By TIOL News Service

KOLKATA, FEB 27, 2017: THE issue is - Whether the upfront premium on Zero Coupon Non Convertible Debentures, is an allowable deduction being in the nature of interest expenses. YES is the verdict.

Facts of the case:

The assessee is engaged in the business of manufacturing and sale of tyres. It filed return and claimed a deduction on account of upfront premium on Zero Coupon Non-Convertible debentures.These debentures were borrowed from the financial institutions for a discounted rate. The financial Institutions agreed to reduce the premium rate subject to the condition that the Assessee will pay upfront premium to the said discounted rate. Accordingly, the Assessee had paid upfront premium to various Financial Institutions out of which proportionate premium was claimed in the Return of Income. The remaining upfront premium was duly reflected in Financial Statement as prepaid expenses under the major head of Advances recoverable in cash or in kind or for value to be received on asset side of balance sheet and was regularly claimed by Assessee in respective subsequent years and was also allowed by the revenue. According to the AO, the assessee followed mercantile system of accounting therefore upfront premium paid in advance could not be allowed. The AO accordingly passed an order u/s.154.

On appeal, the ITAT held that,

++ the question whether the upfront premium on Zero coupon Non-convertible debentures can be regarded as revenue expenditure or not or was in the nature of interest or was advance payment of future interest liability which cannot be allowed under the mercantile system of accounting are matters which the AO ought to have considered while concluding the assessment u/s.143(3) of the Act. Recourse to the provisions of Sec.154 of the Act cannot and ought not to be made for such highly debatable issues which might require detailed examination of facts. Secondly the upfront premium paid was in the nature of interest on loan on borrowing, as admittedly the loans in questions were non-convertible debentures. Such expenditure was in the nature of interest expenses and had to be allowed as deduction. Further the AO has erroneously considered the sum as not pertaining to the relevant previous year and was a payment of interest in advance. The sum claimed as deduction was therefore rightly claimed as deduction and the order of CIT(A) which is in conformity with the legal position does not call for any interference.

(See 2017-TIOL-183-ITAT-KOL)