2013 (12) TMI 1212 - HC - Income Tax

Disallowance out of preliminary expenses - Held that - Following assessee s own casew for A.Y. 1994-95 - Total preliminary expenses incurred by the assessee had to be apportioned in the ten successive previous years, for preliminary expenses in accordance with Section 35D of the Income Tax Act, determining the previous year in which the business was commenced or in which the existence of the industrial undertaking was completed or in which the new industrial units commenced operation - Decided against Revenue. Disallowance of deferred revenue expenditure - Held that - The AO had not disputed the genuineness of the expenditure. His only objection was that the claim of expenses was on deferred basis. The advances were not doubted and the expenses were incurred during the year - The assessee had claimed less than the allowable expenditure, there was no justification for the disallowance under consideration - Decided against Revenue. Disallowance of debenture transfer fee, upfront fee and processing fee - Held that - There was no controversy as to whether the expenditure was capital expenditure or revenue expenditure - The borrowed funds were utilized for working capital, and since these funds were utilized for the business purpose, no disallowance was made out of the interest paid on such borrowed funds - The Tribunal further found that the AO has accepted that the interest bearing funds were entirely utilized by the assessee for its business purposes - Tribunal is final fact finding authority - Decided against Revenue.

Summary

Issues involved:
1. Disallowance of interest relating to borrowed capital of Project Work-in Progress.
2. Addition of preliminary expenses under Section 35-D of the Income Tax Act.
3. Disallowance of deferred revenue expenditure.
4. Admissibility of debenture transfer fee, upfront fee, and processing fee under Section 36 (i) (ii) of the IT Act.

Detailed Analysis:
Issue 1: The Tribunal held that the disallowance of interest relating to borrowed capital of Project Work-in Progress could not be made, considering the similar issue sub judice before the High Court for Assessment Year 1995-96. The Tribunal's decision was in favor of the assessee based on the facts and circumstances of the case and a previous judgment in favor of the assessee for the assessment year 1995-96.

Issue 2: The Tribunal ruled that the addition of preliminary expenses under Section 35-D could not be made. The assessee had been claiming preliminary expenses at a rate of 10% on expenditure incurred in earlier years, which had been allowed except for one assessment year. The Tribunal upheld the deletion of disallowance by the CIT (A) for the assessment year 1994-95, and no substantial question was found for decision by the Court in a related case. Thus, the deletion of disallowance was upheld for the assessment year in question.

Issue 3: The Tribunal decided against the revenue in setting aside the order of the CIT (A) regarding the disallowance of deferred revenue expenditure. The AO had made the disallowance based on certain calculations, but the CIT (A) held that the expenses were genuine and allowable. The Tribunal found that the AO had not disputed the genuineness of the expenditure, and since the assessee had claimed less than the allowable expenditure, there was no justification for the disallowance.

Issue 4: The Tribunal held that the debenture transfer fee, upfront fee, and processing fee were admissible for deduction under Section 36 (i) (ii) of the IT Act. The expenses were considered capital in nature as they were related to raising term loans for business purposes, which were allowable under the Income Tax Act. The Tribunal found no controversy regarding the nature of the expenditure and upheld the deletion of disallowance based on the funds being utilized for working capital and business purposes.

In conclusion, the High Court dismissed the Income Tax Appeal, upholding the Tribunal's decisions in favor of the assessee on all the issues involved.