Jamnagar Infrastructure Enteprises, ... vs Assessee

ITA No.3894/Mum/2013 ( Assessment Year :2009-10) Jamnagar Infrastructure Vs. JCIT(OSD), Cir.15(1), Enterprises, 1203-06, Mumbai Arcadia, 195 Backbay Reclamation, N. Point, Mumbai-400 021 PAN/GIR No. : AAATJ 4453 G ( Appellant) .. ( Respondent)

/Assessee by : Shri J.D.Mistry /Revenue by : Shri Akhilendra P. Yadav

Date of Hearing : 13th Nov, 2014 Date of Pronouncement : 09/01/2015 ORDER

PER R.C.SHARMA (A.M.) :

This appeal is filed by the assessee against the order of CIT(A),

dated 22-3-2013, for the assessment year 2009-10, in the matter of order

passed under Section 143(3) of the I.T. Act.

2. Rival contentions have been heard and record perused. Facts in

brief that assessee is a private Trust carrying on its activities under the

name of M/ s. Jamnagar Infrastructure Enterprises and is formed by

Settler Reliance Capital Ltd. (RCL) with the object of holding the trust

amount and carrying on the activities and business as undertaken by

Reliance Capital Ltd. by virtue of debt defeacensing agreements. M/ s. 2 ITA No.3894/2013

Appollo Exim Private Ltd. has been appointed as a Trustee to carry on the

activities of the assessee. During the course of scrutiny assessment, the

AO found that the assessee claimed discount on assigned liability of

Rs.4,07,80,324/-. On enquiry by the AO, it was explained by the assessee

that the claim of discount on the assigned liability taken over represent the

finance cost of the liability taken over, which has been worked out by

apportioning the difference between the amount received for taking over

payment obligation and the amount payable on account of payment

obligation over the period of assigned liability at pre-determined rate.

However, the AO did not accept assessee's contention by observing that

in the assessment years 2007-08 & 2008-09, the AO has disallowed such

claim of the assessee, assesee's claim for the year under consideration

was also disallowed.

3. By the impugned order, the CIT(A) confirmed the action of the AO,

against which the assessee is in further appeal before us and has taken

the following grounds :-

"The Appellant objects to the order dated 22.03.2013 passed by the learned Commissioner of Income tax (Appeals)-26, Mumbai for the A.Y.2009-10 on the following among other grounds :-

1. The order passed by the Commissioner of Income-

tax(Appeals) is illegal, bad in law, ultra vires and contrary to the provisions of law and facts of the case and without appreciating the facts of the case in their proper perspective.

2. The learned Commissioner of Income-tax (Appeals) erred in confirming disallowance of Rs.4,07,80,324/- being discount on assigned liabilities claimed as deductible u/s.37(1) of the Income tax Act.

3. It is prayed that the order of Commissioner of Income tax (Appeals) be cancelled and direction be issued to allow the appeal on the grounds raised before him."

3 ITA No.3894/2013

4. Shri J.D.Mistry, learned Senior Counsel appearing on behalf of the

assessee has contended that there was a finance transaction between

the person assigning the liability and the person accepting the liability i.e.

the assessee, whereby the person accepting the liability in view of having

received present value of the liability agrees to pay on the due dates the

amount of liability to the respective State Governments. Learned AR

placed reliance on the decision of Hon'ble Supreme Court in the case of

Madras Industrial Corporation Ltd. Vs. CIT, reported in 225 ITR 802,

wherein on the same principle discounted liability were spread over the

period of maturity and allowed. Further, the learned AR brought to our

notice the order of the Tribunal in assessee's own case of the assessment

years 2007-08 & 2008-09, wherein exactly similar claim of the assessee

was allowed by the Tribunal.

5. On contrary, learned DR supported the order of the lower

authorities and contended that it was not an ascertained liability,

therefore, the AO was justified in declining the claim of deduction.

6. We have considered rival contentions, carefully gone through the

orders of the authorities below and found from the record that assessee -

Jamnagar Infrastructure Enterprises (JIE) is a Trust, which is formed by

the settler, Reliance Capital Ltd. (RCL) with the object of holding the trust

amount and carrying on the activity and business as undertaken by RCL

by virtue of debt defeacensing agreement. Appollo Exim Pvt. Ltd. is the

Trustee of the Trust. RCL, settler of the Trust was engaged in various

financial activities. The Trust is formed with the objective of securing the 4 ITA No.3894/2013

