S. 36(1)(iii) — Issue of secured premium notes — Premium payable on the same — Allowable as it was very much in the nature of interest payable on the borrowings made.

The assessee-company raised funds by issue of Secured Premium
Notes. In respect of the same, it paid certain premium. The entire amount of
premium was payable before the date of final settlement. The premium was claimed
on proportionate basis in the form of provision made in the books of accounts.
Further, the liability to pay the premium arose in the fourth year, though the
assessee had utilised the funds from the first year itself. The deduction in
respect of the premium was claimed by the assessee u/s.36(1)(iii) of the Act.
The Assessing Officer disallowed the deduction on the ground that the funds
raised were for the purpose of expansion of business and therefore were capital
in nature.

On appeal to the Tribunal, it was held, that case was covered
in favour of the assessee in its own case for A.Y. 1996-97. In the order passed
earlier, the Tribunal held that the premium payable was nothing but in the
nature of interest for the borrowings made by the assessee. The assessee has
been following mercantile system of accounting and so provision has been made on
accrual basis towards the liability arising. The liability provided by the
assessee was an ascertained liability and not a contingent liability. The
Tribunal also relied on the decision of Madras Industrial Investment Corporation
Ltd. v. CIT, (225 ITR 892) (SC).

Further, it was held that though the liability to pay starts
from the fourth year, this does not mean that the funds for the first three
years were interest free. It was only in view of terms and conditions that
premium was payable from the fourth year. Hence the liability for the premium
was very much eligible for deduction.