LexMADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. versus COMMISSIONER OF INCOME TAX, TAMIL,NADU I, MADRAS
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MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. v. COMMISSIONER OF INCOME TAX, TAMIL,NADU I, MADRAS APRIL 4, 1997 [S.C. AGRAWAL AND SUJATA V. MANOHAR, JJ.] Income Tax Act, 1961: Section 37. Income Tax-Business Expenditure-AY 1968-69-Discount on Deben- tures issued by assessee-Held : Discount on such debentures was business expenditure in the nature of revenue expenditure-Hence, an allowable deduc- tion-fl owever, since the liability to pay the discount was spread over a number of years, only prop01tionate part, and not the entire amount, of the A B c discount could be deducted in the assessment year in question. D Words and Phrases : "Expenditure''--Meaning of-In the context of S.37 of the Income Tax Act, 1961. E The appellant-Company issued debentures at a discount of 2% redeemable after 12 years with interest at a stipulated rate. For AY 1968-69 the appellant wrote off Rs. 12,500 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with 30-6-1967. The Income tax Appellate Tribunal not only allowed the deduction of Rs. 12,500 but also allowed the deduction of the balance F amount of Rs. 2,87,500. The question before the High Court was 'Whether there was any expenditure in the sum of Rs. 2,87,500 and whether it was revenue expenditure"? The High Court answered the first part of the question in the negative and did not answer the second part. Hence this appeal. G Disposing of the appeal, this Court HELD : 1.1. "Expenditure" is not necessarily confined to the money, which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a H 593 594 SUPREME COURT REPORTS [1997] 3 S.C.R. A future date. However, a contingent liability, which may have to be dis- charged in future, cannot be considered as expenditure. [600-F-G] Indian Molasses Co. (Private) Ltd. v. CIT, (1959) 37 ITR 66 and Calcutta Co. Ltd. v. CIT, (1969) 37 ITR 1, relied on. B 1.2. Although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in presenti although it is payable in C futuro. A contingent liability that may arise in future is, however not "expenditure". It would. cover not just a one-time payment but a liability spread out over a number of years. [602-B-C] CIT v. Chandulal Keshavlal & Co., (1960) 38 ITR 601, relied on. D CIT v. Indian Jute Mills Association, (1982) 134 ITR 68, approved. 2.1. When a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. The company incurs such a liability for the purposes of its business in order to generate funds for its business activities. The company uses the E amounts so obtained by issue of debentures for the purposes of its busi- ness. This would, therefore, be expenditure. [603-E-G] M.P. Financial Corporation v. CIT, (1987) 165 ITR 765 (MP), ap- proved. F Spicer and Pegler's: "Book-Keeping and Accounts'~ 17th Edn., P. 240 G and Batliboi: "Principles and Practice of Auditing, referred to. 2.2. Whether a particular expenditure is revenue expenditure in- curred for the purpose of business must be determined on a consideration of all the facts and circumstances. And by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-making proceeds and not for acquisition of an asset or a right of a permanent character, the possession H of which is a condition of the carrying on of the business, expenditure may ·~ ' MADRAS INDL. INVESTMENT CORPN. LTD. v. C.I.T. 595 be regarded as revenue expenditure. [604-C] Indian Cemel!fs Ltd. v. CIT, (1966) 60 ITR 52 and Bombay Steam Navigation Co. Ltd. v. CIT, (1965) 56 ITR 52, relied on. A Texas Land and Mortgage Co. v. William Holtham, (1894) 3 Tax Cases B 255 and Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., 12 Suppl. ITR 513, referred to. 3.1. The Income Tax Appellate Tribunal's conclusion, t
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