2019 (4) TMI 1321 - HC - Income Tax

Addition made on account of front end fees - capital or revenue or deferred revenue expenditure - front end fee is part of interest u/s 2(28A) - assessee claimed amortization of the expense u/s 35D - HELD THAT - The facts of this case are very similar to those before the Supreme Court in MADRAS INDUSTRIAL INVESTMENT CORPORATION LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1997 (4) TMI 5 - SUPREME COURT Here the assessee was required to pay front end fee to obtain loan from a bank or financial institution. It also had to pay interest. As I have observed above, the front end fee is part of interest under Section 2(28A) of the said Act. Now this interest payment was spread over the duration of the loan. Therefore, the front ends fee constituted interest liability of the assessee spread over a period of time. Obtaining the loan and paying interest to service it ensured long term benefit to the assessee. Hence, this expenditure was revenue and not capital. Furthermore, according to the above decision, the assessee was entitled to amortize it. Tribunal is required to re-determine this issue by considering Madras Industrial Investment and determine the allowable revenue, expenses of the assessee for the relevant assessment year. The impugned order of the tribunal is set aside with regard to the issue concerning front end fee. - Decided in favour of the assessee. Addition of unrealized foreign exchange gain - HELD THAT - Assessee conceded that the decision of in the case of Commissioner of Income Tax Vs. Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT was in favour of the revenue. Thus question is answered in favour of the revenue as the issue is covered against the assessee by the above judgment of the Supreme Court. That part of the impugned order dealing with unrealized foreign exchange gain is set aside.

Summary

Issues Involved:
1. Treatment of front end fees as an expense under Section 35D of the Income Tax Act, 1961.
2. Deletion of addition made on account of unrealized foreign exchange gain.

Analysis:

Issue 1: Treatment of Front End Fees
The appeal raised questions on the treatment of front end fees paid by the assessee as an expense under Section 35D of the Income Tax Act, 1961. The department contended that the expenditure of &8377; 61,69,000/- on front end fees could not be spread over a period of ten years as claimed by the assessee. The department argued that this expense did not fall within the conditions stipulated in Section 35D(1) and (2) of the Act. However, the counsel for the assessee argued that front end fees could be equated with "any service fee or other charge" defined in Section 2(28A) of the Act, constituting a part of interest payment made by the assessee. The counsel relied on a Supreme Court judgment to support the argument that such expenses could be amortized. The tribunal, in its impugned judgment, followed its earlier decision for the Assessment Year 2003-04 without considering the Supreme Court judgment cited by the assessee.

Issue 2: Deletion of Unrealized Foreign Exchange Gain
The Assessing Officer added a sum of &8377; 7,20,12,479/- on account of unrealized foreign exchange gain, contending that it should be assessed as income since the assessee followed the mercantile system of accounting. The Commissioner of Income Tax, Appeals directed the deletion of this amount, a decision upheld by the tribunal. The counsel for the respondent conceded that a Supreme Court judgment favored the revenue on this issue, leading to the conclusion that the unrealized foreign exchange gain should be included in the assessment.

In conclusion, the High Court set aside the impugned order concerning front end fees and directed the tribunal to re-determine the issue in light of the Supreme Court judgment cited by the assessee. On the issue of unrealized foreign exchange gain, the court ruled in favor of the revenue, setting aside the tribunal's decision and instructing a recomputation of the assessment. The tribunal was granted the liberty to remand the matter to the assessing officer for a recomputation of the assessee's income.