RAJESH BALIA, J.
1. Heard learned counsel for the parties.
2. This appeal under Section 260A of the IT Act, 1961 (for short 'the Act') is directed against the order of Tribunal, Jodhpur Bench, Jodhpur, dt. 28th January, 2003 at the instance of CIT. It relates to asst. yr. 1992-93. The issue relates to claim of the assessee regarding deduction of liability to pay premium on non-convertible debentures issued by it during the assessment year in question.
3. The facts are that the assessee is a limited company, which is registered under the Indian Companies Act, 1956, It has issued non-convertible debentures of Rs. 3 crores in favour of LIC and State Bank of India mutual fund on premium. As per the term of issue of debentures, the assessee was to redeem those debentures at a premium of 5 per cent of the face value of the debentures in three equal instalments at the end of 7th, 8th and 9th year by paying Rs. 35 per year. The payment of Rs. 105 was to be made against the issue amount of Rs. 100 per debenture. Thus, against receipt of Rs. 3 crores of finance the assessee agreed to Rs. 3,15,00,000. The assessee maintains its books of account as permercantile system. Though, no entries have been made regarding this liability in books, in its return, the assessee claimed deduction of this additional amount of Rs. 15,00,000 as revenue expenditure against the profits of previous year relevant to asst. yr. 1992-93.
4. One of the terms of debenture issue was as under:
'The company shall have a right to repurchase (from the market) some or all of the debentures at any time prior to the redemption date(s) and reissue the same at its discretion from time to time in accordance with the provisions of Section 121 and other applicable provisions, if any, of the Companies Act, 1956. Upon such reissue, the persons entitled to the debentures shall have and shall be deemed always to have had the same rights and priorities as if the debentures had never been redeemed.'
By considering the aforesaid clause, the AO held that the liability to pay premium amount at the time of redemption of debenture was a contingent liability. In coming to this conclusion, he relied on the decision of Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. : [1994]207ITR553(Cal) . It was considered by the AO that conditions pertaining to repurchase and reissue of debentures made the liability to pay premium as contingent one and would not arise until the expiry of 7th years when the redemption of the debenture would commence, if prior to that date debentures are not repurchased by the company. However, he did not dispute the assessee's contention that it is a revenue expenditure.
5. On appeal, the CIT(A) vide his order dt. 18th Sept., 1995, affirmed the disallowance made by the AO by adopting the same reason as prevailed with the AO.
6. On further appeal, the Tribunal has allowed the claim of the assessee in a modified form. It held the liability to pay premium to be not contingent, but a revenue expenditure. However, it found that the amount is to be, allowed proportionately over the period of redemption of debentures i.e., to say during the period the fund generated, by issue of debenture are to be utilised by the company for its benefits. In coming to this conclusion, the Tribunal placed reliance on the decision of Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT : [1997]225ITR802(SC) .
7. The other contention of the Revenue was that since the assessee has not made any provision in the books of account, notwithstanding it is maintaining the accounts as per mercantile system, no deduction can be allowed, was not sustained by the Tribunal on the anvil of the decision of Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT : [1997]227ITR172(SC) .
8. About the other contentions raised in the said appeal for the asst. yr. 1993-94, we are not concerned.
9. Aggrieved with the aforesaid allowance of deduction of the liability to pay premium on redemption of debenture issue, this appeal has been preferred by the Revenue and following questions of law were framed at the time of admission :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the premium payable on debentures was not a contingent liability and that it is allowable revenue expenditure.
2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing to allow the claim of premium though proportionately over the period of redemption.'
10. Both the questions pertain to the basic issue whether the liability to pay premium on the issue price of debenture by a company is a contingent liability and if not, whether when such liability is to be allowed as a deduction. The latter, aspect of the question is that whether it is to be allowed as one time expenditure at the time it is incurred or is to be spread over proportionately over the entire period of redemption of debenture or is to be allowed at the time of redemption.
11. In its simple manifestation, the issue is no more res integra and is settled by the: decision of the Supreme Court in Madras Industrial Investment Corporation Ltd.'s case (supra). It was a case in which the assessee-company had issued redeemable debentures on discount, instead of at a premium that is to say for a debenture of the face value of Rs. 100. The company has received Rs. 98 only, as its discounted issue price and it has undertaken to pay Rs. 100 by way, of principal at the time of redemption. The less amount received by the company vis-a-vis the face value of the debentures was claimed by the assessee as a revenue expenditure in the year of issue as having incurred or laid wholly or exclusively for the purpose of its business under Section 37 of the Act. The assessee had, in its return, claimed Rs. 12,500 only as deduction in respect of the proportionate part of discount on issue of debenture referable to the asst. yr. 1968-69. However, at the time of assessment the company claimed totaldiscount on the issue of Rs. 1.5 crores amounting to Rs. 3 lacs deduction during the same year. It has been unsuccessful before the AO and CIT(A). However, the Tribunal has allowed the assessee's appeal and allowed its entire claimregarding deduction.
