Introduction
1.1 Sizeable debt funds are being raised by the corporates through the issue of debentures. To make the issue of debentures attractive, such debentures are issued with different terms. Sometimes debentures are issued at a discount with nominal or lower rate of interest. At times, the debentures are issued at par for a fixed period with specified interest rate, but the option is also given to the debenture holders for upfront payment of present value of interest on debentures in the very first year for the entire period of debentures. In such cases, the accounting treatment of such interest is guided by the accounting principles, and generally the expenditure on interest is spread over the life of the debentures on an appropriate basis.
1.2 The expenditure of revenue nature incurred on issue of such debentures generally qualifies for deduction u/s. 37(1) of the Income-tax Act, 1961 (the Act). Section 36(1)(iii) of the Act grants deduction of interest on capital borrowed for business purpose. Accordingly, interest on such debentures should generally qualify for deduction u/s. 36(1)(iii) of the Act, subject to certain exceptions with which we are not concerned in this write-up.
1.3 In the past,for the assessees following mercantile system of accounting, the issue was under debate with regard to the year of deductibility of interest under the Act, in cases where the upfront payment of present value of interest on debenture is made in the very first year for the entire period of debentures and for accounting purpose, such interest is amortised over the redemption period of debentures in the books of account.
1.4 Earlier, the issue with regard to deductibility of discount on issue of debentures under the Act came up for consideration before the courts. Finally, the Apex Court in the case of Madras Industrial Investment Corporation Ltd [225 ITR 802 – Madras Industrial Investment’s case] settled the controversy with regard to deductibility of such discount and the year of its deductibility. In this case, the Apex Court, on the facts of that case, held that the discount on issue of debentures constitutes revenue expenditure. The Court further held that, although a liability of such expenditure has been incurred in the year of issue of debenture, this is a continuing liability which stretches over the period for which the debentures were issued and therefore, the liability spreads over such period. Accordingly, the deduction of such expenditure will also be spread over on a proportionate basis during the tenure of the debentures. The Court also noted that this view is in conformity with the accounting practice in which such discount is amortised over the redemption period of debentures. It may be noted that in this case, initially, the assessee itself had claimed deduction on proportionate basis and subsequently, changed it’s position in this respect. We had analysed this judgment in this column in the July, 1998 issue of the journal.
1.5 Recently, the issue with regard to the year of deductibility of upfront payment of interest in the first year of the tenure of debentures referred to in para 1.3 above came up for consideration before the Apex Court in the case of Taparia Tools Ltd. and the Court has decided this issue. Considering the importance and usefulness of this judgment, it is thought fit to consider the same in this column.
Taparia Tools Ltd. vs. JCIT – 260 ITR 102 [Bom.]
2.1 The issue referred to in para 1.3 above came up before the Bombay High Court in the above case. In this case, the brief facts were: the assessee was following mercantile system of accounting and it had issued non-convertible debentures of the face value of Rs. 100 each aggregating Rs. 600 lakh on a private placement basis. Under the terms of issue,effectively, as noted by the Court,the debenture holders were entitled to receive interest periodically on half yearly basis @ 18% p.a. for five years. Alternatively, the debenture holders had the option to receive one year upfront payment of Rs. 55 per debenture immediately on allotment. The debentures were redeemable at a premium of Rs. 10 per debenture in one installment any time after the end of fifth year from the date of allotment but, not later than the seventh year from that date.
2.1.1 The company made allotment of debentures to six parties on two different dates. On 29th March, 1996, the allotment was made to one party for which the company had received Rs. 495 lakh and on 19th June, 1996, the company had made an allotment to five parties for which the company had received Rs. 100 lakh from one party and Rs. 1.25 lakh each from the other four parties. Out of six parties, two lenders exercised the option to receive upfront payment. Accordingly, upfront payment of Rs. 2,72,25,000 became payable to one party (who was allotted debentures of the face value of Rs. 495 lakh) on 29th March, 1996 and Rs. 55 lakh became payable to another party (who was allotted debentures of the face value of Rs. 100 lakh)on 19th June, 1996. The other four debenture holders holding debentures of the aggregate face value of Rs. 5 lakh opted for payment of interest periodically as per the terms of issue of debentures. In the books of account, the assessee had shown the upfront payment of interest of both the years as ‘deferred revenue expenditure’ to be written off over a period of five years. Similarly, the premium of Rs. 60 lakh payable on redemption of debentures was also proportionately debited to each year’s profit and loss account and credited as reserve on the liability side of the balance sheet. Even for tax purpose, the claim by deduction of this premium payable on redemption was spread over the life of the debentures.
