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[2015]56taxmann.com79(PuneTrib.)/[2015]153ITD311(PuneTrib.)
IT : Where under share sale and purchase agreement assessee purchased 51 per
centshareholdingofcompany'M'whileassigneddebtsofRs.1.35croresto'M'for
Re. 1 only and subsequently recovered amount was shown and taxed in hand of
company 'M', original loss of Rs. 1,34,99,999 was in fact compensation paid to
company'M'forsurrenderingtheir51percentsharehence,acapitalexpenditure
IT:Salestaxrefund,saleofscrap,discountfromvendors,etc.wouldformpartof
businessprofitsforpurposeofsection80HHC
IT : Goodwill is an asset under Explanation 3(b) to section 32(1) and, thus, eligible
fordepreciation
IT : Prepayment charges paid in respect of debenture issued were expenses
incurredforpurposeofbusinessandsamewasallowableexpenditure

[2015]56taxmann.com79(PuneTrib.)
INTHEITATPUNEBENCH'A'
AssistantCommissionerofIncometax,Circle9,Pune
v.
GKNSinterMetal(P.)Ltd.*
SHAILENDRAKUMARYADAV,JUDICIALMEMBER
ANDR.K.PANDA,ACCOUNTANTMEMBER
ITAPPEALNOS.879&3465(PUNE)OF2010
[ASSESSMENTYEAR200304]
MAY6,2013
I. Section 37(1), read with sections 36(1)(vii) and 41(4), of the Incometax Act, 1961
BusinessexpenditureAllowabilityof(Lossonassigneddebts)Assessmentyear200304
Assesseecompanyenteredintoasharesaleandpurchaseagreementwithcompany'M'
Underthisagreement51percentshareholdingof'M'waspurchasedbyassesseecompany
Further, assessee assigned debts of Rs. 1.35 crore to 'M' for Re. 1 only Assessee
assignor had undertaken to collect debts on behalf of assignee 'M' and remitted same
periodically 'M' paid tax on recovered amount Assessee had not shown any income on
accountofrecoveryofpartofdebtWhethertherewasnomeritinargumentsadvancedby
assessee that amount of Rs. 1,34,99,999 should be allowed either as a bad debts or a
businesslossrathertherewasforceinargumentofdepartmentthatassesseehadadopted
a colourable device to compensate 'M' for surrender of their 51 per cent shareholding and
thiswasacapitalexpenditureHeld,yes[Para20.6][Infavourofrevenue]
II. Section 80HHC of the Incometax Act, 1961 Deductions Exporters (Sales tax refund,
sale of scrap etc.) Assessment year 200304 Whether sales tax refund, sale of scrap,
discount from vendors, etc. would form part of business profits for purpose of section
80HHCHeld,yesWhether,therefore,90percentofsuchmiscellaneousincomecouldnot
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be reduced from eligible business profits for purpose of computation of deduction under
section80HHCHeld,yes[Para9][Infavourofassessee]
III. Section 32 of the Incometax Act, 1961 Depreciation Allowance/Rate of (Goodwill)
Assessmentyear200304WhethergoodwillisanassetunderExplanation3(b)tosection
32(1)and,thus,itiseligiblefordepreciationHeld,yes[Para21.8][Infavourofassessee]
IV.Section37(1)oftheIncometaxAct,1961BusinessexpenditureAllowabilityof(Shave
issueexpenses)Assessmentyear200304Whetherprepaymentchargespaidinrespect
of debenture issued were expenses incurred for purpose of business and same was an
allowableexpenditureHeld,yes[Para22.12][Infavourofassessee]
FACTI

The assesseecompany was engaged in the business of manufacture and sale of sintered bearings and
partsetc.ItenteredintoasharesaleandpurchaseagreementwithoneM&M,intermsofwhichassessee
together with its nominees held the entire equity shares of M&M. Under this agreement 51 per cent
shareholding of Mahindra & Mahindra Ltd. was purchased by the assessee company. The assessee
assigneditsdebtsofRs.1.35croretoM&MforRe.1andclaimedlossofRs.1,34,99,999asbaddebts.
The Assessing Officer disallowed the assessee's claim of expenditure holding the same to be capital
expenditureinnature.
OnappealbeforetheCommissioner(Appeals),assesseesubmittedthatifthebaddebtswasnotallowable
under section 36(i)(vii) then the loss suffered on account of assigning such debts had to be allowed as
business loss under section 37. The Commissioner (Appeals) was not convinced with the submission
advanced by the assessee and upheld the action of the Assessing Officer rejecting the assessee's claim
bothasbaddebtsandbusinessloss.
Onappeal:
HELDI

TheonlyquestiontobedecidedhereisastowhethertheamountofRs.1,34,99,999isallowableasbad
debtorbusinesslossasclaimedbytheassesseeorthesameisnotallowableundersection36(i)(vii),read
with section 36(2) or under section 37(1) as held by the Assessing Officer and upheld by the
Commissioner(Appeals)Fromthevariousdetailsfurnishedbytheassesseeitisfoundthattheassessee
hasassignedthedebtstoM&MforRs.1.[Para20.4]
Issueofallowabilityasbaddebts
Thefirstpropositionmadebytheassesseeisthatthesameshouldbeallowedasbaddebtinviewofthe
decision of Supreme Court in the case of TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391.
However,thereisnoforceintheabovesubmissionoftheassesseesincetheassesseehasnotwrittenoff
theamountasbaddebt but has claimed loss on assignment due to transfer ofthedebtorsbyadeedof
assignment for a consideration of Rs. 1. Therefore, for claiming the bad debt as allowable under the
provisionsoftheIncometaxActthesamemustbewrittenoffinconformitywiththeprovisionsofthe
IncometaxAct.BytransferringthedebtofRs.1.35CrorestoM&MforRs.1,theassesseehaslostthe
ownershipoverthedebts.Therefore,bydoingthistheassesseehasmadetheprovisionsofsection41(4)
redundant.Asperthesaidprovisionsifanyamountisrecoveredinfutureonaccountdeductionallowed
in respect of bad debts or part thereof then the same shall be deemed to be the profits and gains of
business or profession in that year and accordingly chargeable to tax. However, in the instant case the
assessee has not shown any income on account of recovery of part of such debt since the assessee has
assigned the debts to M&M and as per submission of the assessee M&M has offered the same to tax.
Therefore,thefirstpropositionarguedbytheassesseebeingwithoutanymeritisdismissed.[Para20.5]
Issueofallowabilityasbusinessloss
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Nowcomingtothesecondpropositionoftheassesseethatthesameshouldbeallowedasbusinessloss
sincetheassesseehassoldthedebtsofRs.1.35CroresforRs.1itisfoundthatsameisalsowithoutany
merit.Firstofallitisnotthebusinessoftheassesseetoassigndebts.Further,theassesseeintheinstant
casehasassignedthedebtstoM&M.Therefore,theassesseebecomestheassignorandM&Mbecomes
theassignee.Inacaselikethistheassigneeissupposedtocollectonbehalfoftheassignorforwhichthe
assignorshallgivesomecommissiontotheassignee.However,intheinstantcasetheassessee,i.e.the
assignor has undertaken to collect the debts on behalf of the assignee and has remitted the same
periodically. The submission of the assessee that M&M has paid tax on the debts so recovered and
thereforetaxingthesameinthehandsoftheassesseeamounttodoubletaxationisofnomerit.Therefore,
there is no merit in the arguments advanced by the assessee that amount of Rs. 1,34,99,999 should be
allowedeitherasabaddebtorabusinessloss.Rather,thereisforceintheargumentoftheDepartmental
RepresentativethattheassesseehasadoptedacolourabledevicetocompensateM&Mforthesurrender
oftheir51percentshareholdingand,therefore,thisisacapitalexpenditure.Accordinglyisdismissedthe
groundraisedbytheassessee.[Para20.6]
FACTSII

During the course of assessment proceedings, the Assessing Officer found that while computing the
deductionclaimedundersection80HHCtheassesseehadreduced90percentofgrossinterestreceived
buthadnotreduced90percentofthemiscellaneousincometoarriveattheadjustedprofiteligiblefor
deduction under section 80HHC. Therefore, he was relying on the observation made in earlier year
recomputedthedeductionundersection80HHC.
Onappeal,theCommissioner(Appeals)allowedtheclaimoftheassesseebyfollowingthedecisionof
theTribunalinassessee'sowncaseforearlieryears.
Onrevenue'sappeal:
HELDII

RespectfullyfollowingthedecisionoftheTribunalinassessee'sowncaseandinabsenceofanycontrary
materialbroughttonoticethereisnoinfirmityintheorderoftheCommissioner(Appeals),theAssessing
Officerisdirectednottoreduce90percentofmiscellaneousincomefromtheeligiblebusinessprofitsfor
the purpose of computation of deduction under section 80HHC. The ground raised by the revenue is
accordinglydismissed.[Para9]
FACTSIII

Theassesseeincurredcertainexpenditurebeingonetimelicencefeepaidtotheownerforgrantingtothe
useranditclaimedsaidexpenditureasrevenueexpenditure.
TheAssessingOfficerdisallowed50percentofthesameholdingthatincomewasobtainedforaperiod
of2years.
On appeal, the Commissioner (Appeals) disallowed the entire expenditure on the ground that the same
wasforacquiringofgoodwillfor2yearsandonwhichnodepreciationcouldbeallowed.
Onappeal:
HELDIII

