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Commissioner Of Income-Tax v. East India Hotels Ltd.
Factual and Procedural Background
The assessee, a public limited company engaged in running Oberoi Hotels, claimed a deduction of Rs. 67,18,758 as revenue expenditure on account of expenses incurred in the issue of 7,50,000 secured debentures of Rs. 100 each for the assessment year 1982-83. The Assessing Officer allowed this deduction while completing the assessment on March 17, 1986. However, the Commissioner of Income-tax, upon scrutiny, issued a show-cause notice and subsequently directed under section 263 of the Income-tax Act, 1961, that the deduction be withdrawn. The Commissioner relied on the insertion of section 35D and the view that the earlier Supreme Court decision in India Cements Ltd. v. Commissioner Of Income Tax, Madras, [1966] 60 ITR 52, was no longer good law. The Tribunal, on appeal, disagreed and held that the deduction was allowable as revenue expenditure despite the insertion of section 35D. The present opinion arises from a reference under section 256(2) of the Income-tax Act on whether the Tribunal's finding was based on relevant material or was perverse.
Legal Issues Presented
- Whether the Tribunal's finding that the assessee is entitled to the deduction of expenses on account of the issue of debentures amounting to Rs. 67,18,758 was based on relevant material or was otherwise perverse.
- Whether expenses incurred on the issue of debentures, particularly when part of the loan repayment is made by the issue of equity shares, can be allowed as revenue expenditure.
- Whether the insertion of section 35D of the Income-tax Act affects the allowability of such expenses as revenue expenditure.
Arguments of the Parties
Revenue's Arguments
- The Commissioner of Income-tax contended that the deduction of Rs. 67,18,758 should be withdrawn because 20% of the debentures would be repaid by the issue of equity shares within three years, which is not a repayment of the loan within the stipulated eleven years.
- According to the Commissioner, the loan was not taken for a certain and limited period, rendering the Supreme Court decision in India Cements Ltd. inapplicable.
- After the insertion of section 35D, expenses on the issue of debentures cannot be allowed as revenue expenditure but must be amortised over ten years.
Assessee's Arguments
- The assessee relied on the Supreme Court decision in India Cements Ltd., which held that expenses incurred on a loan for a certain period are revenue expenses.
- They argued that section 35D provides for amortisation of capital expenses but does not negate the allowability of expenses that are otherwise revenue in nature.
- The issue of equity shares as repayment of 20% of the loan within three years does not alter the character of the loan repayment within eleven years.
- The assessee submitted written arguments supporting the Tribunal’s view that the expenses on issue of debentures remain allowable as revenue expenditure.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| India Cements Ltd. v. Commissioner Of Income Tax, Madras, [1966] 60 ITR 52 (SC) | Established that expenditure incurred on securing a loan for a certain period is revenue expenditure; the loan is not an asset of enduring nature and the expenditure is for the use of money for a limited time. | The court reaffirmed this principle and held that despite the insertion of section 35D, the decision still holds. The expenses on issue of debentures are revenue expenses and allowable as deduction. |
Court's Reasoning and Analysis
The court examined the nature of the expenses incurred on the issue of debentures and the repayment terms. It noted that the debentures were to be repaid within eleven years, with 20% payable at the end of three years by issue of equity shares, and the balance by cheque in subsequent years. The Commissioner of Income-tax argued that the issue of shares as repayment meant the loan was not for a fixed period and thus the expenses could not be allowed as revenue expenditure, especially after the insertion of section 35D.
The court referred to the Supreme Court decision in India Cements Ltd., which held that such expenditure is revenue expenditure if the loan is for a certain period and the expenditure is for securing the use of money for that period. The court observed that section 35D was introduced to allow amortisation of capital expenses but does not override the allowability of revenue expenses.
The Board's Circular No. 56, dated March 19, 1971, was also cited, clarifying that amortisation provisions do not supersede other provisions allowing deduction of such expenditure as revenue expenses. The court found that the repayment terms, including the issue of shares, did not alter the character of the loan being repayable within eleven years. Consequently, the court found no reason to interfere with the Tribunal's order allowing the deduction.
Holding and Implications
The court answered the referred question in the affirmative, in favour of the assessee and against the Revenue.
The direct effect of this decision is that the assessee is entitled to claim the deduction of expenses incurred on the issue of debentures as revenue expenditure for the assessment year 1982-83. The decision confirms the continued applicability of the Supreme Court's ruling in India Cements Ltd. despite the insertion of section 35D. No new precedent was set; rather, the court reaffirmed existing legal principles and clarified the interplay between section 35D and revenue expenditure deductions.
Y.R Meena, J.:— On an application under section 256(2) of the Income-tax Act, 1961, this court has directed the Tribunal to refer the following question set out at page 2 of the paper book for our opinion:
“Whether, the finding of the Tribunal that the assessee is entitled to the deduction of expenses on account of issue of debentures amounting to Rs. 67,18,758 was based on any relevant material or otherwise perverse?”