2.1.2 For the purpose of furnishing return of income for the assessment year 1996-97, the assessee claimed entire upfront payment of interest of Rs. 2,72,25,000 as deduction and similarly, in the Return of income from the assessment year 1997- 98, the full deduction of Rs. 55 lakh paid upfront was claimed as deduction. For both the years, the deduction was disallowed by the Assessing Officer (AO) on the ground that liability for the full amount regarding discounted interest paid upfront has not been incurred in the respective accounting years and the approximate income which the assessee would have earned by utilisation of Rs. 595 lakh (Rs. 495 lakh and Rs. 100 lakh) borrowed was not offered for taxation. Relying on the judgment of the Apex Court in Madras Industrial Investment’s case, the AO spread over the deduction of interest expenditure over a period of five years and worked out the amount of deduction of interest by applying appropriate discount rate for the assessment year 1996-97 [Rs. 74,250 – for three days (annual amount being Rs. 89,10,000) as against the claim of Rs. 2,72,25,000]. For the assessment year 1997-98 also, similar approach was adopted. It seems that in subsequent years, deduction was allowed on this basis. On first appeal, for the Assessment Year 1996-97, the Commissioner of Income-tax (Appeals) [CIT (A)] took the view that the entire scheme was made to avoid tax and the upfront payment was repayment of capital out of the total borrowing and accordingly, the actual borrowing for the assessment year 1996-97 was only Rs. 2,22,75,000 (and not Rs. 495 lakh). For this, the CIT(A) also relied on the judgment of the Apex Court in the case of McDowell & Company Ltd. [154 ITR 148 – McDowell’s case]. Based on this, the CIT(A) allowed deduction on this reduced amount of borrowing for three days. The Tribunal set aside the order of CIT(A) and restored the order of the AO.
2.2 It seems that similar views were taken for the assessment years 1997-98 and subsequent years. It also seems that appeals for three assessment years (1996-97 to 1998-99) were filed by the assessee as well as the revenue before the Bombay high Court. details of the other years are not available. Appeals of the Revenue were filed on the ground that the upfront payment represented repayment of borrowed capital and therefore, the assessee was entitled to deduction u/s. 36(1)(iii) only on the net amount of rs. 2,22,75,000.
2.3 On the above facts, the matters came-up before the Bombay high Court, and the high Court, it seems, dealt with the appeals by first taking the appeal for the assessment year 1996-97 as the base. It seems that in the assessee’s appeals, large number of questions were raised before the Court. however, the high Court framed the following substantial question of law for its decision [Page 107]:
“Whether, on the facts and circumstances of the case and in law, the tribunal was right in holding that, even though the liability of payment of interest stood liquidated in the first year itself, such liability had to be allowed on a spread over basis over the life of the debentures?”
2.4 On behalf of the assessee, it was, inter alia, contended that the upfront payment of Rs. 55 per debenture on 29th march, 1996 was on account of interest and the CIT(a) wrongly treated the payment of Rs. 55 per debenture on capital account. the terms of issue of debentures in this respect are very clear. for accounting purpose, the assessee has debited 1/5th of Rs. 55 for five years in profit and loss account but, for the purpose of determining deductibility of the amount under the act one has to go by the year in which the liability arises under the terms of issue of debentures, and for that purpose, the treatment in the books of account is irrelevant. The assessee is following mercantile system of accounting and under the terms of issue, the liability arose in the first year itself and therefore, deductibility thereof cannot be spread over the five years as erroneously done by the ao. It was further contended that it was not open to the revenue to tamper with the terms of issue and therefore, the ao was wrong in spreading the deduction over the five years. Such spreadover in five years amounts to altering the terms and conditions of the issue of debentures which was not permissible. It was also pointed out that, had the assessee not claimed the deduction in the very first year, the Revenue could have denied deduction in the second and subsequent years on the ground that no liability accrued in those years and no amount was also paid during those years. The method of determining the quantum for allowing the deduction on a spreadover basis adopted by the revenue was also questioned.
