1999 (11) TMI 872 - AT - Income Tax

Tribunal upholds CIT(A)'s orders on loan processing charges deduction & interest deletion

The Tribunal upheld the CIT(A)'s orders on both grounds. The deduction of Rs. 7,50,000 for loan processing charges was allowed based on the Supreme ... - Issues Involved:1. Deduction of Rs. 7,50,000 on account of loan processing charges.2. Deletion of disallowance of Rs. 23,19,683 on account of interest and loan processing charges.Issue-wise Detailed Analysis:1. Deduction of Rs. 7,50,000 on Account of Loan Processing Charges:The first ground of appeal concerns the deduction of Rs. 7,50,000 for loan processing charges paid to HDFC and Citibank. The Assessing Officer disallowed this claim, arguing that these charges should be spread over the entire loan period as per the loan agreement terms, and since no loan repayment occurred during the relevant year, the expenditure had neither accrued nor crystallized.In contrast, the assessee argued that the Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52 supports the claim that expenditure for raising loans is of a revenue nature, irrespective of the loan's term. The CIT(A) examined this precedent, noting that the Supreme Court had held such expenditures as revenue expenditure, incidental to the business, and not capital expenditure. The CIT(A) found that the facts of the assessee's case were similar to India Cements Ltd., where the expenditure was for securing the use of money for a certain period. Consequently, the CIT(A) directed the Assessing Officer to allow the deduction of Rs. 7,50,000.The Tribunal agreed with the CIT(A), noting that the learned Departmental Representative could not provide any authority against the CIT(A)'s view. Thus, the Tribunal confirmed the CIT(A)'s order, dismissing the first ground of appeal.2. Deletion of Disallowance of Rs. 23,19,683 on Account of Interest and Loan Processing Charges:The second ground of appeal involves the deletion of Rs. 23,19,683, which includes Rs. 19,19,683 debited to financial charges and Rs. 4,00,000 for loan processing charges. The Assessing Officer had disallowed these amounts as capital expenditure. The assessee argued that the Assessing Officer failed to consider Explanation 8 to Section 43(1) of the Act and CBDT Circular No. 461 dated 9-7-1986, which states that interest on borrowed funds constitutes the cost of borrowing, not the cost of the asset.The assessee contended that the loan was for additions to the existing hotel business, not a new project. The hotel business had already commenced, and the interest paid on borrowings for additions to the block of assets should be a permissible deduction. The CIT(A) accepted this contention, noting that the hotel business was a running concern, and the interest on borrowings was allowable as revenue expenditure. The CIT(A) also allowed the processing charges of Rs. 4,00,000 as revenue expenditure.The Tribunal considered the rival submissions and cited the Supreme Court's decision in State of Madras v. G.J. Coelho [1964] 53 ITR 186, which held that interest paid on borrowed capital for the acquisition or working of a plantation is allowable as a deduction. The Tribunal found the CIT(A)'s decision to allow the interest and processing charges justified and dismissed the second ground of appeal.Conclusion:The Tribunal dismissed the departmental appeal, confirming the CIT(A)'s orders on both grounds. The first ground regarding the deduction of Rs. 7,50,000 for loan processing charges was upheld based on the Supreme Court's precedent in India Cements Ltd. The second ground concerning the deletion of Rs. 23,19,683 was also upheld, supported by the Supreme Court's decision in State of Madras v. G.J. Coelho and other relevant judgments.