2014 (1) TMI 1848 - HC - Income Tax

Claim of deduction towards incidental expenditure incurred on substitution of high interest cost of NCDs - expenditure fully and exclusively for the purpose of business leviable under section 37(1) - Held that - This Court in the case of Commissioner of Income-Tax vs. Gujarat State Fertilizers and Chemicals Ltd. reported in 2013 (7) TMI 701 - GUJARAT HIGH COURT has dealt with this very issue and held CDR expenses have been rightly held by both the CIT (Appeals) and the Tribunal as revenue in nature and the same has rightly not been held to be capital in nature. For the waiver of the loan the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable under Section 37(1) - decided against revenue Expenditure on replacement of core engine of captive power plant - Held that - Tribunal it held that the leased property cannot be held as a property belonging to the assessee and therefore expenditure incurred on the property is in the nature of the revenue expenditure. While so doing it had followed Commissioner of Income-Tax vs. Madras Auto Services (P) Ltd. 1998 (8) TMI 1 - SUPREME COURT noting the fact that this was a lease asset and the Tribunal having rightly approached the issue treating the same as revenue expenditure we see no reason to interfere in this question as well. Payment of lease amount to its holding company which is GNFC Limited in respect of certain assets taken on lease - According to the Assessing Officer this was a financial transaction - Held that - The Tribunal noted that GNFC Limited had shown lease rent as income under the head Business income and in case of the lessor the issue had been consistently decided that the assets were owned by the GNFC and therefore the lease rent received by the assessee was to be assessed as business income. See Deputy Commissioner of Income Tax Bharuch Circle vs. Gujarat Narmada Valley Fertilizers Co.Ltd 2013 (8) TMI 300 - GUJARAT HIGH COURT - Tribunal therefore has committed no error in allowing the appeal of the assessee

Summary

Issues Involved:
1. Deduction of incidental expenditure for debt restructuring.
2. Nature of expenditure on replacement of core engine of captive power plant.
3. Payment of lease rent to holding company and its nature.

Analysis:

Issue 1: Deduction of Incidental Expenditure for Debt Restructuring
The first issue concerns the deduction of incidental expenditure of Rs. 5 lakhs for debt restructuring. The assessee claimed that this expenditure was for pre-payment of premium expenses on NCDs, resulting in reduced interest rates and increased profitability. The Assessing Officer contended that only proportionate expenditure should be allowed as the benefit could be enjoyed over time. The CIT(A) upheld this view, but the Tribunal disagreed. The Tribunal held that the expenditure was wholly and exclusively for business purposes under section 37(1) of the Income Tax Act. The Tribunal emphasized that the entire payment was made in the same year, leading to a commercial benefit for the assessee. The Court also referred to a similar case where such expenses were allowed as revenue in nature. Therefore, the Tribunal's decision to allow the deduction of the full expenditure was upheld.

Issue 2: Nature of Expenditure on Replacement of Core Engine of Captive Power Plant
The second issue revolves around the expenditure of Rs. 4,16,93,695 on replacing the core engine of a captive power plant. The Assessing Officer disallowed the entire expense, considering the enduring benefit to the business. The CIT(A) upheld this decision, treating the core engine as a capital asset. However, the Tribunal disagreed, stating that since the plant was a leasehold property and not owned by the assessee, the expenditure was revenue in nature. The Tribunal cited precedent to support its decision, concluding that the expenditure was rightly treated as revenue. Therefore, the Tribunal's decision was upheld, and the expenditure was deemed revenue in nature.

Issue 3: Payment of Lease Rent to Holding Company
The third issue involves the payment of lease rent of Rs. 7.48 crores to the holding company, GNFC Limited, for assets taken on lease. The Assessing Officer viewed this as a financial transaction, a view upheld by the CIT(A). However, the Tribunal considered the lessor's ownership of the assets and ruled in favor of the assessee. The Tribunal cited a previous case where depreciation claimed on leased equipment was allowed, emphasizing the rule of consistency. The Tribunal found no error in allowing the claim, and the appeal of the assessee was upheld. Consequently, the Tribunal's decision was affirmed, dismissing the Revenue's claim.