/BANG/2011 PAGE 2 OF 14 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE LD. CIT(A) ERRED IN ALLOWING THE ENTIRE CLA IM OF DISCOUNT OF RS.5.00 CRORE ON DEBENTURES ISSUED DURI NG THE RELEVANT PREVIOUS YEAR AS REVENUE EXPENDITURE HOLDI NG THAT THERE IS NO FRESH FLOW OF FUNDS AS THE AMOUNT COLLECTED T HROUGH ISSUE OF DEBENTURES WAS USED FOR REPAYING THE EXISTING LOAN FROM IDBI. THE CIT(A) FAILED TO APPRECIATE THAT THE SCHEDULE O F REDEMPTION OF DEBENTURES IS IN A PHASED MANNER OVER A PERIOD O F TEN YEARS AND CONSEQUENTLY, THE BENEFIT FOR THIS EXPENDITURE WOULD ACCRUE OVER THIS PERIOD AND ACCORDINGLY, THE EXPENDITURE N EEDS TO BE SPREAD OUT OVER THIS PERIOD. 3. THE CIT(A) ERRED IN NOT APPLYING THE RATIO OF H ONBLE SUPREME COURTS JUDGEMENT IN THE CASE OF MADRAS IND USTRIAL INVESTMENTS CORPORATION LTD., VS. CIT (225 ITR 802) WHOSE FACTS ARE IDENTICAL TO THAT OF THE ASSESSEES CASE BY HOLDING THAT THERE WAS NO FRESH FLOW OF FUNDS ALTHOUGH THERE WAS NO SUCH ISSUE RAISED IN THAT JUDGEMENT. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT( A) IN SO FAR AS IT RELATED TO THE ABOVE GROUNDS MAY BE REVERSED AND TH AT THE ASSESSING OFFICER MAY BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF TIE GROUNDS THAT MAY BE URGED. 3. THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGE D IN THE BUSINESS OF MANUFACTURING OF METAL PACKAGE AND CANS. IN THE COMPUTATION OF INCOME, THE ASSESSEE CLAIMED DEDUCTION OF RS.5 CROR ES BEING DISCOUNT ON ISSUE OF DEBENTURES. THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THAT DURING THE PREVIOUS YEAR, THE ASSESSEE HAD ISS UED 38 LAKHS 9% SECURED REDEEMABLE NON-CONVERTIBLE DEBENTURES OF RS .100/- EACH OF THE AGGREGATE VALUE OF RS.38 CRORES AT A DISCOUNTED VAL UE OF RS.33 CRORES. ITA NO.698/BANG/2011 PAGE 3 OF 14 THE DIFFERENCE VIZ., A SUM OF RS.5 CRORES HAD BEEN CLAIMED AS A DEDUCTION. THE ASSESSEE FURTHER EXPLAINED THAT IT HAD AN OUTST ANDING INSTITUTIONAL DEBT FROM IDBI AND ON A ONE TIME SETTLEMENT (OTS) SCHEME , THE ASSESSEE GOT SUBSTANTIAL WAIVER OF PRINCIPAL AND INTEREST AND WI TH A VIEW TO TAKE ADVANTAGE OF SUCH AN OFFER, THE ASSESSEE ISSUED DEB ENTURES TO CITICORP FINANCE LTD. [HEREINAFTER REFERRED TO AS CITICORP ] THE ASSESSEE ALSO POINTED OUT THAT THE PROCEEDS RECEIVED ON ISSUE OF DEBENTURES WERE USED ONLY FOR THE PURPOSE OF DISCHARGING OBLIGATIONS OF THE ASSESSEE UNDER OTS WITH IDBI BANK. THE ASSESSEE ALSO POINTED OUT THAT THE BENEFIT THE ASSESSEE RECEIVED IN THE FORM OF WAIVER OF INTEREST BY IDBI UNDER THE OTS WAS OFFERED TO TAX AND THE DISCOUNT ON ISSUE OF DEB ENTURES WAS CLAIMED AS DEDUCTION WHILE COMPUTING INCOME. IT IS NOT IN DIS PUTE THAT THE REDEMPTION SCHEDULE OF DEBENTURES ISSUED TO CITICORP WAS AS FO LLOWS:- 10% IN THE FIRST YEAR, 15% IN THE SECOND YEAR, 20% IN THE THIRD YEAR, 25% IN THE FOURTH YEAR, AND 30% IN THE FIFTH YEAR. 4. IN THE BOOKS OF