(2015) 372 ITR 605 (SC)
Other specified deductions allowable; general conditions for revenue expenditure
No. Where the liability has been incurred and the sum actually paid in the year, the whole of it is deductible in that year. The treatment adopted in the books does not govern, and there is no concept of deferred revenue expenditure in the Act absent a specific provision.
Where a taxpayer actually pays upfront the entire interest on a debenture issue, must the deduction nonetheless be spread over the debenture's term because the books show it being amortised?
The assessee issued debentures and offered subscribers a choice: receive interest periodically over the term, or take a discounted lump sum of the entire interest upfront. Some subscribers chose the upfront option and were paid accordingly during the year. In its books, the assessee amortised that upfront payment over the life of the debentures, but in its return it claimed the whole amount as a deduction in the year of payment. The Revenue allowed only the proportion charged in the books, relying on the assessee's own accounting treatment and on the spreading approach.
The disallowance was upheld by the Tribunal and the Bombay High Court, which considered that the assessee's own amortisation in the books reflected the correct position. The assessee appealed to the Supreme Court.
For the assessee
The liability to pay the interest arose and was discharged entirely in the year in question; nothing remained outstanding. Under the mercantile system a liability incurred and paid is deductible in that year. Entries in the books do not create or destroy a right to a deduction, which depends on the provisions of the Act.
For the Revenue
The assessee itself treated the payment as relating to future years by spreading it in its accounts, and consistency requires the same treatment for tax. Allowing the whole in one year distorts the profits of that year and departs from the matching approach approved in Madras Industrial.
The Court held that the entries an assessee makes in its books are not determinative of its entitlement to a deduction; the question is governed by the provisions of the Act applied to the facts. Where the liability has been definitely incurred and the sum has actually been paid in the relevant year, the ordinary rule is that the deduction is allowable in that year in full. The Court distinguished Madras Industrial on an important footing: there the assessee had itself claimed the deduction over the term and the issue was whether spreading was permissible, whereas here the assessee had paid the entire amount and claimed it in the year of payment. It held that Madras Industrial gives the assessee an option to spread where the expenditure relates to future years, but does not compel spreading where the sum has been paid outright. The Court emphasised that there is no general concept of deferred revenue expenditure in the Act, and that in the absence of a specific provision requiring deferral, an actual payment discharging an incurred liability is deductible when made.
Applied under Sections 32 and 34 of the IT Act 2025. Read with Madras Industrial it produces a workable rule: an assessee that has actually paid may claim in full in the year of payment, while an assessee that has incurred a liability relating to future years may spread it. The rejection of book entries as determinative is relied on far beyond this context, including in disputes over provisions and accounting standards.