Law:

Section:

Section 37(1) of the Income-tax Act, 1961, read with section 121 of the Companies Act, 1956 - Business expenditure - Allowability of - Assessment year 1992-93 - Assessee, a registered company, issued non-convertible debentures on premium - As per term of issue of debentures, assessee was to redeem those debentures at a premium of 5 per cent of face value of debentures in three equal instalments at end of 7th, 8th and 9th year by paying Rs. 35 per year - Payment of Rs. 105 was to be made against issue amount of Rs. 100 per debenture - Assessee, thus, against receipt of Rs. 3 crores of finance, agreed to pay Rs. 3,15,000 - Assessee maintained account books as per mercantile system - It claimed deduction of this additional amount of Rs. 15 lakhs as revenue expenditure against profits of previous year, though no entries had been made regarding this liability in books - Terms of debenture issue provided, inter alia, that assessee-company shall have a right to repurchase from market some or all of debentures at any time prior to redemption date(s) and reissue same at its discretion from time-to-time in accordance with provisions of section 121 and other applicable provisions, if any, of Companies Act - Whether premium payable by assessee-company on debentures was not a contingent liability and was allowable as revenue expenditure - Held, yes - Whether amount of premium was to be allowed proportionately over period of redemption of debentures - Held, yes FACTS The assessee-company issued non-convertible debentures of Rs. 3 crores on premium. As per the term of issue of debentures, the assessee was to redeem those debentures at a premium of 5 per cent of the face value of the debentures in three equal instalments at the end of 7th, 8th and 9th year by paying Rs. 35 per year. The payment of Rs. 105 was to be made against the issue amount of Rs. 100 per debenture. Thus, against receipt of Rs. 3 crores of finance, the assessee agreed to pay Rs. 3.15 crores. The assessee maintained its books of account as per mercantile system. Though no entries had been made regarding that liability in books, in its return, the assessee claimed deduction of the additional amount of Rs. 15…

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