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Commissioner of Income-tax Vs. Madras Industrial Investment Corporation Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 179 of 1975 (Reference No. 162 of 1975)
Judge
Reported in(1980)16CTR(Mad)175; [1980]124ITR454(Mad)
ActsIncome Tax Act, 1961 - Sections 31, 66(1), 66(2), 84, 253 and 256(1); Income Tax Act, 1922 - Sections 10(2) and 33(4); Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950; Indore Industrial Tax Rules
AppellantCommissioner of Income-tax
RespondentMadras Industrial Investment Corporation Ltd.
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateK. Srinivasan, Adv.
Cases ReferredLomax (Inspector of Taxes) v. Peter Dixon
Excerpt:
direct taxation - assessment - sections 31, 66 (1), 66 (2), 84, 253 and 256 (1) of income tax act, 1961 and income tax act, 1922 - whether tribunal right in permitting assessee to raise contention that entire amount of rs. 300000 being discount relating to issue of debentures for rs. 1.5 crores to be allowed as permissible deduction - entry in discount account show that there was no payment or scope for payment to anyone - no corresponding receipt of rs. 300000 to correlate expenditure claimed by assessee - no expenditure laid out or incurred by assessee which could be allowed as deduction to that extent - no evidence to show any payment to subscribers - question answered in negative. - sethuraman, j.1. in this reference under section 256(1) of the i.t. act, 1961, the following questions have been referred :'(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 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 ? (ii) 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 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.....
Judgment:

Sethuraman, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following questions have been referred :

'(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 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 ?

(ii) 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 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 '

2. The assessee is a public limited company, sponsored by the Tamil Nadu Government, with the main object of advancing long-term loans to industrial concerns. It underwrites the issue of capital by such concerns. On 10th December, 1966, which falls within the accounting year ended 30th June, 1967, relevant for the assessment year 1968-69, the assessee made a public issue of debentures of the total value of Rs. 1.5 crores carrying interest at 5.75% per annum. The issue price was Rs. 98 per bond of Rs. 100. The total discount on the issue of 1.5 crores of rupees thus amounted to Rs. 3,00,000. The period of redemption of the debentures was 12 years, and the assessee wrote off Rs. 12,500 being the proportionate amount of the discount for the period of six months ending with 30th June, 1967. The assessee had issued debentures carrying an interest of 4% earlier on 11th August, 1958. There was an issue of 4|% debentures at a discount of 1% redeemable after the period of 10 years. The total issue came to Rs. 99,93,000 and the discount relating to these debentures was being written off periodically. In the year under consideration, a sum of Rs. 10,000 was written off.

3. On the ' liabilities ' side of the balance-sheet, as on 30th June, 1967, the debentures issued was shown at the figure of Rs. 1.50 crores. On the ' assets ' side, the discount account of debentures was shown, and it runs as follows:

Rs. Rs. 'Discount allowed on issue of bonds

(to the extent not written off) Up to last balance-sheet....22,500Additions during the year....3,00,000

3,22,500Less : Amount written off....22,500

3,00,000

4. The assessee filed a return of income claiming the deduction of Rs. 22,500 mentioned above, being the proportionate amount of discount claimed to have been paid to the subscribers of the debentures consisting of Rs. 10,000 relating to the 41/2% debentures issued in 1958 and Rs. 12,500 in relation to debentures issued in this year. The ITO disallowed the claim of Rs. 22,500 observing that ' the discount on bonds and debentures, which is not allowable as an expenditure, is disallowed '.

5. The assessee appealed to the AAC contending, inter alia, that the sum of Rs. 22,500 should have been allowed as deduction. The AAC upheld the claim for deduction of Rs. 12,500, bat rejected the claim as regards Rs. 10,000 on the ground that it related to the debentures issued in the year 1958 and that it did not pertain to the relevant previous year.

