2011 (5) TMI 283 - AT - Income Tax

Disallowance - Interest reset premium and burning loss - Deffered or capital expenditure - The re-structuring is of a liability and it has not in any way affected the fixed assets of the assessee - the said expenditure incurred or fee paid to the banks/financial institutions for restructuring of the interest accrued interest and the borrowed capital for the benefits of the assessee is not a capital expenditure and the same is an allowable expenditure as the spent for the purposes of the business of the assessee - if the impugned expenditure constitutes interest within the meaning of section 2(28A) of the Act the same attracts the provisions of section 43B as argued by the Ld counsel and claim has to be allowed in accordance with the provisions of section 43B of the Act - Decided in the favour of the assessee by way of remand Regarding burning loss - Held that the claim of melting loss in excess of 8.50% is not allowed by the Tribunal in those appeals - in the other AYs of this assessee the burning loss upto the upper limit of 8.5% should be allowed - Appeal is dismissed

Summary

Issues Involved:
1. Allowability of the claim of deduction of interest reset premium.
2. Allowable extent of the burning loss.

Detailed Analysis:

I. Allowability of the claim of deduction of interest reset premium

Background:
The primary issue in contention is the allowability of the deduction claimed by the assessee for the interest reset premium. The assessee, a Public Limited Company engaged in the foundry business, had raised foreign currency loans from ICICI, which were later converted into rupee loans. Due to financial difficulties, the company negotiated with ICICI to reduce the interest rate from 18% to 15% and obtained an additional loan of Rs. 13 crore. As part of this restructuring, the company agreed to pay an interest reset premium of Rs. 75,00,000, which it claimed as a business expenditure.

Assessment Officer (AO) Action:
For AY 2001-02, the AO disallowed the claim of Rs. 75 lakhs, stating it was not debited to the Profit & Loss (P&L) account and was considered a capital expenditure, providing enduring benefits. For AYs 2003-04 and 2004-05, similar disallowances were made for restructuring fees of Rs. 2,80,00,000, citing that these were not interest on borrowed capital under section 2(28A) and were capital expenditures.

CIT(A) Decision:
The CIT(A) upheld the disallowances for AY 2001-02, stating no deduction was allowed as it wasn't written off by debit to the P&L account. However, for AYs 2003-04 and 2004-05, the CIT(A) held that restructuring fees were in the nature of interest under section 2(28A) and allowable under section 36(1)(iii), but treated them as deferred revenue expenditure.

Tribunal's Findings:
The Tribunal affirmed the CIT(A)'s view that the restructuring fees and interest reset premium fell within the definition of interest under section 2(28A) of the Act. It was held that these expenditures were incurred wholly and exclusively for the business and thus allowable. However, the Tribunal noted the need for a harmonious interpretation of section 2(28A) and section 43B, directing the CIT(A) to re-examine the extent of allowability under section 43B.

II. Addition for excess melting loss being suppressed gross profit

Background:
This issue pertains to the Revenue's appeal for AY 2003-04, where the AO added an amount for excess melting loss, alleging it resulted in suppressed gross profit.

Tribunal's Findings:
The Tribunal referred to its earlier decisions for AYs 2001-02 and 2002-03, where it allowed a burning loss up to 8.5%. In the present case, the discrepancy was within this limit, and thus, the Tribunal dismissed the Revenue's claim of suppressed gross profit.

Conclusion:
The appeals were partly allowed for statistical purposes, with the Tribunal directing the CIT(A) to re-evaluate the extent of allowability of the interest reset premium under section 43B. The addition for excess melting loss was dismissed, upholding the allowable limit of 8.5%.