Holding

Interest paid upfront on debentures is fully deductible in the year it is incurred and paid, as per Section 36(1)(iii) read with Section 43(ii), irrespective of the accounting treatment.

Summary

Taparia Tools Ltd issued non‑convertible debentures offering investors a choice of either periodic interest or a one‑time upfront interest of Rs.55 per debenture. The company paid the upfront interest in the years 1995‑96 and 1996‑97 and, following mercantile accounting, recorded it as deferred revenue expenditure to be written off over five years. The Assessing Officer, however, allowed only one‑fifth of the interest as a deduction each year, contending that the matching concept required spreading the expense. The company appealed, arguing that under Section 36(1)(iii) and the definition of "paid" in Section 43(ii) of the Income Tax Act, the entire amount was payable and therefore fully deductible in the year of payment. The Supreme Court held that the interest was genuinely incurred and paid in the assessment year, and that the statutory provision permits full deduction irrespective of the accounting treatment. Consequently, the Court allowed the appeals and directed that the entire interest amounts be allowed as deductions in the respective years.

Issues considered

The interest payable upfront on debentures is a capital‑borrowed expense under Section 36(1)(iii) and whether it can be deducted fully in the year of payment.
Whether the definition of "paid" in Section 43(ii) allows deduction of interest that is incurred but recorded as deferred revenue expenditure.
Whether the Assessing Officer can invoke the matching concept to require spreading the interest deduction over the life of the debentures.

Legislation cited

Income Tax Act, 1961s. 2(28A), s. 36(1)(iii), s. 43(ii)

Subjects

interest deductionupfront interestdebenturesSection 36Section 43mercantile accountingmatching conceptdeferred revenue expenditure

Judgment

[2015) 3 S.C.R. 746

A TAPARIATOOLS LIMITED
v.
JOINT COMMISSIONER OF INCOME TAX SPECIAL
RANGE-1, NASIK
8 (Civil Appeal Nos. 6366-6368 of 2003)
MARCH 23, 2015
[A.K. SIKRI AND ROHINTON FALi NARIMAN, JJ.]
Income Tax Act, 1961: s.36(i)(iii) - Deduction - Interest
C paid upfront to the debenture holder whether allowable in the
first year itself or to be spread over a period of five years
being the life of the debentures - In the instant case, in the
debenture issue, two options as regards the payment of
interest were given to the debenture holders - Payment of
0
interest every half yearly@ 18% .p.a. over a period of 5 years
or else, one time upfront payment of~ 55 per debenture -
Assessee having followed the mercantile system of
accounting showed the upfront payment of interest on
E debentures as deferred revenue expenditure in the accounts
to be written off over a period of 5 years - Notwithstanding
this accounting treatment, it claimed the entire upfront interest
payment as fully deductible expenditure - Held: Assessee 's
claim is valid- The money raised on account of issuance of
F the debentures is the capital borrowed and the debentures
are issued for the purpose of the business of the assessee -
In such a scenario, when the interest is actually incurred by
the assessee, the assessee would be entitled to deduction
of full amount in the assessment year in which it is paid.
G
Allowing the appeals, the Court

HELD: 1. Section 36 of the Income Tax Act, 1961
is a residual section in respect of certain deductions
H which are to be maderrom the income of the assessee
746
TAPARIA TOOL LTD. v. JOINTCOMMR. OF INCOME TAX 747
SPECIAL RANGE, NASIK