6. The assessee appealed to the Tribunal, and in the grounds of appeal, it was stated that ' the Appellate Assistant Commissioner, having held that the discount allowed at the time of issue of bonds must be treated as part of the expenditure incurred for such issue, should have further allowed a sum of Rs. 2,87,500 being the balance amount of the total discount of Rs. 3,00,000 relating to the issue of the debentures for Rs. 1.5 crores '. The Tribunal held that instead of receiving from each subscriber at the rate of Rs. 100 for each debenture subscribed, and returning to him Rs. 2 for each debenture by way of discount, the issue price was stated at Rs. 98 and that a subscriber was required to pay only at the rate of Rs. 98 per debenture of the face value of Rs. 100. The view of the Tribunal was that the expenditure of Rs. 3,00,000 was incurred during the relevant previous year, and that though for accounting purposes this amount was distributed over 12 years and only Rs. 12,500 was written off during the relevant previous year, the accounting entries could not make any difference to the application of the principle and that, therefore, the assessee was entitled to deduction of the balance of Rs. 2,87,500. The result was that the appeal of the assessee on this point succeeded, and the matterhas been brought before us on reference at the instance of the Commissioner.

7. The first question raises a point of jurisdiction as to whether the assessee could be permitted to raise this contention before the Tribunal. The contention was that the assessee having agitated for the allowance of only Rs. 12,500 before the AAC and having obtained that allowance from the AAC, could not feel aggrieved against the decision of the AAC so as to justify an appeal to the Tribunal on this point. It was further contended that with reference to the sum of Rs. 2,87,500 the matter had not been raised before the ITO and had not been considered by him, that the matter had not also been raised before the AAC and that, therefore, the point could not be taken for the first time before the Tribunal.

8. The jurisdiction and powers of the Tribunal have been considered in several decisions of the Supreme Court. In Hukumchand Mills Ltd. v. CIT : [1967]63ITR232(SC) , the assessee carrying on business in Indore (Indian State) was assessed to income-tax before independence in what was then British India. After the Constitution of India came into force, Indore became a Part B State, and the Indian I.T. Act, 1922, was introduced to it with effect from 1st April, 1950. For the assessment years 1950-51 to 1952-53, one of the points raised before the ITO related to the determination of the proper ' written down value ' of the building, machinery, etc., for calculation of the depreciation allowance. The Tribunal held that only that part of the depreciation, which had entered into the computation of the taxable income of the assessee under the Indian I.T. Act of 1922 for the assessment years prior to 1950-51, could be treated as depreciation actually allowed, and not the total depreciation which went into the computation of the total world income. The Tribunal, however, permitted the department to raise a contention that the ITO had not considered the provisions of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, and accepting it, remanded the matter back to the ITO to ascertain whether any depreciation was allowed under the Indore Industrial Tax Rules. If those rules related to income-tax or super-tax on profits of business, the ITO was required to take into consideration such depreciation as was actually allowed under the Rules for the purpose of computing the written down value. The assessee contended that the Tribunal should not have allowed the department to raise the contention for the first time before it and remanded the case. The Supreme Court held that the Appellate Tribunal had sufficient power under Section 33(4) of the I.T. Act to entertain the contention of the department and remand the case to the ITO. After referring to Section 33(4) of the 1922 Act, which provides for the Appellate Tribunal ' passing such orders thereon as it thinks fit ', it was observed that the word ' thereon ' in Section 33(4) restricts the jurisdictionof the Tribunal to the subject-matter of the appeal, that the words ' pass such order as the Tribunal thinks fit ' include all powers (except possibly the power of enhancement) which are conferred on the AAC by Section 31 of the Act, and that consequently the Tribunal has authority under this section to direct the AAC or the ITO to hold a further enquiry and dispose of the case on the basis of such enquiry. At page 238 it was added :

' We are accordingly of the opinion that the Tribunal had jurisdiction to entertain the argument of the department in this case and to direct the Income-tax Officer to find whether any depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation should be taken into consideration for the purpose of computing the written down value. '

9. It may be seen that^what the Supreme Court was concerned with in that case was whether the Tribunal could entertain a fresh submission or contention on the part of the department, which had not been considered by the AAC.

