CIT Vs. INSOTEX INDIA LTD

JUDGEMENT

(1.) A common question of law is involved in all these three appeals between the same parties for different assessment years and therefore, it is taken for consideration together and disposed of by this common judgment. The assessee is carrying on business in manufacture of electrical insulation tapes. In respect of the assessment year 1999-00, he filed a return of income declaring NIL income. A notice under section 148 of the Income Tax Act, 1961 was issued for reopening assessment. The assessing officer took up the matter for scrutiny assessment. The assessing officer found that the assessee had invited 'Deep Discount Bonds'. The holder of this bond had the option of obtaining equity shares by converting 60% of the value of the bonds at the end of 25 years. This option was provided only at the instance of the assessee company. On examination, the assessing officer found that the bonds did not disclose payment of any interest. The right of redemption, which was with the company, could be exercised at the end of 5th, 10th, and 15th years. The assessee had created provision for a sum of Rs. 2,82,79,950 as interest payable on the redemption of the bonds. The assessing officer found that there was no contract to pay interest and on redemption, which was at the instance of the assessee company only shares had to be issued. Therefore, no such interest accrued. According to him it was a mere contingent liability, which cannot be treated as expenditure and the same was disallowed. Aggrieved by the same, the assessee preferred an appeal. The Commissioner (Appeals-I) relying on the accountancy practice recognised by the institute of Chartered Accountants at India and also following the judgment of the Apex Court in the case of BEML Vs. CIT, 2000 245 ITR 428 and also in the case of Metal Box Company of India Ltd. Vs. Their Workmen, 1969 73 ITR 53 as well as the judgment of Apex Court in the case of Madras Industrial Investment Cor. Ltd. Vs. CIT, 1997 225 ITR 802 held that the assessing authority is not justified in disallowing the deduction claimed by the assessee on the ground that it is contingent liability. Accordingly, the addition of Rs. 2,79,76,080 was deleted. Aggrieved by the same the revenue preferred an appeal to the appellate Tribunal. The appellate Tribunal relied on the very same judgments on which the reliance was placed by the appellate Commissioner, was of the view that the discount though ultimately accruing at the end of maturity, was allowed to be spread evenly, over the period of such deep discount bonds issued. Therefore, the provision made by the assessee for meeting the liability incurred by in on the terms of issue of deep discount bonds is the accrued liability and therefore, dismissed the appeal. Aggrieved by these orders, the revenue is in appeal. The appeal was admitted on 26-3-2007 to consider the following substantial questions of law.

(2.) The learned counsel for the revenue assailing the impugned order contends that the liability to pay interest is a contingent liability, which may arise in future and therefore, it is not expenditure. More over, the terms of the contract make it very clear at the end of the period agreed upon the assessee has to issue shares and not pay money and therefore, the assessee was not justified in spreading the interest payable for each financial year and in claiming deduction under the heading of expenditure.

(3.) Per contra, the learned counsel appearing for the assessee supported the impugned order. The Apex Court in the case of Madras Industrial Investment Corp. Ltd. Vs. CIT after referring to various judgments has held as under :