12. On a reference being made nder Section 256(1) of the Act, the question referred to Madras High Court was whether there was any expenditure in the sum of Rs. 2,87,500 and whether it was revenue expenditure? The following two questions were referred to the Madras High Court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in permitting the assessee to raise the contention that the entire amount of Rs. 3,00,000 being the discount relating to the issue of debentures for Rs. 1.5 crores during the relevant previous year was to be allowed as a permissible deduction ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee had incurred an expenditure of Rs. 3,00,000 during the relevant previous year by way of discount paid to the persons who had subscribed to the debentures issued by it for Rs. 1-5 crores during the relevant previous year and the same was allowable as a revenue expenditure ?'
13. The first question formulated by: the Madras High Court Was answered in favour of the assessee holding that it was permissible for the Tribunal to allow the assessee to raise this issue in appeal. However, on the second issue, it was held that discount of Rs. 3 crores did not represent any payment made to any one so as to constitute expenditure. It was further held that no expenditure was laid out or incurred by the assessee/appellant-company which could be allowed as a deduction. This led to appeal before the Supreme Court. The Supreme Court posed the following question for its consideration in the first instance :
'We have first to consider whether the discount of Rs. 3,00,000 on debentureswhich were issued by the appellant-company is expenditure incurred by theappellant-company for the purpose of its business. The appellant-companyactually received Rs. 1.47 crores as against which it incurred a liability to returna sum of Rs. 1.50 crores with interest at the end of 12 years (the date ofredemption). This liability which the assessee incurred, to pay the amount of Rs. 3,00,000 in addition to what it actually received, is being written off over the period of 12 years. Can it be treated as expenditure ?'
The Supreme Court laid down the following propositions :
'1. The difficulty in the estimation of liability did not convert the accrued liability into a conditional one. This Court said that the expression 'profits or gains' in Section 10(1) of the Indian IT Act, 1922, had to be understood in its commercial sense; and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some further date.
2. Expenditure is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure.'
The Court explained as under:
'Although, expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in future. A contingent liability that may arise in future is, however, not 'expenditure'. It would also cover not just a one-time payment but a liability spread out over a number of years.'
The Court concluded about the nature of expenditure which a company incurs over and above actual money received by agreeing to pay more than that amount in addition to interest as under:
'When a company issues debentures, at a discount, it incurs a liability to pay a large amount than what it has borrowed, at a future date........... The liability, however, to pay the discounted, amount over, and above the amount received for the debentures, is a liability which has been incurred, by the company for the purpose of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purpose of its business. This would, therefore, be expenditure.'
Thus, the Supreme Court held that the difference between amount actually received on issue of debenture and liability to pay higher sum by way of principle expenses incurred for the purpose of business activities is an expenditure incurred at the time when funds are generated.
The Court also held that the expenditure so incurred for generating funds for the purpose of its business activities is not a capital expenditure, but a revenue expenditure.
14. Relying on its earlier decision in Bombay Steam Navigation Co. (1963) (P) Ltd. v. CIT : [1965]56ITR52(SC) in which the Court held that the loan obtained is not an asset or advantage of an enduring nature; that the expenditure was made for securing the use of money for a certain period and that it is irrelevant to consider the object with which the loan was obtained, it was laid down that in the circumstances of the case, the expenditure was revenue expenditure under Section 10(2)(xv). The ratio of the above decision was applied in the case of Madras Industrial Investment Corporation Ltd, (supra)
15. Coming to the question whether the entire amount should be allowed as an expenditure in the year of issue of debenture or should be spread over during the period until redemption of debenture, the Court approved the principle stated by Batliboi's 'Principles and Practice of Auditing' which reads as under:
'When debentures are issued at discount, an account styled 'Discount on Debentures Account', will be debited with the discount allowed on the issue. The debentures account will be credited in the books at their normal value and will appear at that value as a liability in the balance sheet. The loss thus arising need not be completely written off in the year in which the debentures are issued, since the benefit to be derived from the amount borrowed will continue till the debentures are redeemed. Where the debentures are redeemable at the end of a fixed period, a proportionate of discount should be written off out of Revenue every year during which the debentures are outstanding'.
