2020 (10) TMI 1392 - HC - Income Tax

Expenditure incurred towards prepayment charges for substituting high cost debt for low cost debt - interest as defined u/s 2(28A) and not allowable as deduction u/s 37 - whether Tribunal was right in law in holding that the prepayment charges is in the nature of interest incurred during the construction period would form part of the capital asset to be capitalised as per proviso to Section 36(1)(ii)? - HELD THAT - Tribunal, in our view, rightly held that the said decision instead of assisting the assessee's case, would assist the case of the Revenue. Tribunal held that the Reset Fee is only in the nature of interest defined under Section 2(28A) of the Act to include any service fee or charge in respect of monies borrowed or debt incurred. Tribunal also took note of the provision of Section 36(1)(iii) of the Act as noted by the Assessing Officer and held that the same would stand to be a part of the core cost of the capital asset towards acquiring which the borrowing stands applied, the interest being incurred during the construction period. Tribunal had applied the decision of Core Health Care Limited 2008 (2) TMI 8 - SUPREME COURT - We find that the reasons assigned by the Tribunal are perfectly valid on facts. The Assessing Officer, CIT(A) as well as the Tribunal considered the nature of transaction and rejected the plea of the assessee that Reset Fee should be treated as a Revenue expenditure. Thus, We find no grounds to interfere with the orders passed by the Tribunal - Decided against assessee.

Summary

Issues:
1. Interpretation of prepayment charges as interest under Section 2(28A) of the Income Tax Act.
2. Capitalization of prepayment charges under Section 36(1)(iii) of the Act.

Analysis:
1. The appeal before the High Court involved the interpretation of prepayment charges incurred by the assessee during the year for substituting high cost debt with low cost debt. The primary issue was whether these charges should be considered as interest under Section 2(28A) of the Act and thus not allowable as a deduction under Section 37. The Tribunal held that the prepayment charges constituted interest as defined under the Act, including any service fee or charge related to borrowed money. The court also considered the decision in CIT Vs. Gujarat Guardian Ltd., where it was held that such charges are deductible for the year of payment. The Tribunal's decision was based on the nature of the transaction and relevant legal provisions, ultimately rejecting the assessee's claim that the charges should be treated as a revenue expenditure.

2. The second issue pertained to the capitalization of the prepayment charges under Section 36(1)(iii) of the Act. The assessee contended that the charges should not be capitalized but treated as a revenue expenditure. However, the Assessing Officer, CIT(A), and the Tribunal all agreed that the charges should be capitalized as part of the core cost of the capital asset, considering the interest incurred during the construction period. The Tribunal referred to the decision in Deputy Commissioner of Income Tax Vs. Core Health Care Limited to support its reasoning. Ultimately, the court found no grounds to interfere with the Tribunal's decision and dismissed the Tax Case Appeal, answering the substantial questions of law against the assessee.

In conclusion, the High Court upheld the Tribunal's decision regarding the treatment of prepayment charges as interest and their capitalization under the relevant provisions of the Income Tax Act. The court found the reasoning provided by the Tribunal to be valid and in line with the legal framework, leading to the dismissal of the appeal.