2.4.1 It was further contended that the judgment of the apex Court in the case of madras industrial investment’s case did not apply to the facts of the case of the assessee. this was distinguished on various grounds which, inter alia, include: in that case, the Court was concerned with the concept of premium payable at the time of redemption and in this case, although the assesse is liable to pay 10% premium at the time of redemption, that has been claimed on the basis of tests laid down in that case and,therefore, in this case, we are not concerned with the deductibility of such premium. Present case is concerned with the deductibility of upfront payment of interest which became payable in the very first year ending on 31st march, 1996. it was further pointed out that in madras industrial investment’s case, the premium amount was payable after five years and therefore, the apex Court has allowed amortisation whereas in this case, the liability to pay interest arose in the very first year and that is also discharged in the first year itself. Furthermore, in that case the liability was a continuing liability which is not the case in this case. From the judgment of the apex Court in that case, it would appear that the option was with the assessee to claim deduction in the very first year when it discharged the accrued liability or to spread it over for five years. As such, according to the learned counsel appearing on behalf of the assessee, the judgment of the Apex Court in the madras industrial investment’s case had no application to the facts of the present case. A reliance was also placed on the judgment of the Bombay high Court in the case of Buckau Wolf new india engineering Works Ltd. [157 ITR 751] in which case, the amount was payable in installments and yet, the high Court took the view that the deduction for the entire amount should be given in the first year because the liability was accrued in the first year.
2.4.2 It was also pointed out that @ 55 per debenture, the assessee was required to pay Rs. 4,45,50,000 interest in five years but by paying upfront amount of Rs. 2,72,25,000 it has been able to save a payment of interest to the extent of Rs. 1,73,25,000. While spreading over the deduction,even the revenue is ultimately allowing deduction of Rs. 4,45,50,000 as against the claim of deduction of Rs.2,72,25,000 made by the assessee. It was also contended that the Revenue has wrongly invoked the judgment of the apex Court in mcdowell’s case.
2.4.3 The learned counsel for the assessee further contended that under the terms of issue, the lenders were free to opt for interest on half yearly basis @ 18% per annum for five years (i.e. in aggregate Rs. 90 per debenture) or to receive upfront payment of Rs. 55 per debenture in the year of allotment itself. Therefore, the lenders had a right to receive discounted amount of interest in the first year under the second option. In other words, by making upfront payment of Rs. 55 per debenture, the assessee has brought the present value of rs. 90 to Rs. 55 which is nothing but discounted value of the interest otherwise payable in five years. Under the first option, the assessee would have paid Rs. 89,10,000 every year for a period of five years on this amount of borrowing. however, by making upfront payment of discounted value of interest amounting to Rs. 2,72,25,000,the assessee got rid of the annual liability of Rs. 89,10,000 for five years. It was also contended that the revenue has accepted that upfront payment of Rs. 55 per debenture was revenue expenditure and by spreading over the amount of deduction, the revenue allows deduction of rs. 89,10,000 per year for a period of five years aggregating the amount to Rs. 4,45,50,000 as against the assessee’s claim of deduction of Rs. 2,72,25,000 in the first year. Therefore, there is no loss to the revenue. As such, the only question which the ao was required to decide was whether the liability to pay interest was incurred in the first year itself or not, and if so, the assessee was entitled to obtain full deduction in the first year.
2.4.4 It was also pointed out that the tribunal has proceeded on the footing that the entire measure was adopted because the assessee had surplus income whereas the concerned lender had brought forward losses. In this respect, it was contended that the court should not take into account extraneous factors while deciding the claim of the assessee.
2.4.5 Referring to the judgment of the Apex Court in the case of tuticorin alkali Chemicals and fertilizers Ltd. [227 itr 172 – tuticorin’s case], it was further contended that the deduction of expenditure under the act does not depend on what the assessee debits in its accounts but, it depends on the provisions of the law. Therefore, in this case, the fact that the assessee has not debited the full amount to profit and loss account in the first year itself cannot be the ground for its disallowance in that year. The tax cannot be levied on the basis of entries made by an assessee in its books of account.
2.4.6 It was also contended that the tribunal has erred in introducing matching concept to the effect that the expenditure must relate to the income in the assessment year and the benefit was spread over for a period of five years and therefore, the expenditure must also be spread over. According to the learned counsel, since the liability in this case is incurred in the first year itself, the assesseee was entitled to full deduction in that year and, therefore, the question of co-relating the expenditure to income/ benefit for five years does not arise. For this, the reliance was placed on the judgment of the Apex Court in the case of Mysore Spinning and mfg. Co. Ltd. [61 itr 572].
