TAPARIA TOOLS LIMITED versus JOINT COMMISSIONER OF INCOME TAX SPECIAL, RANGE -1, NASIK

Citation: [2015] 3 S.C.R. 746 · Decided: 23-03-2015 · Supreme Court of India · Bench: A.K. SIKRI · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
[2015) 3 S.C.R. 746 
TAPARIATOOLS LIMITED 
v. 
JOINT COMMISSIONER OF INCOME TAX SPECIAL 
RANGE-1, NASIK 
8 
(Civil Appeal Nos. 6366-6368 of 2003) 
MARCH 23, 2015 
[A.K. SIKRI AND ROHINTON FALi NARIMAN, JJ.] 
Income Tax Act, 1961: s.36(i)(iii) - Deduction - Interest 
C paid upfront to the debenture holder whether allowable in the 
first year itself or to be spread over a period of five years 
being the life of the debentures - In the instant case, in the 
debenture issue, two options as regards the payment of 
0 
interest were given to the debenture holders - Payment of 
interest every half yearly@ 18% .p.a. over a period of 5 years 
or else, one time upfront payment of~ 55 per debenture -
Assessee having followed the mercantile system of 
accounting showed the upfront payment of interest on 
E debentures as deferred revenue expenditure in the accounts 
to be written off over a period of 5 years - Notwithstanding 
this accounting treatment, it claimed the entire upfront interest 
payment as fully deductible expenditure - Held: Asses see 's 
claim is valid- The money raised on account of issuance of 
F the debentures is the capital borrowed and the debentures 
are issued for the purpose of the business of the assessee -
In such a scenario, when the interest is actually incurred by 
the assessee, the assessee would be entitled to deduction 
of full amount in the assessment year in which it is paid. 
G 
Allowing the appeals, the Court 
HELD: 1. Section 36 of the Income Tax Act, 1961 
is a residual section in respect of certain deductions 
H which are to be made rrom the income of the assessee 
746 
TAPARIA TOOL LTD. v. JOINTCOMMR. OF INCOME TAX 747 
SPECIAL RANGE, NASIK 
while arriving at- the taxable income. One of the A 
deductions, apart from many other kinds of deductions 
stipulated in the section, relates to the amount of interest 
paid in respect of capital borrowed for the purpose of 
business or profession. While examining the allowability 
of deduction of this nature, the AO is to consider the B 
genuineness of business borrowing. 
Once the 
genuineness is proved and the interest is paid on the 
borrowing, it is not within the powers of the AO to disallow 
the deduction either on the ground that rate of interest C 
is unreasonably high or that the assessee had himself 
charged a lower rate of interest on the monies which he 
lent. In the instant case, the AO did not dispute that the 
non-convertible debentures were issued and money 
raised for business purposes. The AO did not even o 
dispute the genuineness of clause relating to upfront 
payment of interest in the first year itself as per the 
option to be exercised by the debenture holder. 
Therefore, there is no dispute that interest has, in fact, 
been 'paid' during the accounting year. Definition of E 
'paid' is contained in Section 43(ii) of the Act to mean 
actually paid or incurred according to the method of 
accounting. As per the definition of 'paid' as Section 43, 
even if the amount is not actually paid but 'incurred', 
according to the method of accounting, the same would F 
be treated as 'paid'. Since the assessee was following 
mercantile system of accounting, the amount of interest 
could be claimed as deduction even if it was not actually 
paid but simply 'incurred'. However, in the instant case, G 
the amount of interest was actually paid as well in the 
assessment year in which it was claimed. [Paras 8 and 
9] [753-D, E-F; 755-A-E, H; 756-A-B] 
2. 
By allowing only 1/5th of the upfront payment H 
748 
SUPREME COURT REPORTS 
[2015] 3 S.C.R. 
A actually incurred, though the entire amount of interest 
is'aetually incurred in the very first year, the AO, in fact, 
· fre{ted both the methods of payment at par, which was 
clearly unsustainable. By doing SO, the AO, in fact, 
tampered with the terms of issue, which was beyond his 
B domain. On exercise of the option of upfront payment of 
interest by the subscriber in the very first year, the 
assessee ·paid that amount in terms of the debenture 
issue and by doing so he was simply discharging the 
C interest liability in that year thereby saving the recurring 
liability of interest for the remaining life of the debentures 
because for the remaining period the assessee was not 
required to pay interest on the borrowed amount. [Para 
D 
11] (756-G-H; 757-A-C] 
I 
3. The assessee did not want spread over of this 
expenditure over a period of five years as in the return 
filed by it, it had claimed 

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