The same principle has been applied by the Madhya Pradesh High Court in the case of M.P. Financial Corporation v. CIT (1987) 165 ITR 765, which was approved by the Court.
16. Thus, ordinarily speaking the amount undertaken to be paid over and above the amount received on issue of debentures at the time of redemption was held to be revenue expenditure incurred for generating the fund for business activities. Thus, the proportionate liability can be allowed as deduction on the period during which money borrowed through issue of debentures are to be utilised i.e., to say upto date of redemption. On principle, the case of additional liability incurred over and above the sum received by issue of debentures redeemable on premium cannot be differentiated from the case of additional liability incurred over and above the sum received on account of discount issue of debenture. The principle remains the same that where for generation of fund for the business activities, the entrepreneurs undertake to pay more than what they actually receive from the lenders, is an allowable revenue expenditure.
17. However, the learned counsel for the appellant has contended that because of the term 17 of the debenture issue quoted above, the liability undertaken by the appellant cannot be said to be incurred unqualifiedly. It becomes a contingent liability because it depends on the event that is to say that if the company does not decide to repurchase the debentures, before its maturity. Learned counsel relies on a decision of Calcutta High Court in Tungabhadra's case (supra). In Tungabhadra's case (supra), learned counsel for the Revenue pointed out, a like condition with was there subject to which debentures were issued in 1983, namely; that debentures were to be redeemed after expiry of 7th year from the date of allotment with accrued interest thereon at the premium of 5 per cent at the face value of debenture. The company has also reserved its right to repurchase and reissue the debentures. Construing the aforesaid condition, the Calcutta High Court held as under :
'On a construction of the aforesaid clauses it appears to us that the premium is payable to the debenture holders at the rate of 5 per cent of the face value of the debentures on the expiry of the seventh year from the date of allotment. It is true that the company shall have the right to reissue debentures which are repurchased by it from time to time in accordance with the provisions of Section 21 and other applicable sections of the Companies Act, 1956, and upon such reissue the person entitled to the debentures shall have, and shall be deemed always to have had, the same rights and priorities as if the debentures had never been redeemed. But in the case of repurchase of debentures, no premium is payable. We are, therefore, unable to hold that the liability for payment of the premium was created at the time of issue of the debentures or the liability to pay the premium is in unqualified terms. The liability to pay the premium, in our view, clearly arises at the expiry of the seventh year from the date of allotment and, there is no liability to pay the premium at all if the debentures are repurchased under the buy-back clause and there is no further issue of debentures. The payment of premium is, therefore, in our view, clearly a contingent liability and the liability to pay the premium shall arise only if the debentures are not repurchased by the company under Clause 5(b) and are redeemed only at the end of seven years.'
Significantly, the Calcutta High Court in Tungabhadra's case (supra) has also unequivocally held that the expenditure incurred in respect of debenture is a revenue expenditure and not a capital expenditure and the amount of premium payable in respect of the debenture issue is to be allowed as a deduction in its entirety in one year i.e., the year in which liability is to be discharged, that is to say at the time of redemption and not before.
18. Learned counsel for the assessee, on the other hand, urged that the provision enabling the company to repurchase or buy-back debentures, which may absolve the company from its liability to pay the debenture is contingent. In other words, the avoidance of liability already incurred is contingent. But, liability, which in the ordinary course, is to be discharged unless something does not happen at the option of the company is not contingent. Liability to pay premium is already incurred when debentures redeemable at premium are purchased by the buyer. Such liability, at the time of its incurrence, is not contingent. He contends that when the debentures were issued with stipulation that the redeemable debentures were issued with stipulation that at the time of redemption they will be redeemed at premium, on the date the receipt of amount, of debenture by the company it has incurred liability to repay more amount than what the company has received to the debenture-holders and then the subsisting contract between the debenture-holders and the company which would remain unaltered unless something happens which may affect that right or liability, 'therefore, the liability is not a contingent on happening. Its avoidance depends on the volition of the company, Therefore, such avoidance is contingent on exercise of volition and not the honouring of agreement. Therefore, the liability to pay additional amount by the company to the lender under the term of borrowing, than what it has to pay on future date is not a liability which is incurred in future, but a liability which is incurred in praesenti to be discharged in future.
19. The distinction drawn by the learned counsel for the Revenue was also founded on the premise that entire liability is liable to deduction in one year only. In that event the liability has been allowed as deduction only when the repayment becomes due.
It was pointed out by Mr. Kothari on both the issues, that the decision of the Supreme Court in Madras Industrial Investment Corporation Ltd. 's case (supra) impliedly overrules the ratio of the Calcutta decision.