PerusedtheordersoftheAssessingOfficerandtheCommissioner(Appeals)andthepaperbookfiledon
behalfoftheassessee.ThereisnodisputetothefactthattheassesseehasincurredexpenditureofRs.75
lakhsbeingonetimelicencefeepaidtotheownerforgrantingtotheuser,thelicencetocontinuetouse
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thetrademarkasperthenamelicenceagreement.Theassesseetreatedthesameasrevenueexpenditure
inthebooks.However,theAssessingOfficerallowedonly50percentoftheexpensesasallowableduring
theyearandthebalance50percentinsubsequentyearsincethelicencewasobtainedforaperiodof2
years.Commissioner(Appeals)enhancedtheamountanddisallowedtheentireexpenditureontheground
thatthesameisforacquiringofgoodwillfor2yearsandonwhichnodepreciationcanbeallowed.Itis
the submission of the counsel for the assessee that the entire amount should be allowed as revenue
expenditure. Alternatively it is the argument of the the assessee that depreciation should be allowed in
caseitisheldtobeacquisitionofgoodwillinviewofdecisionofSupremeCourtinthecaseofCITv.
SMIFSSecuritiesLtd.[2012]348ITR302/210Taxman428/24taxmann.com222(SC).Itisfoundthat
the alternate contention of the assessee that depreciation should be allowed is acceptable in view of
decision of Supreme Court in the case of SMIFS Securities Ltd. (supra) wherein it has been held that
goodwillunderExplanation3(b)ofsection31(2)iseligiblefordepreciation.Inviewofthedecisionof
Supreme Court cited supra, the order of Commissioner (Appeals) and direct the Assessing Officer to
allow depreciation on the goodwill as per law. Accordingly, Ground of appeal Nos. 3 and 4 by the
assesseearedismissedandGroundofappealNo.5isallowed[Para21]
FACTSIV

Theassesseecompanyclaimedexpendituretowardsdebenturesprepaymentcharges.
TheAssessingOfficerdisallowedthesaidexpensesandmadeaddition.
Onappeal,theCommissioner(Appeals)upheldtheorderoftheAssessingOfficer.
Onappeal:
HELDIV

SofarasthedecisionreliedonbytheCommissioner(Appeals)inthecaseofAssociatedHotelsofIndia
Ltd.v.CIT[1953]23ITR134(Punj.&Har.)itisfoundthatthesamewasdecidedbythePunjabHigh
Court(CircuitBenchatDelhi).Thefactsinthatcaseweredistinguishableandnotapplicabletothefact
of the present case. In that case debentures were redeemed before maturity by paying bonus and fresh
debentureswereissuedbeforematurity.However,intheinstantcase,itisnotthecaseoftherevenuethat
the assessee has issued fresh debentures after prepayment of the debentures. Therefore, the above
decisionisnotapplicabletothefactsofthepresentcase.Consideringthetotalityofthefactsofthecase
and in view of the decision cited (supra) we are of the considered opinion that the amount of Rs.
43,34,000 incurred by the assessee being prepayment charges paid in respect of debentures issued are
expensesincurredforthepurposeofbusinessandthesameisanallowableexpenditure.Accordinglythe
orderoftheCommissioner(Appeals)ontheissueissetasideandGroundofappealNo.6bytheassessee
isallowed[Para22.12]
CASEREVIEWI

AssociatedHotelsofIndiaLtd.v.CIT[1953]23ITR134(Punj.&Har.)(para22.52)distinguished.
CASEREVIEWII

Asstt.CITv.GKNSinterMetal(P.)Ltd.[ITAppealNo.555/M/2007,dated2782008](para9)followed.
CASEREVIEWIII

CIT v. SMIFS Secuirities Ltd. [2012] 348 ITR 302/210 Taxman 428/24 taxmann.com 222 (SC) (para 21)
followed.
CASEREVIEWIV

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CITv.AshokLeylandLtd.[1972]86ITR549(SC)CITv.GujaratGuardianLtd.[2009] 177 Taxman 434

(Delhi)OverseasSanmarFinancialLtd.v.Jt.CIT[2003]86ITD602(Chennai)(para22.12)followed.
CASESREFERREDTO

T.R.F.Ltd.v.CIT[2010]323ITR397/190Taxman391(SC)(para20),EmpireJuteCo.Ltd.v.CIT [1980]
124ITR1/3Taxman69(SC)(para21.3),AlembicChemicalsWorksCo.Ltd.v.CIT[1989]177ITR377/43
Taxman312(SC)(para21.3),CITv.B.C.SrinivasaSetty[1981]128ITR294/5Taxman1(SC)(para21.5),
Cambatta&Co.(P.)Ltd.v.CEPT[1961]41ITR500(SC)(para21.5),SeethalakshmiAmmalv.CED[1966]
61 ITR 317 (SC) (para 21.5), CIT v. SMIFS Securities Ltd. [2012] 348 ITR 302/210 Taxman 428/24
taxmann.com222(SC)(para21.8),GujaratGuardianLtd.v.Jt.CIT[2008] 174 Taxman 151 (Chd.)(para
22.5),CITv.GujaratGuardianLtd.[2009]177Taxman434(Delhi)(para22.5),CITv.AshokLeylandLtd.
[1972]86ITR549(SC)(para22.5),OverseasSanmarFinancialLtd.v.Jt.CIT[2003]86ITD602(Chennai)
(para22.6)andAssociatedHotelsofIndiaLtd.v.CIT[1953]23ITR134(Punj.&Har.)(para22.12).
MukeshVermafortheAppellant.FarukhIranifortheRespondent.
ORDER

R.K. Panda, Accountant Member The above cross appeals filed by the revenue and the assessee
respectivelyaredirectedagainsttheorderdated02032010oftheCIT(A)4,MumbairelatingtoA.Y.2003
04.Forthesakeofconveniencethesewereheardtogetherandarebeingdisposedofbythiscommonorder.
ITANo.879/PN/2010(ByRevenue):
2.Theonlyeffectivegroundraisedbytherevenuereadsasunder:
"Whetheronthefactsandcircumstancesofthecaseandinlaw,theLd.CIT(A)wasjustifiedindirecting
theAssessingOfficernottoreduce90%ofmiscellaneousincomefromtheeligiblebusinessprofitsfor
thepurposeofcomputationofdeductionu/s.80HHCwhenthesamewasrightlyheldbytheAssessing
Officerasnonoperationalbusinessincome".
3.Factsofthecase,inbrief,arethattheAssessingOfficerduringthecourseofassessmentproceedingsnoted
thattheassesseehasclaimeddeductionu/s.80HHCamountingtoRs.42,40,416.HeobservedfromtheP&L
AccountoftheassesseecompanythattheassesseehasshownanamountofRs.63,91,400asMiscellaneous
incomeunderthehead"otherincome".Whilecomputingthedeductionclaimedu/s.80HHCtheassesseehas
reduced90%ofgrossinterestreceivedbuthasnotreduced90%oftheMiscellaneousincometoarriveatthe
adjusted profit eligible for deduction u/s.80HHC. He referred to the order for A.Y. 199899 in case of the
assessee wherein the issue has been discussed elaborately and the claim for the assessee that the
Miscellaneous income consists mainly of scrap sale and exchange gain and hence forms a part of eligible
business profit was not accepted for the reasons mentioned therein. Since the issue in the instant year is
identical to that of assessment year 199899 the Assessing Officer relying on the observation made in the
A.Y. 199899 recomputed the deduction u/s.80HHC by reducing 90% of the Miscellaneous income of
Rs.63,91,400inadditionto90%ofinterestincome.
4.InappealthelearnedCIT(A)allowedtheclaimoftheassesseebyfollowingthedecisionoftheTribunalin
assessee'sowncaseforearlieryears.AggrievedwithsuchorderoftheCIT(A)therevenueisinappealbefore
us.
5.ThelearnedcounselfortheassesseeattheoutsetfiledcopiesoftheordersoftheTribunalinassessee's
own case for A.Y. 199899, 200001, 200102 and 200203 and submitted that under identical facts and
circumstancestheTribunalhasallowedtheclaimoftheassesseeandtheappealfiledbytherevenueinA.Ys.
200001,&200203hasbeendismissedandinotheryearstheappealfiledbytheassesseehasbeenallowed.
6. The learned Departmental Representative fairly conceded that the issue has been decided against the
revenuebythedecisionsoftheTribunalinassessee'sowncasefortheprecedingassessmentyears.

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7.Afterhearingboththesideswefindtheassesseehasclaimedthefollowingitemsasmiscellaneousincome,
thedetailsofwhicharementionedatpara21oftheorderoftheCIT(A):
Account
Head

Amount
Rs.

Particulars

SalesTax
9,95,864
Refund

Thisrepresentsthesaletaxrefundreceivedoncompletionofthesalestaxassessment

Misc.
Income

15,198

Thisrepresentssundryincomeofthecompany

Saleof
Scrap

Thisrepresentstherecoverymadebythecompanyinrespectofscrapgenerated
33,02,043 duringproductionandisnothingbutareduction/recoveryofthecostsincurredandis
intricatelylinkedtotheoperatingandmanufacturingactivitiesofthecompany

Discount 9,495

Thisrepresentsdiscountsreceivedfromvendors

Saleof
Garbage

Thisrepresentsthesaleofwasteatthefactory

1.06.024

Gainon
Thisrepresentstheexchangegainaccruingtothecompanyaspartofitsoperational
19,62,776
Exchange
activities
Total