fulfillment of obligations of the settler in respect of the loans as set out in

the said agreements. JIE has taken over the Payment Obligations to GIIC

from RCL and thereafter from RIL. The Trust has utilized the amount so

received in purchasing various securities. On such securities, assessee

has earned for the year ended 31.03.2009 interest income and dividend

income. Against these incomes, the assessee Trust has claimed discount

on the assigned liability taken over which represents the finance cost of

the liability taken over. This is worked out by apportioning the difference

between the amount received for taking over payment obligations and the

amounts payable on account of the payment obligations over the period of

the assigned liability at the predetermined rate. Thus, the assessee had

claimed proportional discount on assigned liability of Rs.4,07,80,324/- as

a deduction while computing the income. Thus, it was in the nature of

finance transaction between the person assigning the liability and the

person accepting the liability i.e. the assessee, whereby the person

accepting the liability in view of having received present value of the

liability agreed to pay on the due dates the amount of liability to the

respective State Governments. Since this is a finance transaction, the

amount received from the assignor is a liability which has to be repaid

alongwith interest in future and hence it has been reflected alongwith

accrued discount under the head "Unsecured Loans" in Schedule 'B' of

the Balance sheet. From the record also we found that this liability was

accepted at its present value worked out at the internal rate of Return

(IRR) ranging from 6% to 9%. The net present value of the liability

received if invested continuously @ 6% to 9%.per annum will make it 5 ITA No.3894/2013

possible for the assignee to repay the liabilities on due dates. Thus, it was

like any other finance transaction where either the asset is purchased and

given on lease, the lease rental being worked out on the basis of the

prevailing rate and the IRR desired by the lessor or purchasing a distant

liability at its present net value utilising the funds received by way of

present value of the liability for earning business income in the form of

interest, trading income etc. and repaying these liabilities on due dates.

Since this assignment of liability being in the nature of finance transaction

such transactions are part of normal business transactions of the trust and

the discount accrued on this liability is a proper charge on the business

income of the company and is therefore allowable as a revenue

deduction.

7. We also found from the record that discount claimed by assessee

was an actual liability arising in terms of the contract under which the

assigned liability has been accepted by the assessee and it is not a

contingent liability. As per the terms of the contract, the Trust has

undertaken to discharge liabilities of the assignor on due dates as

mentioned in the contract and in lieu thereof, has received certain

amounts. The difference between the amount received and the amount

payable over a period of time has been claimed as deduction over the

period of time during which such amounts are going to be utilised for the

purpose of business of the Trust. Thus, the difference between the

amount received by JIE and total amount payable at a future date, being a

loan liability of assignors, represents the cost of borrowing which has

been incurred but payable on future date, as per agreed terms, such 6 ITA No.3894/2013

accrued liability in praesenti even though payable in future is a deductible

expenditure over a period for which the amount received initially has been

used by the JIE, sofar as such liability has been incurred for the purpose

business.

8. The Hon'ble Supreme Court in the case of Madras Industrial

Corporation Ltd. (supra), had dealt with the similar issue and held that

discount on debenture is a liability accrued or incurred in praesenti though

to be discharged in futuro and cover not only a one time payment but a

liability spread over a number of years. The precise observations of the

Hon'ble Supreme Court are as under :-

"Expenditure" is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. Although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro. A contingent liability that may arise in future is, however, not "expenditure". It would also cover not just a one time payment but a liability spread out over a number of years. Therefore, when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. One need not go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, however, to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. The character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient. Any liability incurred for the purpose of obtaining the loan would be revenue expenditure."

7 ITA No.3894/2013 9. Applying the same proposition to the facts of the instant case, we

found that the difference between amount received by the assessee and

total amount payable at a future date represents the cost of borrowings

which is deductible expenditure over a period for which the amount

received initially has been used. Exactly similar issue has been dealt by

the Tribunal in assessee's own case and allowed the claim after having

the following observations :-

"7. We have considered the rival submissions and perused the orders of the lower authorities and the material evidence brought on record. It is not in dispute that in previous four assessment years, three assessments were done u/s.143(3) of the Act. For A.Y.2004- 05 a claim of Rs.101,79,28,529/- was allowed, in A.Y.2005-06, claim of Rs.132,46,66,345/- was allowed and similarly in A.Y.2006- 07 a claim of Rs.110,05,21,488/- was allowed. The Hon'ble Supreme Court in the case of Madras Industrial Corpn. Ltd. (supra) has held that the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purposes of its business in order to generate funds for its business activities. It was therefore taken as expenditure. The Hon'ble Supreme Court directed as to allow such expenditure. The facts of the case are identical to the facts of the case decided by the Hon'ble Supreme Court (supra) and also the finding that in earlier three scrutiny assessment in the case of the assessee, the AO has allowed such discount. In our considerate view, facts being the same, and the law has not changed therefore similar view should be followed. On that note, we do not find any error or infirmity in the findings of the Ld. CIT(A) which we accordingly confirm."

10. In view of the above discussion, respectfully following the order

of the Tribunal in assessee's own case vis-à-vis reasoning given

hereinabove, we do not find any merit in the order of the lower

authorities for disallowing discount on ascertained liability u/s.37(1) of

the I.T. Act.

11. In the result, appeal filed by the assessee is allowed. 8 ITA No.3894/2013

Order pronounced in the open court on this 9th January.2015.

9th Jan,2015

Sd/- Sd/- ( ) ( ) (SANJAY GARG) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 09/01/2015 /pkm, PS

Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A)-X, Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai

6. Guard file.

//True Copy// / BY ORDER,

(Asstt. Registrar) / ITAT, Mumbai