To understand the effect of such term of right to repurchase and reissue needs understanding the gamut of debenture, redemption, repurchase and reissue of the redeemable debentures by the company in its proper perspective.
The term 'debenture' is not a technical term nor a term of art, but in its ordinary sense denotes one of the modes for borrowing money by any company in exercise of its borrowing powers.
However, in the ordinary business sense, a 'debenture' is generally understood to be a document usually but not' necessarily under seal, acknowledging a debt and securing repayment thereof by mortgage or charge on the company's property or undertaking and providing that until repayment, interest will be paid thereon at a fixed rate payable usually either half-yearly on fixed dates.
20. Speaking about meaning of word 'debenture' Chitty J. expressed in In Levy v. Abercorris Co. (1887) 37 Ch. D. 260 that 'I cannot find any precise legal definition of the term, it is not either in law or commerce a strictly technical term, or what is called a term of art.'
21. However, Chitty J. in Edmonds v. Blaina Co. (1887) 36 Ch. D. 215 put the meaning of term 'debenture' as follows :
'The term itself imports a debt-an acknowledgement of a debt-and speaking of the numerous and various forms of instrument which have been called debentures without anyone being able to say the term is incorrectly used, I find that generally, if not always, the instrument imports an obligation or covenant to pay. This obligation or covenant is in most cases at the present day accompanied by some charge or security.'
22. Palmer in his Company Law has said that in modern commercial usage a debenture denotes an instrument issued by the company, normally, but not necessarily called on the face of it a debenture and providing for the payment of, or acknowledging the indebtedness in a specified sum say 100 at a fixed date with interest thereon. It usually but not necessarily gives a charge by way of security and is often though not invariably expressed to be one of the series of like debentures.
23. The definition included in Companies Act of England as well as Indian Companies Act, 1956, clarifies that the debentures can be issued without constituting a mortgage or charge on the assets of the company. However, it does not intend to define what debenture is.
24. In this connection, Paddington in his Chapter of Debentures and Debt Securities in his book 'Company Law' discussed the property of debenture and placing historical evolution. It explained that the distinctive form of security which may be created by companies, however, is the debenture and its derivatives, namely, debenture stock, loan stock, loan notes and other varieties of debt securities. When the debentures first appeared during 1860s it envisaged that in addition to containing a covenant by the company to repay the loan, they mortgaged or charged the company's property or assets or its whole assets and undertaking were subjected to mortgage or charge with repayment of loan which came to be identified as floating charge. Towards the end of the last century instead of creating mortgage or charge with the company's assets in favour of debenture-holders, the trust deed was introduced by which the trustees were appointed to represent the interests of the lenders and the trust deed created legal mortgages over the company's fixed assets and a floating charge over its other assets and its undertaking in favour of the trustees. The trust deed additionally empowered the trustees to consent on lenders' behalf to minor deviations by the company from the terms of the collective loan and to minor variations in the security for it. This system also underwent a change during the earlier period of twentieth century. The Palmer said :
'In a modern trust deed the company covenants with the trustees to repay the total amount secured by an issue of debentures (that is the total amount subscribed by the debenture holders), together with yearly or half-yearly interest until the principal is repaid, and payment of these amounts is to be made either to the trustees on behalf of the debenture holders, or directly to the debenture holders themselves in proportion to their individual subscriptions.'
The later development in large-scale issues of debt securities by major public companies which have unimpeachable records of financial soundness and stability has been the diminution of the security given by the trust deed securing the issue. Legal mortgages are now rarely given over land or fixed assets by such companies, except property investment companies, and sometimes there is not even a floating charge over the generality of the company's assets and it's undertaking.
This has also led to change with the format of trust. It is usual for trust deeds covering such stocks or notes to contain a 'negative pledge' clause, by which the company undertakes not to mortgage or charge its property or assets, or not to secure its indebtedness to its creditors for more than a specified sum.
It is the repayment of the loans of the money borrowed by issue of debentures, in the vocabulary of Companies Law is considered as 'redemption' of debentures. In its ordinary sense redemption means repayment of debt which discharges its security.
25. The Palmer has said that the principal methods by which debentures or debenture stock can be redeemed are : (1) Out of the proceeds of a fresh issue of share or loan capital. It is not safe to rely on this method, as the redemption date may not be a propitious time for raising new capital. (2) By setting aside a predetermined annual sum by way of a sinking fund, such sum being calculated in a manner which ensures that the amount retired on final redemption is available at the redemption date. Subject to the terms of issue, the sinking fund may be used for partial redemptions before the final redemption date as explained below. (3) By purchase in the market, by tender or private treaty. The terms of issue of debentures or debenture stock usually authorise a company, at its option, to redeem a part of the issue at any time by purchase in the market or by tender available to all holders and to utilise the sinking fund payments for this purpose. The maximum price payable for debentures so redeemed is normally restricted to their nominal value. When the market price is lower than par, most companies will take advantage of purchasing stock for redemption on these favourable terms. Purchases by tender or private treaty are rarely resorted to by companies with listed debenture stock, but may be used by others when there is an opportunity of acquiring debentures for redemption at less than their nominal value.
