2005 (12) TMI 447 - AT - Income Tax

Summary

Issues:
1. Disallowance of loan procurement expenses as capital expenditure.
2. Addition of loan procurement expenses to book profit for section 115JA computation.

Issue 1: Disallowance of Loan Procurement Expenses as Capital Expenditure:
The appellant, a company engaged in manufacturing, claimed deduction for loan procurement expenses amounting to Rs. 2,35,000. The Assessing Officer disallowed these expenses as capital expenditure since they were incurred for obtaining a loan to acquire fixed assets. The CIT (Appeals) upheld this decision referring to a Supreme Court judgment. However, the appellant argued that the expenses were revenue in nature and should be allowed under section 37(1) based on another Supreme Court ruling. The Tribunal analyzed the Supreme Court's decision in India Cements Ltd., emphasizing that the loan obtained is not an enduring asset and the purpose for which the loan is required is irrelevant in determining the nature of expenditure. The Tribunal concluded that the disallowance was incorrect, and the expenses should be treated as revenue expenditure under section 37(1).

Issue 2: Addition of Loan Procurement Expenses to Book Profit for Section 115JA Computation:
The Assessing Officer added Rs. 2,35,000 of loan procurement expenses to the book profit for section 115JA computation. The CIT (Appeals) agreed with this addition, stating that the appellant falsely claimed the expenditure to reduce net profit and avoid section 115JA. The appellant contended that the Supreme Court's judgment in Apollo Tyres Ltd. prohibits varying the P&L Account prepared as per the Companies Act, except as permitted by the Explanation below section 115JA(2). The Tribunal held that the Loan Procurement Expenses did not fall under the categories listed in the Explanation, and the Assessing Officer exceeded jurisdiction by adding them back to book profit. Additionally, the Tribunal found no evidence that the appellant falsely claimed the expenditure. Therefore, the Tribunal directed the Assessing Officer to reduce the book profit by Rs. 2,35,000.

Conclusion:
The Tribunal allowed the appeal, stating that the disallowance of loan procurement expenses as capital expenditure was incorrect and directed their treatment as revenue expenditure. Additionally, the Tribunal instructed the reduction of book profit by Rs. 2,35,000 for section 115JA computation, rejecting the addition of expenses not covered by the Explanation. The Tribunal's decision was based on the principles established in relevant Supreme Court judgments and statutory provisions.