Law:

Section:

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1996-97 and 1997-98 - For payment of interest on non-convertible debentures issued by assessee-company, debenture-holders had at option either to periodically receive interest on half yearly basis at 18 per cent per annum for five years or one year upfront payment of Rs. 55 per debenture - Two parties opted for upfront payment of interest and, so upfront payments were made to them which were shown by assessee in its financial statements as 'deferred revenue expenditure' (DRE) and written off over a period of five years - However, in its return, assessee claimed entire upfront payment - Assessing Officer disallowed such claim holding that upfront payment made represented deferred interest, therefore, not allowable in entirety in one accounting year - Assessing Officer estimated expenditure by applying discount rate of 18 per cent and apportioned expenses over five years - Whether Matching concept in which revenue and income earned during an accounting period, irrespective of actual cash in flow, is required to be compared with expenses incurred during same period, irrespective of actual outflow of cash, is very relevant to compute taxable income, particularly in cases involving DRE - Held, yes - Whether though ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in year in which it is incurred, in instant case, Assessing Officer was justified to spread expenditure over life of debentures because allowing entire expenditure in one year might give a distorted picture of profit of a particular year - Held, yes FACTS The assessee-company issued 60 lakhs non-convertible debentures of fair value of Rs. 100 each on private placement basis. As regards payment of interest on debentures, the debenture-holders had option either to periodically receive interest on half-yearly basis at 18 per cent per annum for five years or one year upfront payment of Rs. 55 per debenture. Under the terms of the issue, the debentures could be redeemed at par along with 10 per cent redemption premium at any time after the end of the…

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