2008 (7) TMI 509 - HC - Income Tax

Court allows deduction of roll over charges as revenue expenditure

The court ruled in favor of the appellant/assessee, allowing the deduction of roll over charges under section 36(1)(iii) of the Income-tax Act, 1961. The ... Interest on borrowed capital under section 36(1)(iii) – Modernization of existing plant – The assessee obtained loans in foreign currency for modernization and expansion of the existing business. Since the repayment of these loans was stipulated in installments the assessee desired to ensure that the foreign currency required for payment of the loans be obtained at a pre-determined rate and cost. Hence the assessee booked forward contracts for delivery of the required foreign currencies on the stipulated dated. The assessee claimed deduction of the roll over premium for the assessment years 1986-87 to 1994-95. In this case Gujrat High Court held that the roll over premium was paid to mitigate the risk involved in possible higher payment due to adverse fluctuation of the rate of exchange. Thus, the nature of expenditure involved was for the business purpose of raising loans on revenue account. The assessee was entitled to deduction for roll over charges under section 36(1)(iii) of the Act. – Decision in favor of assessee – against the revenue Issues Involved:1. Interpretation of the provisions of section 36(1)(iii), section 37, and section 43A of the Income-tax Act, 1961.2. Treatment of roll over charges paid by the assessee for foreign exchange forward contracts.3. Applicability of Supreme Court decisions in similar contexts.Detailed Analysis:1. Interpretation of the Provisions of Section 36(1)(iii), Section 37, and Section 43A of the Income-tax Act, 1961:Background:The appellant/assessee, a publicly held company, was assessed by the Income-tax Department for various assessment years from 1986-87 to 1994-95. The primary issue was the disallowance of insurance expenses paid to Citi Bank for roll over premium on foreign exchange forward contracts, which the Assessing Officer treated as capital expenditure.Tribunal's Decision:The Tribunal reversed the Commissioner of Income-tax (Appeals)'s decision, which had allowed the expenditure as revenue expenditure. The Tribunal concluded that the roll over charges should be capitalized under section 43A of the Income-tax Act, 1961.Appellant's Argument:The appellant argued that the loans in foreign currency were for modernization and expansion of existing business, not for acquiring fixed assets. The roll over premiums were paid to mitigate exchange rate fluctuation risks, and such premiums should be treated as revenue expenditure. The appellant relied on Supreme Court decisions in India Cements Ltd. v. CIT [1966] 60 ITR 52, Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464, and CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465, which held that expenses incurred for raising loans are on revenue account.Revenue's Argument:The Revenue contended that the roll over charges should be capitalized under section 43A, which overrides other provisions including section 36(1)(iii). They argued that the roll over charges were in connection with the purchase of plant and machinery, thus qualifying as capital expenditure.Court's Analysis:The court considered the statutory provisions and the cited authorities. It noted that section 36(1)(iii) does not distinguish between capital borrowed for revenue or capital purposes. The only requirement is that the capital must be borrowed for business purposes. The court found that the roll over charges were indeed for business purposes and related to the borrowed capital, thus meeting the criteria under section 36(1)(iii).2. Treatment of Roll Over Charges Paid by the Assessee for Foreign Exchange Forward Contracts:Appellant's Position:The appellant argued that the roll over charges were paid to mitigate the risk of adverse exchange rate fluctuations and should be treated as revenue expenditure. They emphasized that such premiums were a business necessity and not related to the acquisition of machinery.Revenue's Position:The Revenue argued that the roll over charges should be capitalized as they were related to the purchase of plant and machinery, invoking section 43A.Court's Ruling:The court held that the roll over charges were akin to interest or commitment charges, which are allowable under section 36(1)(iii). The court referenced the Supreme Court's decisions in Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 and Deputy CIT v. Gujarat Alkalies and Chemicals Ltd. [2008] 299 ITR 85, which supported the view that such charges are revenue expenditure.3. Applicability of Supreme Court Decisions in Similar Contexts:Appellant's References:The appellant cited several Supreme Court decisions to support their claim that roll over charges should be treated as revenue expenditure. These included:- India Cements Ltd. v. CIT [1966] 60 ITR 52- Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464- CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465- Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194- Deputy CIT v. Gujarat Alkalies and Chemicals Ltd. [2008] 299 ITR 85Court's Conclusion:The court found these decisions relevant and applicable, reinforcing that the roll over charges should be treated as revenue expenditure. The court emphasized that section 43A's scope is limited and does not apply to the roll over charges in this context.Final Judgment:The court allowed the appeals, reversing the Tribunal's orders and holding that the assessee is entitled to deduction of roll over charges under section 36(1)(iii) of the Income-tax Act, 1961. All appeals were allowed without any order as to costs.