2.5 On behalf of the revenue, it was, inter alia, contended that the option given to the lenders refers to upfront one-time payment and it does not speak of interest. the upfront payment of Rs. 55 per debenture, as against the amount of Rs. 90, was made to get the benefit of differential amount of Rs. 45 for a period of five years and therefore, the ao was right in spreading the expenses over that period. If the argument of the assessee for deduction of the full amount in the first year is accepted, then the computation of income will stand distorted, because the assesse got the benefit of Rs. 45 for five years. Upfront payment of Rs. 55 was on account of advance payment of interest in the first year for five years. As such, the principle laid down by the apex Court in the madras industrial investment’s case was squarely applicable to the facts of the case of the assessee. It was also contended that under both the options, the interest was payable every six months and therefore, the amortisation principle was applicable to both the options. Therefore, even Rs. 55 per debenture was payable by way of interest for five years which was paid by the assessee in the first year and therefore, the ao was right in applying the principle of amortisation in this case.
2.5.1 Supporting the appeals filed by the Revenue, the learned counsel appearing on behalf of the revenue, further contended that, as against the amount of Rs. 4,95,00,000 borrowed on 29th march, 1996, on the same day, an amount of Rs. 2,72,25,000 was repaid in the name of upfront payment of interest and therefore, the actual borrowed capital left with the assesse was only Rs. 2,22,75,000 which was used for the purpose of business. Since part of the borrowed capital was refunded to the subscribers on the same date, the actual borrowed capital remaining was the net amount and the tribunal has failed to appreciate this factual positon. as such, the assessee was entitled to claim deduction u/s. 36(1)(iii) for interest only on Rs. 2,22,75,000.
2.5.2.1 It was also contended that the entire scheme of issue of non-convertible debenture was devised to defeat the collection of tax revenue. In the present case, the assessee has not paid the discounted value of interest, but has repaid part of the face value of the debenture itself under the garb of upfront payment of interest at present value. therefore, the tribunal has erred in giving spread over and granting deduction of Rs. 4,45,50,000 @ 18% per annum for five years on the gross amount (i.e. Rs.4,95,00,000) of debentures.
2.6 After considering the contentions raised on behalf of both the sides, the Court proceeded to decide the question referred to in para 2.3. For this purpose, at the outset, the Court noted the following relevant terms of the issue of debentures [Page115]:
“3(a) Each debenture shall carry interest at the rate of 2%. Per annum above the prime lending rate and the interest shall be payable half-yearly.
(b) Each debenture shall carry interest at the rate of Rs. 55 per debenture, payable up-front within thirty days of the exercise of option or from the date of allotment, whichever is earlier”.
These terms were not accepted by the lenders.
The final terms of the issue were as follows:
“2. Terms of the issue:
(a) Up-front fee – the debenture shall carry up- front fee at the rate of Rs. 55 per debenture payable up-front immediately on allotment.
(b) Redemption period – the debenture shall be redeemed at a premium of 10 per cent, i.e., Rs.10 per debenture, in one instalment any time after the end of the fifth year from the date of allotment, but not later than the seventh year from the date of allotment.”
2.6.1 The Court then briefly referred to the facts of the present case and stated that the question which arises for determination in this case is whether Rs. 55 per debenture (total – Rs. 2,72,25,000) deductible in the first year of allotment or that expenditure was to be apportioned over the period of five years, which is the life of the debenture. The Court also noted that the assesse is following the mercantile system of accounting on the basis of which the assessee has made a claim for the full amount in the first year itself whereas the Revenue has treated this as deferred revenue expenditure (DRE) and apportioned the expenditure for five years. The Court then stated that for the purpose of deciding this issue, two concepts are required to be borne in mind, viz., matching and discount rate.
