(a) Income-tax---

----Financial Corporation---Deduction in respect of special reserve-- Deduction under S.36(l)(viii) must be allowed before making deductions under Chapter VI-A and also before taking into account deduction allowable under S.36(1)(viii)---Indian Income Tax Act, 1961.

(b) Income-tax---

----Business expenditure---Amounts representing discount on bonds and debentures---Deductible---Indian Income Tax Act, 1961, S.37. (c) Income-tax--- ----Income---Accrual of income---Interest---Mercantile system' of accounting---interest on "sticky loans" --Suits filed for recovery of amount with interest---Order of remand by Tribunal to make additions of interest which had actually accrued---Order-of Tribunal valid.

Held, that the deduction under section 36(1)(viii) of the Income Tax Act, 1961, should be allowed at the prescribed percentage of the total income computed before making deduction under Chapter VI-A and also before taking into account the deduction allowable under section 36(1)(viii) itself.

CIT v. Himachal Pradesh Financial Corporation (1998) 232 ITR 138 (HP) fol.

It is not necessary for the assessee to make out a case of actual expenditure before claiming allowable deduction under the provisions of section 37 of the Act. The amounts representing discounts on bonds was deductible.

M.P. Financial Corporation v. CIT (1987) 165 ITR 765 (MP) fol.

It was admitted that the accounts were being maintained on mercantile basis by the assessee. Hence, it was not necessary for the Department to consider whether the interest had been actually received by the assessee during the year in question or not. It could be decided on the basis of accrued interest. It was stated that several suits were pending and during the pendency of the suits the assessee would not be in a position to ascertain the interest which might be ultimately allowed by the Court. The Tribunal had remanded the matter to the assessing Authority for fresh decision on the quantum regarding addition to be made in each year. The order passed by the Tribunal was valid.

CIT v. Indian Jute Mills Association (1982) 134 ITR 68 (Cal.); CIT v. Madras Industrial Investment Corporation Ltd. (1980) 124 ITR 454 (Mad.); CIT v. T. N. K. Govindarajulu Chetty (1987) 165 ITR 231; India Cements Ltd. v. CIT (1966) 60 ITR 52; Indian Molasses Co. (Pvt.) Ltd. v. CIT (1959) 37 ITR 66; Jones v. Carmarthen Corporation (1841) 10 LJ Exch. 401; Nash (Inspector of Taxes) v. Tamplin and Sons Brewery Brighton Ltd. .(1951) 2 All ER 869; R. v. Marsham (1892) 1 QB 371 (CA); Westminster Bank Ltd. v. Riches (1947) 15 ITR (Suppl.) 29 and Usher's Wiltshire Brewery Limited v. Bruce (1915) AC 433 ref.

Kuldip Singh for the Assessee.

Inder Singh and M.M. Khanna for the Commissioner.

JUDGMENT

M. SRINIVASAN, C. J.---The Tribunal has referred three questions to us for our consideration. One of the questions relates to deduction under section 36(1)(viii) of the Income Tax Act, 1961. It is covered by our judgment in I. T. R. No. 9 of 1988---CIT v. Himachal Pradesh Financial Corporation (1998) 232 ITR 138, dated May 14, 1997. We have answered the question in that case that the Tribunal was right in law in deciding that the deduction under section 36(1)(viii) of the Income-tax Act be allowed at the prescribed percentage of the total income computed before making deduction under Chapter VI-A and also before taking into account the deduction allowable under section 36(1)(viii) itself. Following the said judgment, we answer the question holding that the Tribunal was right in its view that the deduction under section 36(1)(viii) of the Act is allowable at the prescribed percentage of the total income before making deduction under section 36(1)(viii) itself.

The second question to be considered by us is whether the assessee entitled to claim the amounts representing discount on bonds and debentures as allowable expenditure. In the first year, that is, 1976-77, the claim was disallowed on the ground that they did not relate to that year. In the second year, the Inspecting Assistant Commissioner (Appeals) observed that the assessee had itself added back Rs.19,538 on account, of discount of bonds in the computation of income. The Tribunal in relation to the year 1977-78 has deleted this sum but, according to the Inspecting Assistant Commissioner (Appeals), the decision of the Tribunal has not been accepted by the Department. Hence, he added back Rs.19,53$ to that year. On appeals, the Commissioner of Income-tax (Appeals) deleted the disallowance of Rs.5,702 in the first year and 85.10,050 in the second year. That was challenged by the Revenue. In the third year, that is, 1981-82, the assessee had debited Rs.19,538 as discount on bonds. While computing the taxable income the assessee itself added back Rs.9.487 as it had been allowed in the year 1977-78 as a result of appeal effect in that year. For the balance, it had claimed a deduction.

