2019 (2) TMI 271 - AT - Income Tax

Disallowance of interest free ICD advance - whether there was no nexus between interest bearing loan funds and ICD advanced by the assessee company from its own funds? - Held that - CIT (A) has rightly deleted the addition on the grounds inter alia that the assessee company has already charged the interest @ 8% on ICD advance to its group company in the previous year relevant to 2011-12 including interest accrued under assessment year under consideration; that differential interest @ 4% (12% - 8%) has already been disallowed by the AO in the subsequent year 2011- 12; and that the ICD was advanced prior to the loan availed off from the bank meaning thereby the same has been advanced out of own funds by the assessee. So, in the given facts and circumstances, we find no ground to interfere with the findings returned by the ld. CIT (A) deleting the addition. Upfront charges paid for obtaining term loan from bank - whether is covered within the definition of interest given in section 2(28A) and hence allowable as revenue expenditure? - Held that - When we examine provisions contained u/s 36(1)(iii) in the light of the definition of interest in section 2(28)(a) of the Act, it certainly includes any service fee or other charges in respect of money borrowed or debt incurred. Even otherwise, when AO has allowed the interest on the loan in question as Revenue expenditure then how the upfront fee which also form the part of the interest can be disallowed. The ld. CIT (A) by relying upon the decision rendered by Hon ble Bombay High Court in the case of Premier Automobiles Ltd. vs. CIT 1970 (3) TMI 28 - BOMBAY HIGH COURT and in case of CIT vs. Secure Meters Ltd. 2008 (11) TMI 66 - HIGH COURT RAJASTHAN has rightly held that upfront charges paid by the assessee is allowable deduction being part of the interest already allowed by the AO as revenue expenditure. Finding no illegality or perversity in the deletion of addition on account of disallowance of upfront charges paid by the assessee for availing the loan of ₹ 200 crores for business purpose. Addition on account of purchase of data packages on the ground that the same amounts to deferred revenue expenditure - Held that - Revenue has not disputed the incurrence of that expenses for business purposes but allowed the same as deferred expenditure over a period of five years. We are of the considered view that when the assessee was made to incur the mandatory expenses having been paid to DGH for participating in tender/bid process, no enduring benefit, as has been observed by AO, can be made out. Moreover, AO has not disputed the nature of these expenses as revenue expenses. So, when the incurrence of such expenses are admittedly of revenue nature, the same cannot be considered as deferred revenue expenditure. So, we are of the considered view that the ld. CIT (A) has rightly deleted the addition - Decided against the Revenue.

Summary

Issues:
1. Disallowance of interest-free ICD advance
2. Treatment of upfront fees for term loan
3. Disallowance of proportionate interest for upfront fee
4. Disallowance of expenditure for data package purchase

Issue 1 - Disallowance of interest-free ICD advance:
The appellant, DCIT, challenged the deletion of the addition of ?1,32,00,000 made by the AO on account of interest-free ICD advance by the assessee company. The AO contended that interest on the ICD was not verified and the ICD was made from interest-bearing funds. The CIT(A) found that the ICD was advanced out of the assessee's own funds, charged interest in the subsequent year, and had a nexus with the bank loan. The Tribunal upheld the CIT(A)'s decision, stating no grounds to interfere.

Issue 2 - Treatment of upfront fees for term loan:
The AO disallowed ?1,67,22,000 as capital expenditure for upfront fees paid by the assessee for a term loan of ?200 crores. The CIT(A) allowed the deduction, considering upfront charges as part of interest, relying on relevant court decisions. The Tribunal agreed, finding no illegality in the deletion of the addition.

Issue 3 - Disallowance of proportionate interest for upfront fee:
The AO did not consider proportionate interest disallowances for upfront fee payment, treated as interest and allowed as revenue expenditure. The Tribunal did not address this issue separately in the judgment.

Issue 4 - Disallowance of expenditure for data package purchase:
The AO disallowed ?47,94,600 out of total expenditure of ?59,93,250 for purchasing a data package, treating it as capital in nature. The CIT(A) deleted the addition, considering the expenditure as revenue in nature with no enduring benefits. The Tribunal upheld the CIT(A)'s decision, determining the issue against the Revenue.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on the various issues raised regarding disallowances and deductions, as detailed above in the judgment delivered on November 30, 2018.