while arriving at- the taxable income. One of the A
deductions, apart from many other kinds of deductions
stipulated in the section, relates to the amount of interest
paid in respect of capital borrowed for the purpose of
business or profession. While examining the allowability
of deduction of this nature, the AO is to consider the B
genuineness of business borrowing. Once the
genuineness is proved and the interest is paid on the
borrowing, it is not within the powers of the AO to disallow
the deduction either on the ground that rate of interest C
is unreasonably high or that the assessee had himself
charged a lower rate of interest on the monies which he
lent. In the instant case, the AO did not dispute that the
non-convertible debentures were issued and money
raised for business purposes. The AO did not even o
dispute the genuineness of clause relating to upfront
payment of interest in the first year itself as per the
option to be exercised by the debenture holder.
Therefore, there is no dispute that interest has, in fact,
been 'paid' during the accounting year. Definition of E
'paid' is contained in Section 43(ii) of the Act to mean
actually paid or incurred according to the method of
accounting. As per the definition of 'paid' as Section 43,
even if the amount is not actually paid but 'incurred',
according to the method of accounting, the same would F
be treated as 'paid'. Since the assessee was following
mercantile system of accounting, the amount of interest
could be claimed as deduction even if it was not actually
paid but simply 'incurred'. However, in the instant case, G
the amount of interest was actually paid as well in the
assessment year in which it was claimed. [Paras 8 and
9] [753-D, E-F; 755-A-E, H; 756-A-B]

2. By allowing only 1/5th of the upfront payment H
748 SUPREME COURT REPORTS [2015] 3 S.C.R.

A actually incurred, though the entire amount of interest
is'aetually incurred in the very first year, the AO, in fact,
· fre{ted both the methods of payment at par, which was
clearly unsustainable. By doing SO, the AO, in fact,
tampered with the terms of issue, which was beyond his
B domain. On exercise of the option of upfront payment of
interest by the subscriber in the very first year, the
assessee ·paid that amount in terms of the debenture
issue and by doing so he was simply discharging the
C interest liability in that year thereby saving the recurring
liability of interest for the remaining life of the debentures
because for the remaining period the assessee was not
required to pay interest on the borrowed amount. [Para
11] (756-G-H; 757-A-C] I

D
3. The assessee did not want spread over of this
expenditure over a period of five years as in the return
filed by it, it had claimed the entire interest paid upfront
as deductible expenditure in the same year. In such a
E situation, when this course of action was permissible in
law to the assessee as it was in consonance with the
provisions of the Act which permit the assessee to claim
the expenditure in the year in which it was incurred,
merely because a different treatment was given in the
F books of accounts cannot be a factor which would
deprive the assessee from claiming the entire
expenditu~e as a deduction. Entries in the books of
accounts are not determinative or conclusive and the
matter is to be examined on the touchstone of provisions
G contained in the Act. There is no estoppel against the
Statute and the Act enables and entitles the assessee to
claim the entire expenditure in the manner it is claimed.
[Paras 19 and 20] (763-C-F, 764-C]
H
TAPARIA TOOL LTD. v. JOINT COMMR. OF INCOME TAX 749
SPECIAL RANGE, NASIK

Bharat Earth Movers v. Commissioner of Income Tax A
(2000) 6 SCC 645: 2000 (2) Suppl. SCR 295; Kedamath
Jute Manufacturing Co. Ltd. v. Commissioneroflncome Tax
(Central), Calcutta (1972) 3 SCC 252: 1972 (1) SCR 277;
Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v.
Commissioner of Income Tax, Madras (1997) 6 SCC 117: B
1997 (1) Suppl. SCR528; Sutlej Cotton Miffs Ltd. v.
Commissioner of Income Tax, Calcutta (1978) 4 SCC 358:
1979 (1) SCR 976; United Commercial Bank, Calcutta v.
Commissioneroflncome Tax, WB-111, Calcutta (1999) 8 SCC C
338: 1999 (3) Suppl. SCR 254 - relied on.

Madras Industrial Investment Corporation Limited v.
Commissioner of Income Tax (1997) 4 SCC 666: 1997 (3)
SCR 593 - distinguished.
D
CASE LAW REFERENCE
2000 (2) Suppl. SCR 295 relied on. Para 15
1997 (3) SCR 593 distinguished. Para 16
1972 (1) SCR277 relied on. Para 19 E
1997 (1) Suppl. SCR 528 relied on. Para 19
1979 (1) SCR 976 relied on. Para 19
1999 (3) Suppl. SCR 254 relied on. Para 19
F
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
6366-6368 of 2003.

From the Judgment and Order dated 08.01.2003 passed
by High Court of Judicature at Bombay in Income Tax Appeal G
Nos. 88, 89 & 90 of 2001.