The assessing authority followed the judgment of the Madras High Court in CIT v. Madras Industrial Investment Corporation Ltd. (1980) 124 ITR 454. The assessee relied upon the decision of the Supreme Court in India Cements Ltd. v. CIT (1966) 60 ITR 52, but the assessing authority held that the judgment of the Supreme Court was not applicable and followed the Madras case. The Commissioner of Income-tax (Appeals) upheld the order of the assessing authority. On second appeal, the Tribunal rejected the contention of the assessee and accepted the contention of the Revenue.

We have been taken through the judgment of the Madras High Court in CIT v. Madras Industrial Investment Corporation Ltd.(1980) 124 ITR 454, which has been considered by a judgment of the Madhya Pradesh High Court in M, P. Financial Corporation v. CIT (1987) 165 ITR 765. We have also perused the judgment of the Supreme Court in India Cements Ltd. v. CIT (1966) 60 ITR 52. We can straightaway point out that the judgment of the Supreme Court has no relevance in the present case.

No doubt, the Madras High Court has expressed the opinion that there should be actual expenditure before the claim is made by the assessee. The Madhya Pradesh High Court in ((1987) 165 ITR 765) has refused to accept that judgment and has given its reasoning as follows (page 769):

"The Tribunal held, following the decision of the Madras High Court in CIT v Madras Industrial Investment Corporation Ltd.(1980) 124 ITR 454, that the expression 'expenditure' occurring in section 37 of the Act has to be construed in the sense of paying out the money which goes out of the pocket of the assessee irretrievably and that in the case of issue of debentures at discount, there is no such paying out, as is contemplated by section 37 of the Act. With respect we may say that the decision in CIT v. Madras Industrial Investment Corporation Ltd. (1980) 124 ITR 454 (Mad.), does not take note of the real nature of the amount of discount when debentures are issued at a discount. The decision in (1980) 124 ITR 454 came up for consideration before the Calcutta High Court in CIT v. Indian Jute Mills Association (1982) 134 1TR 68. Referring to the decision. of the Supreme Court in Indian Molasses Co. (Pvt.) Ltd. v. CIT (1959) 37 ITR 66, on which reliance was placed by the Madras High Court, it was observed that the Supreme Court was, inthat case, considering the meaning of the expression 'expenditure incurred' while dealing with the question as to whether there was a distinction between the actual liability in presenting and a liability due futuro. Sabyasachi Mukharji J. (as he then was), who delivered the judgment of the Court observed as follows (pages 75 and 76) "The expression "expenditure" is not defined in the Act, as such. In the context of different statutes, the expression "expenses" has been construed. For example, in Stroud's Judicial Dictionary, third edition, Vol II, page 1030, it is noted that in the case of Jones v. Carmarthen Corporation (1841) 10 LJ Exch. 401, the expression "expenses" meant actual disbursements not allowances for loss of time. Therefore, a charge by a town clerk for preparing lists of parliamentary voters was not "expense incurred" by him within the Parliamentary Voters Registration Act, 1843 But, again, in the case of R. v. Marsham (1892) 1 QB 371, 379 (CA), the Master of the Rolls Lord Esher, observed that the "moneys expended" by a local board and recoverable from - the owners or occupiers were not confined to moneys actually paid but included the moneys expended in the sense, the owner or occupier was bound to pay it. It, therefore, appears that the expression must be understood in the context in which it is used.'

The learned judge further observed as follows (pages 76 and 77):

'Reference in this connection may be made to section 37 of the Act which enjoins that any expenditure, not being expenditure of the nature described in sections 30 to 36, laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed in computing the income chargeable under the head "Profits and gains of business or profession" In sections 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" had been used. For example, depreciation and allowances have been dealt with in section 32. Therefore, the Legislature was using the expression "any expenditure" in section 37 to cover both.

We respectfully agree with the aforesaid observations.

It would thus appear that the expression 'expenditure' as used in section 37 of the Act may in the circumstances of a particular case, cover an amount which is really a loss but the said amount has not gone out from the pockets of the assessee. In Nash (Inspector of Taxes) v. Tamplin and Sons Brewery Brighton Ltd. (1951) 2 All ER 869, the House of Lords was considering the question as to whether the assessee was entitles to deduct the rent forgone' in the circumstances of that case. It was held, following the decision in Ushers Wiltshire Brewery Limited v. Bruce (1915) AC 433, that 'rent forgone' would, in the circumstances of that case, amount to money wholly and exclusively laid out or expended for the purposes of the trade of the assessee.