63,91,400

8.WefindtheTribunalinassessee'sowncasevideITANo.5155/M/2007orderdated27082008forA.Y.
200203hasdismissedtheappealfiledbytherevenuebyholdingasunder:
"4.Duringthecourseofhearingboththepartiesfairlyconcededthattheseissuesarecoveredinfavour
of the assessee by the decision of the ITAT 'A' Bench Mumbai in ITA No. 3588/M/2004 in assessee's
owncaseforA.Y.200001andalsoinITANo.6427/M/2003inassessee'sowncasefor19989.Inthe
laterreferredcase,inpara15oftheorderitwasheldasunder:
13.VariousdecisionsoftheBombayHighCourtandtheTribunalshaveconsistentlyheldthatsalestax
refundgoestoreducethecostofproduction.Foreignexchangegainsformpartofeligibleturnoverand
incomefromscrapsalespertainthecharacterofbusinessincome.Usefulreferencemaybemadetothe
decisionsoftheBombayHighCourtinthecaseofCITv.BangaloreClothingCo.[2003]260ITR371
andAlfaLavalIndiaLtd.v.Dy.CIT[2004]266ITR418.(Bom.) The Mumbai Tribunal in the case of
RenaissanceJewellery(P.)Ltd.v.ITO[2006]101ITD380hasfollowedthesamerule.Inassessee'sown
casefortheassessmentyear200001,theTribunalhasheldinITANo.3588/Mum/2004,thatsuchitems
areformingpartofthebusinessprofitsforthepurposeofSec.80HHC.Therefore,thisgroundisalso
liabletobedismissed.
5. It is also noticed from the order of the CIT(A) that miscellaneous income consist mainly of scrap
sales,salestaxrefundanddiscount.Nowhereitismentionedthatexchangegainisalsoincluded.Bethat
as it may, if there is any exchange gain involved the assessee is entitled for deduction under section
80HHContheaboveamount.RespectfullyfollowingtheabovedecisionthegroundsoftheRevenueare
rejected".
9.RespectfullyfollowingthedecisionoftheTribunalinassessee'sowncaseandinabsenceofanycontrary
materialbroughttoournoticewefindnoinfirmityintheorderoftheCIT(A)directingtheAssessingOfficer
nottoreduce90%ofMiscellaneousincomefromtheeligiblebusinessprofitsforthepurposeofcomputation
ofdeductionu/s.80HHC.Thegroundraisedbytherevenueisaccordinglydismissed.
ITANo.3465/M/2010(ByAssessee):
10.GroundsofappealNo.1and2bytheassesseereadasunder:
"1. TheLd.CIT(A)erredinconfirmingtheactionoftheAssessingOfficerindisallowingtheamount
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of Rs.1,34,99,999 being the loss on assignment of a debt, by holding that the same was not
allowableu/s.37(1)oftheAct.
2. Without prejudice to Ground No.1 above, the Ld. CIT(A) erred in holding that the amount of
Rs.1,34,99,999 could not be allowed as a bad debt u/s.36(1)(vii) r.w.s.36(2) of the Act as the
conditionsprescribedwerenotsatisfied".
11.Factsofthecase,inbrief,arethattheassesseecompanyisengagedinthebusinessofmanufactureand
saleofsinteredbearingsandparts,sinteredautomotivecomponents,sinteredfiltersandmetalpowders.The
companyalsomanufacturestools.DuringthecourseofassessmentproceedingstheAssessingOfficernoted
thattheassesseehasdebitedanamountofRs.2,09,99,999totheprofitandlossaccountwhilearrivingatthe
profit figure of Rs.13,04,53,776/ as extraordinary items of expenditure. The details in respect of these
extraordinary items of expenditure specified in Note 3(a) & (b) of ScheduleXV of the audited accounts
whichisreproducedbytheAssessingOfficerintheassessmentorderreadasunder:
"a. The Company Mahindra & Mahindra Ltd. (M&M) and GKN Sinter Metals Holdings Ltd. (GKN)
entered into a Share Sale & Purchase Agreement on 28th March, 2002, in terms of which M&M sold
11,50,508 equity shares in the Company to GKN. Pursuant to this, GKN together with its nominees,
holdstheentireequitysharesoftheCompany.Pursuanttothechangeinshareholding,thenameofthe
CompanyhasbeenchangedtoGKNSinterMetalsLtd.,effectivefrom2ndAugust,2002.
b.ExtraordinaryItems:
PursuanttotheShareSale&PurchaseAgreementreferredabove,
(i) ThecompanyhasassigneddebtsaggregatingtoRs.1,35,00,000/toM&Mfora
considerationofRe.1.Accordingly,thelossonassignmenthasbeenwrittenoffin
thebooksofaccountRs.1,34,99,999.
(ii)

TheCompanyhasenteredintoaNameLicenseAgreementwithM&Mforuseof
trademarksforaonetimefee
TOTAL

Rs.1,35,00,000/

Rs.75,00,000/
Rs.2,09,99,999/
"

12. On being questioned by the Assessing Officer to justify the claim of the extraordinary items of
expenditureamountingtoRs.1,35,00,000/asarevenueexpendituretheassesseerepliedasunder:
"(1) EnclosedpleasefindcopyoftheAgreementdated18.07.2002betweenourCompany,Mahindra&
Mahindra and GKN Sinter Metals Holdings Ltd., U.K. for Share sale and Purchase. 2) The
Companyhaddebtsduefromvariouscustomersonaccountofsalesmadetotheminthenormal
courseofbusiness.Needlesstosay,thecorrespondingamountshadbeenofferedfortaxfromtime
to time. In ordinary course therefore if any portion of these debts had wholly or partially bad or
irrecoverable,theshortfallwouldhavebeenallowableasadeduction,asabaddebtu/s.36(1)(vii).
(2) ThecompanyassignedthesedebtstoMahindra&Mahindraintermsofanagreementdated27th
September, 2002 (copy enclosed). On the basis of a fair estimate of the chances of recovery of
thesedebts,itwasfeltthatonlymarginalamountscouldberecoveredagainstbookvalueofRs.
1,35,00,000. It therefore' made no sense in continuing to carry these debts in the books at their
bookvalueofRs.1.Theamountstreatedasbaddebtshavebeenfactuallywrittenoffinthebooks
bycreditingtheaccountsoftherespectivepartiesandhaveclaimedasbaddebtsu/s.36(1)(vii).
Needless to say, Mahindra & Mahindra Limited has offered to tax the amount recovered from the
assigneddebtsinsubsequentyearintheirassessment.Aletterwrittenbythemtothiseffectisenclosed."
13.However,theAssessingOfficerwasnotconvincedwiththeaboveexplanationgivenbytheassesseeand
asked the assessee to file copy of certificate from auditors in respect of its claim for writing off bad debts
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assignedtoMahindraandMahindraandalsotofilethecopiesofaccountsofdebtswrittenoff.Inresponseto
thesametheassesseerepliedasunder:
"(2) TherelevantportionofreportgivenbyErnst&Youngonreceivables,whichhadmentionedabout
balancesoveronehundredandeightydaysandwere,outstandingonaccountofamountsdisputed
bythecustomersduetorejections,ratedifferencesandalsocertainfreightamountsandoverdue
interestsamountsnotacceptedbycustomers,whichwereoutstandinginourbooksandwhich,we
werenothopefulofrecovering.
(3) WehadactuallywrittenoffbalancesofcustomersasBadDebtswhichwereconsideredasdoubtful
byErnst&Young,whichwereoversixmonthsandweredisputedbythecustomers.Copiesofthe
somestatementofaccountsshowingthewriteoffsinthebooksareenclosed."
14. In order to verify the contents of the Share sale and Purchase Agreement dated 18072002 the AO
obtainedacopyofthesamefromMahindraandMahindraLtd.andnotedthatthesharesaleandpurchase
transactionagreementdated28032002wasenteredintobetweenfollowingparties:
"(i) Mahindra&MahindraLtd.(Seller)
(ii) GKNSinterMetalsHoldingLtd.(Purchaser)
(iii) MahindraSinteredProductsLtd.(Company).
TheassesseecompanywasformerlyknownasMahindraSinteredProductsLtd.,whereinM/s.Mahindra
&MahindraLtd.(Seller)held51%sharesandM/s.GKNSinterMetalsHoldingsLtd.(Purchaser)held
49%.
Byvirtueoftheagreementdated28.03.2002,thepurchaseracquiredtheshareholdingoftheSellerfora
considerationofRs.65Crores.
A supplementary agreement dated 18.07.2002 was made to the original agreement dated 28.03.2002,
betweenthesame3partiesmentioned(supra).
Byvirtueofthesupplementaryagreementdated18072002,theassesseecompanyassignedBookDebts
ofRs.1,35,00,000/foraconsiderationofRs.1totheSeller."
15.AfteranalyzingthevariousclausesandscheduleattachedtotheprincipalagreementtheAOconfronted
theassesseewiththefollowingfacts:
"4.(e)Inthisregard,videthisofficeletterdated10022006,theassesseewasinformedasunder:
1. Inthisregardtheundersignedobtainedacopyofthesharesaleandpurchaseagreementdated20
032002, between Mahindra & Mahindra Ltd. (Seller) and G.K.N. Sinter Metals Holdings Ltd.
(Buyer).
2. AsperClause2ofthesaidagreement,certainconditionsprecedenttotheclosingofthesharesale
andpurchasetransactionwaslaiddown.
Yourattentionisdrawnmorespecificallytoclause2.1.9ofthesameagreement,whichstatedthat
"thecompanyshallhavecompletedthewritingofassetssetoutinSchedule'8'ofthisagreementas
specifically identified by the parties, in its books of accounts after 31.03.2002, but prior to the
closing".
3. By virtue of supplementary agreement dated 18.07.2002 to the original share sale purchase
agreement,clause2.1.9andschedule8oftheprincipalagreementwasdeletedandclause5.3&5.4
wasinsertedintheprincipalagreement.Byvirtueofthisnewclause5.3,youhaveassignedBook
Debtors of Rs.1.35 Crores for a consideration of Re.1. Furthermore, notwithstanding the
assignmentofthesedebtorstothecompanyshallcollectdebtsforandonbehalfofthesellerand
shallremittotheselleranyamountsocollectedonamonthlybasis.
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4. From the above facts and circumstances, it can be seen that the assignment of Book Debtors of
Rs.1.35 Crores for a value of Re.1, is a part of the consideration paid/payable to Mahindra &
Mahindrafortheirshareholdinginthecompany.Hence,theexpensesofRs.1,34,99,999/claimed
byyouaslossonassignmentofdebtorstoMahindra&Mahindraisnotarevenueexpensebuta
capitalexpenseandhencenotallowable."
16.Inresponsetothesametheassesseerepliedasunder:
"AsmentionedinourletterdatedJanuary30th,2006alongwithwhichwehadenclosedthereportof
Ernst&Youngwhichclearlystatedthatthereceivablesweredoubtful,henceitwasdecidedtowriteit
offinthebooksandassigningthesametoMahindra&MahindraLimited@Re.1value.Asthereceipt
ofmoneyfromthedebtorsbyuswasmoreconvenient,itwasdecidedthatwhateverwasreceivedfrom
debtorsagainstassigneddebtsshallberemittedtoMahindra&MahindraLimitedonmonthlybasis.We
hadinfactwrittenofftheseassigneddebtsasbaddebtsinourbooksonassignmentandgivenyouthe
statement of debtors. Hence, we respectfully submit, that these should be considered as revenue
expenditureforthepurposeofdeterminationofincome.Incidentally,thiswasputinShareSalePurchase
agreement,byvirtueoftheDueDiligencereportofErnst&Youngcopyofwhichisalreadygivento
you. As already advised by Mahindra & Mahindra Limited the amount received by them, have been
offeredtotax."
17. However, the AO was not convinced with the explanation given by the assessee and disallowed the
assessee's claim of expenditure amounting to Rs.1,34,99,999 holding the same to be capital expenditure in
natureforthefollowingreasons:
"4. (g) The assessee's various submissions have been considered in depth, however, the same is not
acceptedforthefollowingreasons:
(i) Theassessee'scontentionthattheamountofBookDebtsassignedtoMahindra&Mahindrawould
beallowableasadeductionasaBadDebtsu/s.36(1)(vii)isbeliedbythefactthattheassesseeis
recoveringthesedebtsonbehalfofMahindra&Mahindraandremittingtheamountcollectedto
Mahindra&Mahindra.Hence,itisnotclearhowthesedebtscanbeconsideredtobebadinthe
handsoftheassesseecompany.
(ii) From the copies of accounts filed by the assessee in respect of few parties in respect of debts
assigned,suchas:
1. HindustanMotorsLtd.
2. RicoAutoIndustriesLtd.
3. LohiaMachinesLtd.MunjalShowLtd.
4. HeroHondaMotorsLtd.
5. EscortsLtd.
Itisseenthattheassesseehasregulartransactionsthroughouttheyearandisalsoreceivingpayments
fromthesepartiesregularlyandperiodically.Hence,theassessee'sclaimthatcertainamountsduefrom
thesepartiesarenotrecoverableandhencebaddebtscannotbeaccepted.Theassesseehasnotgivenany
evidencetosupportitsclaimthattheseamountsweredisputedbythecustomersforvariousreasons.
(iii) Asmentionedinmyletterdated10.02.2006totheassessee,formaplainreadingof,thetermsof
theShareSale&PurchaseAgreementitcanbeseenthattheassignmentofBookDebtsofRs.1.35
CroresforavalueofRe.1,isaintrinsicpartoftheconsiderationpayabletoMahindra&Mahindra
forrelinquishingitsshareholdingintheassesseecompany.
(iv) Mahindra & Mahindra Ltd., vide their letter dated 07.02.2006 have confirmed that out of total
debtsofRs.1,35,00,000/takenbythematavalueofRe.1,theyhaverecovereddebtsamounting
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toRs.79,51,040/asunder:
(a)