ACCOUNTS, THE ASSESSEE HAD SPREA D OVER THE DISCOUNT ON DEBENTURES DURING THE ENTIRE PERIOD OF REDEMPTION IN THE PROPORTION IN WHICH THE DEBENTURES WERE TO BE REDEE MED FOR A PERIOD OF FIVE YEARS. THE QUESTION BEFORE THE AO WAS AS TO WHETHE R THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE ENTIRE DISCOUNT OF RS .5 CRORES SHOULD BE ACCEPTED OR DEDUCTION SHOULD BE ALLOWED IN THE PROP ORTION IN WHICH THE ITA NO.698/BANG/2011 PAGE 4 OF 14 DISCOUNT HAD BEEN WRITTEN OFF IN THE BOOKS OF ACCOU NTS OVER A PERIOD OF FIVE YEARS. THE AO PRIMARILY RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CIT, 225 ITR 802 (SC) , CAME TO THE CONCLUSION THAT THE DISCOUNT ON DEBENTURES WAS REVENUE EXPENDITURE BUT HAD TO BE AL LOWED FOR A PERIOD OF FIVE YEARS IN THE PROPORTION IN WHICH THE DEBENTURE S WERE TO BE REDEEMED BY THE ASSESSEE. THE SAME WAS AS FOLLOWS:- % OF REDEMPTION OF DEBENTURES ALLOWABALITY OF DISCOUNT PROPORTIONATELY ALLOWABILITY IN F Y 10% 50 LAKHS 2005-06 15% 75 LAKHS 2006-07 20% 1 CRORE 2007-08 25% 1.25 CRORE 2008-09 30% 1.50 CRORE 2009-10 TOTAL 5 CRORES ACCORDINGLY, A SUM OF RS.50 LAKHS WAS ALLOWED AS A DEDUCTION IN A.Y. 2006-07 AND DEDUCTION OF A SUM OF RS.4.5 CRORES WAS REJECTED BY THE AO. 5. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(APPEALS). THE PRIMARY CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) WAS THAT THE ASSESSING OFFICER HAS ERRED IN RELYING ON THE SUPREME COURT DECISION IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V CIT (225 ITR 802) AS THE ISSUE IN THAT CASE RELATED TO FRESH ISSUE OF DEBENTURE AT A DISCOUNT T O INCREASE THE CAPITAL OF THE COMPANY. WHEREAS IN THE APPELLANTS CASE, THERE WAS NO FRESH INFUSION ITA NO.698/BANG/2011 PAGE 5 OF 14 OF FUNDS TOOK PLACE BY ISSUE OF DEBENTURES TO CITIC ORP AND IT WAS SOLELY ISSUED TO REPLACE THE EXISTING HIGH COST DEBT AND H ENCE THERE IS NO ENDURING BENEFIT THAT THE ASSESSEE GAINED IN THE PR OCESS EXCEPT SAVING IN THE RECURRING REVENUE EXPENDITURE. IN SUPPORT OF I TS VIEW, THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V GENERAL INSURANCE CORPORATION (SC) 156 TAXMAN 96 WHEREIN IT WAS HELD THAT EXPENDITURE INCURRED ON ISSUE OF BONU S SHARE CAN BE DEDUCTED AS REVENUE EXPENDITURE AS THERE IS NO FRES H FLOW OF CAPITAL. THE ASSESSEE SUBMITTED THAT IN ITS CASE, BY ISSUING DE BENTURES AT DISCOUNT THE ASSESSEE HAS NOT BROUGHT IN ANY FRESH CAPITAL OR FR ESH ASSET THAT RESULTED IN ENDURING BENEFIT. 