10. In CIT v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) , the assessee, carrying on business in the manufacture and sale of cotton yarn, spent Rs. 93,215 for introduction of the ' Casablanca conversion system '. The assessee claimed development rebate on the ground that the introduction of this system involved installation of new machinery. For the first time before the Appellate Tribunal, there was an alternative claim that the amount of Rs. 93,215 was, in any event, expenditure for current repairs allowable under Section 10(2)(v) of the Indian I.T. Act, 1922. The Tribunal held that though development rebate was not admissible, this sum of Rs. 93,215 was allowable as an expenditure. One of the questions referred to the High Court was whether the Tribunal had jurisdiction to decide whether the sum of Rs. 93,215 constituted an allowable item of expenditure under Section 10(2)(v) of the 1922 Act. The High Court held that the Tribunal had jurisdiction. When the matter was taken on appeal, the Supreme Court observed at pages 712 and 713 as follows :

' By the first question the jurisdiction of the Tribunal to allow a plea inconsistent with the plea raised before the departmental authorities is canvassed. Under Sub-section (4) of Section 33 of the Indian Income-tax Act, 1922, the Appellate Tribunal is competent to pass such orders on the appeal ' as it thinks fit '. There is nothing in the Income-tax Act which restricts the Tribunal to the determination of questions raised before the departmental authorities. All questions whether of law or of fact which relate to the assessment of the assessee may be raised before the Tribunal. If for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground isjustified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him.'

11. It may be seen that in this case what the assessee originally claimed was only a fraction of the sum of Rs. 93,215 spent by him on the introduction of the conversion system, the fraction representing the development rebate which is a part of the asset, admissible under the law. However, when the matter came before the Tribunal, the assessee put forward a different ground and took the plea that the entire amount of Rs. 93,215 was allowable as deduction. The result of the Tribunal's order accepting this alternative plea was to reduce the total by Rs. 93,215, as against a fraction thereof originally considered by the ITO and the AAC. This decision envisaged a duty on the part of the departmental authorities to grant relief on any ground, if that relief was admissible under the law. The assessee is not restricted only to the plea raised by him before the departmental authorities.

12. On the same day, there was another decision of the Supreme Court, CIT v. 5. Nelliappan : [1967]66ITR722(SC) . In that case, the assessee was a transport operator. The assessing officer rejected the account books and made several additions to the book profits. The additions were confirmed on appeal. Before the Tribunal the assessee raised various points, apart from objecting to the estimate of the income as made by the income-tax authorities. The Tribunal found that the estimate of the profits worked out to an average of Rs. 4,000 per vehicle, and that this estimate could not be said to be excessive or unreasonable. The Tribunal declined to deal with the other contentions raised by the assesssee on the view that those contentions had a direct bearing ultimately only on the final quantum and that the ' overall quantum ' was not excessive. The High Court, on reference, held that the Tribunal was bound to go into the individual items, and directed the appeal to be disposed of afresh. At the hearing before the Tribunal, pursuant to the order of the High Court, the assessee contended that cash credits of Rs. 19,796 and Rs. 32,700 assessed for the two years in appeal should be deleted. While taking the view that the cash credits deserved to be treated as the income of the assessee in the respective years, the Tribunal observed that ' since in each of the two years under appeal additions to the book profits had been accepted in excess of the amounts of cash credits, additions of those credits had become redundant and should be deleted '. The ITO was directed to amend the assessment accordingly. The questions raised for reference to the High Court were :

' (i) Whether the Tribunal was right in law in deleting the addition and

(ii) Whether the Tribunal was right in law in making out a new case for the assessee inconsistent with the assessee's own plea and interfering with the assessment '

13. The Tribunal rejected the reference and the High Court declined to exercise its power under Section 66(2). There was an appeal by the Commissioner consequent on the grant of special leave to the Supreme Court. At pages 724 and 725, the Supreme Court, pronouncing on the jurisdiction of the Tribunal to go into the assessability of the cash credits, observed as follows :

' In hearing an appeal the Tribunal may give leave to the assessee to urge grounds not set forth in the memorandum of appeal, and in deciding the appeal the Tribunal is not restricted to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal. The Tribunal was, therefore, competent to allow the assessee to raise the contention relating to the cash credits which was not made the subject-matter of a ground in the memorandum of appeal. It cannot be said that in accepting the contention of the assessee that the cash credits represented income from the business withheld from the books, the Tribunal made out a new case inconsistent with the assessee's own plea. In any event the Tribunal is not precluded from adjusting the tax liability of the assessee in the light of its findings merely because the findings are inconsistent with the case pleaded by the assessee.'