A.Y.200304

Rs.72,09,104/

(b)

A.Y.200405

Rs.7,41,936/

Total

Rs.79,51,040/

Thus,furtherfortifiesmycontentionthatthedebtsassignedtoMahindra&Mahindra,wereinno
waybad,asMahindra&Mahindrahasrecovered53.40%ofthesaiddebtsinthesamefinancial
year.
(v) TheassignmentofbookdebtsofRs.1,35,00,000/atavalueofRe.1andclaimingthedifferenceas
a Revenue expense is nothing but a colourable device adopted by the assessee company for
compensatingMahindra&Mahindraforthesurrenderoftheirshareholding(51%)intheassessee
company.RelyinguponthedecisionofMcDowell&Co.Ltd.v.CTO(1985)154ITR148(SC),I
disallow the assessee's claim of expense amounting to Rs. 1,34,99,999/, holding the same to be
expenseofcapitalnature."
18.BeforetheCIT(A)theassesseefiledelaboratewrittensubmissionswhereinthedisallowancemadebythe
AOwaschallenged.Itwassubmittedthattheassesseehasfulfilledalltheconditionsprescribedforclaiming
thebaddebtsince:
(i) Thecompanyhasnotarbitrarilyorirrationallywrittenoffanybaddebt.
(ii) CompletedetailsofeachandeverybaddebtwasfurnishedbytheAO.
(iii) Baddebtswereonaccountofsuppliesmade/servicesrenderedtocustomers.
(iv) Inmostcasestheamountisverypettysothatanylegalproceedingswouldamounttowastinggood
moneyorbadmoney.
(v) Baddebtismere1.32%ofthetotalsales.
(vi) NoneofthepartiesareGovernmentparties.
18.1Theassesseealsoreliedonvariousdecisions.Itwassubmittedthatifthebaddebtisnotallowableas
baddebtthenthelosssufferedonaccountofassigningsuchdebthastobeallowedasbusinesslossu/s.37.It
wassubmittedthatMahindra&MahindraLtd.haveconfirmedthattheyhavesubsequentlyrecovereddebts
amountingtoRs.79.5lakhsonlywhichprovesthatthedebtassignedtoMahindra&MahindraLtd.wasinno
waygooddebt.ItwasalsoconfirmedbyMahindra&MahindraLtd.thatthebaddebtsorecoveredhasbeen
offered to tax. The observations of the AO that the assignment of book debts is nothing but a colourable
devicewaschallenged.Itwassubmittedthatforthepurposeofsharesaleoneofthecommercialtermsofthe
transactionswasthatanydebtwhichweredoubtfulforrecoveryandoutstandingformorethan180daysisto
bewrittenoffbytheassesseecompany.AduediligencereportwasobtainedfromErnst&YoungCompany
onbehalfofthepurchaserbeforethesharesale.Therefore,thelossclaimedbytheassesseeisallowableas
revenueloss.
19.However,thelearnedCIT(A)alsowasnotconvincedwiththeargumentsadvancedbytheassesseeand
upheldtheactionoftheAObyholdingasunder:
"6.IhavedulyconsideredthesubmissionoftheauthorizedrepresentativeandIfindthattheassesseehas
writtenoffanamountofRs.1,34,99,999/inaccordancewithanagreementwiththepurchaserofshares.
Inthefactsandcircumstancesofthecaseitcannotbesaidthatthelossisabaddebtastheassesseeis
notinthebusinessofmoneylending.Theassesseehasalsonotshownanyevidencetoshowthatanyof
the debt has become bad or the party has expressed its inability to pay any amount due to any
differences. Hence the claim made by the appellant cannot be categorised as bad debt as conditions
prescribedinsection36(1)(vii)&36(2)requirestheassesseetowriteoffonlybaddebtandnotanyother
debt.Variouscaselawscitedbytheappellantalsoemphasistheneedtotakehonestdecisionregarding
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writingoffthedebt.Inthiscasetheassesseehasnotwrittenoffthedebtastheyarenotrecoverablebut
duetoanagreemententeredintowiththepurchaserofshares.Hencetheclaimisnotallowableasbad
debt.
7. As regards the claim of the appellant that the loss should be allowed as business loss is also not
tenableasthelosswasnotincurredbytheassesseeforthepurposeofbusiness.Itisevidentfromthe
factsofthiscasethatanagreementwasenteredbetweentheappellantandpurchaserofsharesthatdebts
which are outstanding for more than 180 days should be written off. Accordingly, the assessee has
writtenoffthesedebts.RathertheassesseehasassignedthesedebtstoMahindra&MahindraforRe.1.
Thequestioniswhetherthislossisforthebusinessoftheassessee?Isitpossiblebyanyappellantto
enterintoanagreementwithathirdpartyandwriteoffcertainamountandclaimthesameasbaddebt?
Inmyconsideredopinionthelossclaimedbytheappellantisnotforthebusinessoftheassessee.No
agreementcanbeenteredintobyanypersonagainsttheLaw.Inthiscaseitisevidentthatthepurchaser
ofsharesandtheappellanthasenteredintoanagreementtowriteoffalldebtswhicharemorethan180
days and accordingly the assessee has written off these debts not because they were bad but because
therewasanagreementwiththepurchaserofshares.Suchclaimoflosscreatedbytheassesseecannot
beregardedasgenuinelossandhencetheyarenotallowableasbusinesslossunderSection37(1)ofthe
I.T. Act. The A.O. has proved that these debts are not bad in the sense that Mahindra & Mahindra to
whomthesedebtswereassignedhasrecoveredthedebtstotheextentofRs.79.51Lacs.Hencetheloss
claimedbytheappellantcannotbeallowed.Intheresult,thisgroundofappealisdismissed.
8. The authorized representative filed additional ground of appeal during the course of appellate
proceedings.IntheadditionalgroundofappealtheappellanthasclaimedthattheA.O.hasdisallowed
thebaddebtwhichisnotjustified.
9.Ifindthattheassesseehasclaimedexpenditure/lossinthefirstgroundofappeal.However,duringthe
appellateproceedingsallsubmissionsweremadeclaimingthelossasbaddebt.Assuchtheadditional
groundofappealwasfiledclaimingthelossasbaddebt.Sincetheclaimofbaddebtisbeingdisallowed
forreasonsstatedabovethisadditionalgroundofappealisnotrequiredtobeadjudicatedseparately."
19.1AggrievedwithsuchorderoftheCIT(A)theassesseeisinappealbeforeus.
20.TheLd.CounselfortheassesseereiteratedthesameargumentsasmadebeforetheAOandtheCIT(A).
He submitted that the Ld. CIT(A) is not justified in disallowing the claim of bad debt as claimed by the
assessee.HesubmittedthataccordingtotheLd.CIT(A)ifthecompanywouldhavewrittenoffitwouldhave
gotthededuction.ReferringtoPage2oftheassessmentorderhesubmittedthattheamountofRs.1.35Crores
was taken into account while computing the income of earlier years. Referring to page 3 and 5 of the
assessment order he submitted that the debts were actually written off in the books. He submitted that the
ratioofdecisionofHon'bleSupremeCourtinthecaseofTRFLtd.v.CIT[2010]323ITR397/190Taxman
391 is squarely applicable to the facts of the present case and it is not necessary to prove that the amount
writtenoffhadbecomebad.Referringtothecopyofthesharesaleagreementdated28032002,(copyof
whichisplacedatPages1to58ofthePaperBook)theLd.Counselfortheassesseedrewtheattentionofthe
BenchtoClause2atpage9whichspeaksofconditionsprecedingtoclosing.HesubmittedthatMahindra&
Mahindrahasalreadypaidthetaxonaccountofcollectionoutofbaddebtsandthereforetaxingthesamein
thehandsoftheassesseecompanybydisallowingtheclaimofbaddebtwillamounttodoubletaxation.He
submittedthatsincetheassesseehaswrittenoffthebaddebtofRs.1,35,00,000/byassigningthesamefor
Rs.1/,therefore,thebalanceamountofRs.1,34,99,999/hastobeallowedasbaddebtinviewoftheratioof
decision of Hon'ble Supreme Court in the case of TRF Ltd. (supra). Without prejudice to the above he
submittedthatsincetheassesseehasassignedthedebtorsofRs.1.35CroresforRs.1/,therefore,thebalance
amount is clearly allowable as business loss. He accordingly submitted that either the amount has to be
allowedasbaddebtorthesamehastobeallowedasbusinessloss.
20.1TheLd.DepartmentalRepresentativeontheotherhandheavilyreliedontheorderoftheAOandthe
CIT(A).Hesubmittedthatsofarastheclaimoftheassesseeregardingallowabilityofthesameasbaddebt,
thesamecanbeallowableonlyifthesameiswrittenoffinconformitywiththeprovisionsoftheI.T.Act.
Furtheranyrecoverysubsequenttowriteoffistaxableundertheprovisionsofsection41(4)oftheI.T.Act
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and the assessee does not lose the ownership over the debt since the ownership remains with the assessee
whenthedebtiswrittenoff.However,intheinstantcasetheownershiphasbeentransferredbyassignment.
20.2Sofarasthelossonaccountofassignmentofthedebtisconcernedhesubmittedthatinsuchacasethe
assignorassignsthedebtstotheassigneeforthecollectionofthesame.Theassigneeactingastheagentof
theassignorrecoversthedebtsfromthedebtorsandremittotheassignororprincipal.Theassignorpaysthe
assigneesomecommissionasperagreementtowardstheservices.Therefore,incaseofassignmentofdebt
theassigneeactsascollectorofdebtandaftercollectingthemoneyhanditovertotheassignor.Relatingto
the facts of the case he submitted that here the assessee has collected the debt and has sent the amount
collected to Mahindra & Mahindra Ltd. He submitted that the assessee, i.e. GKN Sinter Metal Ltd. has
transferred the debt of Rs.1.35 Cr. for Rs.1/ to Mahindra & Mahindra Ltd. under share sale and purchase
agreementdated28032002.Underthisagreementthe51%shareholdingofMahindra&MahindraLtd.has
been purchased by the assessee company. The Ld. Departmental Representative drew the attention of the
BenchtoClause2.1.9oftheagreementwhichreadsasunder:
"TheCompanyshallhavecompletedthewritingoffofassetssetoutinSchedule"8"tothisAgreement,
as specifically identified by the Parties, in its books of accounts after March 31, 2002, but prior to
Closing".
HesubmittedthatunderthisclausethecompanywashavingintentiontowriteoffassetsasperSchedule'8'
oftheaboveagreement.TheSchedule'8'includedthedebtsoverduebymorethan180dayswhichworked
out at Rs.1.35 Cr. However, the company changed its intention of writing off by entering into the
supplementaryagreementdated18072002.AsperPara2ofthisagreementtheclause2.1.9andSchedule'8'
of the principal agreement were deleted. Thus, the company itself decided not to write off the debts by
entering into the supplementary agreement. Therefore, the claim of the assessee of writing off of bad debt
u/s.36(i)(vii) of the Act has got no merit. He submitted that the assessee in the year of claim itself had
recoveredanamountofRs.72,09,104/butnoincomeonaccountofrecoveryofsuchdebtswasshownbythe
assessee. This also proved that the claim is not in conformity with the provisions of the I.T. Act. He
accordingly submitted that the assessee is neither entitled to claim of bad debt nor on account of business