6. THE CIT(APPEALS) DELETED THE ADDITION MADE BY T HE AO. THE CIT(A) FIRSTLY HELD THAT THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SUPRA) WAS A CASE WHERE THERE WAS A FRESH ISSUE OF DEBENTURES WHERE THERE WAS INFLOW OF FUNDS. HE THEN REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GENERAL INSURANCE CORPORATION (SUPRA) WHEREIN THE HONBLE SUPREME COURT HELD THAT EXPENSES INCURRED I N CONNECTION WITH ISSUE OF BONUS SHARES IS TO BE CONSIDERED AS REVENU E EXPENDITURE AND ALLOWED AS DEDUCTION AS THERE WAS NO FRESH INFLOW O F FUNDS BY ISSUE OF BONUS SHARES. THEREAFTER THE CIT(A) FOUND THAT IN THE CASE OF THE ASSESSEE ISSUANCE OF DEBENTURES TO CITICORP AT A DI SCOUNT DID NOT RESULT ITA NO.698/BANG/2011 PAGE 6 OF 14 IN ANY INFLOW OF FRESH FUNDS OR INCREASE IN THE CAP ITAL EMPLOYED; THE CAPITAL EMPLOYED REMAINED THE SAME. ISSUANCE OF DEBENTURES WAS MERELY A REALLOCATION OF COMPANYS DEBT FUNDS. HE THEREFORE HELD THAT THE ASSESSEE HAS NOT ACQUIRED A BENEFIT OR ADVANTAGE OF ENDURING NATURE. THE TOTAL FUND AVAILABLE WITH THE ASSESSEE GOT REDUCED BY ISSUE OF DEBENTURES AT DISCOUNT AND DID NOT RESULT IN ANY INCREASE IN THE CAPITAL S TRUCTURE OF THE COMPANY. THEREFORE ISSUE OF DEBENTURES AT DISCOUNT DID NOT RESULT IN THE EXPANSION OF CAPITAL BASE OF THE COMPANY. THE FOLLOWING WERE THE OBSERVATIONS OF THE CIT(A):- 5.0. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANTS AR. I HAVE ALSO GONE THROUGH THE WRITTE N SUBMISSIONS FILED BY THE APPELLANT AND OTHER DOCUMENTS PRODUCED BEFORE ME. THE FACTS OF THE CASE ARE ENTIRELY DIFFERENT FROM T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF THE MADRAS INVESTMENTS WHICH WAS RELIED BY THE ASSESSING OFFIC ER. IN THE CASE OF MADRAS INVESTMENTS THE HONBLE COURT HAS EL ABORATELY DISCUSSED THE ISSUE. IN ONE OF ITS PARA THE COURT H AS MADE THE FOLLOWING OBSERVATIONS. THE TRIBUNAL, HOWEVER, HELD THAT SINCE THE ENTIRE LIABILITY TO PAY THE DISCOUNT, ON DEBENTURES HAD BE EN INCURRED IN THE ACCOUNTING YEAR IN QUESTION, THE ASSESSEE WAS ENTITLED TO DEDUCT THE ENTIRE AMOUNT O F RS. 3 LAKH IN THAT ACCOUNTING YEAR. THIS CONCLUSION DOES NOT APPEAR TO BE JUSTIFIED LOOKING TO THE NATU RE OF THE LIABILITY. IT IS TRUE THAT THE LIABILITY HAS BE EN 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 ENTIRETY IN THE YEA R IN WHICH IT IS INCURRED. IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN IF THE ASSESSEE HAD WRITTEN IT OFF IN HIS BOOKS OVER A PERIOD OF YEARS .. ITA NO.698/BANG/2011 PAGE 7 OF 14 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 G IVE A MUCH DISTORTED PICTURE OF THE PROFITS OF A PARTIC ULAR YEAR. THUS IN THE CASE OF HINDUSTAN ALUMINIUM CORPORATION LTD. V. CIT[1983] 144 ITR 474, THE CALCUTTA HIGH COURT UPHELD THE CLAIM OF THE ASSESSE E TO SPREAD OUT A LUMP SUM PAYMENT TO SECURE TECHNICA L ASSISTANCE AND TRAINING OVER A NUMBER OF YEARS AND ALLOWED A PROPORTIONATE DEDUCTION IN THE ACCOUNTING YEAR IN QUESTION. 5.1. IT IS PERTINENT TO NOTE THAT THE SC JUDGMENT ON MADRAS INVESTMENTS CASE RELATES TO THE FRESH ISSUE OF DEBE NTURES AND IT WAS HELD THAT THE ASSESSEE HAS INCURRED THE LIABILI TY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES; THE PA YMENT IS TO SECURE A BENEFIT OVER THE NUMBER OF YEARS. IN VIEW OF THE ENDURING BENEFIT TO THE BUSINESS OVER THE ENTIRE PERIOD, THE LIABILITY SHOULD SPREAD OVER THE PERIOD OF DEBENTURES AND ACCORDINGL Y THE DISCOUNT SHOULD BE ALLOWED PROPORTIONATELY. 