26. The aforesaid different modes of repayment of debenture only shows that a redemption is a method by which the company obliterates its obligation to repay its debt either by paying its debt to the debenture-holders or debenture stockers or by itself repurchasing the debentures.
27. Discharging liability to the debenture-holder who has sold his debentures and since company cannot be its own debtor, in effect such purchase amounts to repayment of the loan. However, in ordinary course unless otherwise required by law or contract the discharge of debt results in discharge of mortgage charge or trust which is created for the purpose of borrowing money by issue of debentures. It was held In re, Routledge (George) & Sons Ltd. (1904) 2 Ch.D. 474 and In re, Tasker (W) & Sons (1905) 1 Ch.D. 283 that debenture once paid off was extinguished and could not be reissued and results in discharge of mortgage charge or the trust when such discharge takes place. Obviously the same debenture cannot be reissued for raising loans for the company and the company has to undergo the same preliminaries before it does issue debenture for raising loan for its business purpose.
28. To overcome these procedural difficulties, Section 90 of the Companies Act of England confers power to reissue the debentures so repaid unless the company has manifested an intention to cancel them and extinguished the security of which the debentures have been issued. The provision of the Companies Act of England enables the company to reissue the debentures and can be read as an implied condition of the original issue of debentures. The same principle has been adopted by the Companies Act, 1956, governing the debenture issue in India, which we shall advert to shortly hereinafter.
The nature of this raising of loan and the terms on which the debentures are to be redeemed or repaid has been succinctly stated by Pennington. He said in chapter relating to Debenture and Debt Securities :
'The date on which the principal of the debt secured by debentures or debt securities becomes repayable is fixed as a matter of contract by the terms of issue of the debentures, or by the terms of the loan agreement or by the covering trust deed.'
As a matter of term of contract the debentures or debt security can be issued at discount. In such case as per Pennington the company's obligation is to repay the nominal value of the debenture or debt securities and discount may be recorded as the price the company has to pay to obtain the money advanced by the subscribers.
Likewise, a debenture can be issued redeemable at premium. In such event, there can be two different format of term as to payment of premium. These contingencies have been explained by Pennington in his Company Law as under :
'Companies which reserve the right to repay long or medium term loans before the contractual date for payment, often undertake to pay a premium in addition to the principal or part of the principal which is repaid; the premium is calculated at a percentage rate on the amount repaid, and is usually charged at a graduated rate dependent on how early the repayment is made. Also companies in straitened circumstances have some times been compelled to promise to pay a substantial bonus or premium on redemption to induce investors to lend to them, and have charged their undertakings with payment of both the loan and the bonus or premium........... Where a payment in addition to the principal and interest of a loan is secured on mortgaged property, it forms part of the mortgage debt, and unless equity can set the bargain aside because it is harsh and unconscionable, the mortgagor cannot redeem at all unless he pays the whole amount secured on his property. In the second place, it is clearly contemplated by the Companies Act, 1985, that premiums may be paid on the redemption of debentures, and bonuses are indistinguishable from premiums. It would seem, therefore, that provisions for premiums or bonuses to be paid to debenture or debt security holders are valid and may be included in the total amount secured, unless they can be set aside by the Court in exercise of its equitable jurisdiction to give relief from unconscionable and oppressive bargains.'
The aforesaid view of the gamut of issuing debentures redeemable on premium shows that premium on repayment is a matter of contract by the terms of issue and forms the part of the sum which the company agrees to repay at the time of redemption/repayment or repurchase. It also explains that premium may be payable as part of the terms of debenture issue both at the time of premature redemption or at the time of redemption.
29. In the whole process as noticed above the date on which the principal debt secured by issue of debentures, becomes payable is also a term of the contract. By the promise to redeem the debenture premium at the time repayment becomes due is also a contingent term of the agreement. In ordinary terms unless something happens the contract would go absolute as per the terms of agreement and if something has to happen differently, that variation would be a contingent event. Likewise where a premium becomes payable, if at the option of the company the debentures are repaid or repurchased before its due date such liability to pay premium becomes contingent in the event the company decides to redeem the debentures prematurely. In the former case liability to pay premium is incurred as on the date the debenture issue in subscribed. In the latter, liability is incurred on the date the company exercises its option to repurchase or redeem the shares prematurely.