2.6.2 The Court then proceeded to consider the ‘matching concept’ referred to in above para. for this purpose, the Court noted that the mercantile system of accounting is based on accrual. under this system, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. the system postulates the taxation of monies that are due and payable by the parties to whom they are debited. explaining the effect of the ‘matching concept’ in the mercantile system of accounting, the Court observed as under [Page no. 116]:
“…….therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). under the mercantile system of accounting, this matching is required to be done on accrual basis. under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in- flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assesse is following the mercantile system of accounting. this matching concept is very relevant to compute taxable income particularly in cases involving dre. it has been recognised by numerous judgments… ”
2.6.2.1 The Court then referred to the judgment of the apex Court in the case of Calcutta Co. Ltd. [37 ITR 1] and stated that, in that case, the Court had held that the expression ‘profits or gains’ used in section 10(1) of the income-tax act, 1922 [similar to section 28(i) of the act] should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purpose of earning receipts is deducted therefrom. the Court then noted that in that case the apex Court had applied the ‘matching concept’ and allowed the deduction of an expenditure required to be incurred in subsequent period on an estimated basis which related to the income that was already accounted on the ground that otherwise it was not possible to compute profits and gains. The Court then stated that this concept is also applied by the apex Court in the case of madras industrial investment’s case and for that purpose the Court noted the following observations from the head notes of that case [Page 117]:
“Ordinarily, revenue expenditure which is incurred wholly and exclusively for thepurpose of business must be allowed in its entirety in the year in which, it is incurred. it cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. in fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assesse has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. the liability should, therefore, be spread over the period of the debentures”.
2.6.2.2 The Court then stated that the ‘matching concept’ is also covered by section 36(1)(iii) read with section 43(2), which defines the word ‘paid’ to include incurred according to the method of accounting. Both these sections are part of the provisions relating to computation of business income. Interest on monies borrowed for business purposes is an expenditure in the business, which is deductible under section 36(1)(iii). the Court then pointed out that for claiming deduction u/s. 36(1)(iii), the necessary conditions are: the capital must have been borrowed; it must have been borrowed for business purpose and the interest must have been paid i.e., actually paid or incurred in accordance with the method of accounting followed by the assessee.
2.6.2.3 Referring to the facts of the case of the assessee, the Court noted that the assessee got the benefit of the borrowed money for a period of five years and if the ‘matching concept’ is not applied, the profits get distorted. In this context the Court then observed as under [Page 118]:
“……for the year ending march 31, 1996, the assessee has submitted that it has incurred an expenditure amounting to rs. 2,72,25,000 as and by way of interest deductible under section 36(1)(iii) of the income-tax act. however, in the annual accounts, the said amount is not debited to the profit and loss account. It is interesting to note from the profit and loss account for the year ending March 31, 1996, that profit after tax was rs.1,86,34,016. now if the expenditure incurred was Rs. 2,72,25,000 as submitted by the assessee then the assessee could never have earned the said profit of Rs. 1,86,34,016. This is how the profit got distorted. In the annual report, the assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, the Assessing Officer has recorded a finding of fact which categorically brings out the ‘matching concept’. he has stated that for the accounting year March 31, 1996, profit after tax increased to Rs. 1,86,34,016 from rs. 50 lakhs in the last year ending march 31, 1995. Therefore, the Assessing Officer was right in apportioning the expenditure at 18 per cent. per annum on Rs. 495 lakhs amounting to Rs.74,259 for three days because only then the estimated expenditure could match with income of Rs. 1,86,34,016… ”
2.6.2.4 Considering the above referred accounting treatment and the accounting profit for the year ending 31st march, 1996, the Court stated that the assessee has shown Rs. 2,72,25,000 as deferred revenue expenditure and according to the Court, this expenditure, though paid, was not incurred in the year ending 31st march, 1996 and the expenditure incurred in that year was Rs. 74,250. in this context, the Court further observed as under [Page 118]:
“… What we would like to emphasise is that, therefore, ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. However, in a given case, like the present one, the facts may justify the Assessing Officer to spread the expenditure over the life of the debentures because allowing the entire expenditure in one year might give a distorted picture of the profit of a particular year… ”
2.6.2.5 Considering the overall facts of the assessee, the Court took the view that the assessee has received the borrowed funds for a period of five years and it is a continuing benefit to the business of the assessee over the entire period of debentures and therefore, the liability was required to be spread over the period of debentures. the Court also noted that the assessee itself has applied a ‘matching concept’ qua the claim of premium payable on redemption of debentures. As such, in this very case, the assessee has invoked the ‘matching concept’ qua premium but not for interest.