WITH

C. A. Nos. 6946-6948 of 2014 H
750 SUPREME COURT REPORTS [2015] 3 S.C.R.

A K. Radhakrishnan, Sanjay M. Shah, Rustom B.
Hathikhanawala, Niranjana Singh, Rupesh Kumar, Ram Bhaj,
Anil Katiyar for the appearing ·parties.

The Judgment of the Court was delivered by
B
A.K. SIKRI, J. 1) The appellant- Taparia Tools Limited
(hereinafter referred to as the 'assessee') is b~fore us, having
lost in the r.ourts below.· 1n these six appeals; the issue involved
is identical, that too.between the same parties. Necessity of
c six appeals is because of the reason that the same dispute
pertains to three assessment years, namely, assessment years
1996-97, 1997-98 and 1998-99. The assessee had claimed
deduction of revenue expenditure on account of interest
payment in the sum of~ 2,72,25,000 paid to one Mis. Maliram
D Makharia Stock Brokers Pvt. Ltd. and~ 55,00,000 on account
of interest payment given to Mis. Sharp Knife Company Pvt.
Ltd. This was on account of upfront payments of interest given
to the aforesaid two debenture holders in the assessment years
1996-97 and 1997-98 respectively. The Assessing Officer (for
E short, the 'AO'), however, treated it as the 'deferred revenue .
expenditure', to be written off over a period of five years and,
therefore, in these assessment years he allowed only 115th of
the payment made, though the entire payment was made in
F the assessment year 1996-97.

2) The question of law, in the given circumstances, which
has arisen for consideration is as to whether the liability of the
assesee to pay the interest upfront to the debenture holder is
G allowable as a deduction in the first year itself or it is to be
spread over .a period of five years, being the. life of the
debentures? This substantial question of law has arisen in
the following circumstances:

3) In the debenture issue of the assessee two options as
H
TAPARIATOOLLTD. v.JOINTCOMMR. OF INCOME TAX 751
SPECIAL RANGE, NASIK [A. K. SIKRI, J.]

regards payment of interest thereupon were given to the A
subscribers/ debenture holders. They could either receive
interest periodically, that is every half yearly@ 18% per annum
over a period offive years, or else, the debenture holders could
opt for one time upfront payment of'{ 55 per debenture. In the
second alternative,'{ 55 per debenture was to be immediately B
paid as upfront on account of interest. At the end of five years
period, the debentures were to be redeemed atthe face value
of' 100.

4) The debentures were allotted to the following parties C
as below:
S.No. Party Amount
(in lacs)
1. Maliram Makharia Stock 495.00 o
Brokers Pvt. Ltd.,dt. 29.03.1996
2. Orient Corporation, dt. 19.06.1996 1.25
3. Shree SuyogAgencies, dt. 19.06.1996 1.25
4. Shree Kyamsap Enterprises, 1.25
dt. 19.06.1996 E
5. Shree Su raj Agencies, dt. 19.06.1996 1.25
6. Sharp Knife Co. Pvt. Ltd, dt. 100.00
19.06.1996
TOTAL 600.00 F
On February 14, 1996, M/s. Maliram Makharia Stock
Brokers Pvt. Ltd. gave their letter of acceptance opting for
upfront payment of interest. Likewise, vide letter of acceptance
dated May 24, 1996, M/s. Sharp Knife Company Pvt. Ltd. G
exercised similar option.

As these parties, mentioned at S. Nos. 1 and 6, had
opted for one time upfront payment towards interest, they were
paid interest in the sum of'{ 2,72,25,000 and '{ 55,00,000 H
752 SUPREME COURT REPORTS [2015] 3 S.C.R.

A respectively.

5) The assessee follows mercantile system of accounting.
Further, one time upfront interest of an amount mentioned
above was actually paid as well in the Accounting Years 1995-
B 96 and 1996-97 respectively. However, it so happened that
the said upfront payment of interest oh debentures were shown
. by the assessee as deferred revenue expenditure in the
accounts to be written off over a period of five years.
Notwithstanding this accounting treatment given to the payment
C qua interest, in the returns filed by the assessee for the
assessment years 1996-97 and 1997-98, it claimed the entire
upfront interest payment in the sum of~ 2,72,25,000 and~
55,00,000 respectively as fully deductible expenditure. It may
be clarified that insofar as the assessee's claim for deduction
D
of premium payable on redemption is concerned, the same
was claimed in the return on a spread over basis covering a
period of five years.

