2008 (2) TMI 11 - SC - Income Tax

Tribunal has allowed the deduction of Commitment charges u/s 37 and not only u/s 36(1)(iii), hence there is no infirmity therein - Once the Department equated the charges payable to COFACE with interest they are held to be revenue expenditure and deductible u/s 37 of the Income-tax Act, 1961

Summary

Issues:
1. Deductibility of "commitment charges" under Section 36(1)(iii) of the Income-tax Act, 1961.
2. Allowance of "charges" paid to COFACE as similar to payment of interest under Section 36(1)(iii) of the Income-tax Act, 1961.

Analysis:
1. The first issue revolves around the deductibility of "commitment charges" under Section 36(1)(iii) of the Income-tax Act, 1961. The case involved an assessee who borrowed funds from IDBI, refinanced by COFACE, a foreign company, which charged interest, commitment charges, and insurance charges. The Supreme Court examined the contract between IDBI and the assessee and referred to previous judgments. Notably, in the case of Addl. Commr. of Income-tax v. Akkamamba Textiles Ltd. and Commr. of Income-tax v. Sivakami Mills Ltd., it was held that commission paid to a banker and insurance company was deductible under Section 37 of the Income-tax Act, 1961. The Court clarified that the deductions were allowed under Section 37 and not Section 36(1)(iii). Consequently, the Court ruled in favor of the assessee on question No.(1).

2. The second issue pertained to whether the "charges" paid to COFACE were akin to interest payment under Section 36(1)(iii) of the Income-tax Act, 1961. The assessee had obtained a foreign currency loan from IDBI, refinanced by COFACE, with finance charges paid to COFACE. The Department contended that these charges were capital in nature, citing Explanation 8 to Section 43(1) of the Income-tax Act, 1961. However, the Court referenced a previous judgment in the case of Dy. Commr. of Income Tax, Ahmedabad v. M/s. Core Health Care Ltd. to support the assessee's position. The Court also noted that the finance charges were equated with commitment charges, which were considered revenue expenditure and deductible under Section 37 of the Income-tax Act, 1961. Consequently, the Court ruled in favor of the assessee on question No.(2).

In conclusion, the Supreme Court dismissed the Department's civil appeals, upholding the deductibility of commitment charges and charges paid to COFACE as revenue expenditure under the Income-tax Act, 1961.