The main legal point established in the judgment is that the discount on debentures is a revenue expenditure and should be spread over the period of the debentures, and the premium payable on redemption of debentures is also deductible as revenue expenditure.

(Tax Case Appeals filed under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal ‘A’ Bench dated 30.08.2005 in ITA No.1168/Mds/97 for the assessment year 1993-94. and ‘C’ Bench dated 19.7.2004 in ITA No.351/Mds/98 for the assessment year 1994-95.)

P.D. Dinakaran, J.

Mr. V.S. Jayakumar, learned counsel takes notice on behalf of the respondent.

The above tax case appeals are directed against the orders of the Income Tax Appellate Tribunal dated 30.08.2005 and 19.07.2004 made in ITA No.1168/Mds/97 and ITA No.351/Mds/98 for the assessment years 1993-94 and 1994-95.

2. The brief facts are as follows:

The Revenue is the appellant. The relevant assessment years are 1993-94 and 1994-95. For the said assessment years, the assessee claimed deduction of amount paid towards provision for premium payable on redemption of debentures in future years. The assessing officer disallowed the same and also disallowed the amount claimed on the debenture issue expenses. Aggrieved by the order of the assessing officer, the assessee preferred appeals before the Commissioner of Income-Tax (Appeals), who confirmed the order of the assessing officer relying on the earlier orders in the assessee’s own case for the assessment year 1988-89. On further appeals before the Income Tax Appellate Tribunal at the instance of the assessee, the Tribunal allowed the appeals following the assessee’s own case and also the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. V. Commissioner of Income Tax reported in 225 ITR 802. Hence, the present appeals by the Revenue raising the following substantial questions of law:

T.C. (A) Nos.209/06 and 1099/04:

1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the premium payable on actual redemption of debentures in future years is to be spread over and part of it is allowable as a deduction in this Assessment year?

T.C. (A) No.209/06:

2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred for issue of debentures in earlier years is to be spread over and allowed as a deduction in this year?

3. While the first question is related to the deduction of the premium payable on actual redemption of debentures and spreading over the period of the debentures, the second question relates to the deduction of the expenditure incurred for issuing debentures and which is to be spread over the period of debentures and thus both are inter-related. Hence, both the questions are dealt with jointly.

4.1. It is a settled law that the discount on debenture is a revenue expenditure and hence the same is deductible under Section 37 of the Income-Tax Act.

4.2. It is apt to refer Section 37 of the Income Tax Act, which reads as follows:

37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “ Profits and gains of business or profession.”

5.1. The questions whether the discount on debenture is the revenue expenditure or capital expenditure and the same could be spread over and that whether the expenditure incurred for the issue of debenture in earlier years has to be spread over and allowed as a deduction in future years came for consideration before the Apex Court in the case of Madras Industrial Investment Corporation Ltd. V. Commissioner of Income Tax reported in 225 ITR 802, wherein the Apex Court observed that when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what is borrowed. The liability to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purpos