Mrs. SUJATA V. MANOHAR, J. - (1.) THE appellant is a public limited company. THE present appeal filed by it pertains to the accounting year ending June 1967 relevant to the assessment year 1969-89.
(2.) ON 10/12/1966 a public issue of the debentures of the appellant-company was made. The total value of the debenturs was Rs. 1.5 crores repayable with interest at the rate of 5-3/ 4% per annum. The debentures were issued at a discount of 2%, redeemable after 12 years. The issue price of a debenture of Rs. 100.00 was Rs. 98.00. The total discount on the issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For the assessment year 1968-69 the appellant-company wrote off Rs. 12,500.00 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with 30/06/1967, taking into account the period of 12 years which was the period of redemption and dividing the discount of Rs. 3 lakhs over the period of 12 years. Earlier the appellant had issued debentures at a discount of 1% redeemable after 10 years. The discount relating to these debentures was being written off periodically. For the assessment year 1968-69 the appellant-company wrote off a discount of Rs. 10,000.00.Thus, in the balance-sheet as of 30th of June, 1967, on the Liabilities side the debentures issued during the relevant accounting year were shown at the figure of Rs. 1.50 crores. On the Assets side, the discount account of these debentures was as follows :- "Discount allowed on issue of Bonds (to the extent not written off) JUDGEMENT_666_4_1997Html1.htm The discount of Rs. 22,500.00 represented Rs. 12,500.00 written off out of the discount of Rs. 3,00 ,000.00 and Rs. 10,000.00 written off as discount of the previous issue. The Income-tax Officer by his assessment order dated 31/01/1969 disallowed the claim of the appellant for deduction of Rs. 22,500.00 on the ground that discount on bonds and debentures was not allowable as an expenditure. On appal, the Appellate Assistant Commissioner by his order dated 4/07/1969 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. 12,500.00 but rejected the claim as regards Rs. 10,000.00 on the ground that it related to discount on debentures issued in an earlier year and hence it did not pertain to the relevant previous year.
(3.) THE assessee then preferred an appeal before the Appellate Tribunal. THE assessee contended, inter alia, that (1) THE Appellate Assistant Commissioner had erred in sustaining the disallowance of Rs. 10,000.00 on the ground that it related to an earlier year and (2) THE Appellate Assistant Commissioner having held that discount allowed at the time of issue of debentures was to be treated as part of the expenditure incurred for such issue, should have further allowed a sum of Rs. 2,87,000.00 being balance amount of the total discount of Rs. 3,00,000.00 relating to the issue of debentures of Rs. 1,5 crores. Before the Tribunal the department contended that the appellant-company had, for the first time, made a new claim before the Tribunal for deduction of Rs. 2,87,000.00 and the Tribunal had no jurisdiction to examine this claim. This objection was rejected by the Tribunal. THE Tribunal held that the expenditure of Rs. 3,00,000.00 was incurred during the relevant previous year although it was proportionately written off over a period of 12 years. THE expenditure of Rs. 3,00,000.00 was allowable as expenditure incurred for the purpose of business. But the mere fact that for accountancy purposes this amount was spread over 12 years and only Rs. 12,500.00 was written off, being the proportionate amount for 6 months ending with 30/06/1967, cannot make any difference. THErefore, the Tribunal allowed a deduction of Rs. 2,87,500/- also. On the application of the Department, the Tribunal stated a case under Section 256 (1) of the Income-tax Act, 1961 to be decided by the Madras High Court. THE following two questions were referred to the Madras High Court :- "(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in permitting the assessee to raise the contention that the entire amount of Rs. 3,00,000.00 being the discount relating to the issue of debentures for Rs. 1.5 crores during the relevant previous year was to be allowed as a permissible deduction ? (2) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee had incurred an expenditure of Rs. 3,00,000.00 during the relevant previous year by way of discount paid to the persons who had subscribed to the debentures issued by it for Rs. 1.5 crores during the relevant previous year and the same was allowable as a revenue expenditure?" THE Madras High Court by its judgment and order dated 5/11/1979 (reported in (1980) 124 ITR 454) answered the first question in favour of the appellant-assessee. THE High Court reframed the second question as follows : "Whether there was any expenditure in the sum of Rs. 2,87,500.00 and whether it was revenue expenditure?" It held that the discount of Rs. 3,00,000.00 did not represent 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. 3,00,000.00 a discount of Rs. 12,500.00 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. 2,87,500.00 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. The present appeal is filed by the appellant-company against the second question as reframed by the Madras High Court and answered as above. We have first to consider whether the discount of Rs. 3,00,000.00 on debentures which were issued by the appellant-company is expenditure incurred by the appellant-company for the purpose of its business. The appellant-company actual received Rs. 1.47 crores as against which it incurred a liability to return a sum of Rs. 1.50 crores with interest at the end of 12 years (the date of redemption). This liability which the assessee incurred to pay the amount of Rs. 3,00,000.00 in addition to what it actually received, is being written off over the period of 12 years. Can it be treated as expenditure? In the case of Indian Molasses Co (Private) Ltd. v. Commr. Of Income-tax, West Bengal (1959) 37 ITR 66 : ( AIR 1959 SC 1049) this Court considered the meaning of "expenditure" under Section 10 (2) (xv) of the Income-tax Act 1922. The High Court was concerned with sums which were transferred by the company to trustees to take out an annuity policy on the life of the managing director or the longest life policy in favour of the managing director and his wife. There was a provision in the policy for surrendering the annuity for a capital sum after giving notice. The payment by the company to the trustees was contingent and the liability itself was contingent. The Court said that expenditure which is deductible for income tax purposes is one which is towards a liability actually existing at the time. Putting aside of money which may become expenditure on the happening of an even it not expenditure. During with what is expenditure, this Court said : that "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. The idea of spending in the sense of "paying out or away" money is the primary meaning. Expenditure is what is paid out or away, something that is gone irretrievably. In the case of Calcutta Co. Ltd., v. Commissioner of Income-tax, West Bengal, (1959) 37 ITR 1 : ( AIR 1959 SC 1165) decided in the same month, the assessee bought lands and sold them in plots for building purposes. The assessee undertook to develop the plots by laying out roads, providing a drainage system, installing lights etc. When the plots were sold the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee undertook to carry out the development of these plots. In the relevant accounting year, the assessee who followed the mercantile system of accounting, actually received in cash only a sum of Rupees 29,392/- towards the sale price of lands; but it credited in its accounts the sum of Rupees 43,692/- representing the full sale price of lands and at the same time it also debited an estimated sum of Rs. 24,809.00 as expenditure for the development it had undertaken on carry out even though that amount was not actually spent. The Department disallowed this expenditure. Upholding the claim of the assessee to deduction, this Court said that the undertaking given by the assessee imported a liability on the assessee which accrued on the dates of the deeds of sale though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of business. The difficulty in the estimation of liability did not convert the accrued liability into a conditional one. This Court said that the expression 'profits or gains' in Section 10 (1) of the Income-tax Act, 1922 had to be understood in its commercial sense; and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipt is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date.;