14. This case establishes that even a new case not taken in the memorandum of appeal could be permitted to be urged by the Tribunal.

15. There is, however, another line of case in Moti Ram v. CIT : [1958]34ITR646(SC) . The assessee was carrying on a business in cloth in Srinagar for a long time. In 1943-44, he started a similar business in Amritsar. He remitted from Srinagar to Amritsar a sum of Rs. 5,00,000, approximately in payment of the purchase price of goods there, of which Rs. 3,00,000 were found by the ITO assessing the assessee in Amritsar to have been the income earned in Kashmir (Indian State) and remitted to the then British India. This sum was brought to tax accordingly. In the appeal before the AAC, the amount remitted out of the profits was taken to be only Rs. 1,20,000. In the further appeal to the Tribunal, it remanded the case to the ITO for a proper enquiry and report as to whether, and if so, to what extent, the moneys remitted to British India included the profits of earlier years available for remittances. The assessee was not in a position to establish as to what were the profits available for remittances nor to show that the remittances were only out of capital. The result was that the sum assessed by the AAC was taken to be the proper amount assessable in the assessee's hands. After receipt of this report from the ITO, at the time of the hearing of the appeal, the assessee contended that even with reference to the sum of Rs. 1,20,000, the post office or the banks were the agents ofthe recipient and that, therefore, no moneys were brought by the assessee into British India. The Tribunal felt that this contention raised new questions of fact, which could not be decided without taking further evidence, and so it did not allow the assessee to raise it. The attempt of the assessee to take the matter on reference under Sections 66(1) and 66(2) failed. Thereafter, the matter was taken on appeal by special leave to the Supreme Court. At page 649, it was observed as follows :

' We are clear in our mind that the Tribunal was right in holding that the question raised by the appellant could not be decided without taking further evidence. The Tribunal refused permission to the appellant to lead futher evidence and it had full jurisdiction to do so. We see no reason to interfere with the exercise of the Tribunal's discretion in the matter. '

16. In Addl. CIT v. Gurjargravures P. Lid. [1978] 1001 ITR 1 , one of the grounds of appeal raised by the assessee in the appeal before the Assistant Commissioner was that the ITO had erred in not giving him the benefit of Section 84 of the I.T. Act of 1961. No such claim had been made before the ITO when he completed the assessment nor was there any material on record supporting such a claim. In subsequent years relief under Section 84 was allowed to the assessee. The AAC dismissed the assessee's appeal holding that there was no question of any error committed by the ITO, as no claim for exemption under Section 84 was made before him. On further appeal, the Tribunal proceeded on the view that since the entire assessment was open before the AAC, there was no reason for his not entertaining the claim and directed the ITO to allow the appropriate relief. The High Court upheld the competence of the Tribunal to pass such order. In the appeal, the Supreme Court held, reversing the decision of the High Court, that as there was no claim before the ITO regarding the relief under Section 84, and there was no material on record in support thereof, it could not be assumed that the prescribed conditions justifying a claim for relief under Section 84 were fulfilled. It was also pointed out that the mere fact that such a claim had been allowed in subsequent years would not affect the issue and that the Tribunal was not competent to hold that the AAC should have entertained the question of rebate under Section 84 and directed the ITO to allow the relief. When the ITO brought an item to tax, he could not be deemed to have considered its non-taxablity though no such claim was made before him by the assessee. From these two decisions, it appears that where the point is taken for the first time before the appellate authorities, the appellate authorities would have a discretion not to allow the assessee to raise such a new point, when the consideration of the new point would involve investigation of facts which are not on record.