6) In the assessment orders passed by the AO, the
E assessee's claim for deduction of upfront interest payment was
denied. Instead, the AO chose to spread it over a period of
five years thereby giving deduction only to the extent of 1/5th
each in the respective assessment years. The order of the
F AO was challenged by the assessee in appeals preferred
before the Commissioner of Income Tax (Appeals). The
Commissioner, however, dismissed the appeals thereby
sustaining the orders passed by the AO. The assesee then
approached the Income TaxAppellate Tribunal and thereafter
G the High Court of Bombay but was unsuccessful as the appeals
preferred by him before the two fora have been dismissed
maintaining the method of deduction adopted by the AO. To
put it otherwise, instead of entire amount paid by the assess~e
in the particular assessment year, full deduction is not given
H
TAPARIA TOOLLTD. v.JOINTCOMMR.OFINCOMETAX 753
SPECIAL RANGE, NASIK [A. K. SIKRI, J.]

and this deduction is spread over a period of five years. Thus, A
the question is as to whether deduction of the entire amount of
interest paid should be allowed or the stance of Revenue needs
to be affirmed.

7) As pointed out above, the assessee maintains its B
accounts on mercantile basis. Further, the entire amount for
which deduction was claimed was, in fact, actually paid to the
debenture holder as upfront interest payment. It is also a matter
of record that this amount became payable to the debenture
holder in accordance with the terms and conditions of the non- C
convertible debenture issue floated by the assessee, on the
exercise of option by the aforesaid debenture holders, which
occurred in the respective assessment years in which
deduction of this expenditure was claimed.
D
8) Section 36 of the Income Tax Act, 1961 (hereinafter
referred to as the 'Act') is a residual section in respect of certain
deductions which are to be made from the income of the
assessee while arriving at the taxable income. It is
nomenclatured as 'other deductions', as some ofthe\preceding E
sections provide
. . for certain deductions
.
of spedfic
/
nature, with
which we are not concerned in the present qase. One of the
. deductions, apart from many other kinds of deductions
stipulated in the section, relates to the amount of interest paid F
in respect of capital borrowed for the purpose of business or
. professic>n. This is provided in clause (iii) of sub-section (1)
of Section 36 and reads as under:

"S.36. (1) The deductions provided for in the following
G
clauses shall be allowed in respect of the matters
dealt with therein, in computing the income referred
to in slction 28 -

xx xx xx
H
754 SUPREME COURT REPORTS [2015] 3 S.C.R.

A (iii) the amount of the interest paid in respect of
' ' capital borrowed for the purposes of the business or•
profession': ·

[Provided that any amount of the interest paid,
B in respect of capital borrowed for acquisition of an
asset for extension of existing business or profession •
(whether capitalised in the books'of account or riot); ' ·
for any period beginning from the date·on which the~ , ·
capital was borrowed for acquisition of the asset till · ,
c the date on which such asset was first put to' use, shall' ,'.'
not be allowed as deduction.] ·

Explanation. - Recurring subscriptions paid
.. \

periodically by shareholders or subscriber!> in Mutual .
·D Benefit Societies which fulfil such conditions as may
be prescribed; shall be deemed to be ·Capital
borrowed within the mealling ofthis clause;
~ .. •ii.; ,,, ' ~ :..