5.2. HOWEVER, IN THE INSTANT CASE, THE REPRESENTAT IVE HAS PRODUCED THE DOCUMENTS TO SUPPORT THAT THERE WAS NO FRESH FLOW OF FUNDS DUE TO ISSUE OF DEBENTURES. THE APPELLANT HAS CLEARLY EXPLAINED IN ITS SUBMISSIONS AND ALSO SPELT OUT AT THE TIME OF HEARING THAT THE DISCOUNT ON DEBENTURE ISSUED TO CI TI CORP IS SUBSISTING DURING THE PERIOD OF DEBENTURE, THE INTE NT AND PURPOSE BEHIND THE DISCOUNT IS NOT TO CREATE ASSET. THE DOC UMENTS PRODUCED HAVE ALSO SUPPORTED ITS CLAIM THAT THERE I S NO FRESH INFLOW OF FUNDS 5.3. FURTHER, THE SUPREME COURT JUDGMENT WHICH THE APPELLANT RELIED ON I.E., IN THE CASE OF COMMISSIONER OF INCOME TAX, MUMBAI VS. GENERAL INSURANCE CORPORATION (2006) 156 TAXMAN 96 (SC) CASES/GENERA/ INSURANCE CASE THAT WHEN THERE IS NO FRESH INFLOW OF FUNDS THE COMPANY DOES NOT AC QUIRE ANY BENEFIT OR ADVANTAGE OF ENDURING NATURE. IN THIS CA SE, THE COURT RULED THAT EXPENSES ON ISSUE OF BONUS SHARES CAN BE DEDUCTED AS REVENUE EXPENDITURE IN THE YEAR IT IS INCURRED. 5.4. THE JUDGMENT IS IMPORTANT TO THE PRESENT CASE AS THE COURT MADE A DISTINCTION BETWEEN THE FACTS OF TWO OTHER C ASES WHERE THERE WAS A FRESH FLOW OF FUNDS AND THE FACTS OF TH E GENERAL ITA NO.698/BANG/2011 PAGE 8 OF 14 INSURANCE CASE WHERE THERE WAS NO FRESH FLOW OF FUN DS. THE OTHER TWO CASES ARE 1. BROOK BOND INDIA LIMITED V COMMISSIONER OF INCOME TAX (1997) 225 ITR 798 (SC) CASES/BROOKE BON DS CASE.DOC AND 2. PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION V COMMISSIONER OF INCOME TAX 1997 225 / TR 792 (SC). CASES/PUNJAB STATE AND DEV CRP CASE. DOC . 5.5. IN THESE TWO CASES THERE WAS A FRESH FLOW OF FUNDS ON ACCOUNT OF ISSUE OF SHARES AND HENCE THE COURT HELD THAT EXPENSES ON ISSUE OF SHARES AS CAPITAL EXPENDITURE. IN THE P RESENT CASE, THERE WAS NO FRESH FLOW OF FUNDS AND THEREFORE THE DISCOUNT ON DEBENTURES IS REVENUE EXPENDITURE DEDUCTIBLE IN THE YEAR OF ITS INCURRENCE. 5.6. I DO NOT SEE ANY MERIT IN THE OBSERVATIONS OF THE ASSESSING OFFICER IN RELYING ON THE SUPREME COURT DECISION IN THE CASE OF CIT V/S KODAK INDIA AS THE SAME IS NOT APPLICABLE T O THE SITUATION OF THE APPELLANT, AS THE EXPENDITURE INCURRED BY YO UR APPELLANT IS NOT TOWARDS ANY PUBLIC OF SHARES. THE APPELLANT CON TENDED THAT THE EXPENDITURE BY WAY OF DISCOUNT WAS INCURRED BY YOUR APPELLANT IS TOWARDS ISSUE OF DEBENTURES AND NOT FO R ISSUE OF SHARES TO PUBLIC. THE DEBENTURE IS NOTHING BUT ANOT HER FORM OF LOAN ON WHICH INTEREST IS PAYABLE. THE DEBENTURES C ANNOT BE EQUATED WITH THE SHARES. DEBENTURE IS NOTHING MORE THAN AN ACKNOWLEDGMENT OF INDEBTEDNESS BY THE COMPANY FOR T HE PAYMENT OF INTEREST ON THE SUM BORROWED UNTIL DEBEN TURE IS REDEEMED. 