17.Thus, the legal position is clear that neither the assessee nor the department is restricted to the plea put forward at any earlier stages, when the matter travels through the hierarchy of authorities, and that it would be open to the Tribunal to consider any fresh plea in the exercise of its discretion. Even where consequences of the acceptance of the assessee's plea would involve granting a larger amount as deduction than was demanded at the stage of assessment, the Tribunal would have jurisdiction to consider such a plea. The Tribunal has, however, discretion not to admit any fresh plea being put forward when it would involve investigation of facts.

18. Considerable reliance was placed for the department on the decision of CIT v. Karamchand Premchand P. Ltd. : [1969]74ITR254(Guj) . In that case the assessee made three claims for deduction regarding (1) depreciation, (2) development rebate and (3) expenditure incurred by way of stamp duty, registration charges, etc., in connection with the issue of debentures, to secure a loan borrowed for the purpose of the business. For our present purposes, it is only the third plea that is relevant. The ITO rejected it, and the assessee did not take up this point on appeal. The result was that the AAC was not called upon to consider it. When the matter reached the Tribunal on further appeal, there was a pronouncement of the Supreme Court bearing on the allowability of the expenditure in the case of India Cements Ltd. v. CIT : [1966]60ITR52(SC) , and the assessee, therefore, sought to agitate it by means of an additional ground. The Gujarat High Court held that the Tribunal could not have allowed the assessee to take up such a plea for the first time before it, and after elaborately considering several decisions, it observed as follows (p. 266 of 74 ITR) :

' Whatever grounds of appeal could be taken by the appellant in the memorandum of appeal, he can urge them with leave of the Tribunal if he has omitted to take them in the memorandum of appeal. But if he was not entitled to take a ground of appeal even in the original memorandum of appeal, he cannot avail of this rule and improve his position by obtaining leave of the Tribunal. Since we are of the view that there being no decision of the Appellate Assistant Commissioner on the point whether the disallowance of the third claim was proper, the assessee was not entitled to appeal against it to the Tribunal and the ground of appeal relating to such disallowance could not, therefore, have been taken even in the memorandum of appeal, we must hold that the Tribunal was not entitled to allow the assessee to agitate this question under the guise of granting leave under this rule (Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963). '

19. The case of CIT v. 5. Nelliappan : [1967]66ITR722(SC) , referred to earlier in this judgment, was cited before the Gujarat High Court. It was held that the Supreme Court had not said that even where a decisionof the ITO on a particular item was not challenged before the AAC and the AAC had not considered and decided that matter, it could still be agitated by the assessee in the appeal before the Tribunal.

20. This decision of the Gujarat High Court turned on a different question. It was a case where the assessee had not raised the matter on appeal before the AAC and, took up the objection to the assessment for the first time before the Tribunal. The learned counsel for the department contended that as far as the sum of Rs. 2,87,500 is concerned, the present case would fall within the ratio of the Gujarat High Court. We are unable to agree with him. The assessee claimed deduction of Rs. 1,25,000 which is part and parcel of the sum of Rs. 3,00,000. It is this claim for deduction that was accepted by the AAC. Consistent with the view of the AAC, the assessee wanted a larger deduction, and that is how the matter was brought before the Tribunal. So long as the matter agitated before the Tribunal formed part and parcel of the original claim made before the AAC, it cannot be stated that the assessee was trying for the first time to agitate the question of deduction of a particular ground in second appeal.

21. There is a distinction between a case where the assessee makes a claim for the first time before the Tribunal and a case where the assessee on the same facts prays for a larger relief. The latter class of cases is represented by the decision of the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) , and in those classes of cases there can be no question of objection to the jurisdiction. In that case, what the assessee did was only to require the grant of the appropriate amount as the relief, though he had prayed for a smaller amount as deduction at the earlier stage. That case affords a close parallel to this case.