•XX."' .-I XX ··'· ..:.xX~ ,,. 1 :1·
E ·. ·•· ..:.J -~ ._. · ·• · .. ·.. ~.o: ..,t,. : ·~ ·..,.1- -_ ~'f,
. 9) Ignoring the proviso and theexplanation'ihClause (iii)
above, with which we are admitte(:lly not co"rieerne9 in this' case,
it is clear that as per the aforesai.d provision any arriount"on
account of interest paid becomes an adrnissible deduction
F under Section 36 if the · ,
iritere'st
-. .
was p~id'tor\' tht{
I'
capital ~4 ·

borrowed by the assessee and this borrowing was for the
purpose of business or profession. There is no quarrel, in the
present case, that the money raised on account of isisuari'ce ·of
the debentures would be capital borrowed and the debantures
G were issued for the purpose of the business of the assessee.
In such a scenario when the interest was actually incurred by
the assessee, which follows the mercantile system of
accounting, on the application of this statutory provision;_Jn
H incurring of such interest, the assessee would be entitled to

..
TAPARIA TOOL LTD. v. JOINTCOMMR. OF INCOME TAX 755
SPECIAL RANGE, NASIK [A. K. SIKRI, J.]

deduction of full amount in the assessment year in which it is A
paid. While examining the allowability of deduction of this
nature, the AO is to consider the genuineness of business
borrowing and that the borrowing was for the purpose of
business and not an illusionary and colourable transaction.
Once the genuineness is proved and the interest is paid on B
the borrowing, it is not within the powers of the AO to disallow
the deduction either on the ground that rate of interest is
unreasonably high or that the assessee had himself charged
a lower rate of interest on the monies which he lent. In the C
instant case, the AO did not dispute that the non-convertible
debentures were issued and money raised for business
purposes. The AO did not even dispute the genuineness of
clause relating to upfront payment of interest in the first year
itself as per the option to be exercised by the debenture holder. o
:in nutshell, the Ao did not dispute that the expenditure on
account of interest was genuinely incurred. Therefore, there
is no dispute that interest has, in fact, been 'paid' during the
year of accounting. Definition of 'paid' is contained in Section
43(ii) of the Act to mean actually paid or incurred according to E
the method of accounting. To be precise, this definition is
couched in the following language: •

"S.43 In sections 28 to 41 and in this section, unless
the context otherwise requires - F

xx xx xx
(2) "paid" means actually paid or incurred according
to the method of accounting upon the basis of which
G
the profits or gains are computed under the head
"Profits and gains of business or profession";

xx xx xi'
H
756 SUPREME COURT REPORTS [2015] 3 S.C.R.
•"

A As per the aforesaid definition, even if the amount js not
actually paid but 'incurred', according to the method of
accounting, the same would be treated as 'paid'. Since the
assessee was following mercantile system of accounting, the
amount of interest could be claimed as deduction even if it
B was not actually paid but simply 'incurred'. However, in the
instant case, it is not in dispute that the amount of interest was
actually paid as well in the assessment year in which it was
claimed.

C 10) The only reason which persuaded the AO to stagger
and spread the interest over a period of five years was that
the term of debentures was five years and that the assessee
had itself given this very treatment in the books of accounts,
viz, spreading it over a period of five years in its final accounts
0
by not debiting the entire amount in the first year to the Profit
and Loss account and it has, in fact, debited 1/5th of the interest
paid to the Profit and Loss account from the second year
onwards. The High Court, in its impugned judgment, has based
E its reasoning on the second aspect and applied the. principle
of 'Matching Concept' to support this conclusion.

11) Insofar as the first reason, namely, non-convertible
debentures were issued for a period offive years is concerned,
F that is clearly not tenable. While taking this view, the AO clearly
erred as he ignored by ignoring the terms on which debentures
were issued. As noted above, there were two methods of
payment of interest stipulated in the debenture issued.
Debenture holder was entitled to receive periodical interest
G after every half year@ 18% per annum for five years, or else,
the debenture holder could opt for upfront payment of~ 55 per
debenture towards interest as one time payment. By allowing
only 1/5th of the upfront payment actually incurred, though the
entire amount of interest is actually incurred in the very first
H
TAPARIATOOLLTD. v. JOINTCOMMR.OFINCOMETAX 757
SPECIAL RANGE, NASIK [A. K. SIKRI, J.]

year, the AO, in fact, treated both the methods of payment at A
par, which was clearly unsustainable. By doing so, the AO, in
fact, tampered with the terms of issue, which was beyond his
domain. It is obvious that on exercise of the option of upfront
payment of interest by the subscriber in the very first year, the
assessee paid that amount in terms of the debenture issue B
and by doing so he was simply discharging the interest liability
in that year thereby saving the recurring liability of interest for
the remaining life of the debentures because for the remaining
period the assessee was not required to pay interest on the C
borrowed amount.

