Shetron Limited v. The Deputy Commissioner of Income-tax, Circle-12(3), Bangalore
[Citation -2020-LL-1015-35]

Citation 2020-LL-1015-35
Appellant Name Shetron Limited
Respondent Name The Deputy Commissioner of Income-tax, Circle-12(3), Bangalore
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 15/10/2020
Assessment Year 2006-07
Judgment View Judgment
Keyword Tags mercantile system of accounting • principle of matching concept • proportionate deduction • redemption of debenture • discount on debenture • expenditure incurred • revenue expenditure • waiver of interest • enduring benefit • discounted value • actual payment • capital asset
Bot Summary: The assessee in the books of accounts spread over the discount on debentures during the entire period of redemption in the proportion in which debentures were to be redeemed for a period of five years. The Assessing Officer by an order dated 15.12.2008 by placing reliance on decision of the Supreme Court in 'MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT', 225 5 ITR 802 held that discount on debentures was revenue expenditure but had to be allowed for a period of five years in proportion in which debentures were to be redeemed by the assessee. The assessee thereupon approached the Commissioner of Income Tax who by an order dated 21.02.2011 inter alia held that there was no fresh flow of funds in case of assessee and therefore, the discount on the debentures is revenue expenditure and is deductible in the year of its incurrence. Learned counsel for the assessee submitted that the tribunal failed to appreciate that the debentures were issued towards fund raising for business purposes and the funds were utilized for the discharge of the loan taken for business purposes, by which substantial benefit was availed by the assessee. In TAPARIA TOOLS LIMITED supra, the Supreme Court in paragraph 17 of the decision held that it is conscious of the principle that normally revenue expenditure is to be allowed in the same year, in which it is incurred at the instance of the assessee who wants spreading over the court can allow the assessee that benefit when it is found that there was a continuing benefit to the business of the company over the entire period and the aforesaid benefit can only be applied if the principle of matching concept is satisfied. The tribunal in our opinion has placed reliance on the decision in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra and the decision in the case of TAPARIA TOOLS LIMITED supra is not applicable in the case of the assessee as the assessee has failed to satisfy the principle of matching concept as the instant case is a case of financial transaction and test of matching principle cannot be made applicable as in the case of real estate following percentage completion method. The benefit of discount to the assessee is instant as assessee paid lesser amount as against the amount which was 12 actually payable and therefore, the aforesaid benefit has to be offered to tax in the same year.


1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 15TH DAY OF OCTOBER 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.515 OF 2013 BETWEEN: M/S. SHETRON LIMITED PLOT NO.1, BOMMASANDRA HOSUR ROAD, BANGALORE-560099 REP. BY ITS MANAGING DIRECTOR SIR. KARTIK NAYAK AGED ABOUT 46 YEARS S/O SRI. MANOHAR NAYAK. ... APPELLANT (BY SRI.PARTHASHARATHI , ADV.,) AND: DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 12 (3) R.P.BHAVAN NRUPATHUNGA ROAD BANGALORE - 560 001. ... RESPONDENT (BY SRI.K.V. ARAVIND, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 02.08.2013 PASSED IN ITA NO.698/BANG/2011 FOR ASSESSMENT YEAR 2006-07 PRAYING TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. 2 (II) ALLOW APPEAL AND SET ASIDE ORDER PASSED BY ITAT, BANGALORE IN ITA NO.698/BANG/2011 DATED 02.08.2013. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by assessee. subject matter of appeal pertains to Assessment year 2006-07. appeal was admitted by bench of this Court vide order dated 17.03.2014 on following substantial question of law: (i) Whether in law, tribunal was justified in holding that discount on issue of debenture was required to be spreadover in proportion to percentage of redeeming of such debenture and to be allowed only to extent of discount charged off in relevant year? (ii) When appellant following mercantile system of accounting has incurred expenditure of discount on 3 issuance of debenture, was it not liable to be allowed in same year in full as revenue expenditure? (iii) Whether ratio laid down by Supreme Court in Madras Industrial Investment Corporation Ltd. Vs. CIT (225 ITR 802) would apply to all cases irrespective of difference in facts and would prevail over later judgment of supreme Court in case of CIT VS. General Insurance Corporation (286 ITR 232)? 2. Facts leading to filing of this appeal briefly stated are that assessee is public limited company engaged in business of manufacture of metal package and cans. assessee filed return of income for Assessment Year 2006-07 and claimed deduction of Rs.5 Crores, being discount on issue of debentures. It was case of assessee before Assessing Officer that during Previous Year, assessee had issued Rs.38 Lakhs, 9% secured 4 redeemable non convertible debentures of Rs.100/- each of aggregate value of Rs.38 Crores at discounted value of Rs.33 Crores and difference of Rs.5 Crores was claimed as deduction. It was also pointed out by assessee that proceeds received on issue of debentures was used only for purpose of discharging obligation of assessee under One Time Settlement Scheme (OTS) with IDBI Bank and benefit received in form of waiver of interest from bank under scheme was offered to tax and discount on issue of debentures was claimed as deduction while computing income. assessee in books of accounts spread over discount on debentures during entire period of redemption in proportion in which debentures were to be redeemed for period of five years. Assessing Officer by order dated 15.12.2008 by placing reliance on decision of Supreme Court in 'MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT', 225 5 ITR 802 (SC) held that discount on debentures was revenue expenditure but had to be allowed for period of five years in proportion in which debentures were to be redeemed by assessee. Assessing Officer allowed sum of Rs.50 Lakhs as deduction for Assessment Year 2006-07 and claim for deduction for sum of Rs.4.5 Crores was rejected by Assessing Officer. 