TaxTMI 
TaxTMI 
2024 (11) TMI 35
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....es a different view and particularly when two views are possible whether the order can be said to be erroneous in so far as it is prejudicial to the interest of revenue and therefore is liable to be quashed and / or set aside? B. Whether in the facts and circumstances of the case the expenditure incurred for payment of foreclosure premium for restructuring loan and obtaining fresh loan at a lower rate of interest is allowable as business expenditure under Section 37(1) of the Income Tax Act in view of the judgment of the Jurisdictional Tribunal in the case of Overseas Sanmar (86 ITD 602) and the judgment of the Delhi High Court in the case of Gujarat Guardian (177 Taxman 434) or should such expenditure be treated as capital expenditure in view of the judgment in the case of Aztec Software & Technology Services (107 ITD 441)? C. Whether in the facts and circumstances of the case the provision for bad and doubtful debts is required to be added back in view of the law laid by the Supreme Court in the case of Vijaya Bank (323 ITR 166)?" 2. The appellant challenges an order of the Income Tax Appellate Tribunal (ITAT/Tribunal) confirming an order passed by the Commis....
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....ances, the appellant merely states that the issue had been examined while framing assessment orders. No further justification is offered. The detailed explanation set out in regard to the claim to pre-closure premium is as follows:- "As regards your first contention we would like to point out that in the Profit & Loss Account for the year ended 31.3.2005 a sum of Rs. 34,100,000/- was debited as premium on prepayment of term loan, which is classified as extraordinary item. At the time of hearing the Assessing Officer sought justification for claiming the prepayment premium as allowable business expenditure. Vide letter dated 3.10.2007 it was clarified that the Company had borrowed from The Hongkong & Shanghai Banking Corporation Limited, 31 BBD Bag, Kolkata - 700001 a sum of Rs. 40 crores out of which Rs. 21.2 crores carried interest rate of 13.10% p.a. and the balance amount of Rs. 18.8 Crores carried interest rate of 12.75%. Since the rate of interest charged by HSBC was too high and loan was available in the market at that time at a substantially lower rate from other banks so it was decided to foreclose the term loan of HSBC by taking fresh loan of Rs. 40 Crores from UT....
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....by the Supreme Court being the issue of provision of bad and doubtful debts, and the other by the Special Bench of the Income Tax Appellate Tribunal being the issue of pre-closure premium. Hence, the conclusion is that the order passed under Section 263 was correct, both on the aspect of assumption of jurisdiction and on the merits, and the view arrived at by the assessing officer at the original instance was concurrently erroneous and prejudicial. 9. Mr.Vasudevan, appearing for appellant at the outset contests the assumption of jurisdiction by the Commissioner. Reliance is placed on the case law in (i) Malabar Industrial Co., Ltd v Commissioner of Income Tax 159 CTR (SC) 1, (ii) Commissioner of Income Tax- Gujarat II v Kwality Steel Suppliers Complex, AIR 2017 SC 2949, (iii) Commissioner of Income Tax v South India Shipping Corporation Ltd 147 CTR (Mad) 433, (iv) The Commissioner of Income Tax (Central II) v Goetze (India) Limited [2014 II AD Delhi 81] and (v) Commissioner of Income Tax, Central -I v Maithan International [(2015) 277 CTR (Cal) 65]. 10. On merits, the appellant would reiterate the submissions advanced in the earlier round, drawing attention to the fact that t....
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.... aforesaid details have thus been sought for by the assessing officer. 17. As regard the issue of provision for doubtful debts and advances, too, there is no query on record. We note incidentally that even in the grounds of appeal filed by the appellant before the Income-Tax Appellate Tribunal while presumption of jurisdiction under Section 263 and the allowability of claim of pre-closure premium have been specifically raised, there is no ground pertaining to the provision for doubtful debts and advances. 18. The records reveal an interesting turn of events. There is an audit note on file, which reads as follows:- Name of A. EIH Associated Hotels Ltd Pan No: AAACE2125M Status - Co Ay. Process AO.D - T-.Income C/A/Sec OF06 143/3 30/11/07 - 5,82,86,789 not seen The 'is' is doing the business of running hotels, for AY 05-06 on 28.10.05 admitting a loan of Rs. 5,85,56,523. It is seen from the P & L Q/C the ís' had debited a sum of Rs. 3.41 crores as premium paid on preclosure on prepayment of loan. Any espouse related connect with raining and loan or any interest payment in allowed.. Premium paid on preclosure of loan cannot be allowed o....