22. The learned counsel for the Commissioner contended that only if the assessee was aggrieved by an order of the ITO, he could appeal to the AAC and that only if he was aggrieved by the order of the AAC, he could file an appeal before the Tribunal, and that where the AAC had accepted the assessee's plea, there could be no question of any grievance. It has been held that an assessee, who denied his liability to be assessed under the Act, is entitled to appeal on that ground even if he had not denied his liability before the ITO. See Muthuwappa v. CIT : [1962]46ITR1107(Mad) . If a point which was not agitated before the ITO could be the subject of a grievance before the AAC, as in the above case, similarly to the extent to which the point had not been taken before the AAC, the assessee could have a grievance. We do not, therefore, find anything in Section 253 to stand in the way of the assessee to put forward the claim for deduction of Rs. 2,87,500. The assessee may have a grievance against the order of the AAC, even though the grievance may not have comprehended the entire amount which the assessee put forward as deductible in the further appeal.

23.In Pt. Sheo Nath Prasad Sharma v. CIT : [1967]66ITR647(All) , R. S. Pathak J. (as he then was), sitting singly, held that the order of the Commissioner rejecting the revision application on the ground that the assessee, himself had shown the amount as his income was erroneous, as the Commissioner was bound to apply his mind to the question whether the assessee was taxable on that income. What applies to a revision should logically apply to an appeal, as the appellate power is wider than the revisional power.

24. In CIT v. Sayaji Mills Ltd. : [1974]94ITR26(Guj) , the AAC refused to permit the assessee to contend that the profits realised on the sale of machinery in the relevant previous year were not taxable because the business was not in existence at any time during the relevant previous years. The reason was that the contention had not been raised before the ITO, and that it would also involve investigation into new questions of fact. The Tribunal on appeal held that the contention went to the root of the matter and should be considered and, therefore, directed the AAC to consider it. On a reference, it was held by the Gujarat High Court that the decision of the Tribunal was correct, that all questions, whether of law or of fact, which related to the assessment of the assessee might ordinarily be allowed to be raised by him in appeal even though it might not have been raised before the ITO, if grant of relief would follow as a consequence of the determination of such questions. It was also observed that the Tribunal rightly felt that substantial justice required in that case that the claim of the assessee, although it was advanced for the first time before the AAC, should be investigated by him. Thus, the failure to raise a point before the ITO does not involve the consequence that the assessee cannot feel aggrieved by the assessment to that extent.

25. Similarly, an assessee could put forward a claim for a larger deduction which he had not urged before the lower authorities, and it would be open to the Tribunal as the final fact-finding authority, to consider such a claim. The result is that the first question has to be answered in the affirmative and in favour of the assessee.

26. We now consider the second question, which relates to the deductibility of Rs. 3,00,000 and not merely Rs. 12,500 which is part of it and which has been allowed by the AAC. On this point, the real question is as to what is the contract or the nature of the transaction at the time of the issue of the debentures, and also whether the assessee had incurred any expenditure in the sum of Rs. 3,00,000. We have already set out the facts relating to the issue of debentures. The assessee offered the debentures at Rs. 98 per bond of the face value of Rs. 100. This is what is called' issue of bonds or debentures at a discount '. The face value of the bond being Rs. 1'5 crores, the asseasee was obliged to show in its books the sum of Rs. 1.5 crores and exhibit it as a liability in the balance-sheet. As the assessec had actually received only Rs. 1.47 crores, it was under the obligation to show the sum of Rs. 3,00,000 in the assets side, in order to balance the sum of Rs. 1.50 crores shown as the issue of debentures. This it did by creating an account called the ' discount account '. The sum of Rs. 3,00,000 is not really an asset, as the assessee would not be in a position to encash it at any time. This is what the accountants call a kind of fictitious asset. In order to maintain the true and fair position of the affairs of the company, this amount of fictitious or non-existent asset has to be periodically written off, so that it disappears from the balance-sheet by the time the debentures are redeemed. The assessee contemplated writing off the sum of Rs. 3,00,000 in annual instalments of Rs. 25,000 and as in the present year subsequent to the issue of debentures, there was only a half year period, one-half of Rs. 25,000, i.e., a sum of Rs. 12,500, was written off and it is this amount that was claimed as deduction. The AAC has allowed this amount. We are not now concerned with this allowance, because the department did not take the matter on appeal to the Tribunal. The allowance of Rs. 12,500 has become final. As regards the balance of Rs. 2,87,500 taken up before the Tribunal and allowed by it, the contention urged for the Commissioner is that there was actually no expenditure incurred by the assessee in the relevant year and that, therefore, the amount could not have been treated as deduction. It was also submitted that there was no actual receipt to the extent of Rs. 3,00,000, so that there could be any outgoing to that extent. For the assessee, the submission was that this is only in the nature of an actual issue of the bonds or debentures for Rs. 100 and payment back to the subscribers of Rs. 2 per bond and that in this sense there was an expenditure.