loss.Hesubmittedthatthefactsofthecasehastobeseeninbroaderprospectaspartofsharepurchaseand
saleagreement.Sincetheassesseecompanyhaspaidtheconsiderationforpurchaseofsharesintheformof
cashandtransferringofdebts,therefore,thistransferofdebtsisbasicallypartofthesaleconsiderationfor
purchaseofshares.Therefore,nodeductionisavailableeitheru/s.36(i)(vii)oru/s.37(1).
20.3SofarastheargumentoftheLd.Counselfortheassesseethatrecoveryofdebthasbeenofferedtotax
byMahindra&MahindraLtd.hesubmittedthatthesameisnotrelevantheresincetheissueoftaxationof
recoveryofbaddebtisnottheissuebeforetheTribunal.HeaccordinglysubmittedthattheorderoftheLd.
CIT(A)beupheld.
20.4 We have considered the rival arguments made by both the sides, perused the orders of the AO and
CIT(A)andthePaperBookfiledonbehalfoftheassessee.Wehavealsoconsideredthevariousdecisions
cited before us. The only question to be decided here is as to whether the amount of Rs.1,34,99,999/ is
allowableasbaddebtorbusinesslossasclaimedbytheassesseeorthesameisnotallowableu/s.36(i)(vii)
r.w.s.36(2)oru/s.37(1)asheldbytheAOandupheldbytheCIT(A).Fromthevariousdetailsfurnishedby
theassesseewefindtheassesseehasassignedthedebtstoMahindra&MahindraLtd.forRs.1/.Thecopyof
the assignment of debt filed in Paper Book at Pages 63 & 64 is undated. We find the first sentence of the
agreementreadsasunder:
"ThisdeedofassignmentismadeatMumbaionthisdayofSeptember2002".
20.5ThefirstpropositionmadebytheLd.Counselfortheassesseeisthatthesameshouldbeallowedasbad
debtinviewofthedecisionofHon'bleSupremeCourtinthecaseofTRFLtd.(supra)However,wefindno
forceintheabovesubmissionoftheLd.Counselfortheassesseesincetheassesseehasnotwrittenoffthe
amountasbaddebtbuthasclaimedlossonassignmentduetotransferofthedebtorsbyadeedofassignment
foraconsiderationofRs.1/.Inouropinion,forclaimingthebaddebtasallowableundertheprovisionsof
theIncomeTaxActthesamemustbewrittenoffinconformitywiththeprovisionsoftheIncomeTaxAct.
BytransferringthedebtofRs.1.35CrorestoMahindra&MahindraLtd.forRs.1/,theassesseehaslostthe
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ownership over the debts. Therefore, by doing this the assessee has made the provisions of section 41(4)
redundant.Asperthesaidprovisionsifanyamountisrecoveredinfutureonaccountdeductionallowedin
respectofbaddebtsorpartthereofthenthesameshallbedeemedtobetheprofitsandgainsofbusinessor
professioninthatyearandaccordinglychargeabletotax.However,intheinstantcasetheassesseehasnot
shownanyincomeonaccountofrecoveryofpartofsuchdebtsincetheassesseehasassignedthedebtsto
Mahindra&MahindraandaspersubmissionoftheLd.CounselfortheassesseeMahindra&Mahindrahas
offered the same to tax. Therefore, the first proposition argued by the Ld. Counsel for the assessee being
withoutanymeritisdismissed.
20.6 Now coming to the second proposition of the Ld. Counsel for the assessee that the same should be
allowedasbusinesslosssincetheassesseehassoldthedebtsofRs.1.35CroresforRs.1/wefindthesameis
alsowithoutanymerit.Firstofallitisnotthebusinessoftheassesseetoassigndebts.Further,theassesseein
theinstantcasehasassignedthedebtstoM/s.Mahindra&MahindraLtd.Therefore,theassesseebecomes
the assignor and M/s. Mahindra & Mahindra Ltd. becomes the assignee. In a case like this the assignee is
supposed to collect on behalf of the assignor for which the assignor shall give some commission to the
assignee. However, in the instant case the assessee, i.e. the assignor has undertaken to collect the debts on
behalf of the assignee and has remitted the same periodically. The submission of the Ld. Counsel for the
assesseethatM/s.Mahindra&MahindraLtd.haspaidtaxonthedebtssorecoveredandthereforetaxingthe
sameinthehandsoftheassesseeamounttodoubletaxationinouropinionisofnomerit.We,therefore,find
no merit in the arguments advanced by the Ld. Counsel for the assessee that amount of Rs.1,34,99,999/
shouldbeallowedeitherasabaddebtorabusinessloss.Rather,wefindforceintheargumentoftheLd.
Departmental Representative that the assessee has adopted a colourable device to compensate Mahindra &
Mahindra for the surrender of their 51% shareholding and therefore this is a capital expenditure. We
accordinglydismissthegroundraisedbytheassessee.
21.Groundsofappeal3,4and5bytheassesseereadasunder:
"3.TheLd.CIT(Appeals)erredinholdingthattheamountofRs.75,00,000/paidforuseofTradeName
foraperiodoftwoyearsconstitutescapitalexpenditure."
4. Without prejudice to Ground No.3 above, the Ld. CIT(Appeals) further erred in enhancing the
assessment,bytreatingtheentireamountofRs.75,00,000/paidforuseoftheTradeNamefortwoyears
aspaymentforpurchaseofgoodwill.
5.WithoutprejudicetoGroundNos.3and4above,theLd.CIT(Appeals)furthererredinnotallowing
depreciationonthesaidamountofRs.75,00,000/".
21.1Factsofthecase,inbrief,arethattheextraordinaryitemsofRs.2,09,99,999/debitedtotheprofitand
loss account includes an amount of Rs.75,00,000/. On being asked by the AO to justify the same it was
submittedthatthesamehasbeenpaidtoMahindra&Mahindra,byvirtueofa"NameLicenceAgreement"
dated18072002.Itwassubmittedthatasperclause6oftheagreement,M/s.GKNSinterMetalsLtd.was
allowedtousetheTradeMark"Mahindra"fortwoyears.TheAOaskedtheassesseetojustifythepayment
ofRs.75,00,000/paidforacquisitionofTradeMarkandexplainastowhythesameshouldnotbetreatedas
capitalExpense.Inreply,theassesseevideletterdated24012006madefollowingsubmissions:
"CopyoftheNameLicenceAgreementisenclosed.Thefeewasforuseof'Mahindra'nameafterour
CompanycameoutofMahindraGroupon17thJuly,2002.Wewereallowedtouse'MahindraSintered
ProductsLimited'nametill31stDecember,2002and'FormerlyMahindraSinteredProductsLimited'for
aperiodoftwoyearsfromtheAgreementdate.TheNameLicenceFeewaspaidintheAssessmentTear
200304andcanbeallowedtobeclaimedas'RoyaltyPaymentforuseofthename.
Sincetheavailabilityofthenamewasforaverylimitedperiodandmoreoversincewhatwasavailable
wasonlyarighttousethenameetc.,andthattooforalimitedperiod,neitheranyownershipacquired
nor anyadvantageof an enduring nature acquired. The expenditure is thereforeallowableasaroutine
businessexpenditure."
21.2 However, the same was not accepted by the AO who disallowed 50% of the same for the following
reasons:
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"AcquisitionofTradeMarkinordinarycircumstancesistheacquisitionofaintangiblecapitalassetas
envisaged in the I.T. Rules and consequently payments for same would be capital expenditure with
entitlementtodepreciationthereon@25%.
However,intheinstantcase,thepaymentisnotforthepurchaseofthetrademark,"Mahindra",buta
licencefeespayableforuseofthetrademarkforaperiodof2yearsfromdateofagreement.Thebenefit
ofthispaymentisspreadoveraperiodof2years.
Accordingly,theassesseeisallowed50%oftheamountpaidintheyearunderconsiderationandbalance
portionisallowableforremainingportionoflicenceterminnextyear.Consequently,Rs.37,50,000/is
disallowedandaddedbacktoassessee'stotalincome."
21.3BeforetheCIT(A)itwasarguedthatbypayingasumofRs.75Lacstheassesseehasusedthenameof
Mahindraalongwiththenameofthecompany.Thisexpenditureisrevenueexpenditureinviewofthefact
thatnonewassetwasacquiredbytheassessee.ThereisnoenduringbenefitderivedbypayingasumofRs.
75 Lacs for a limited period of two years. Hence the expenditure is required to be allowed in full. It was
submitted that there is no concept of deferred revenue expenditure in Income tax. Hence the A.O. is not
justifiedinallowingonly50%oftheexpenditureinthisyear.Thefollowingcaselawswerereliedupon:
i. EmpireJuteCo.Ltd.v.CIT[1980]124ITR1/3Taxman69(SC)
ii. AlembicChemicalsWorksLtd.v.CIT[1989]177ITR377/43Taxman312(SC)
21.4 However, the CIT (A) also was not convinced with the explanation given by the assessee. He issued
noticeforenhancementu/s.251(1)toshowcauseastowhytheentireexpenditureofRs.75Lacsshouldnot
be disallowed as the assessee has acquired good will of Mahindra which is a capital expenditure and not
allowableasrevenueexpenditure.Nodepreciationisalsoallowableinrespectofgoodwill.
21.5ItwasreiteratedthatthecompanyhaspaidasumofRs.75LacstoMahindra&Mahindraforuseofits
name.ThetrademarkisoneofthemostvaluableindustrialpropertiesofMahindra&Mahindra.Bypayinga
sumofRs.75LacstheassesseehasbecomeentitledtousetheTradenameMahindraforalimitedperiodof
twoyears.Asnonewassethascomeintoexistencetheexpenditurecannotbetreatedascapitalexpenditure.
Noenduringbenefithasalsocomeintothepossessionofthecompany.Itwassubmittedthatu/s.32(l)(ii)of
theI.T.Actdepreciationisgrantedonintangibleassetsaswell.Itwasarguedthatingeneralinotherbusiness
of commercial rights of similar nature would include the use of trade name and hence the depreciation is
allowableontheintangibleassetsu/s.32(l)(ii).Thefollowingdecisionswerereliedupon:
i. CITv.B.C.SrinivasaSetty[1981]128ITR294/5Taxman1(SC)
ii. S.C.Cambatta&Co.(P.)Ltd.v.CEPT[1961]41ITR500(SC)
iii. SeethalakshmiAmmalv.CED[1966]61ITR317(SC)
21.6 However, the CIT(A) was not convinced with the explanation given by the assessee and upheld the
actionoftheAssessingOfficerbyholdingasunder:
"IhavedulyconsideredthesubmissionsoftheauthorizedrepresentativeandIfindthattheassesseehas
incurredtheexpenditureofRs.75Lacsonacquiringofgoodwillfortwoyears.Goodwillisanasseton
which no depreciation can be allowed as the same is not an item listed in section 32(1)(ii). Hence the
expenditureincurredforacquiringgoodwilli.e.tradenameofMahindra&Mahindraisnotallowable
andnodepreciationalsoisallowableongoodwill.Hencetheincomeoftheappellantisenhancedby
Rs.37,50,000/ as the A.O. has disallowed only a sum of Rs. 37,50,000/ in this year i.e. 50% of the
expenditure incurred by the assessee whereas the entire expenditure of Rs. 75 Lacs is required to be
disallowedascapitalexpenditureonaccountofpurchaseofgoodwill.Hencetheincomeisenhancedby
Rs.37,50,000/andnodepreciationisallowableonthiscapitalexpenditure."
21.7AggrievedwithsuchorderofCIT(A)theassesseeisinappealbeforeus.