5.7. ISSUANCE OF DEBENTURES TO CITICORP AT A DISCO UNT DOES NOT RESULT IN ANY INFLOW OF FRESH FUNDS OR INCREASE IN THE CAPITAL EMPLOYED; THE CAPITAL EMPLOYED REMAINS THE SAME. IS SUANCE OF DEBENTURES IS MERELY A REALLOCATION OF COMPANYS DE BT FUNDS. THIS WAS ILLUSTRATED BY THE APPELLANT BY PRODUCING THE AUDITED ANNUAL ACCOUNTS OF THE COMPANY FOR THE YEAR ENDED 3 1ST MARCH 2006, WHICH ESTABLISHES THAT THE DEBENTURE ISSUE LE AVES THE CAPITAL EMPLOYED AT A LOWER LEVEL AS AGAINST THE PR EVIOUS YEAR AND HAS RESULTED ONLY SOME REALLOCATION OF COMPANYS FU NDS. THERE IS NO INFLOW OF FRESH FUNDS OR INCREASE IN THE CAPITAL EMPLOYED, WHICH REMAINS THE SAME. IF THAT BE SO, THEN IT CANN OT BE HELD THAT THE COMPANY HAS ACQUIRED A BENEFIT OR ADVANTAGE OF ENDURING NATURE. THE TOTAL FUNDS AVAILABLE WITH THE COMPANY IF FACT HAS REDUCED BY ISSUE OF DEBENTURES AT DISCOUNT AND HAS NOT RESULTED IN ANY INCREASE IN THE CAPITAL STRUCTURE OF THE COMPAN Y. IN OTHER ITA NO.698/BANG/2011 PAGE 9 OF 14 WORDS, THE ISSUE OF DEBENTURES AT DISCOUNT DOES NOT RESULT IN THE EXPANSION OF CAPITAL BASE OF THE COMPANY. 7. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WHO REITERATED THE STAND OF THE AO AS REFLECTED IN THE ORDER OF ASSESS MENT. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF THE CIT(A PPEALS) AND ALSO FILED BEFORE US A COPY OF THE DECISION OF THE ITAT HYDERA BAD BENCH IN THE CASE OF AMAR RAJA BATTERIES LTD. V. ACIT, 91 ITD 280 (HYD) , WHEREIN THE TRIBUNAL TOOK A VIEW THAT REVENUE EXPENDITURE WRITT EN OFF BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS BY DEFERRING IT OVER A PERIOD OF FIVE YEARS WILL NOT BE A BAR TO CLAIM THE ENTIRE EXPENDITURE IN ONE YEAR I.E ., IN THE YEAR IN WHICH THE EXPENDITURE WAS INCURRED, PROVIDED IT WAS REVENUE I N NATURE. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS. IN OUR VI EW, THE ORDER OF THE LD. CIT(APPEALS) CANNOT BE UPHELD. THE CIT(A) HAS R EAD A CONDITION IN THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SUPRA) THAT THERE SHOULD BE FRESH FLOW OF FUNDS BY ISSUE OF DEBENTURES AND IT IS ONLY IN SUCH CIRCUMSTANCES THE RATIO LAID DOWN IN THE SAID DECISION WILL BE APPLICABLE. WE HAVE PERUSED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SUPRA) AND WE DO NOT FIND ANY SUCH ITA NO.698/BANG/2011 PAGE 10 OF 14 CONDITION LAID DOWN IN THE AFORESAID DECISION. IT IS NO DOUBT TRUE THAT IN THE PRESENT CASE THE FUNDS THAT WERE DERIVED BY ISSUE O F DEBENTURES WERE USED FOR THE PURPOSE OF DISCHARGING THE ASSESSEES OBLIG ATION UNDER A ONE TIME SETTLEMENT SCHEME WITH IDBI BANK. IN OUR VIEW, THI S FACT WILL NOT HAVE ANY BEARING WHATSOEVER WHEN IT COMES TO CLAIMING DEDUCT ION ON ACCOUNT OF DISCOUNT ON ISSUE OF DEBENTURES. 