30. Therefore, in our opinion, whether the company undertakes to pay the face value of debenture by receiving the discounted amount of debenture subscription or whether it undertakes to pay the additional amount by way of premium on due date of redemption under the terms of agreement, it makes little difference. The liability which the company incurs for paying more amount what it has received is absolute. Such liability to pay more amount than what receives being incurred to induce the investors to loan money to the company it becomes part of a revenue expenditure.
31. The provision of reissue in the statute or the term as to reserving the right of the company to reissue debentures only affects the security under which the debentures are issued. If the company's rights to reissue the debentures on the same terms after the present liability to repay is discharged, is not reserved, on repayment or repurchase of debentures as such stood extinguished. So also the mortgage charge or trust created for the purpose of issue of debenture also stands discharged.
32. As we shall see presently that unless the terms of contract otherwise provide, repayment or repurchase of debentures does not extinguish the company's right to reissue the same debentures and the debentures are kept alive for reissue, the mortgage charge or trust created for the purpose of borrowing money by issue of debenture is also not discharged and is kept alive with debentures has received statutory recognition.
33. The provisions of the Companies Act relating to issue of debentures do envisage that where, repayment of debenture is secured by creating a charge on the company's assets or not, a trust is required to set for the purpose of securing repayment of debentures by the company.
34. In this connection, Section 117 of the Companies Act ordains that after the commencement of the Companies Act, the debenture-holder will not be having any voting rights at any meeting of the company, whether generally or in respect of particular classes of business. Thus, made it clear that debenture-holders are not the shareholders in the company having its shares in the management.
35. Further pointer to this aspect of the matter is that vide Companies (Amendment) Act, 2000, Sections 117A and 117B were inserted making it clear that no company shall issue a prospectus or a letter of offer to the public for subscription of its debentures, unless the company has, before such issue, appointed one or more debenture trustees for such debentures and the company has, on the face of the prospectus or the letter of offer, stated that the debenture trustee or trustees have given their consent to the company to be so appointed vide under Section 117B.
Section 117A envisaged that a trust deed for securing any issue of debentures shall be in such form and shall be executed within such period as may be prescribed. Even before insertion of Sections 117A and 117B, Sections 118 and 119 envisaged appointment of debenture trustee or trustees.
36. Section 119 of the Companies Act provided that subject to the provisions of Section 119 any provision contained in a trust deed for securing an issue of debentures, or in any contract with the holders of debentures secured by a trust deed, shall be void insofar as it would have the effect of exempting a trustee thereof from, or indemnifying him against liability for breach of trust, where he fails to show the degree of care and diligence required of him as trustee. Apparently while making provisions for issue of debentures for raising the funds, the Companies Act envisaged that debentures may be both having charge on the company's assets or not having charge against the company's assets. But by making provision under Sections 118 and 119 made to ensure that whether debentures are secured by a charge or mortgage on the company's assets or not, such debentures shall be secured by creation of appropriate trust and appointment of trustees for that purpose, information in respect of which it shall be given to purchasers of debentures.
In this connection, we may also refer to Securities and Exchange Board of India (Debenture Trustees) Regulations Act, 1993, and rules framed thereunder for the purpose of ensuring to keep the trustees of debentures act within the bounds of such regulations and rules.
37. We are not on the details of the gamut of debenture issue, but debentures are securities whether they are secured by a charge on the company's assets or secured by appointment, of trustee or trustees as the case may be.
Whether the charge on asset is created or trustee is appointed to secure repayment of debenture money, in ordinary sense on the repayment of amount payable on debenture, such charge is discharged. Such security whether by way of charge or mortgage on the company's assets or by the trustees appointed for the purpose.
38. The term 'redemption' means that on repayment of debt, the security on which debt is secured is discharged whether it is obtained by creating charge on property by way of mortgage or otherwise or by appointing trustees. In the latter case, the trust stand discharged and trustee's obligation to administer trust came to an end.
39. In the aforesaid context Section 121 is required to be considered, which reads as under:
'Section 21. Power to reissue redeemed debentures in certain cases--(1) Whether either before or after the commencement of this Act, a company has redeemed any debentures previously issued.
(a) unless any provision to the contrary, whether express or implied, is contained in the articles, or in the conditions of issue, or in any contract entered into by the company; or
(b) unless the company has, by passing a resolution to that effect or by some other act, manifested its intention that the debenture shall be cancelled; the company shall have, and shall be deemed always to have had, the right to keep the debentures alive for the purposes of reissue; and in exercising such a right, the company shall have, and shall be deemed always to have had, power to reissue the debentures either by reissuing the same debentures or by issuing other debentures in their place.
