The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Revenue’s appeal and upheld the claim of a non-banking financial company (NBFC) to deduct the entire discount incurred on the issuance of non-convertible debentures (NCDs) in the year of issuance itself.
The bench of Anikesh Banerjee (Judicial Member) and Om Prakash Kant (Accountant Member) ruled that the Income Tax Department cannot compel an assessee to spread a revenue expenditure over future years when the assessee has chosen to claim the entire deduction in the year the liability was incurred.
The dispute arose from the assessment for Assessment Year 2023-24, where the Assessing Officer (AO) disallowed ₹33.23 crore out of a total debenture discount claim of approximately ₹40.01 crore. The assessee had issued NCDs with an aggregate face value of ₹495 crore at a discount and claimed the entire discount as a revenue expenditure during the relevant assessment year.
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The department argued that the discount on debentures generated benefits extending throughout the tenure of the instruments and therefore should be amortised over the life of the debentures rather than being claimed entirely in the year of issuance. The Assessing Officer relied heavily on the Supreme Court’s decision in Madras Industrial Investment Corporation Ltd. v. CIT, contending that the discount represented a continuing liability and should be spread across the debenture period. Based on this reasoning, only one-sixth of the discount expenditure was allowed during the year, while the balance amount was added back to the assessee’s income.
The department further contended that the assessee had treated the expenditure differently in its books and that principles of consistency and matching concept supported amortisation rather than an upfront deduction.
The assessee maintained that it was engaged in the business of lending and financing and that the funds raised through the NCDs were directly used for its regular financing activities. According to the company, the discount represented a cost incurred for raising business funds and constituted a revenue expenditure wholly connected with its financing operations. Since the liability crystallised in the year of issuance, the entire expenditure was deductible under the mercantile system of accounting.
The assessee relied upon the Supreme Court’s landmark ruling in Taparia Tools Ltd. v. JCIT, which clarified that revenue expenditure ordinarily has to be allowed in the year in which it is incurred and that spreading such expenditure over multiple years is permissible only when the assessee itself opts for such treatment. The assessee also cited the Bombay High Court’s decision in Tata Industries Ltd., which reaffirmed this principle in the context of debenture-related expenses.
The Commissioner of Income Tax (Appeals) accepted the assessee’s submissions and deleted the disallowance. The appellate authority observed that the Assessing Officer had misapplied the Supreme Court’s ruling in Madras Industrial Investment Corporation. According to the CIT(A), the later Supreme Court judgment in Taparia Tools had clearly explained that the earlier decision did not mandate amortisation as a matter of law; rather, amortisation had been permitted because the assessee in that case had voluntarily chosen such treatment.
The CIT(A) further noted that the assessee had consistently claimed the entire discount in the year of issuance and had not sought any deferment. Since no statutory provision required the expenditure to be spread over future years, the Revenue could not force amortisation. Accordingly, the disallowance of ₹33.23 crore was deleted.
After hearing both sides, the ITAT agreed with the reasoning adopted by the CIT(A). The Tribunal noted that the central issue was whether the liability towards the debenture discount, admittedly incurred during the year, could be fully deducted in that year or whether it had to be apportioned over the debenture tenure.
The Tribunal observed that the Supreme Court in Taparia Tools had unequivocally held that the normal rule is to allow revenue expenditure in the year in which it is incurred. It further recognised that spreading expenditure over multiple years can occur only when the assessee elects to do so and where the matching concept justifies such treatment. In the present case, the assessee had never exercised such an option and had consistently claimed the entire discount in the year of issuance.
The Bench also took note of the Bombay High Court’s ruling in Tata Industries Ltd., where the Court held that the Revenue cannot compel an assessee to spread debenture-related expenditure over future years when the assessee chooses to claim it upfront.
Apart from the debenture discount dispute, the Revenue also challenged the CIT(A)’s restriction of disallowance under Section 14A of the Income Tax Act. The Department argued that Rule 8D required disallowance to be computed with reference to all investments capable of generating exempt income, irrespective of whether exempt income had actually been earned during the year.
The CIT(A), however, restricted the disallowance to investments that had actually yielded exempt income and substantially reduced the addition. The department questioned this reduction before the Tribunal as well.
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