The assessee issued debentures giving the debenture holders two options as regards to the payment of interest. They could either receive interest periodically<\/p>\n
i.e. half yearly at the rate of 18% per annum over a period of five years or opt\u00a0\u00a0\u00a0\u00a0 \u00a0for one time upfront receipt of discounted interest of Rs. 55\u00a0 per\u00a0 debenture. In\u00a0\u00a0 the second alternative, discounted interest of Rs. 55 per debenture was to be paid upfront. At the end of five years period, the debentures were to be redeemed at\u00a0\u00a0\u00a0 the face value of Rs. 100. Two of the debenture holders opted for the upfrontpayment of interest. In the books of account the said upfront payment of interest\u00a0 on debentures was recorded as deferred revenue expenditure and was\u00a0 written\u00a0 off over a period of five years. For the purpose of income-tax, entire payment of interest was claimed as a deduction under section 36(i)(iii) of the Act in the year\u00a0\u00a0 of payment itself. However, the AO, CIT(A), ITAT and High Court rejected the assessee\u2019s claim and held that though the amount was paid upfront, the same\u00a0\u00a0 was only allowable as a deduction over the tenure of the debentures i.e. over the period of five years.<\/p>\n
\u00a0<\/p>\n
Whether the upfront payment of interest to the debenture holders is allowable as\u00a0\u00a0\u00a0 a deduction in the year in which it is incurred and paid\u00a0 or it is to be spread over\u00a0 the life of the debentures?<\/p>\n
\u00a0<\/p>\n
In the case of Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) <\/em><\/strong>the Supreme Court has held that if a business liability has arisen in the accounting year, the deduction should be allowed in that year even if such a liability may have to be quantified and discharged at a future date.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n The Supreme Court held that in accordance with the terms and conditions of the issue of non-convertible debenture floated by the assessee the amount of interest became payable to the debenture holders on the exercise of option by them which occurred in the current assessment year in which deduction of the expenditure\u00a0 was claimed. As per section 36(1)(iii) of the Act, any interest expenditure paid\u00a0\u00a0\u00a0\u00a0\u00a0 by the assessee for the purpose of its business is allowable as a deduction. Further, \u2018paid\u2019 as per section 43(2) means actually paid or\u00a0 incurred. Therefore, the Supreme Court held that when the interest was actually incurred and paid\u00a0\u00a0\u00a0\u00a0\u00a0 by the assessee, the assessee would be entitled to deduction of the upfront payment of discounted interest on debenture in the assessment year in which it\u00a0\u00a0\u00a0\u00a0 is paid. The Supreme Court held that normally revenue expenditure incurred in\u00a0\u00a0\u00a0\u00a0 a particular year has to be allowed in that year itself and if the assessee claims\u00a0\u00a0\u00a0 that expenditure in that year,\u00a0 the\u00a0 department cannot deny the same. There is\u00a0 no concept of deferred revenue expenditure in the Income-tax Act, 1961, except where the section specifically provides for the same. Further, the treatment in the books of account do not determine the allowability or taxability of any item of expenditure or income. The deduction of any expenditure is permissible as per the provisions of the Act. The matching concept also does not come in the way of the assessee. If an assessee follows mercantile system of accounting, the expenditure becomes allowable once the liability to\u00a0 pay\u00a0 is\u00a0 incurred by\u00a0 the\u00a0 assessee. Even if the assessee treats such expenditure as deferred revenue expenditure in the books of account, then same shall not estop the assessee from claiming the entire deduction for the purpose of the Act. (AY. 1996-97, 1997-98, 1998-99) (CA Nos. 6366-6368of 2003 and 6946-6948 of 2004 dt. 23-3-2015)<\/p>\n Editorial: <\/em><\/strong>The order of the Bombay High Court in Taparia Tools Ltd. v. JCIT (2003) 260 ITR 102\/126 Taxman 544 (Bom) (HC) <\/em><\/strong>has been reversed. The principle laid down in this judgment that once the liability is incurred by the assessee it\u00a0\u00a0\u00a0 has to be allowed as an expenditure has been followed by the Supreme Court in CIT v. Modern Spinners Ltd. (2016) 382 ITR 472\/243 Taxman 437 (SC). <\/em><\/strong>This principle has been followed in the following judgments as well: CIT v. Oil & Natural Gas Corporation Ltd. (2016) 387 ITR 710 (Uttarakhand) (HC) Prithvi Associates v. ACIT (2016) 240 Taxman 621 (Guj.)(HC)<\/em><\/strong><\/p>\n \u201cThe law of love could be best understood and learned through little children.\u201d<\/em><\/p>\n – Mahatma Gandhi<\/p>\n \u00a0<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" S.36(1)(iii): Interest on borrowed capital \u2013 Upfront interest paid \u2013 Interest on debentures \u2013 Allowable in the first year or to be spread over a period of five years \u2013 Method of accounting \u2013 Held, entire expenditure to be allowed in the year in which interest expenditure is incurred and paid \u2013 Held, treatment in the books of account not determinative \u2013Matching concept not to be applied in such a case [S. 35D, 37(1), 43, 145]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13310","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3sG","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13310"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13310\/revisions"}],"predecessor-version":[{"id":13311,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13310\/revisions\/13311"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13310"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Held<\/h3>\n