(2) Upon such reissue, the person entitled to the debentures shall have, and shall be deemed always to have had, the same rights and priorities as if the debentures had never been redeemed.
(3) Where with the object of keeping debentures alive for the purpose of reissue, they have, either before or after the commencement of this Act, been transferred to a nominee of the company, a transfer from that nominee shall be deemed to be a reissue for the purposes of this section.
(4) Where a company has, either before or after the commencement of this Act, deposited any of its debentures to secure advance from time to time on current account or otherwise, the debentures shall not be deemed to have been redeemed by reason only of the account of the company having ceased to be in debit whilst the debentures remained so deposited.
(5) The reissue of a debenture or the issue of another debenture in its place under the power by this section given to, or deemed to have been possessed by, a company, whether the reissue or issue was made before or after the commencement of this Act, shall be treated as the issue of a new debenture for the purposes of stamp duty, but it shall not be so treated for the purposes of any provision limiting the amount or number of debentures to be issued:
Provided that any person lending money on the security of a debenture reissued under this section which appears to be duly stamped may give the debenture in evidence in any proceedings for enforcing his security without payment of the stamp duty or any penalty in respect thereof, unless he had notice or, but for his negligence, might have discovered, that the debenture was not duly stamped; but in any such case the company shall be liable to pay the proper stamp duty and penalty.
(6) Nothing in this section shall prejudice :
(a) the operation of any decree or order of a Court of competent jurisdiction pronounced or made before the twenty-fifth day of February, 1910, as between the parties to the proceedings in which the decree or order was made;
(b) where an appeal has been preferred against any such decree or order, the operation of any decree or order passed on such appeal, as between the parties to such appeal; or
(c) any power to issue debentures in the place of any debentures paid off or otherwise satisfied or extinguished, reserved to a company by its debentures or the securities for the same.'
40. The aforesaid provision clearly provides that unless any provision to the contrary is made Whether express or implied, is contained in the articles, or as a condition of issue of debentures or any other contract entered into by the company or unless the company, has passed resolution to that effect or by some other Act, manifested its intention that the debentures shall be cancelled, the company shall have, and shall be deemed always to have had, the right to keep the debentures alive for the purpose of reissue. This only suggests that even it redeemed debt to the holders of debenture script, it will not discharge any security or a trust, on the basis of which, the debentures have been issued and their repayment has been secured. It gives power to the company to reissue the same debentures or by issuing other debenture in their place on same terms and conditions on which the earlier debentures have been issued for which charge or security has been created or that trustees have been appointed. Therefore, the term 'redemption' strictly comes into play where on repayment of debt would result in discharging the security or surety. If the debentures are issued by creating a mortgage or charge on assets of company, on redemption the assets become free of such mortgage or charge. Likewise on repayment of debt, the trust will be discharged on the trustee will be absolved from their responsibility. But, where notwithstanding repayment of debenture debt, the debenture is kept alive for reissue by the company, it does not discharge the security or the trust nor does it result in absolving the trustees of their obligation to administer the trust. Such charge or trust continues to exist, notwithstanding repayment of loan secured by issuing such debentures for the time being. In that event, the term 'redemption' does not convey, the whole meaning, while it conveys merely redemption of debt for the debenture-holders, it does not serve as redemption of mortgage or the trust. Understood in this context the repurchase is a term which is used in substitution of redemption where the company has kept its right to reissue the same debentures on the same terms alive. It obviates necessity of preliminaries of issuing debentures for securing funds for company's burden, but on the existing charge or trust, the debentures can be reissued by paying stamp duty on such reissue.
41. In this connection, it would be apposite to draw attention to many meaning of term redemption. It has also been shown that repurchase or buy-back are the expression used as synonymous with the terms redemption.
42. It has been stated in Black Law Dictionary that the 'redemption' means realization of a right to have the title of property restored free and clear of the mortgage, performance of the mortgage obligation being essential for that purpose. Redemption has also been used in terms of imposing heavy fines as distinguished from confiscation of property in terms of imposition of penalties and the penal consequence of failure to abide by any provisions of law or to act in breach of certain conditions.
