(1997) 225 ITR 802 (SC)
General conditions for revenue expenditure; method of accounting
It must be spread. The discount is the price of obtaining the use of money over the debenture's term, so the liability is to be allocated over that period rather than deducted entirely in the year of issue.
Where debentures are issued at a discount, is the whole discount deductible in the year of issue, or must it be spread over the life of the debentures?
The assessee issued debentures at a discount to face value, receiving less than the amount it would ultimately have to repay. It claimed the entire discount as a deduction in the year of issue, treating it as expenditure incurred in raising the loan. The Revenue took the view that the discount represented a cost of borrowing referable to the whole term of the debentures and allowed only the proportion relating to the year in question.
The dispute proceeded through the appellate stages to the High Court, which upheld the spreading. The assessee appealed to the Supreme Court.
For the assessee
The liability to pay the discount arose in the year of issue, when the debentures were allotted at less than face value. Ordinarily a liability is deductible in the year it is incurred, and there is no provision requiring the deduction to be deferred or apportioned across future years.
For the Revenue
The discount is in substance additional interest, being the consideration for having the use of the money for the debenture's term. Allowing the whole of it in the first year would distort the profits of that year and of the years that follow, each of which enjoys the benefit of the borrowing.
The Court accepted that the liability had been incurred in the year of issue, but held that the year in which a liability is incurred does not invariably determine the year of deduction. Where an expenditure is incurred for the purpose of securing a benefit that is spread over a number of years, it may properly be spread over those years. It characterised the discount as the cost of obtaining the use of the borrowed funds, no different in substance from interest: a company that issues at a discount pays for the loan in that form rather than by a higher coupon. Since the benefit of the borrowing extends over the whole term of the debentures, matching the cost to that period gives a truer picture of the profits of each year. The Court held that the assessee was entitled to deduct a proportionate part of the discount in each year over which the liability was spread, and it noted that the assessee had itself written off the discount over the term in its books, which was consistent with the commercial reality of the transaction.
Applied under Section 34 of the IT Act 2025, with the method of accounting governed by Section 272. The matching approach it endorses is routinely applied to upfront borrowing costs, premium on redemption, and lease premia. It should be read alongside Taparia Tools, which confirms that spreading is not compulsory where the assessee has actually paid the sum and claims it in that year.