K. Raviraja Pandian, J.:— In the above reference cases, we are called upon to give our opinion on the following question of law:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the discounted interest is to be assessed proportionately spreading over the three assessment years, though it is received in the relevant previous year in full?”
2. The necessary facts are as follows:
The assessees are individuals. For the assessment year 1992–93, the asses-sees claimed deduction under section 54E of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for the amounts deposited in the National Housing Bank Three Year Bond. The interest was payable at the rate of 9 per cent, by the Government. Both the assessees had opted for the discounted interest and the same was paid to the assessees during the year underassessment. The assessee, A.R Santhanakrishnan, received the discounted interest of Rs. 11,28,000 on July 9, 1991, on the deposit of Rs. 47 lakhs. Likewise, the other assessee, A.R Chandrika, received the interest of Rs. 2,29,680 on July 9, 1991, on the deposit of Rs. 9,57,000. But the assessees offered for income-tax one-third of the interest received by them as the interest accrued for the assessment year 1992–93. The Assessing Officer did not agree to the proposal of the assessees, however brought the entire interest amount received by the assessees to tax for the said assessment year.
3. The appeals carried by the assessees to the Commissioner (Appeals) ended in rejection. On further appeal to the Tribunal, the Tribunal held that the claim of the assessees that only one-third of the interest received was alone taxable for the assessment year 1992–93 is correct.
4. At the instance of the Revenue, being not acceptable to the decision of the Tribunal, the Tribunal made the reference as stated above.
5. Learned counsel for the Revenue submitted that the decision relied on by the Tribunal for coming to the conclusion that the amount of discount, in effect, represents deferred interest was rendered in a totally different context. In such circumstances, the reliance on the said judgment for the facts in issue in the present case is totally misplaced and further contended that the peti- tioner has followed the cash accounting system. The entire amount of interest for the period of three years has actually been received at the relevant assessment year. Even assuming that the accounting system is the mercantile system, since the entire amount of interest as discounted has been received in the previous year, the same has to be accounted for in the assessment year.
6. Learned counsel appearing for the respondents/assessees has submitted that the Tribunal has passed an order only following the principle of law laid down by the Madhya Pradesh High Court in the decision rendered in M.P Financial Corporation v. CIT, [1987] 165 ITR 765 and as such, there is no infirmity in the order.
7. We have heard learned counsel on either side and perused the material on record.
8. It is the admitted case that the assessees have deposited certain amount in the National Housing Bank Three Year Bond, which carry interest at the rate of 9 per cent, and payable by half-yearly rest. However, the assessees opted for discounting of interest and received the interest on July 9, 1991. The entire interest payable as opted by the assessees, worked out at the rate of 8 per cent, instead of 9 per cent, has been received by the assessees on July 9, 1991, itself. The assessees offered one-third of the interest received for income-tax for the assessment year 1992–93. According to the assessees, the rest of the amount had to be offered in the subsequent two years since the amount has been received as interest for three years.
9. The Tribunal for accepting the contention of the assessees solely relied on the decision reported in M.P Financial Corporation v. CIT, [1987] 165 ITR 765 rendered by the Madhya Pradesh High Court. The question referred in that case, inter alia, was (page 767):
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that a sum of Rs. 94,875 allowed as discount to the subscribers of the bond issued by the assessee-Corporation was not an allowable expenditure?”
10. In that case, during the relevant accounting year, with the object of increasing its working capital, the assessee issued bonds for public subscription described as 6¼ per cent. 1981 bonds for a sum of Rs. 82.50 lakhs. As the said bonds were issued at a discount, the assessee debited to its profit and loss account for the assessment year 1978–79, the amount of Rs. 94,875 representing discount at Rs. 1.15 per hundred and claimed it as deduction. While considering the deduction, the Madhya Pradesh High Court held as follows (page 769):
“The discount on the issue is, in effect, deferred interest, and should accordingly be written off over the period having the use of the money raised by the debentures, unless a sinking fund is created to accumulate the full redemption price, including the discount.”
11. The Madhya Pradesh High Court further relied on Batliboi's Principles and Practice of Auditing, as to the effect of issue of debentures at a discount, which stated as follows (page 769):
“‘When debentures are issued at discount, an account styled “Discount on Debentures Account”, will be debited with the discount allowed on the issue. The debentures account will be credited in the books at their nominal value and will appear at that value as a liability in the balance-sheet. The loss thus arising need not be completely written off in the year in which the debentures are issued, since the benefit to be derived from the amount borrowed will continue till the debentures are redeemed. Where the debentures are redeemable at the end of a fixed period, a proportionate amount of discount should be written off out of revenue every year during which the debentures are outstanding’.”
12. As rightly contended by learned counsel for the Revenue, the ratio laid down in the above case cannot by any stretch of imagination be considered applicable to the facts of the present case. Because the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purpose of its business in order to generate funds for its business activities.
13. So far as the present case is concerned, the interest payable on the deposit is 9 per cent., however, the assessees opted to receive the discounted interest in one lumpsum even before it accrued (as per the amount received, the discounted interest rate works out to 8 per cent.). The entire amount of interest for the three years was received in the previous year corresponding to the assessment year. Apart from the amount received as interest, the assessees were not going to receive any other amount by way of interest at a later point of time so as to consider the same as a deferred interest and there was going to be no shortfall in the amount deposited. Further, it is also admitted by learned counsel for the respondents/asses-sees themselves that the system of accounting adopted by the assessees is the cash system and the entire amount of discounted interest has been received on July 9, 1991, which is the previous year relevant to the assessment year. The amount already received cannot be spread over the next two years proportionately as if the interest was yet to be received cannot be done. Hence, we are of the considered opinion that the Tribunal has misdirected itself in relying on a decision of the Madhya Pradesh High Court referred supra, which is no way connected with the discounted interest received by the assessees.
14. Hence, we answer the reference in favour of the Revenue and against the assessees.