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.... bank to the tune of Rs. 40 crores of which 21.2 crores was received as first installment with interest rate of 13.10% per annum whereas the second installment of Rs. 18.8 crores attracted interest rate of 12.75% per annum. The said loan was repaid during the assessment year 2005-06 by taking a new loan of Rs. 40 crores from UTI Bank at a lower rate of interest of 8% per annum approximately. This fact was disclosed in the Annexure X of the Tax Audit Report. The assessee explains that this was wrongly mentioned as repayment of premium. Actually, it represents additional interest charged by HSBC for repayment of outstanding term loan before due date. Since this is an additional interest, the assessee claimed it as revenue expenditure, I am enclosing herewith the letter from the assessee dated 03.10.2007. In view of the above, audit objection may kindly be dropped Sd/- [M.RAJAN] Deputy Commissioner of Income Tax Company Circle II[1], Chennai -34" 21. The issuance of the audit note, the application of mind of the officer to the objection raised, the call for response from the assessee and rebuttal of the objection raised, are prior to passing of the order of ass....
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....evious year relevant to the assessment year in question. 26. The Delhi High Court returned a categoric finding that the authorities had not disputed that the pre-payment premium assumed the characteristic of 'interest' payable to a public financial institution. Hence, the nature of the payment was not in dispute. 27. Though the aforesaid decisions are on the point of amortization or otherwise, the transaction in the case of Gujarat Guardian and in the present case are similar. The Court has held that the prepayment premium of Rs. 8 crores represents present value of the differential rate of interest that would be payable by the assessee if the loan had not been restructured. Hence, applying Section 36 (1)(ii) read with Section 2(28A) of the Act, the claim for deduction was allowed as revenue expenditure. Thus, the distinction that is sought to be made by the Revenue would not, in our view, come to its aid. 28. Revenue has relied upon the decision of the Delhi High Court in Zaheer Mauritius. In that matter, the challenge was to a ruling of the Authority for Advance Ruling (AAR) holding that the gains on the sale of equity shares and Compulsorily Convertible Debentures (CCDs....
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....gned for a consideration less than the amount lent, would be a capital loss. Whether a Compulsorily Convertible Debenture is a loan simplicitor or whether it is in the nature of equity, is not material in determining whether the gain on the sale of the debentures by its holder is a capital gain or not. This depends entirely on whether the debentures are capital assets in the hands of its holder." 30. The above observations would have no bearing to the present case which concerns interest payable on a financial arrangement entered into with the bank. That apart, even the High Court in conclusion, states that the taxability of the gains from CCDs would depend on whether the debenture was a capital asset in the hands of its holder or otherwise. Hence, the decision in Zaheer Mauritius has to be read and understood in the context of those facts alone and would have no bearing in the present case. 31. Revenue also relies on decisions of this Court in Ashok Leyland Finance Limited v The Deputy Commissioner of Income Tax, Company Circle 1(1) in TC(A) No.94 of 2009 dated 29.12.2022 and Chennai Petroleum Corporation Limited v Assistant Commissioner of Income-Tax, Company Circle I(3) in....
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....d up the question of payment of interest does not arise at all. Further the pre-closure charges would a percentage on loan amount sanctioned earlier by HSBC and not additional interest'. According to him, the question of payment of interest would not arise in a case where the loan has been pre-closed. There is no other reason on the basis of which he felt compelled to reverse the grant of claim under Section 37. These decisions are thus of no avail to the revenue. 36. The Income-Tax Appellate Tribunal in the case of Overseas Sanmar Financial Limited (supra), has dealt with the identical issue on similar facts. In that case as well, the issue that arose was allowability of foreclosure premium on loans. That assessee had taken certain fixed term loans at high rates of interest. During the tenure of those loans, since fresh loans had been advertised by financial institutions with lower rate of loans it negotiated the closure of the earlier loans on charge. That charge was claimed as business expenditure on account of the restructuring exercise. The assessing authority was of the view that the claim should be rejected as there was an enduring benefit to the assessee. 37. In appea....