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21.8Wehaveconsideredtherivalargumentsmadebyboththesides,perusedtheordersoftheAOandthe
CIT(A)andthePaperBookfiledonbehalfoftheassessee.Thereisnodisputetothefactthattheassessee
hasincurredexpenditureofRs.75lakhsbeingonetimelicencefeepaidtotheownerforgrantingtotheuser,
thelicencetocontinuetousethetrademarkasperthenamelicenceagreementdated18072002.Wefind
theassesseetreatedthesameasRevenueexpenditureinthebooks.However,theAOallowedonly50%of
the expenses as allowable during the year and the balance 50% in subsequent year since the licence was
obtained for a period of 2 years. We find the Ld. CIT(A) enhanced the amount and disallowed the entire
expenditureonthegroundthatthesameisforacquiringofgoodwillfor2yearsandonwhichnodepreciation
can be allowed. It is the submission of the Ld. Counsel for the assessee that the entire amount should be
allowed as Revenue expenditure. Alternatively it is the argument of the Ld. Counsel for the assessee that
depreciationshouldbeallowedincaseitisheldtobeacquisitionofgoodwillinviewofdecisionofHon'ble
Supreme Court in the case of CIT v. SMIFS Securities Ltd. [2012] 348 ITR 302/210 Taxman 428/24
taxmann.com 222. We find the alternate contention of the assessee that depreciation should be allowed is
acceptable in view of decision of Hon'ble Supreme Court in the case of SMIFS Securities Ltd. (supra)
wherein it has been held that goodwill under Explanation 3(b) of section 31(2) of the Act is eligible for
depreciation.InviewofthedecisionofHon'bleSupremeCourtcitedsuprawesetasidetheorderofCIT(A)
anddirecttheAOtoallowdepreciationonthegoodwillasperlaw.Accordingly,GroundofappealNos.3
and4bytheassesseearedismissedandGroundofappealNo.5isallowed.
22.GroundsofappealNo.6bytheassesseereadsasunder:
"6. The Assessing Officer erred in holding and the the Ld. CIT (Appeals) erred in confirming the
disallowanceofRs.43,34,000/beingprepaymentchargespaidinrespectofdebenturesissuedwerenot
expensesincurredforthepurposeofcarryingonbusiness."
22.1Factsofthecase,inbrief,arethattheAOduringthecourseofassessmentproceedingsnotedthatthe
assessee has claimed an expenditure of Rs.43,34,000/ towards debenture pre payment charges. On being
askedbytheAOtojustifythedeductionitwassubmittedthatthecompanyhadissueddebentureformeeting
itsfinancialrequirements.Pendingutilizationoftheproceedsthesedebenturefundswerekeptinshortterm
depositwithStandardCharteredBank.Subsequentlyitwasrealizedthatthecompanyispayingheavyinterest
ondebentureforaperiodof3years.Thereforethesedebentureswerecancelledandthemoneywaspaidback
toDeutscheBank.ButinthisprocessthecompanyhadtopayprepaymentchargesofRs.43,34,000/.
22.2 However, the AO was not satisfied with the explanation given by the assessee. Relying on various
decisions he disallowed the expenses of Rs.43,34,000/ claimed by the assessee company as prepayment
chargesofdebentureandaddedthesametothetotalincomeoftheassesseeforthefollowingreasons:
"1. From the perusal of the principal terms and conditions of the placement of these unsecured,
redeemablenonconvertibledebentures,itisclearthatthereisnoconditionforpaymentofanypre
closurecharges,whatisspecifiedisonlytheTenor/Maturity&CouponRate.
2. The debentures were issued by the assessee company to Mahindra & Mahindra on private
placement basis. Mahindra & Mahindra in turn sold these debentures to Deutsche Bank, The
debentureswereheldbyDeutscheBankatthetimeofpreclosureandhencetheassesseecompany
wasnotundercontractualobligationtopaypreclosurechargestotheBank.
3. Theobjectsofdebentureissuewasforgeneralcorporatepurposes.Theassesseecompanyutilized
thedebentureproceedsbyplacingtheamountreceivedasfixeddepositwithStandardChartered
Bank.
4. The expenditure incurred for raising money for the purpose of business has been held to be
allowableexpenditureu/s.37inviewofvariousdecisionoftheCourts.However,inpresentcase,
expenditure is not being incurred to raise the money but is being incurred to return the money
alreadyraised.
Moreover, this expenditure is not contractual but purely voluntary in the sense that there is no such
provision in the terms of issue of the debenture payment of this preclosure charges. This payment is
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purelyadiscretionarydecisionbytheassesseecompany,whoisundernolegalcompulsiontomakethis
payment."
22.3 Before CIT(A) the assessee reiterated the same arguments as made before the Assessing Officer.
However,theCIT(A)wasalsonotconvincedwiththeargumentsadvancedbytheassesseeandupheldthe
actionoftheAssessingOfficerbyholdingasunder:
"IhavedulyconsideredthesubmissionoftheAuthorisedRepresentativeandIfindthattheAssessing
OfficerisjustifiedindisallowingtheprepaymentchargesofRs.43,34,000/,incurredbytheassesseeon
cancellation of debentures. I find that there is no condition for payment of preclosure charges. The
debentureswereissuedbyassesseecompanytoMahindra&Mahindraonprivateplacementbasisand
Mahindra&MahindrainturnsoldthesedebenturestoDeutscheBank.Thereforethedebenturesheldby
DeutscheBankatthetimeofpreclosurewerenotcontractualobligationtopaypreclosurechargesto
thebank.Itisalsotruethattheassesseecompanyhasusedtheseamountofdebentureinplacingshort
term fixed deposit with Standard Chartered Bank. The expenditure incurred for raising the money is
allowable u/s. 37. However, in the present case the assessee has not incurred these expenditure for
raising the money but incurred this expenditure to return the money already raised. Hence the A.O. is
justified in disallowing the expenditure of Rs.43,34,000/ as it cannot be said that the assessee has
incurredthelossforthepurposeofcarryingonthebusiness.Issueofdebentureisnotthebusinessofthe
assessee. Paying prepayment charges cannot be regarded as payment for the business of the assessee.
RelianceisplacedonthedecisionofAssociatedHotelsofIndiaLtd.vs.CIT231ITR134(PunjabHigh
Court).Thisgroundofappealisdismissed."
22.4AggrievedwithsuchorderoftheCIT(A)theassesseeisinappealbeforeus
22.5TheLd.CounselfortheassesseereferringtothedecisionofDelhiBenchoftheTribunalinthecaseof
Gujarat Guardian Ltd. v. Jt. CIT [2008] 174 Taxman 151 (Chd.) submitted that any amount paid as
prepaymentchargesasaresultofrestructuringofdebttosavebusinessexpenditurefortheyearorsubsequent
yearswillbeinthenatureofInterestcostandisarevenueexpenditureandthereforeallowableasdeduction.
ReferringtothedecisionofHon'bleDelhiHighCourtinthecaseofCITv.GujaratGuardianLtd.[2009]177
Taxman 434 he submitted that the decision of the Tribunal has been upheld by the Hon'ble High Court
whereinithasbeenheldthattheprepaymentpremiumpaidtoIDBIforrestructuringofitsdebtswas"interest
paidtoPublicFinanceInstitution"andwasdeductibleu/s.43B(d)oftheI.T.Act.Referringtothedecisionof
theHon'bleSupremeCourtinthecaseofCITv.AshokLeylandLtd.[1972]86ITR549hedrewtheattention
oftheBenchtothefollowing:
"Itisobviousfromthefactssetoutearlierthatthecompensationpaidforterminationoftheservicesof
the managing agents was a payment made with a view to save business expenditure in the relevant
accountingyearaswellasforafewmoreyears.Itwasnotmadeforacquiringanyenduringbenefitor
incomeyieldingasset.WeagreewiththeHighCourtthattheTribunalwasrightinitsconclusionthatthe
expenditureinquestionwasarevenueexpenditure."
22.6ReferringtothedecisionofChennaiBenchoftheTribunalinthecaseofOverseasSanmarFinancial
Ltd.v.Jt.CIT[2003]86ITD602hesubmittedthatdeductionclaimedforforeclosurepremiumpaidonloan
taken in earlier year which was repaid prematurely in full in previous year was held to be revenue
expenditure.Relyingonvariousotherdecisionshesubmittedthatsincetheassessesincurredtheexpenditure
ofprepaymentchargestorelieveitfromfuturefinancialburden,therefore,thesameshouldbeallowedasa
revenueexpenditure.
22.7TheLd.DepartmentalRepresentativeontheotherhandheavilyreliedontheordersoftheAOandthe
CIT(A)
22.8 We have considered the rival arguments made by both the sides, perused the orders of the AO and
CIT(A)andthePaperBookfiledonbehalfoftheassessee.Wehavealsoconsideredthevariousdecisions
citedbeforeus.ThereisnodisputetothegenuinenessoftheexpenditureofRs.43,34,000/towardsdebenture
prepaymentcharges.Theonlydisputeisregardingtheallowabilityofthesame.Itisthecaseoftherevenue