12) The next question which arises for consideration is
as to whether the assessee was estopped from claiming
deduction forthe entire interest paid in the year in which it was
0
paid merely because it had spread over this interest in its books
of account over a period of five years. Here, the submission
of learned counsel for the assessee was that there is no such
estoppel, inasmuch as. the treatment of a particular entry (or
for that matter interest entered in the instant case) in the books E
of accounts is entirely different from the treatment which is to
be given to such entry/expenditure under the Act. His. contention
was that assessment was to be made in accordance with the
provisions of theAct and not on the basis of entries in the books
of accounts. His further argument was that had the assessee F
not claimed the payment of entire interest amount as tax in the
income tax returns and had claimed deduction over a period
of five years treating it as deferred interest payment, perhaps
the AO would have been right in accepting the same in
consonance with the accounting treatment which was given. G
However, learned counsel pointed out that in the instant case
the assessee had filed the income tax return claiming the entire
deduction which was allowable to it under the provisions of
Section 36(1 )(iii) of the Act as all the conditions thereof were H
758 SUPREME COURT REPORTS [2015] 3 S.C.R.

A fulfiled and, thus, it was exercising the statutory right which could
not be denied.

13) We find that the High Court has taken into
consideration the provisions of Section 36(1 )(iii) of the Act and
B the conditions which are to be fulfiled for allowing the deduction
on this account in the following words:

"... The term "interest" has been defined under Section
2(28A) of the Act. Briefly, interest payment is an
c expense under Section 36(1 )(iii). Interest on monies
borrowed for business purposes is an expenditure in
a business [see 35 ITR 339- Madras]. For claiming
deduction under Section 36(1 }(iii), the following
conditions are required to be satisfied viz. the capital
D must have been borrowed; it must have been
borrowed for business purpose and the interest must
be paid. The word "Paid" is defined in Section 43(2).
It means' payment in accordance with the method
followed by the assessee. In the present case,
E therefore, the word "Paid" in Section 36(1)(iii) should
be construed to mean paid in accordance with the
method of accounting followed by the assessee i.e.
Mercantile System of accounting ... "
F Notwithstanding the aforesaid, the High Court chose to
decline the whole deduction in the year of payment, thereby
affirming the orders of the authorities below, by invoking the
'Matching Concept'. It is observed by the High Court that under
G the mercantile system of accounting, book profits are liable to
be taxed and in order to determine the net income of an
Accounting Year, the revenue and other incomes are to be
matched with the cost of resources consumed (expenses). For
this reason, in the opinion of the High Court, this matching
H concept is required to be done on accrual basis. As per the
TAPARIA TOOL LTD. v. JOINT COMMR. OF INCOME TAX 759
SPECIAL RANGE, NASIK [A. K. SIKRI, J.]

High Court, in this case, payment of~ 55 per debenture towards A
interest was made, which pertained to five years, and, thus,
this interest of five years was paid in the first year. We are of
the opinion that it is here the High Court has gone wrong and
this approach resulted in wrong application of Matching
Concept. It is emphasized once again that as per the terms of B
issue, the interest could be paid in two modes. As per one
mode, interest was payable every year and in that case it was
to be paid on six monthly basis@ 18% per annum. In such
cases, the interest as paid was claimed on yearly basis over C
a period of five years and allowed as well and there is no
dispute about the same. However, in the second mode of
payment of interest, which was at the option of the debenture
holder, interest was payable upfront, which means insofar as
interest liability is concerned, that was discharged in the first o
year of the issue itself. By this, the assessee had benefited by
making payment of lesser amount of interest in comparison
with the interest which was payable under the first mode over
a period of five years. We are, therefore, of the opinion that in
order to be entitled to have deduction of this amount, the only E
aspect which needed examination was as to whether
provisions of Section 36(1)(iii) read with Section 43(ii) of the
Act were satisfied or not. Once these are satisfied, there is
no question of denying the benefit of entire deduction in the
year in which such an amount was actually paid or incurred. F

14) The High Court has also observed that it was a
case of deferred interest option. Here again, we do not agree
with the High Court. It has been explained in various judgments
that there is no concept of deferred revenue expenditure in the G
Act except under specified sections, i.e. where amortization
is specifically provided, such as Section 35-D of the Act.