2.7 The Court then proceeded to consider the second concept, viz., discount rate. in this context, the Court noted that the ao had taken a view that the upfront payment made by the assessee had to be discounted as these payments represent present value of the interest liability and were deferred revenue expenditure. For this purpose, the ao applied 18% as the discount rate which was effectively based on one of the options available for payment of interest over a period of five years. On this basis, the ao determined the annual liability of interest at Rs. 89,10,000 in respect of borrowing of Rs. 495 lakh and Rs. 18 lakh in respect of borrowing of Rs. 100 lakh. on this basis, the ao allowed deduction of Rs. 74,250 for three days for the assessment year 1996-97 and Rs. 1,03,20,410 for the assessment year 1997-98 (i.e. Rs. 89,10,000 for the first set of debenture and Rs. 14,10,410 for the second set of debenture on a proportionate basis for part of the financial year 1996-97). in the subsequent years,it seems, the ao had allowed deduction on this basis for the full year. The assessee had questioned the discount rate applied by the ao for determining the amount of deduction. After considering the factual position, the Court did not find any defect in the method of determining the amount of deduction adopted by the ao.
2.8 After considering both the above concepts, viz., ‘matching concept’ and discount rate, the Court stated that if they are kept in mind, the matter stands resolved in law. For this purpose, the Court then analysed the annual accounts of three years under appeal and noted that in each of the years, the assessee has treated the upfront payments made in the first year as deferred expenditure and written off the same on that basis during the life of the debentures. After analysing these annual accounts for three years, the Court also noticed that even this method continued in the subsequent accounting years upto 31st march, 2001 and finally, the debentures were repaid during the accounting year 2001-02.
2.8.1 Based on the analysis of the above referred annual accounts, the Court noted that this analysis indicates two things. Firstly, in the accounts, the upfront payment has been written off over the period of debentures by creating an asset in respect thereof on the basis that interest for five years is paid in advance in the first year. Secondly, the accounts show that the premium payable by the assessee on redemption was Rs. 60 lakh and in each year, 20% thereof has been charged to the profit and loss account. On this basis, the Court felt that the acceptance of claim of deduction of the full amount in the first year would result into distortion.
2.9 The Court then noted the contention of the assessee that good accounting is not necessarily correct law. For this, on behalf of the assessee, apart from the other authorities, heavy reliance was placed on the judgment of the Apex Court in tuticorin’s case to contend that the deduction of expenses in computation of income under the act does not depend on its accounting treatment but depends on the provisions of the law. For this, the Court considered the relevant provisions contained in section 36(1)(iii) read with section 43(2) and stated that, from this, it would be clear that question of allowance permitted to be deducted under the head profits and gains would differ according to the system of accounting adopted by the assessee. For this purpose, one has to estimate the expenditure by applying the ‘matching concept’ and a proper discount rate. Referring to the judgment of the Apex Court in the case of A. Krishnaswamy Mudaliar [53 ITR 122], the Court stated that profits of the business should be determined according to the ordinary principles of commercial accounting so far as they are applicable. The Court then stated that there is no merit in the argument advanced on behalf of the assessee that good accounting is not necessarily good law.
2.10 Finally, explaining the effect of judgment in tuticorin’s case,the Court held as under [Page 125]:
“………one of the points which arose for determination was whether interest received by the assessee on short-term deposits during pre-commencement of business could be capitalised as accretion to capital and, therefore, nontaxable. Therefore, in the case, the issue was on the nature of the receipt. Hence, that case has no application. On the contrary, it has been held that the accounting principles are relevant for ascertainment of profits made by a company or for ascertainment of value of assets of the company but, not for determining the nature of receipt. Therefore, the said judgment supports the view which we have taken as in this case, we are concerned with computation of income.
It is important to note that the deferred revenue expenditure is of revenue nature but, because of its special features, it is spread over a number of years during which the benefit of expenditure is expected to arise to the business. on the facts, we hold that the liability was a continuing liability to pay interest spread over for a period of five years… ”
2.11 In view of the above, the Court took the view that the ao was right in spreading the deduction over the period of five years which was the life of the debentures. Accordingly, the Court decided the question referred to in para 2.2. above in favour of the revenue and against the assessee.
2.12 On the above basis, appeals of the assessee for all the three years were dismissed. the Court also noted that the three appeals preferred by the revenue, relate to the ground that upfront payments represented repayment of borrowed capital and therefore, the assessee was not entitled to deduction u/s. 36(1)(iii) in respect thereof. In this respect, the Court clarified that the AO has recorded the finding of fact that the upfront payments were on revenue account and that has been confirmed by the Tribunal and therefore, the Court has decided these matters on the basis of that finding of fact. Accordingly, on this basis, the Court preferred not to answer the questions raised in the three appeals filed by the Revenue.
