Law: Income Tax Act, 1961

Section: 36(1)(iii)

Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Upfront interest charges) - Assessment year 1996-97 - Assessee-company issued debentures for a period of 5 years - Apart from option of half yearly periodical interest, debenture holders were given another option to accept one time upfront discounted interest payment - Assessee was following mercantile system of accounting - It filed its return claiming deduction of upfront interest charges paid during relevant year - However, said amount was shown as deferred revenue expenditure in books of account to be written off over a period of five years - Assessing Officer thus allowed only 1/5th of payment as deduction - Whether since assessee made actual payment, and course of action adopted by assessee was in consonance with provisions of Act, merely because a different treatment was given in books of account could not be a factor which would deprive assessee from claiming entire expenditure as a deduction - Held, yes [Para 19] [In favour of assessee] FACTS â–  The assessee issued debentures during the relevant period. As regards payment of interest, two options were given to debenture holders. As per terms of issue, the debenture holders could either receive interest periodically, that was every half yearly at the rate of 18 per cent per annum over a period of five years, or else, the debenture holders could opt for one time upfront discounted interest payment per debenture. In the second alternative, certain amount was to be immediately paid as upfront on account of interest. At the end of five years period, the debentures were to be redeemed at the face value. Certain debenture holder opted for upfront payment of interest. â–  The assessee was following mercantile system of accounting. It filed its return claiming deduction of upfront interest charges paid during the relevant year. However, said upfront payment of interest on debentures were shown by the assessee as deferred revenue expenditure in, accounts to be written off over a period of five years. â–  The Assessing Officer taking into consideration assessee's books of account, treated said payment as the deferred…