2014 (7) TMI 308 - AT - Income Tax

Nature of expenses - Revenue or capital - Loss of extinguishment of debt Expenses on cancellation of debentures Expenses on prepayment of future interest Held that - CIT(A) was of the view that by paying the amounts the company is saved from making periodic payment of interest and hence the payment has to be considered as revenue in nature and allowable as deduction The decision in CIT vs. Associated Cement Companies Ltd. 1988 (5) TMI 2 - SUPREME Court followed - if the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more effectively and profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account, even though advantage may endure for an indefinite future - even though a benefit may endure for an indefinite period, so long as the expenditure, if incurred in the subsequent year, is allowable as Revenue in nature, the pre-payment would also need to be considered on the same plane - the Assessee incurred expenditure for laying water pipelines which would have otherwise been considered as capital expenditure but the fact remains that the expenditure was in lieu of saving municipal tax and fees payable in future for a period of 15 years - the Assessee foreclosed the loan account by paying some additional amount which would save the Assessee from making periodic payment of interest - it has to be treated as Revenue expenditure Decided against Revenue.

Summary

Issues Involved:
1. Interpretation of expenditure on extinguishment of debt as revenue or capital in nature.
2. Allowability of lump sum payment for saving periodic interest payment as revenue expenditure.

Issue 1: Interpretation of Expenditure on Extinguishment of Debt

The appeal was against the CIT(A)'s order for the assessment year 2003-04, where the Revenue raised grounds opposing the decision. The Assessing Officer disallowed the claim of &8377; 1,31,46,245/- paid by the Assessee to debenture holders on cancellation of debentures and &8377; 15,42,136/- paid to ICICI Bank for prepayment of future interest. The Revenue argued that these payments provided enduring benefits to the Assessee, making them capital in nature. On the contrary, the Assessee contended that these payments should be treated as revenue expenditure as they saved periodic interest payments. The CIT(A) allowed the appeal, considering the payments as revenue in nature. The Revenue appealed, claiming the payments were capital in nature due to the enduring benefits. The Assessee relied on case laws to support the revenue nature of the expenditure.

Issue 2: Allowability of Lump Sum Payment for Saving Periodic Interest Payment

The Assessing Officer argued that the lump sum payment made by the Assessee to save periodic interest payments should be treated as capital expenditure due to the enduring benefits. However, the Assessee contended that such payments should be considered revenue expenditure and allowed in the year of payment. The Assessee cited various case laws to support their argument that the nature of the expenditure is crucial, not the nomenclature of the account head. The Assessee highlighted that if the expenditure facilitates trading operations or enhances business profitability without affecting fixed capital, it should be treated as revenue expenditure. The Assessee emphasized that even if a lump sum payment is made, the character of the payment determines its nature, and in this case, it should be considered revenue expenditure. The Tribunal affirmed the CIT(A)'s decision, considering the expenditure on extinguishment of debt as revenue in nature, dismissing the Revenue's appeal.

This detailed analysis covers the interpretation of expenditure on extinguishment of debt and the allowability of lump sum payment for saving periodic interest payment, providing a comprehensive overview of the judgment delivered by the Appellate Tribunal ITAT Mumbai.