27. There was no decision bearing on the question of the effect of the issue of debentures at a discount as far as the issuing company is concerned. There is, however, a decision of the Court of Appeal in the case of the recipient or the subscriber of the bonds in Lomax (Inspector of Taxes) v. Peter Dixon & Son Ltd. [1944] 12 ITR (Supp) 1 . In that case, the assessee, a company, lent 319,600 to a Finnish subsidiary. There was an agreement to repay this amount in instalments. The Finnish- company agreed to issue 680 notes of 500 each at a discount, of 6% bearing a stated rate of interest and repayable in batches of one hundred on named dates. There was also a provision for redemption at a premium of 20% in case the Finnish company's profits reached a specified level. The question was whether the receipt of the full amount of each bond of 500 to the extent of the discount imbedded therein was liable to tax. The Court of Appealheld that the discount must be treated as capital and, therefore, not assessable to tax. At page 9, Lord Greene M.R. observed as follows :

' It is perfectly true that a company may be able to obtain subscribers by issuing debentures at par at a high rate of interest just as well as it can by issuing them at a lower rate of interest below par or with a premium on redemption. The two methods are, however, essentially different, although actuarially they will normally produce the same result. But, for income-tax purposes, the result is, I think, different according as the company chooses the one method rather than the other. The Crown is, in my opinion, bound by the company's choice and cannot go behind it. '

28. At page 12 one of the propositions is :

' Where a loan is made at or above such a reasonable commercial rate of interest as is applicable to a reasonably sound security there is no presumption that a ' discount ' at which the loan is made or a premium at which it is payable is in the nature of interest. '

29. It is pointed out that the excellence of the security would be expressed in terms of capital if it is issued at a premium, and the defect in the security would be expressed in terms of capital if it is issued at a discount. It was also pointed out that no businessman would regard the discount or the premium as anything but capital assets. These observations have, however, been made only in the context of the company subscribing to the debentures. As to what effect it has in the hands of the company would require consideration on an appropriate occasion. However, as far as this case is concerned, it is enough to examine it in the light of the fact that there was no receipt of Rs. 3 lakhs or expenditure of a like amount.

30. In Indian Molasses Co. (P.) Ltd. v. CIT : [1959]37ITR66(SC) the managing director of a company who had served it for 13 years, was due to retire at the age of 55 in 1955. In the implementation of an agreement to provide a pension for him the company paid a certain amount to the trustees and executed a deed whereby it undertook annually to pay a particular amount for six consecutive years. The trustees undertook to hold the amount upon trust for taking out a deferred annuity policy. Should he die before attaining the age of 55 years the trustees were to purchase with the capital value of the deferred annuity policy an annuity for the wife of the director. The trustees took out a policy providing for an annuity of the amounts varying on the contingencies of the director or his wife pre-deceasing the other. There was also a provision for return of all premiums paid to the insurance society should both the director or his wife die before 1955. The trustees were also entitled to surrender the contract at any time before) that date for a cash surrender value. The assessee claimed deduction of the initial sum and the yearly prernia from its profits. It was held that as until 1955 the assessee company had dominion throughthe trustees over the sums paid at least in two circumstances and there was a possibility of there being a resulting trust in favour of the company, the sums should be treated as set apart to meet a contingency and that the payment of these sums was not a paying out or away of those sums irretrievably and did not amount to ' expenditure '. In the course of the judgment, Hidayatullah J., as he then was, pointed out at page 78 as follows :

' But there is no case directly on what is ' expenditure ', and if the authorities under the English statute were to be of real assistance, the whole of the matter should have been before us. The question, however, limits the approach as to whether the payments made towards the policy were ' expenditure ' within Clause (xv). ' Expenditure ' is equal to ' expense ' and ' expense ' is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expense. But the idea of ' spending ', in the sense of ' paying out or away ' money, is the primary meaning and it is with that meaning that we are concerned. ' Expenditure ' is thus what is ' paid out or away ' and is something which is gone irretrievably. '

31. This decision clearly shows that there must be some payment out before there could be any expenditure. There is no such payment out in this case and, consequently, no expenditure.