15) What is to be borne in mind is that the moment second
H
760 SUPREME COURT REPORTS [2015] 3 S.C.R.

A option was exercised by the debenture holder to receive the
payment upfront, liability of the assessee to make the payment
in that very year, on exercising of this option, has arisen and
this liability was to pay the interest@~ 55 per debenture. In
Bharat Earth Movers v. Commissioner of Income Tax1,
B this Court had categorically held that if a business liability has
arisen in the accounting year, the deduction should be allowed
even if such a liability may have to be quantified and discharged
at a future date. Following passage from the aforesaid
C judgment is worth a quote:

'The law is settled: if a business liability has definitely
arisen in the accounting year, the deduction should
be allowed although the liability may have to be
quantified and discharged at a future date: What
D
should be crtain is the incurring of the liability. It should
also be capable of being estimated with -reasonable
certainty though the actual quantification may not be
possible. If these requirements are satisfied the
E liability is not a contingent one. The liability is in
praesentithough it will be discharged at a future date.
It does not make any difference ifthe future date on
which the liability shall have to be disharged is not
certain."
F
The present case is even on a stronger footing
inasmuch as not only the liability had arisen in the
assessment year in question, it was even quantified
and discharged as well in that very accounting year.
G
16) Judgment in Madras Industrial Investment
Corporation Limitedv. Commissioneroflncome Tax2 was
cited by the learned counsel for the Revenue to justify the
decision taken by the courts below. We find that the Court
H 1 c2000) 6 sec 645
2 (1997) 4 sec 666
TAPARIA TOOL LTD. v. JOINTCOMMR. OF INCOME TAX 761
SPECIAL RANGE, NASIK [A. K. SIKRI, J.)

categorically held even in that case that the general principle A
is that ordinarily revenue expenditure incurred wholly and
exclusively for the purpose of business is to be allowed in the
year in which it is incurred. However, some exceptional cases
can justify spreading the expenditure and claiming it over a
period of ensuing years. It is important to note that in that B
judgment, it was the assessee who wanted spreading the
expenditure over a period of time and had justified the same.
It was a case of issuing debentures at discount; whereas the
assessee had actually incurred the liability to pay the discount C
in the year of issue of debentures itself. The Court found that
the assessee could stil be allowed to spread the said
expenditure over the entire period of five years, at the end of
which the debentures were to be redeemed. By raising the
money collected under the said debentures, the assessee o
could utilise the said amount and secure the benefit over
number of years. This is discernible from the following
passage in that judgment on which reliance was placed by the
learned counsel for the Revenue·herself:
E
"15 .. The Tribunal, however, held that since the entire
liability to pay the discount had been incurred in the
accounting year in question, the assessee was
entitled to deduct the entire amount of Rs.3,00,000 in
that accounting year. This conclusion does not appear F
to be justified looking to the nature of the liability. It is
true that the liability has been incurred in the
accounting year. But the liability is a continuing liability
which stretches over a period of 12 years. It is,
therefore, a liability spread over a period of 12 years. G
Ordinarily, revenue expenditure which is incurred
wholly and exclusively for the purpose of business
must be allowed in its entirety in the year in which it is
incurred. It cannot be spread over a number of years
H
762 SUPREME COURT REPORTS (2015] 3 S.C.R.