10. THE ISSUE BEFORE THE HONBLE SUPREME COURT IN T HE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SUPRA) WAS THE ASSESSEE IN THAT CASE WAS A PUBLIC LIMITED COMPANY. IT ISSUED D EBENTURES OF THE TOTAL VALUE OF RS.1.5 CRORES. THE TOTAL DISCOUNT ON THE ISSUE OF RS. 1.5 CRORES AMOUNTED TO RS. 3 LAKHS. FOR THE ASST. YR. 1968-69 THE APPELLANT-COMPANY WROTE OFF RS. 12,500 OUT OF THE TOTAL DISCOUNT OF R S. 3 LAKHS BEING THE PROPORTIONATE AMOUNT OF DISCOUNT FOR THE PERIOD OF SIX MONTHS ENDING WITH 30TH JUNE, 1967, TAKING INTO ACCOUNT THE PERIOD OF 12 YEARS WHICH WAS THE PERIOD OF REDEMPTION AND DIVIDING THE DISCOUNT OF R S. 3 LAKHS OVER THE PERIOD OF 12 YEARS. EARLIER THE APPELLANT HAD ISSU ED DEBENTURES AT A DISCOUNT OF 1% REDEEMABLE AFTER 10 YEARS. THE DISCO UNT RELATING TO THESE DEBENTURES WAS BEING WRITTEN OFF PERIODICALLY. FOR THE ASST. YR. 1968-69, THE APPELLANT-COMPANY WROTE OFF A DISCOUNT OF RS. 10,00 0. THE ITO BY HIS ASSESSMENT ORDER DT. 31ST JAN., 1969 DISALLOWED THE CLAIM OF THE APPELLANT FOR DEDUCTION OF RS. 22,500 ON THE GROUND THAT DISC OUNT ON BONDS AND DEBENTURES WAS NOT ALLOWABLE AS AN EXPENDITURE. ON APPEAL, THE AAC BY ITA NO.698/BANG/2011 PAGE 11 OF 14 HIS ORDER DT. 4TH JULY, 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 R ELATED TO DISCOUNT ON DEBENTURES ISSUED IN AN EARLIER YEAR AND HENCE, IT DID NOT PERTAIN TO THE RELEVANT PREVIOUS YEAR. BEFORE THE TRIBUNAL, THE A SSESSEE CLAIMED THAT THE ENTIRE DISCOUNT ALLOWED AT THE TIME OF ISSUE OF DEB ENTURES 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. 1.5 CRORES. THE TRIBUNAL HELD THAT THE EXPENDITURE OF RS. 3,00,000 WAS INCURRED DURING THE RELEVANT PREVIOUS YEAR ALTHOUGH IT WAS PROPORTIONAT ELY WRITTEN OFF OVER A PERIOD OF 12 YEARS. THE EXPENDITURE OF RS. 3,00,000 WAS ALLOWABLE AS EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS. B UT THE MERE FACT THAT FOR ACCOUNTANCY PURPOSES THIS AMOUNT WAS SPREAD OVER 12 YEARS AND ONLY RS. 12,500 WAS WRITTEN OFF, BEING THE PROPORTIONATE AMO UNT FOR 6 MONTHS ENDING WITH 30TH JUNE, 1967, CANNOT MAKE ANY DIFFERENCE. O N FURTHER APPEAL BY THE REVENUE, THE HONBLE MADRAS HIGH COURT BY ITS JUDGM ENT AND ORDER DT. 5TH NOV., 1979, REPORTED IN (1980) 16 CTR (MAD) 175 : ( 1980) 124 ITR 454 (MAD) : TC 16R.235, REFRAMED THE QUESTION AS FOLLOW S : 'WHETHER THERE WAS ANY EXPENDITURE IN THE SUM OF RS . 2,87,500 AND WHETHER IT WAS REVENUE EXPENDITURE ?' ITA NO.698/BANG/2011 PAGE 12 OF 14 IT HELD THAT THE DISCOUNT OF RS. 3,00,000 DID NOT R EPRESENT ANY PAYMENT MADE TO ANY ONE SO AS 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 HAD 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. ON FURTHER APPEAL BY THE ASSESSEE, THE HONBLE SUPREME COURT HELD THAT ORDINARILY REVENUE EXPENDITURE WHIC H IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALL OWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT IS INCURRED AND THAT IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN IF THE ASSESSEE HAD WRITTEN IT OFF IN IT S BOOKS OVER A PERIOD OF YEARS, HAS HOWEVER, CARVED OUT AN EXCEPTION TO THE AFORESAID RULE AND