Therefore, our answer to question No. 2 is that though the entire amount of discount amounting to Rs.94,873 was not an allowable expenditure in the assessment year in question, the said amount of discount has to be spread out proportionately over the number of years for which the bonds are issued and the proportionate amount of discount would be allowable expenditure in the assessment year in question "

We find that the reasoning of the Madhya Pradesh High Court is in accordance with law and we prefer to follow that reasoning and hold that it is not necessary for the assessee to make out a case of actual expenditure before claiming allowable deduction under the provisions of section 37 of the Act. In such circumstances, we answer the question referred to us in the negative and hold that the Tribunal was not justified in holding that the discount on bonds was not allowable expenditure.

The third question referred to us relates to interest claimed by the assessee. The question reads:

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in directing the assessing authority to determine the quantum of interest year to year on accrued basis in respect of suit filed cases?"

The Tribunal has dealt with this question in paragraph 11 of its order in the appeal. It reads as follows:

"It was next-argued on behalf of the assessee that only the interest accruing in the particular year could be brought to tax and not the interest accruing to the assessee in an earlier yeas, which had already been excluded from its income by earlier orders of the income-tax authorities or the Tribunal. It was also contended that most of these sticky loans had been the subject-matter of litigation because the corporation had filed suits against the respective parties and no interest could be deemed to have accrued in terms of the agreement between the corporation and the patties concerned because allowance of interest during the pendency of a suit was matter of discretion with the concerned Court There appears to be some force in this contention. However, we are not in a position to determine the exact figures of interest accruing to the assessee during the relevant accounting years because sometimes the interest accruing during earlier years was also debited to the party's account on 1st April, in accordance with the changed system of accounting and in some cases it was conceded that the suits had been filed for recovery of the amounts during the years under consideration. May be that after filing of the suits, accrual of interest in term's of the agreement between the assessee and the debtor would cease in view of the decision in the case of Westminster Bank Ltd. v. Riches (1947) 15 ITR (Suppl.) 29, a decision of the Court of Appeal. However, interest may ultimately be awarded by the Court concerned. Recently, it had been held by the Supreme Court in CIT v. T. N. K. Govindarajulu Chetty (1987) 165 ITR 231 that in a case relating to interest on compensation awarded for acquisition of land the interest accrued from year to year. Therefore, even in a case where suits have been filed and decreed, interest may accrue to the assessee in terms of the Court decrees though at some different rates. This matter requires detailed examination by the assessing authority. We, therefore, accept the departmental ground raised in this behalf, set aside the orders of the Commissioner of Income-tax (Appeals) and restore the matter back to the file of the assessing authority for fresh decision on the quantum regarding addition to be made in each year in the light of our aforesaid observation.'

In our opinion, the proper course to be adopted is to direct the deduction of interest on. a year-to-year basis. It is not in dispute that the account is being maintained on mercantile basis by the assessee. Hence, it is not necessary, for the Department to consider whether the interest has been actually received by the assessee during the year in question or not. It can be decided on the basis of accrued interest.

However, the Tribunal has only remanded the matter to the file of the assessing authority for fresh decision on the quantum regarding addition to be made in each year in the light of its observations. The Tribunal has referred to the judgment of the Supreme Court in CIT v. T. N. K. Govindarajulu Chetty (1987)165 ITR 231. The Supreme Court held that the method of accounting of the assessee being the mercantile system, the interest accrued to the respondent when the compensation amount due to him under the land acquisition proceedings had not been paid in each of the years and had to be spread over between the date of acquisition and the date of actual payment. The appeal preferred by the Department was rejected on that footing. The Court held that having regard to the circumstances of the case, including the fact that the mercantile system of accounting was the basis on which the interest income accrued, the High Court was right in answering the question referred in favour of the assessee.

In this case, it is stated that several suits were pending and during the pendency of the suits the assessee will not be in a position to, ascertain the interest which may be ultimately allowed by the Court. If any suit had been decided and the assessee produces a copy of the decree in such suit, it is open to the assessing authority to take that decree into account and pass orders of assessment appropriately. The view expressed by the Tribunal in following the judgment of the Supreme Court in CIT v. T.N.K. Govindrajulu Chetty (1987) 165 ITR 231, is correct and hence we answer the question referred to us in the affirmative.

The reference is answered accordingly.

M.B.A./3214/FC Reference answered.