|CORAM:||A.K. Sikri J., Rohinton Fali Nariman J.|
|CATCH WORDS:||deferred revenue expenditure, matching concept|
|DATE:||March 23, 2015 (Date of pronouncement)|
|DATE:||March 24, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 36(1)(iii)/ 37(1): Normally revenue expenditure incurred in a particular year has to be allowed in that year and if the assessee claims that expenditure in that year, the Department cannot deny the same. Fact that assessee has deferred the expenditure in the books of account is irrelevant. However, if 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|
The assessee issued debentures in which two options as regards payment of interest were given to the subscribers/debenture holders. They could either receive interest periodically, that is every half yearly @ 18% per annum over a period of five years, or else, the debenture holders could opt for one time upfront payment of Rs. 55 per debenture. In the second alternative, 55 per debenture was to be immediately paid as upfront on account of interest. At the end of five years period, the debentures were to be redeemed at the face value of Rs. 100. The assessee paid to the debenture holder the upfront interest payment and claimed the same as a deduction. In the accounts, the interest expenditure was shown as deferred expenditure. However, the AO, CIT(A), ITAT and High Court rejected the assessee’s claim and held that though the amount was paid, the same was only allowable as a deduction over the tenure of the debentures. On appeal by the assessee to the Supreme Court HELD allowing the appeal:
(i) U/s 36(1)(iii) when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, the assessee would be entitled to deduction of full amount in the assessment year in which it is paid. While examining the allowability of deduction of this nature, the AO is to consider the genuineness of business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. Once the genuineness is proved and the interest is paid on the borrowing, it is not within the powers of the AO to disallow the deduction either on the ground that rate of interest is unreasonably high or that the assessee had himself charged a lower rate of interest on the monies which he lent;
(ii) The High Court wrongly applied the “Matching Concept” to deny the deduction of the upfront interest payment in the first year. As per the terms of issue, the interest could be paid in two modes. As per one mode, interest was payable every year and in that case it was to be paid on six monthly basis @ 18% per annum. In such cases, the interest as paid was claimed on yearly basis over a period of five years and allowed as well and there is no dispute about the same. However, in the second mode of payment of interest, which was at the option of the debenture holder, interest was payable upfront, which means insofar as interest liability is concerned, that was discharged in the first year of the issue itself. By this, the assessee had benefited by making payment of lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. We are, therefore, of the opinion that in order to be entitled to have deduction of this amount, the only aspect which needed examination was as to whether provisions of Section 36(1)(iii) read with Section 43(ii) of the Act were satisfied or not. Once these are satisfied, there is no question of denying the benefit of entire deduction in the year in which such an amount was actually paid or incurred;
(iii) The moment second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax  6 SCC 645, this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year;
(iv) The principle that emerges from Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax  4 SCC 666 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. In the instant case, the assessee did not want spread over of this 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 account 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 account 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  3 SCC 252; Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras  6 SCC 117; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta  4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta  8 SCC 338;
(v) At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, 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.
indeed very right view.
i would suggest to all constitutional courts introduce a system of drawal of judges – viz..
one from state judicial services at appropriate time, and drawal from the practising high court or supreme courts and the same such method need be followed in all levels of courts to provide to the citizen petitioners right mix of judges, so that much healthier judicial views can surface is my view..
this also would not force lawyers to seek panel lawyer appointment too, panel lawyer appointment is used as a tool by departments to affect the independence of advocacy..
this aspect was realized in the earlier British system of judiciary why the same cannot be followed, for it develops healthy legal system in the country. this system can minimize political control on advocates who want complete independence of advocacy!
Else issues like DK Ravi IAS suspected murder case in karnataka state might go on mounting.
The contextual relevance of the comment of the learned Dr., except the opening line, . is not understood; surely, he knows better.
As regards the view the SC has taken, particularly the given reasoning, as viewed, throws up some intriguing points, pivoted on , besides the “matching concept”, the other related concepts of relevance herein, being ,- “method of accounting”, “paid”, “incurred” and “accrued” ; which, as is expected , may have continued to keep nagging for long the mind of an ‘accountant’, if not a lawyer. Those points , as remembered, have been briefly brought to the fore and shared in , – A HAND BOOK ON TAX PRACTICE (Publisher – Puliani and Puliani)
(may be contd.)
I. To recap, the viewpoints on the mentioned concepts as shared in the cited book are briefly these:
i ) Any debit in the accounts in accordance with the accounting practice based on what is known as ‘matching concept’ is not to be regarded as ‘accrued due’, being the legal meaning of ‘incurred’;
ii) The accounting practice since changed for long, for ‘companies’ , ‘accrual’ method of accounting is mandated;
with no option given; hence ‘cash’ method remains ruled out.
iii) The term ‘paid’, as specially defined, means (a) ‘actually paid’ (i.e. cash) OR (b) ‘incurred according to the method of accounting’.
In today’s context, however, the third method known as ‘mixed’ is no longer an option, hence of no relevance. As such, and as ‘cash’ has been separately spelt out as in (a) , the latter expression (b) can only mean ‘accrued due’. What is intriguing is, why then, the term ‘accrual’ makes sense any longer; albeit it is, continued to be used, unwittingly or otherwise, both for accounting and tax.
II. Certain observations of the SC, as read and understood, wprt section 36 (1)(iii) , seem to imply that, if so chosen by assessee, claim could be spread over, following the ‘matching concept’, for accounting . so also for tax.
Nonetheless, if independently analyzed, there could possibly be a different but better view taken. Why say so ? For reasoning, may look up the study as set out in the published Article (TAXMANN) – 14 CPT 819 (at 821, 822)
Among the points qualified as ‘intriguing’ , the most concern is the definition of ‘paid’ adverted to
On loud thinking :
As per settled position in law, “income’ , if it has been received, attracts tax at that point in time; with no need to further go into and probe as to whether or not accrued .
If so, in sync, expenditure once paid, has to be allowed – that appears to be the crux of the SC judgment.
Anyone having a contra viewpoint !