3. assessee thereupon approached Commissioner of Income Tax (Appeals) who by order dated 21.02.2011 inter alia held that there was no fresh flow of funds in case of assessee and therefore, discount on debentures is revenue expenditure and is deductible in year of its incurrence. appeal preferred by assessee was allowed. Being aggrieved, revenue filed appeal before Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). tribunal by order dated 02.08.2013 inter alia held that reliance placed by 6 Commissioner of Income Tax (Appeals) on decision of Supreme Court in case of 'COMMISSIONER OF INCOME-TAX, MUMBAI VS. GENERAL INSURANCE CORPORATION', (2006) 156 TAXMAN 96 (SC) is not justified as aforesaid decision relates to expenses on issue of bonus shares and aforesaid decision deals with issue whether expenditure is capital or revenue in nature and has no application to fact situation of case. It was also held that Supreme Court in MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. supra no where dealt with requirement of fresh flow of funds by issue of debentures. It was thus, held that Assessing Officer rightly relied on decision of Supreme Court in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra and allowed portion of discount on issue of debentures equaled to portion for period for which debentures were to be redeemed. tribunal therefore, quashed 7 order passed by Commissioner of Income Tax (Appeals) and restored order of Assessing Officer. In aforesaid factual background, assessee is in appeal before us. 4. Learned counsel for assessee submitted that tribunal failed to appreciate that debentures were issued towards fund raising for business purposes and funds were utilized for discharge of loan taken for business purposes, by which substantial benefit was availed by assessee. It was further submitted that discount given was incidental to benefit being obtained, which also incidentally suffered tax. It is also argued that Supreme Court in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra has not held that in all cases where expenditure incurred on debenture is redeemable after over period of time, expenditure should be spread over. Our attention has also been invited to decision of Supreme Court in 'TAPARIA TOOLS LIMITED VS. 8 JOINT COMMISSIONER OF INCOME TAX', (2015) 372 ITR 605 (SC). 5. On other hand, learned counsel for revenue submitted that assessee has not actually incurred expenditure of Rs.5 Crores and has merely issued debentures at discount. It is further submitted that decision relied upon by assessee in case of TAPARIA TOOLS LIMITED supra has no application to fact situation of case as in aforesaid decision, Supreme Court was dealing with actual payment of interest in form of upfront payment, whereas, in instant case, assessee has only offered / issued debentures at discount value and discount is not outflow for assessee and is not allowable expenditure. 6. We have considered submissions made by learned counsel for parties and have perused record. cardinal issue, which arises for consideration 9 in this appeal is whether claim of assessee for deduction of entire amount of Rs.5 Crores should be accepted or deduction should be allowed in proportion to which discount has been written off in books of accounts over period of five years. Supreme Court in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra held that ordinarily, revenue expenditure which is incurred wholly and exclusively for purpose of business must be allowed in its entirety in year in which it is incurred and that it cannot be spread over number of years even if assessee had written it off in its books over period of years, has however, carved out exception to aforesaid rule and held that discount on debentures if allowed to be deducted in entirety in one year might give distorted picture of profits of particular year and therefore, accounting treatment given by assessee spreading out discount on debentures and claiming deduction of proportionate deduction over life of 10 debentures was proper accounting method and should be accepted in matter of allowing discount on issue of debentures as deduction. In TAPARIA TOOLS LIMITED supra, Supreme Court in paragraph 17 of decision held that it is conscious of principle that normally revenue expenditure is to be allowed in same year, in which it is incurred at instance of assessee who wants spreading over court can allow assessee that benefit when it is found that there was continuing benefit to business of company over entire period and aforesaid benefit can only be applied if principle of matching concept is satisfied. 7. In instant case, assessee has not incurred expenditure of Rs.5 Crores but has merely issued debentures at discount. redemption of debenture takes place in stages over period of time and discount on debenture results in enduring benefit during period of debentures. However, expenditure 11 incurred in creating enduring benefit does not create any asset or add value to existing asset. There was no creation of capital asset, which would result in advantage of enduring benefit by discount on debentures. Therefore, assessee is entitled to deduction from income for current year only which is liable to be redeemed in first year as against entire discounts. Therefore, tribunal in our opinion has placed reliance on decision in MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. supra and decision in case of TAPARIA TOOLS LIMITED supra is not applicable in case of assessee as assessee has failed to satisfy principle of matching concept as instant case is case of financial transaction and test of matching principle cannot be made applicable as in case of real estate following percentage completion method. benefit of discount to assessee is instant as assessee paid lesser amount as against amount which was 12 actually payable and therefore, aforesaid benefit has to be offered to tax in same year. tribunal therefore, has rightly placed reliance on MADRAS INDUSTRIAL INVESTMENT COPORATION LTD. Supra. In view of preceding analysis, substantial questions of law are answered against assessee and in favour of revenue. In result, appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Shetron Limited v. Deputy Commissioner of Income-tax, Circle-12(3), Bangalore
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