HELD THAT DISCOUNT ON DEBENTURES IF ALLOWED TO BE DEDUCT ED IN ENTIRETY IN ONE YEAR MIGHT GIVE A DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YEAR AND THEREFORE THE ACCOUNTING TREATMENT GIVEN BY THE ASS ESSEE SPREADING OUT THE DISCOUNT ON DEBENTURES AND CLAMING DEDUCTION OF A PROPORTIONATE DEDUCTION OVER THE LIFE OF THE DEBENTURES WAS A PRO PER ACCOUNTING METHOD AND SHOULD BE ACCEPTED IN THE MATTER OF ALLOWING DI SCOUNT ON THE ISSUE OF DEBENTURES AS A DEDUCTION. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE HONBLE SUPREME COURT: ITA NO.698/BANG/2011 PAGE 13 OF 14 11. ISSUING DEBENTURES AT A DISCOUNT IS ANOTHER SUCH I NSTANCE WHERE, ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABI LITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES, TH E PAYMENT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE I S A CONTINUING BENEFIT TO THE BUSINESS OF THE COMPANY O VER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THEREFORE, BE SPREAD OVER THE PERIOD OF THE DEBENTURES. THE APPELLANT, THEREFORE, HAD, IN ITS RETURN, CORRE CTLY CLAIMED A DEDUCTION ONLY IN RESPECT OF THE PROPORTIONATE PART OF DISCOUNT OF RS. 12,500 OVER THE RELEVANT ACCOUNTING PERIOD I N QUESTION. IN THIS CONNECTION, WE AGREE WITH THE REASONING AND CONCLUSION OF THE MADHYA PRADESH HIGH COURT IN THE CASE OF M.P . FINANCIAL CORPN. VS. CIT (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 O FF OVER THE PERIOD OF THE DEBENTURES. 11. WE ARE OF THE VIEW THAT NOTHING CAN BE READ IN TO THE DECISION OF THE HONBLE SUPREME COURT TO THE EFFECT THAT THE SAID D ECISION WILL APPLY ONLY WHEN THERE IS FRESH FLOW OF FUNDS BY ISSUE OF DEBEN TURES AND NOT TO A CASE WHERE THE PROCEEDS PURSUANT TO ISSUE OF DEBENTURES ARE USED TO SETTLE AN EXISTING DEBT PAYABLE BY THE ASSESSEE. FURTHER REL IANCE PLACED BY THE CIT(A) ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GENERAL INSURANCE CORPORATION (SUPRA) , IN OUR VIEW, IS ALSO NOT JUSTIFIED AS THE SAME RELATES TO EXPENSES ON ISSUE OF BONUS SHARES, WHICH IS A DECISION RENDERED IN A TOTALLY DIFFERENT CONTEXT AS TO WHETH ER THE EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. WE ARE OF THE VIEW T HAT THE ASSESSING OFFICER WAS FULLY JUSTIFIED IN FOLLOWING THE DECISION OF TH E HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SUPRA) AND ALLOWING ONLY A PORTION OF THE DISCOUNT ON ISSU E OF THE DEBENTURES EQUAL TO THE PROPORTION FOR THE PERIOD FOR WHICH THE DEBE NTURES WERE TO BE ITA NO.698/BANG/2011 PAGE 14 OF 14 REDEEMED. WE THEREFORE REVERSE THE ORDER OF THE CI T(A) AND RESTORE THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD. 12. IN THE RESULT, THE APPEAL BY THE REVENUE IS ALL OWED. PRONOUNCED IN THE OPEN COURT ON THIS 2 ND DAY OF AUGUST, 2013. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 2 ND AUGUST, 2013. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.