2. In compliance with our direction the aforesaid question has been referred for our opinion. The assessee is a public limited company mainly carrying on the business of running hotels popularly known as “Oberoi Hotels”. The assessment year is 1982-83. Assessment was completed on March 17, 1986, on a total income of Rs. 3,77,12,470.
3. The Commissioner of Income-tax on a scrutiny of the assessment records found that the Assessing Officer has wrongly allowed Rs. 67,18,758 as revenue expenditure while completing the assessment for the assessment year 1982-83. Therefore, he issued a show-cause notice to the assessee why the assessment order should not be set aside and the deduction of amount of Rs. 67,18,758 should not be withdrawn? After hearing the assessee, the Commissioner of Income-tax in his order under section 263 of the Income-tax Act directed the Assessing Officer to withdraw the allowance of Rs. 67,18,758 which was allowed in the assessment order under section 143(3) of the Act.
4. During the course of the assessment, the Assessing Officer has considered the fact that the assessee-company has issued 7,50,000 secured debentures of Rs. 100 each for a total value of Rs. 7.50 crores. The value of the debentures together with interest was to be repaid by the assessee-company within eleven years. Considered the submissions, the claim of the assessee was allowed.
5. The Commissioner of Income-tax in an order under section 263 has directed to withdraw the deduction of the amount pertaining to the expenditure in connection with the debentures on the ground that after the insertion of section 35D the decision of the Supreme Court in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52, is no more a good law and that the expenses cannot be allowed in the light of the decision of the Supreme Court in the case of India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52. In appeal before the Tribunal, the Tribunal has taken the view that even after the insertion of section 35D in the Act of 1961, the expenses on the issue of debentures cannot be disallowed, as the decision of the Supreme Court in the case of India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52, still holds the field. Therefore, expenses on the issue of debentures, for short-term loan, can be allowed as revenue expenses.
6. Heard learned counsel for the parties and liberty was given to the parties to file a written submission if they so desired. Learned counsel for the assessee has submitted written submissions but no written submissions are filed by learned counsel for the Revenue.
7. The facts are not in dispute that the assessee has incurred expenses of Rs. 67,18,758 on the issue of 7,50,000 debentures of Rs. 100 each for a total value of Rs. 7.50 crores and that amount is repaid as under:
“(a) 20 per cent, at the end of three years from the date of allotment of debentures by way of issue of equity shares.
(b) 20 per cent, each thereafter at the end of the 8th, 9th, 10th and 11th years from the date of allotment of debentures by payment in cheques.”
8. The Commissioner of Income-tax has given the main reason for disallowance that 20 per cent, of the amount collected by issue of debentures, will be paid by the end of three years from the date of allotment of debentures, by way of issue of equity shares. According to the Commissioner of Income-tax, when 20 per cent, loan is payable by issue of shares that is not a repayment of the loan within eleven years. The loan has not been taken for a certain and limited period, therefore, the decision of the Supreme Court in the case of India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52, is not applicable. Therefore, expenses on the issue of debentures cannot be allowed as revenue expenses. Secondly, after the insertion of section 35D the expenses on the issue of debentures cannot be allowed as revenue expenses.
9. In India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC), at page 63, their Lordships observed as under:
“To summarise this part of the case, we are of the opinion that: (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv).”
10. Whether the expenditure on issue fresh shares is revenue expenditure or capital expenditure?
11. When the money is secured for certain period the expenditure is revenue expenditure within the meaning of section 10(2), clause (xv) of the Act as held by the apex court in the case of India Cements Ltd., [1966] 60 ITR 52.
12. Section 35D has been introduced to give benefit to a ssessees in cases of capital expenses. When the capital expenses cannot be allowed as deduction in computing the income, but under section 35D capital expenses can be allowed as deduction in ten year span, i.e, 1/10 in each year. But how a deduction, which is allowable otherwise as revenue expenses, can be denied after the insertion of section 35D, learned counsel failed to explain.
13. The Board has also clarified this issue in Circular No. 56, dated March 19, 1971. The Board clarified that the provision for amortisation is not intended to supersede any other provision of the income-tax law under which such expenditure is admissible as a deduction or deduction allowable by virtue of the decision of the Supreme Court in India Cements Ltd., [1966] 60 ITR 52. Admittedly, here the loan has to be repaid within eleven years from the date of allotment of debentures. If 20 per cent, of that loan is payable by the end of three years from the date of issue of debentures by way of issue of shares to make the debentures more lucrative/attractive that does not change the character of repayment of loan within eleven years. Therefore, in view of this admitted fact we find no reason to interfere in the order of the Tribunal.
14. In the result, we answer the question in the affirmative, that is, in favour of the assessee and against the Revenue.
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