2025 (8) TMI 28 - AT - Income Tax

Interest Expenses Allowed as Revenue Deduction; Premium on NCDs Deductible Under Income Tax Rules

The Dy. CI. T. Circle - 28, New Delhi Versus M/s Jindal ITF Limited

The ITAT Delhi upheld the CIT(A)'s decision allowing the assessee's claim of interest expenses as revenue expenditure, rejecting the AO's disallowance ... Disallowance as interest expenses - assessee has failed to produce any concrete and additional evidences in support of its contention - AO came to the conclusion that since the assessee has not yet commenced operations, the interest expenses claimed by the assessee as revenue expenditure should be kept in pre-operative expenses and accordingly, disallowed the interest expenditure HELD THAT:- AO has himself allowed the claim of expenditure including the interest expenditure while conducting scrutiny assessment in the immediate previous year of AY 2012-13. AO has not pointed out any distinguishing feature in facts in the impugned year as to how he altered his view on the claim of interest expenditure. Assessee has already commenced its business activities, the revenue from which would come in due course, and the interest expense requires to be considered as revenue expense allowable for the impugned year. We therefore hold that no interference is called for in the decision of the CIT(A) and direct the AO to delete the addition of interest expense. Addition on account of credit card payments and addition on account of depreciation and amortization of expenses - We are inclined to agree with CIT(A) that it is not a case of expenditure not accounted in the books of accounts or expense not for purposes of the business of the assessee. The subsidiary company has incurred the said expense which is accounted and paid by it as its expenditure. We therefore direct the AO to delete the said addition. As far as addition on account of depreciation and amortization of expenses is concerned, the CIT(A) found that the same was added back by the assessee in its computation of income. Addition on account of claim of deduction for premium on Non-Convertible Debentures - appellant claimed that there was accrued liability on account of premium on NCDs and was claimed that the same should be allowed as deduction for the year under consideration - CIT(A) held that the liability on account of payment of premium (which is in nature of interest) is allowable deduction - Revenue’s main grievance is that the CIT(A) should not have allowed deduction for premium on NCDs as the assessee had not made the claim in the original return or the revised return or before the AO during the assessment proceedings - HELD THAT:- Decision of Goetz India [2006 (3) TMI 75 - SUPREME COURT] itself holds that limitation to entertain issues which are not claimed in the original/revised return, is limited to the Assessing Authority and it does impinge on the powers of the appellate authorities. In the instant case, the assessee raised the issue of expense towards premium on NCDs for the first time before the CIT(A), who after giving the opportunity to the AO to give his comments on the claim, discussed the issue and decided in favour of the assessee. Thus, we are of the considered view that the CIT(A) was well within his jurisdiction to adjudicate on the issues which were not claimed in the original/revised return of income or before the AO. On merits, we concur with the view of the CIT(A) that liability on account of payment of premium, which is actually in the nature of interest, is an allowable deduction being a revenue expense during the impugned year. We therefore, uphold the decision of CIT(A) on both counts. Carry forward of losses - Though the issue of carried forward of loss was not taken up specifically by the revenue in the grounds of appeal but the matter was brought up by the assessee itself during the course of hearing before us. We therefore merely direct the AO to examine the submissions of the assessee with respect to carry forward of loss; the same being lapsed and that it has no effect in tax liability and to take necessary action as per law. The grounds no 4 and 5 is accordingly dismissed with the above direction. ISSUES: Whether interest expenses incurred by an infrastructure company prior to commencement of revenue operations can be allowed as revenue expenditure or must be capitalized as pre-operative expenses.Whether additions on account of credit card payments claimed by the assessee and depreciation/amortization expenses disallowed by the Assessing Officer are justified.Whether a claim for deduction of premium on Non-Convertible Debentures (NCDs) not made in the original or revised return, nor before the Assessing Officer, can be entertained and allowed by the appellate authority.Whether the limitation imposed by the Supreme Court decision in Goetze (India) Ltd. on entertaining claims not made in the original or revised return applies to appellate authorities.Whether losses claimed to be carried forward in a revised return filed under section 139(5) of the Income Tax Act are permissible when the original return was filed under section 139(1) and not under section 139(3), in light of Supreme Court rulings. RULINGS / HOLDINGS: The court held that for an infrastructure company with a high gestation period and a business model involving subsidiaries executing projects, 'earning of revenue alone cannot be the basis of treating whether the expenses are to be allowed or disallowed.' The interest expense was rightly allowed as revenue expenditure and not required to be capitalized as pre-operative expenses.The additions relating to credit card payments were deleted because the expenses were incurred and paid by a subsidiary and accounted for in its books; the depreciation and amortization expenses were correctly deleted as they were added back by the assessee in computation of income.The appellate authority was held to have jurisdiction to entertain and allow the claim for premium on NCDs even though it was not made in the original or revised return or before the AO, relying on the Supreme Court's clarification that the limitation in Goetze (India) Ltd. applies only to the assessing authority and 'does not impinge upon the plenary powers of the ITAT bestowed under Section 254 of the Act.'The liability on account of premium on NCDs, being 'in the nature of interest,' is an allowable revenue deduction during the year under consideration.The filing of a revised return under section 139(5) cannot transform an original return filed under section 139(1) into one under section 139(3) for the purpose of carrying forward losses; hence, carrying forward losses claimed in such revised returns is impermissible under law as per Supreme Court rulings in Wipro Ltd. and Shriram Investment. RATIONALE: The court applied the legal framework under the Income Tax Act and relevant judicial precedents, including the jurisdictional High Court rulings in Maruti Insurance Broking (P.) Ltd., Whirlpool India Ltd., and CIT v. Hughes Escorts Communications, to determine the nature of expenses incurred prior to commencement of business revenue.The Supreme Court decisions in Goetze (India) Ltd., Wipro Finance Ltd., and Shriram Investment were pivotal in interpreting the scope of powers of assessing and appellate authorities regarding claims not made in the original or revised returns, and the permissibility of carrying forward losses.The court recognized a doctrinal clarification that limitations on entertaining fresh claims apply strictly to the assessing authority and do not restrict appellate authorities from adjudicating such claims under their plenary powers.The court noted that the premium on NCDs is treated as interest liability, consistent with the Supreme Court decision in Madras Industrial Investment Corporation Ltd. vs. CIT, thereby qualifying as an allowable revenue deduction.Regarding loss carry forward, the court acknowledged the binding Supreme Court principle that a revised return under section 139(5) cannot be used to claim loss carry forward if the original return was not filed under section 139(3), emphasizing the mandatory nature of filing under section 139(3) for such claims.