2020 (1) TMI 1472 - SC - Income Tax

Deduction of lump sum pre-payment premium paid by the assessee to IDBI allowed by HC - as argued the aforesaid payment represented upfront present value of differential rate of interest that would have been on the loan if no restructuring of the debt had taken place - ITAT and the High Court has held that the principle underlying the exposition in Madras Industrial Investment Corporation Ltd. 1997 (4) TMI 5 - SUPREME COURT has no application to the fact situation of the present case and held that in terms of S. 36(1)(ii) read with S. 2(28A) of the Act prepayment charges being interest paid on moneys borrowed for purposes of business, is to be allowed deduction as revenue expenditure. The prepayment premium being revenue expenditure, is to be allowed deduction in the year of accrual thereof, since the Act does not recognize the concept of deferred revenue expenditure.Besides the above S. 43B(d) also permits claiming deduction on actual payment. Even on this basis the claim of the assessee deserves to be accepted. HELD THAT - The view so taken by the ITAT commended to the High Court. We find no reason to take a different view in the matter. SLP dismissed.

Summary

Issues:
- Deduction of lump sum pre-payment premium
- Applicability of previous Supreme Court judgment

Analysis:
The main issue in this case revolved around the deduction of a lump sum pre-payment premium paid by the assessee to IDBI. The question before the court was whether the High Court was correct in allowing the deduction of Rs. 8 crores, which represented the present value of the differential rate of interest on a loan due to debt restructuring. The assessing officer and the First Appellate Authority had ruled against the assessee, citing a previous Supreme Court judgment. However, the ITAT and the High Court disagreed, stating that the principle from the earlier judgment did not apply to the current scenario.

The ITAT, in its judgment, highlighted that the prepayment premium paid by the assessee was in exchange for IDBI agreeing to reduce the rate of interest on the loan. This payment was considered as an upfront payment of the differential rate of interest that would have been due if no debt restructuring had occurred. The ITAT referred to relevant sections of the Income Tax Act and previous tribunal decisions to support the assessee's claim for deduction. The High Court upheld the ITAT's decision, leading to the dismissal of the appeals.

Ultimately, the Supreme Court concurred with the decisions of the ITAT and the High Court, emphasizing that the prepayment premium was a revenue expenditure and should be allowed as a deduction in the year of accrual. The court found no reason to deviate from the lower courts' interpretation of the law. Consequently, the appeals were dismissed, with no order as to costs, and any pending applications were disposed of.