A even if the assessee has written it off in his books
over a period of years. However, the facts may justify
an assessee who has incurred expendjture in a
particular year to spread and claim it over a period of
ensuing years. In fact, allowing the entire expenditure
B in one year might give a very distorted picture of the
profits of a particular year. Thus in the case of
Hindustan Aluminium Corporation Ltd. vs. CIT,
(1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal)
the Calcutta High Court upheld the claim of the
c assessee to spread out a lump sum payment to
secure technical assistance and training over a
number of years and allowed a proportionate
deduction in the accounting year in question.
D
16. Issuing debentures at a discount is another such
instance where, although the assessee has incurred
the liability to pay the discount in the year of issue of
debentures, the payment is to secure a benefit over
E a number of years. There is a continuing benefit to
the business of the company over the entire period.
The liability should, therefore, be spread over the
period of the debentures."

F 17) Thus, the first thing which is to be noticed is that though
the entire expenditure was incurred in that year, it was the
assessee who wanted the spread over. The Court was
conscious of the principle that normally revenue expenditure
is to be allowed in the same year in which it is incurred, but at
G the instance of the assessee, who wanted spreading over, the
Court agreed to allow the assessee that benefit when it was
found that there was a continuing benefit to the business of the
company over the entire period.

H 18) What follows from the above is that normally the
TAPARIATOOLLTD. v.JOINTCOMMR.OFINCOMETAX 763
SPECIAL RANGE, NASIK [A. K. SIKRI, J.]

ordinary rule is to be applied, namely, revenue expenditure A
incurred in a particular year is to be allowed in that year. Thus,
if the assessee claims that expenditure in that year, the IT
Department cannot deny the same. However, in those cases
where the assessee himself wants to spread the expenditure
over a period of ensuing years, it can be allowed only if the B
principle of 'Matching Concept' is satisfied, which upto now
has been restricted to the cases of debentures.

19) In the instant case, as noticed above, the assessee
did not want spread over of this expenditure over a period of C
five years as in the return filed by it, it had claimed the entire
interest paid upfront as deductible expenditure in the same
year. In such a situation, when this course of action was
permissible in law to the assessee as it was in consonance
0
with the provisions of the Act which permit the assessee to
claim the expenditure in the year in which it was incurred, merely
because a different treatment was given in the books of
accounts cannot be a factor which would deprive the assessee
from claiming the entire expenditure as a deduction. It has E
been held repeatedly by this Court that entries in the books of
accounts are not determinative or conclusive and the matter
is to be examined on the touchstone of provisions·contained
in the Act [See - Kedarnath Jute Manufacturing Co. Ltd. v.
Commissioner of Income Tax (Central), Calcutta 3 ; F
Tuticorin Alkali C4emicals & Fertilizers Ltd., Madras v.
Commissioner of Income Tax, Madras•; Sutlej Cotton
Mills Ltd. v. Commissioner of Income Tax, Calcutta 5; and
United Commercial Bank, Calcutta v. Commissioner of
Income Tax, WB-111, Calcutta6]. G

3 (1972) 3 sec 252
4 (1997) 6 sec 111
5 (1978) 4 sec 358
H
6 (1999) 8 sec 358
764 SUPREME COURT REPORTS [2015] 3 S.C.R.

A , • 20)At the most, an inference can be drawn that by showing
this expenditure in a spread over manner in the books of
accounts, the assessee had initially intended to make such an
option. However, it abandoned the same before reaching the ·
. ,. crucial stage, inasmuch as, in the income tax return.filed by
B .·~he assessee, it chose to claim the entire expenditure in the
year in which it was spenVpaid by invoking the provisions of
Section 36(1 )(iii) of the Act. Once a return in that manner was
filed, the AO was bound to carry out the assessment by applying
C the provisions ofthatActand not to go beyond the said return.
There is no estoppel against the Statute and the Act enables
and entitles the assessee to clai~ the entire expenditure in
the manner it is claimed.

21) In view of the aforesaid discussion, we are of the
D opinion that the judgment and the orders of the High Court and
the authorities below do not lay down correct position in law.
The assessee would be entitled to deductionn of the entire
expenditure of~ 2,72,25,000 and~ 55,00,000 respectively in
E the year in which the amount was actually paid. The appeals
are allowed in the aforesaid terms with no orders as to costs.

Devika Gujral Appeals allowed.