thatthereisnoconditionforpaymentofpreclosurecharges.Further,thedebentureswereheldbyDeutsche
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Bank at the time of preclosure and there were no contractual obligation to pay preclosure charges to the
Bank.ItisalsothecaseoftheRevenuethattheassesseeintheinstantcasehasnotincurredthisexpenditure
forraisingthemoneybutincurredthesametoreturnthemoneyalreadyraisedandthatissueofdebentureis
notthebusinessoftheassessee.ItistheargumentoftheLd.Counselfortheassesseethattheassesseehadto
incurtheexpendituretorelieveitfromfurtherfinancialburdenandthisisacommercialdecision.Wefind
meritintheaboveargumentoftheLd.Counselfortheassessee.Byincurringsuchexpendituretheassessee
hastriedtorelieveitselffromfurtherfinancialburden.
22.9WefindtheHon'bleSupremeCourtinthecaseofAshokLeylandLtd.(supra)hasheldasunder:
'Thereisnodoubtthat,asaresultoftheterminationoftheservicesofthemanagingagents,thecompany
gotridofitsliabilitytopayofficeallowanceaswellasthecommissionitwasrequiredtopayunderthe
managing agency agreement not only during the accounting year but also for a few years more. The
expenditurethussavedundoubtedlyswelledtheprofitsofthecompany.Fromthefactsfound,itisclear
that the managing agency was terminated on business considerations and as a matter of commercial
expediency. There is no basis for holding that by terminating the managing agency, the company
acquiredanyenduringbenefitoranyincomeyieldingassetItistruethatbyterminatingtheservicesof
the managing agents, the company not only saved the expense that it would have had to incur in the
relevantpreviousyearbutalsoforfewmoreyearstocome.Itwillnotbecorrecttosaythatbyavoiding
certain business expenditure, the company can be said to have acquired enduring benefits or acquired
anyincomeyieldingasset.
To quote the illustration given by Rowlatt J. in B.W. Noble Ltd. v. Mitchell, in the ordinary case a
paymenttogetridofaservantwhenitisnotexpedienttokeephimintheinterestoftradewouldbea
deductibleexpenditure.Apaymentmadetoremovethepossibilityofarecurringdisadvantagecannotbe
consideredasapaymentmadetoacquireanenduringadvantage.
In Noble's case, Rowlatt J. had to examine the question whether the item of expenditure concerned in
that case was a revenue expenditure. Briefly stated the facts of that case were : Under its articles of
associationthemanagementofacompanyofinsurancebrokersregisteredinEnglandwasvestedinits
board of directors in London, with powers of delegation. One of the directors was appointed resident
director in France. He conducted the French business of the company from an office in Paris under a
powerofattorneyfromthecompany.
Thecompanyclaimedasadeductionfromitsprofitsforincometaxpurposesasumofpound19,200
payable (by instalments) to a retiring director in the following circumstances: 'The original directors
wereappointedforlifesolongastheyheldaqualifyingnumberofshares,subjecttodismissalforthwith
forneglectormisconducttowardsthecompany.Adirectorsodismissedwasonlyentitledtoreceivehis
salarythendueandcouldberequiredtosellhissharestotheotherdirectorsatpar.Hewouldalsohave
tosurrenderforcancellationcertainnotesissuedbythecompanyentitlinghimtoparticipateinsurplus
profits.Circumstancesarosein1920and1921inwhichthecompanymightpossiblyhavebeenjustified
indismissingoneofthedirectors,buttoavoidpublicityinjurioustothecompany'sreputation,itentered
intonegotiationwiththedirectorforhisretirement.Heclaimedpound50,000ascompensationbuta
compromisewasarrivedatandembodiedinanagreementdatedthe30thDecember,1921,bywhichhe
agreedtoretirefromthecompany,totransferhis300pound1sharestotheotherdirectorsatparvalue
(theywerethenworthconsiderablymore)andtosurrenderhisparticipatingnotes.Thecompanyagreed
to pay him pound 19,200 and the directors to pay him pound 300 (as consideration for his shares)
making together pound 19,500 (payable in five annual instalments) which he agreed to accept in full
satisfactionofallclaimsagainstthecompanyorthedirectors.Thequestionwaswhetherthepaymentof
pound19,200wasadeductibleexpenditure.TheSpecialCommissionersdecidedagainstthecompany
but the King's Bench Division as well as the Court of Appeal accepted the company's contention and
heldthatthepaymentofpound19,200madewasanadmissibledeductioninarrivingatitsprofitsfor
income tax purposes. In the course of his judgment Rowlatt J., sitting on the King's Bench Division,
reliedontheobservationsoftheLordChancellorinAthertonv.BritishInsulatedandHelsbyCablesLtd.
totheeffect:
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"'asumofmoneyexpended,notofnecessityandwithaviewtoadirectandimmediatebenefittothe
trade,butvoluntarilyandonthegroundsofcommercialexpediency,andinorderindirectlytofacilitate
the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the
trade.'"
TheseobservationsoftheLordChancellorwereagainquotedwithapprovalbyLordHanworthM.R.
whenthematterwastakeninappealtotheCourtofAppeal.
ThenextcasewhichmaybeusefullyreferredtoisthedecisioninAngloPersianOilCo.Ltd.v.Dale.
Therein the assessee company by agreement made in 1910 and 1914 had appointed another limited
companyasitsagentsinPersiaandtheEastforaperiodofyears,uponthetermsthattheagentsshould
beremuneratedbycommissionatspecifiedrates.Withthepassageoftimetheamountspayabletothe
agentsbywayofcommissionincreasedfarbeyondtheamountsoriginallycontemplatedbythecompany,
and,afternegotiationsbetweentheparties,theagreementswerecancelledin1922,theagentcompany
agreeingtogointovoluntaryliquidationandthecompanyagreeingtopaytotheagentspound300,000
incash.ThissumwasinfactpaidandthecompanycontendedbeforetheSpecialCommissionersthatit
was an admissible deduction in computing the company's profits for purposes of income tax and
corporationprofitstax.TheSpecialCommissionersrejectedthiscontentionandthecompanyappealed.
Rowlatt J., sitting in the King's Bench Division, allowed the appeal and held that the payment to the
agents was an admissible deduction for the purpose of income tax and corporation profits tax. His
decisionwasaffirmedbytheCourtofAppeal.InthecourseofhisjudgmentRowlattJ.observed:
"Now I want to see how the Commissioners have dealt with it, and what they say is that this was
expenditureofacapitalnaturetosecureanenduringbenefitforthecompany'stradebygettingridofan
onerouscontractInmyjudgmentthatisafindingwhichisperfectlyinconclusive.Itdoesnotdealwith
thequestion.Thequestionisnotmerelygettingridofanonerouscontract,butanonerouscontractfor
what ? If it is an onerous contract for the payment of wages or commission which are chargeable to
revenueaccountintheplainestpossibleway,andifthatistheonerouscontractthatyouaregettingrid
of,itisimpossibletosuggestthatthatisareasonforsayingthatthisisacapitalexpenditureunlessyou
getridofthatonerouscontract(asIpointedoutjustnow)byerectinginitsplaceacapitalassetinthe
natureofcourseIamonlyusingthisasanillustrativeexamplealaboursavingmachinewhichgivesyou
anassetandsodispenseswiththeexpensesoflabour.But,tosaythatitisacapitalexpenditurebecause
itsecuredanenduringbenefitbygettingridofanonerouscontractisnottostatethematerialthing,and
itiscompletelyinconclusive"
InG.Scammell&NephewLtd.v.Rowles,theCourtofAppealheldthattheexpenditureincurredforthe
termination of a trading relationship in order to avoid losses occurring in the future through that
relationship,whetherpecuniarylossesorcommercialinconveniences,isjustasmuchforthepurposesof
thetradeasthemakingorthecarryingintoeffectofatradingagreement.
ThecasewhichcanbesaidtobethenearesttothefactsofthepresentcasedecidedbyanyIndiancourt
is that decided by the Calcutta High Court in Anglo Persian Oil Co. (India) Ltd. v. Commissioner of
Income tax Therein, money was paid by an oil company in a lump sum as compensation for loss of
agency whereby the company relieved itself of future annual payments of commission chargeable to
revenue account. The question was whether the money paid as compensation was allowable as proper
deductionfromthebusinessprofitsofthecompany.Thecourtupheldthecontentionofthecompanythat
it was a revenue expenditure. Further, the court observed that the principle that capital receipt spells
capitalexpenditureorviceversaissimplebutitisnotnecessarilysound.Whetherasumisreceivedon
capitalorrevenueaccountdependsormaydependuponthecharacterofthebusinessoftherecipient.
