2024 (11) TMI 35 - HC - Income Tax

Revision u/s 263 - Expenditure incurred for payment of foreclosure premium for restructuring loan and obtaining fresh loan at a lower rate of interest is allowable as business expenditure u/s 37(1) - Whether pre-closure premium can be claimed as revenue expenditure under Section 37? - HELD THAT - In the present case, it has never been the case of the Revenue that the borrowing was deployed towards purchase of capital asset or purchase / acquisition of a capital asset on that the transaction itself should be viewed as being capital in nature. Such an angle does not find place in either the show-cause notice, order under Section 263 or order of the ITAT. Hence, we would prefer to answer the substantial questions of law based on the factual matrix of the transaction as emanating from the records. Simply put, the Commissioner of Income-Tax expressess in the order under Section 263 the question of payment of interest would not arise in a case where the loan has been pre-closed. There is no other reason on the basis of which he felt compelled to reverse the grant of claim under Section 37. These decisions are thus of no avail to the revenue. Tribunal in the case of Overseas Sanmar Financial Limited 2001 (2) TMI 303 - ITAT MADRAS-C has dealt with the identical issue on similar facts. In that case as well, the issue that arose was allowability of foreclosure premium on loans. That assessee had taken certain fixed term loans at high rates of interest. During the tenure of those loans, since fresh loans had been advertised by financial institutions with lower rate of loans it negotiated the closure of the earlier loans on charge. That charge was claimed as business expenditure on account of the restructuring exercise. The assessing authority was of the view that the claim should be rejected as there was an enduring benefit to the assessee. The foreclosure of the loan to contain the exorbitant charges to be paid, stem from a business decision of the assessee and the commercial expediency that governs its business dealings. In Sassoon J. David and Co.Pvt Limited. 1979 (5) TMI 3 - SUPREME COURT SC states succinctly that ordinarily it is for the assessing authority to decide whether any expenditure should be incurred in the course of his or its business. Such an expenditure may be incurred voluntarily and without any interest and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2) (xv) of the Act even though there was no compelling necessity income such expenditure. Hence it is for an assessee to decide what would be the best way of going about its business and maximising its profit subject to such acts being within the four corners of the law. Incidentally, the decision of the Tribunal in Overseas Sanmar Financial Limited (supra) has not been challenged by the Income-Tax Department and has attained finality. Decided in favour of assessee.

Summary

Issues Involved:

A. Whether the Commissioner of Income Tax can revise an assessment order when two views are possible, particularly if the original view is supported by precedent.

B. Whether the expenditure incurred for payment of foreclosure premium for restructuring a loan is allowable as business expenditure under Section 37(1) of the Income Tax Act, or should it be treated as capital expenditure.

C. Whether the provision for bad and doubtful debts should be added back to the total income.

Issue-wise Detailed Analysis:

Issue A: Revising Assessment Orders with Multiple Views

The primary issue was whether the Commissioner of Income Tax (CIT) could revise an assessment order under Section 263 of the Income Tax Act when the original decision by the Assessing Officer (AO) was supported by precedent and two views were possible. The appellant argued that the AO's decision was based on established legal precedents, including decisions from the jurisdictional Tribunal and higher courts, which supported the allowance of the expenditure. The Tribunal, however, upheld the CIT's revision on the grounds that the AO's decision was erroneous and prejudicial to the interests of the Revenue. The court concluded that the CIT's assumption of jurisdiction under Section 263 was not justified, as the AO had applied his mind to the issue, and the decision was not palpably erroneous. The court emphasized that mere disagreement with the AO's view is insufficient for invoking Section 263, especially when the AO's decision aligns with judicial precedents.

Issue B: Allowability of Foreclosure Premium as Business Expenditure

The second issue addressed whether the foreclosure premium paid for restructuring a loan at a lower interest rate could be claimed as business expenditure under Section 37(1) of the Income Tax Act. The appellant contended that the prepayment was made on grounds of commercial expediency and resulted in significant interest savings, thus qualifying as revenue expenditure. The court examined precedents, including the Delhi High Court's decision in Gujarat Guardian, which recognized such payments as allowable business expenditure. The Tribunal had relied on decisions that were not directly applicable to the issue at hand, leading the court to determine that the foreclosure premium was indeed a revenue expenditure. The court found that the restructuring was a prudent business decision aimed at reducing financial costs, thereby allowing the claim under Section 37(1).

Issue C: Provision for Bad and Doubtful Debts

The third issue involved the treatment of provisions for bad and doubtful debts. The Tribunal had ruled against the appellant based on the Supreme Court's decision in Vijaya Bank, which required such provisions to be added back to the total income. However, the court noted that no specific submissions were made regarding this issue during the appeal, and thus it remained unanswered in the final judgment.

Conclusion:

The court concluded that the substantial questions of law regarding the revisability of the assessment order and the treatment of foreclosure premiums were answered in favor of the appellant. The court held that the AO's original decision was not erroneous, and the foreclosure premium constituted allowable business expenditure. Consequently, the appeal was allowed, and no costs were imposed.