2013 (10) TMI 967 - AT - Income Tax

Allowance of interest u/s 36(1)(iii) and processing charges Held that - Seen from the sanction letter, the loan has been availed by the assessee for the purpose of construction of the project. In other words, it is for working of the assessee company and it cannot be said that the loan was availed for the purpose of acquisition of land. Even otherwise, if the loan amount used for the purpose of its project, it cannot be said that the assessee used the fund for acquisition of fixed asset. The land on which the assessee is constructing the building is to be treated as business asset of the assessee company - Allowed the claim of the assessee towards the interest and processing charges incurred on loan. The proviso to section 36(1)(iii) cannot be applied to the facts of the present case Decided against the Revenue.

Summary

Issues:
1. Treatment of interest as revenue expenditure on land not put to use.
2. Allowance of processing charges as revenue expenditure.

Issue 1: Treatment of interest as revenue expenditure on land not put to use

The appeal by the Revenue was against the CIT(A)'s order for the assessment year 2007-08. The Assessing Officer disallowed interest expenditure of Rs. 2,18,78,331 and processing charges of Rs. 7,56,500 incurred by the assessee on a term loan from HDFC Bank for the purchase of land. The Assessing Officer treated the land as a capital asset and considered the interest expenditure as capital expenditure since the land was not put to use. However, the CIT(A) allowed the appeal of the assessee, stating that interest on the loan cannot be capitalized as part of the land purchase cost. The CIT(A) also considered processing charges as revenue expenditure, not to be capitalized. The Revenue contended that interest on borrowings for acquiring fixed assets should be considered as the cost of fixed assets as per section 36(1)(iii) of the Act. The Revenue's argument was dismissed, and the Tribunal agreed with the CIT(A) that the interest and processing charges were revenue in nature and deductible. Therefore, the ground raised by the Revenue on this issue was dismissed.

Issue 2: Allowance of processing charges as revenue expenditure

The assessee, engaged in construction business, had taken loans for various projects. The loans were used for working capital requirements and were repaid from business proceeds. The loans were taken from HDFC Limited for specific projects, and the repayment details were provided. The CIT(A) allowed the deduction of interest and processing charges as revenue expenditure, leading to the Revenue's appeal. The Tribunal analyzed the purpose of the loans, noting that they were for construction projects and working capital, not for land acquisition. The loans were secured against properties and personal guarantees. The Tribunal agreed with the CIT(A) that the interest and processing charges were revenue expenses, not to be capitalized. The Tribunal found that the loans were for business purposes, and the interest and processing charges were rightly treated as revenue expenditure. Consequently, the appeal of the Revenue was dismissed.

In conclusion, the Tribunal upheld the CIT(A)'s decision to treat interest and processing charges as revenue expenditure, rejecting the Revenue's arguments regarding capitalization. The judgment emphasized the nature of the loans, the purpose for which they were taken, and the business context in determining the deductibility of expenses.