Whether a payment is or is not in the nature of capital expenditure depends or may depend upon the
characterofthebusinessofthepayeranduponotherfactorsrelatedthereto.
Itisobviousfromthefactssetoutearlierthatthecompensationpaidforterminationoftheservicesof
the managing agents was a payment made with a view to save business expenditure in the relevant
accountingyearaswellasforafewmoreyears.Itwasnotmadeforacquiringanyenduringbenefitor
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incomeyieldingasset.WeagreewiththeHighCourtthattheTribunalwasrightinitsconclusionthatthe
expenditureinquestionwasarevenueexpenditure.'
22.10WefindtheHon'bleDelhiHighCourtinthecaseofGujaratGuardianLtd.(supra)hasheldasunder:
"14.Briefly,theassesseeinitsprofitandlossaccounthasdebitedasumofRs8croresasprepayment
premium which is classified as an extraordinary item. The Assessing Officer sought justification from
theassesseeforclaimingtheentireamountasdeductioninthepreviousyearrelevanttotheassessment
yearunderconsiderationinviewofthejudgmentoftheSupremeCourtinthecaseofMadrasIndustrial
Investment Corporation Ltd v. CIT [1997] 225 ITR 802. The Assessee responded to the query of the
Assessing Officer by submitting that it had made a proposal to IDBI for restructuring its debt with
respecttorupeetermloanaggregatingtoRs170.76crores.TheIDBIvideletterdated19.03.1995agreed
to the proposal and inter alia reduced the rate of interest on the rupee term loan to 15% p.a. effective
from01.04.1995upontheassesseepayingIDBIalumpsumprepaymentpremiumofRs8crores.
17.1 According to us, as correctly held by the Tribunal, the assessee's claim for deduction had to be
allowed, in one lump sum, keeping in view the provisions of Section 43B(d) which provides that any
sumpayablebytheassesseeasinterestonanyloanorborrowingfromanyfinancialinstitutionshallbe
allowedtotheassesseeintheyearinwhichthesameispaidirrespectiveoftheprovisionsinwhichthe
liability to pay such sum is incurred by the assessee according to the method of accounting regularly
appliedbytheassessee.Sincetheauthoritiesbelowhavenotdisputedthatprepaymentpremiumpaidto
IDBI,intheinstantcase,isnothingbut"interest"orthatitwaspaidtoapublicfinancialinstitutioni.e.,
IDBIthen,intermsof,Section43B(d)theassessee'sclaimfordeductioncouldonlyhavebeenallowed
intheyearinwhichthepaymenthadactuallybeenmade.Itisnotdisputedthatpaymenthasbeenmade
inthepreviousyearrelevanttotheassessmentyearunderconsiderationi.e.,assessmentyear199697.
Therefore,thereisnoscopeforspreadingovertheliabilityoveraperiodof10yearsaswassoughttobe
done by the Assessing Officer which was, according to us, erroneously sustained by the CIT(A). The
ratioofthejudgmentoftheSupremeCourtinthecaseofMadrasIndustrialCorporation(supra)isnot
applicabletothepresentcase.Thefactsoftheinstantcasearedifferent.MadrasIndustrialCorporation
(supra) pertains to treatment of discount on debenture issued by the assessee. The Supreme Court's
observations that a claim for deduction by an assessee be spread over as deduction in one year would
distort the picture of profits, cannot be applied to the instant case, as the mechanism for claiming
deduction on account of "interest" paid on loans obtained by the assessee from a public financial
institution,isspecificallyprovidedforinthestatuteunderSection43B(d)oftheAct.Therefore,interms
ofSection43B(d)onceitisascertainedthatthepaymentisinthenatureof"interest"intermsofSection
36(1)(iii) read with Section 2(28A) of the Act, and the assessee fulfills the conditions provided in
Section 43B(d), that is, it is the interest paid in respect of loans obtained from public institutions, it
follows that, the interest will have to be allowed as a deduction only in the year of payment,
notwithstandingthefactthat,theliabilitytopaysuchsumwasincurredinanearlieryearbasedonthe
method of accounting regularly employed by the assessee. In these circumstances, in our opinion the
Assessing Officer failed to appreciate the ratio of the judgment of the Supreme Court in Madras
Industrial Corporation (supra), which is, really an application of the principle of accountancy of
matchingincomewithexpenditure,wheretheActmakesnospecificprovisionforclaimofdeduction.
ThesaidprincipleenunciatedbytheSupremeCourtwasnotcontemplatedtoapplytosituationswhere
the Act makes a distinct and specific provision. See Observations made by the Supreme Court in
TuticorinAlkaliChemicalsv.CIT[1997]227ITR172at pages 183184.In the result, no fault can be
foundwiththeapproachoftheTribunalinrespectofthisissue."
22.11WefindtheChennaiBenchoftheTribunalinthecaseofOverseasSanmarFinancialLtd.(supra)has
heldasunder:
"Therivalcontentionsonthisissuetogetherwiththecaselawsasreferredtohavebeengivenourvery
carefulconsideration.Thefactasisevidentfromrecordisthattheloanthatwastakeninearlieryears
wasrepaidinfullinthepreviousyearrelevanttotheassessmentyearandthisresultedinthepaymentof
chargesleviedbythefinancialinstitutionstothetuneofRs.56,15,126.Itisalsoevidentfromtherecord
thatthereductionintherateofinterestforfreshloanstobeadvancedbythefinancialinstitutionsledthe
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assesseecompanytopayofftheentireloanthatcarriedtheburdenofhigherrateofinterest.Theassessee
apparentlycalculatedtheamountofinterestthatitwouldbepayingovertheyearsattheagreedrateof
interestandcompareditwiththeforeclosurepremiumtogetherwiththeinterestthatitwouldpayonthe
revisedratebasisandfoundittobeadvantageoustothecompanybypayingtheforeclosurepremium.
Thisadvantagethatthecompanywantedtobenefitfromisclearlyawelljudgedbusinessdecisionand
therefore,itislaidoutwhollyforthepurposesofitsbusiness.Thisitselfissufficientforallowingthe
claiminfullintheyearinwhichitwasincurred.
In Madras Industrial Investment Corpn. Ltd. 's case (supra) the assessee did not make its claim for
deductionofentireamountofdiscountallowedondebentureissuesbutonlytotheextentofaportion
thatitarrivedbydividingtheamountofdiscountbythenumberofyearsoflifeofdebenture.Thus,the
Apex Court was not addressed on the allowability of the entire amount in the year of incurring and
therefore, there was no ruling on that point. However, the decision SivakamiMillsLtd. s case (supra)
clearlygoestoshowthattheguaranteechargespaidforaloanthatistorunforafewyearsisallowable
onthebasisofthecontractbeingeffectedintheyear.Intheothercase,MadrasAutoService(P.)Ltd.
(supra),thelesseedemolishedtheentirebuildingthatwastakenonaleaseof39yearsandconstructeda
newbuildinginitsplaceontheunderstandingthatonexpiryoftheleasethebuildingasreconstructed
wouldbehandedovertothelessorforwhichconsiderationalowerrentwasagreedtobythelessor.The
courtruledthatbyconstructinganewstructureinplaceoftheoldstructuretheassesseeonlyderiveda
business advantage and no asset of enduring nature was acquired and hence, the entire cost of
constructionisallowableasrevenueexpenditureintheyearitself.
Wearethereforeoftheopinionthattheclaimfordeductionfortheentireamountofforeclosurepremium
intheassessmentyearisjustifiedandweaccordinglyupholdtheclaim.Thisissueisdecidedinfavour
oftheassesseeandagainsttherevenue."
22.12 So far as the decision relied on by the CIT(A) in the case of Associated Hotels of India Ltd.v.CIT
[1953]23ITR134(Punj.&Har)wefindthesamewasdecidedbytheHon'blePunjabHighCourt(Circuit
BenchatDelhi).Thefactsinthatcaseweredistinguishableandnotapplicabletothefactsofthepresentcase.
In that case debentures were redeemed before maturity by paying bonus and fresh debentures were issued
before maturity. However, in the instant case, it is not the case of the revenue that the assessee has issued
fresh debentures after prepayment of the debentures. Therefore, the above decision is not applicable to the
factsofthepresentcase.Consideringthetotalityofthefactsofthecaseandinviewofthedecisionscited
(Supra) we are of the considered opinion that the amount of Rs.43,34,000/ incurred by the assessee being
prepayment charges paid in respect of debentures issued are expenses incurred for the purpose of business
andthesameisanallowableexpenditure.AccordinglytheorderoftheCIT(A)onthisissueissetasideand
GroundofappealNo.6bytheassesseeisallowed.
23.Intheresult,theappealfiledbytherevenueisdismissedandtheappealfiledbytheassesseeispartly
allowed.
RAHUL

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