43. In the context, the condition to which the reference has been made by learned counsel as the condition of the debenture issue by the respondent-company is nothing, but a manifestation of Section 121 of the Companies Act. It would otherwise be inherent under the terms of issue of debentures, had such condition would not have been specifically as term of the issue of the debentures. The company's right to keep the debentures alive for reissue subject to same terms and conditions in future as and when it wants to secure loan from the public, flows from Section 121 in the absence of any agreement contrary to articles of association. In the present case, the company has chosen to go along with the provision of Section 121 without surrendering its rights to keep the debenture alive for reissue which will not discharge the trustees or the security on redemption of loan or repayment.
Therefore, by expression repurchase used as the term of issue of debenture does not alter the position as if the issue has been made without such condition.
44. Since in the present case no such expression has been used as buy-back we need not to go into the finer distinction of word between right to 'repurchase' or right to 'buy-back'. Suffice it to state that prima facie right to repurchase may refer to repurchase at the time of maturity and right to buy-back may refer to redeem of loan before the due date to the' debtor. Else both expression deals with repayment of debt.
45. Be that as it may, the aspect, which is clear from the facts, is that the company has issued debentures redeemable on premium to secure funds for its business activities. The company has received funds by issuing debenture by representing that it will pay Rs. 105 instead of Rs. 100 paid by the debenture subscriber in addition to interest. Thus, the principal agreement, which hascome into existence, was against the receipt of Rs. 100, the company hasundertaken to pay Rs. 105 in three instalments in the 7th year, 8th year and 9thyear from the date of issue. Unless anything happens as per condition No. 17,which may result in reduction of liability, the present liability to pay Rs. 105 wascertain. It was not dependent on happening of certain event. What wasuncertain was the exercise of option by the company to avoid the said liabilityby making repayment of the loan in advance before the due date. Therefore, inpraesenti, the liability to payment of Rs. 105 to the debenture-holders, was notcontingent, but the contingent, if at all, was its avoidance which depended onexercise of option by the company to repurchase the debentures before 7 years.Therefore, the payment of Rs. 105 by the company against the collection ofreceipt of Rs. 100 from the debenture-holders was not contingent uponhappening of any event in future. The company's obligation to pay Rs. 105against receipt of Rs. 100 was certain in praesenti and known at the time whenthe debentures were issued and was to be payable in ordinary circumstances. Itwas only for the company to avoid payment of such liability if it decides torepurchase the debentures earlier. Such repayment prior to the due debt, debtwas contingent on exercise of option. It would not make the liability which iscertain in praesenti to be contingent merely because on happening of certainevent it could be avoided. The distinction drawn by the learned counsel for the appellant on the basis of term in the issue which was in consonance with the provisions of the Act does not exist.
46. With great respect, the decision of the Calcutta High Court, in our opinion, does not take into account the relevant provisions of the Companies Act and the distinction between a liability, discharge of which is contingent on happening of event, on the one hand and the case on which happening of an event which is not certain, existing liability can be reduced, in which case avoidance of liability becomes contingent.
47. Looking from any angle, it cannot be said that the term liability to pay Rs. 105 against receipt of Rs. 100 was contingent liability so as to consider that the liability has not been incurred in the year in which it has been created as liability in respect of the company on receipt of debenture issue price, though, the liability was to be discharged in future.
48. The decision rendered in Madras Investment Industrial Corporation's case (supra) governs the facts of the present case on all fours and no distinction can be found on the basis of Tungabhadras's decision (supra).
49. In CIT v. S.M. Holding & Finance (P) Ltd. the Bombay High Court was required to consider the same question. The assessee-company had issued unsecured redeemable debentures of Rs. 100 each redeemable after 10 years at a premium of 100 per cent. The assessee claimed 10 per cent of the total amount of premium in the first year. The AO found that the terms of debenture could be altered before maturity and did not allow the claim by holding that the liability was not ascertainable and was contingent. The decision of the Supreme Court in Madras Industrial Investment Corporation (supra) was relied on by the Tribunal to allow the claim. In appeal before Bombay High Court, the Madras Industrial Investment Corporation's case (supra) was sought to be distinguished on the ground that since terms of debenture could be altered, the Supreme Court case did not apply. The Bombay High Court did not find any such distinction because there was nothing to show that during the assessment year in question the borrower had exercised such discretion to alter the condition. The decision in Madras Industrial Investment Corporation's case (supra) was found to be fully applicable to the case to affirm the order of the Tribunal. The Bombay High Court had treated the liability as incurrence of deferred revenue expenditure which it had explained in Taparia Tools Ltd. v. Jt. CIT, while considering allowance of deduction of upfront payment of Rs. 55 in place of annual payment of interest, by holding that such upfront payment has to be spread over the period of life of debenture.
50. As a result of the aforesaid discussion, this appeal fails and is hereby dismissed. There shall be no order as to costs.