32. Learned counsel for the assessee drew our attention to another decision of the Supreme Court in support of his contention that actual payment is not contemplated and that appropriate book entries would suffice. He referred to the decision of CIT v. Nainital Bank Ltd. : [1966]62ITR638(SC) . In that case dacoits stole a large quantity of jewellery pledged with the bank. The bank settled the claim of the constituents as follows : When the market value of the jewellery exceeded the amount advanced, the difference was paid by the bank to the constituent ; when the market value of the jewellery was less than the amount advanced, the difference was recovered from the constituent. The bank made total payments of Rs. 48,891 and Rs. 1,21,760 in the two years, 1952 and 1953, respectively, under reference in that case. It claimed deduction of the respective amounts included in the taxable income. It was held that the amounts paid by the bank were expenditure laid out for the purpose of its business and that the settlement consisted of two constituent elements, payment by the bank of the Value of the jewellery pledged with it against the receipt from the constituent of the amount which was recoverable by the bank and that the transaction would appropriately be deemed expenditure and that such expenditure was really laid out for the purpose of business. In the course of the judgment, Shah J., speaking for the court, observed at page 641 as follows :

'In its normal meaning, the expression 'expenditure' denotes ' spending ' or ' paying out or away ', i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ' expenditure ' : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims--one by the assessee against a stranger and the other by the stranger against the assessee--and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed expenditxire within the meaning of Section 10(2)(xv) (of the 1922 Act).'

33. We are not satisfied that this passage is in any manner inconsistent with or runs counter to the earlier decision in the case of Indian Molasses Co. (P.) Ltd. v. CIT : [1959]37ITR66(SC) . The earlier decision was not noticed in the later case, but the later decision is also a case where the money had gone out to the hands of the depositors. There was an adjustment of the accounts. Excepting in cases where the assessee maintained accounts on cash basis, in other cases of mercantile accounts, the expenditure which involved payment out, could be incurred by appropriate book entry being made and not necessarily by cash.

34. The question in the present case is whether there has been any such expenditure even in the shape of book entry. We have already brought out the entries in the balance-sheet relating to the discount account which appears on the assets side. If it is really a payment to the constituent, who subscribed for debentures, then the entry cannot appear in what is called ' discount account '. The entry should appear either in a common account intended for payment to the subscribers or in the respective individual accounts of the subscribers themselves. The fact that the entry appears in the discount account itself shows that there was no payment or scope for payment as such to any one. The balance-sheet itself uses the expression 'The amount written off'. Even the accountancy conception of ' writing off ' presupposes that the figure which or part of which is written off has not been paid out but very much remains in the account till the moment of write-off. Therefore, there is no question of payment to any one so as to constitute ' expenditure '. There was actually no corresponding receipt of Rs. 3,00,000 to correlate the so-called expenditure claimed by the assessee. Thus, there is clearly no expenditure laid out or incurred by the assessee which could be allowed as a deduction to any extent. In the question referred, the sum of Rs. 3,00,000 appears presumably because that represented the total figure of discount. But as the point of dispute before the Tribunal related only to Rs. 2,87,500 so far asthe assessment year in question is concerned, the amount appearing in the question would have to be substituted by that figure. Besides the question assumes that there was a payment to the subscribers, but there was none. If there was such a payment to the bond-holder, the entry would have been worded differently. In order to get over these errors, we would reframe the question as follows :

' Whether there was any expenditure in the sum of Rs. 2,87,500 and whether it was revenue expenditure. '

35. We answer this question in the negative on the first part. The second part does not arise. As neither party succeeded in the reference in full, there will be no order as to costs.


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