2021 (3) TMI 1040 - AT - Income Tax

Revision u/s 263 - AO allowed of the assessee‟s claim for deduction of forfaiting charges as revenue expendiure - CIT observed that, thus the A.O had rendered the assessment order as erroneous insofar it was prejudicial to the interest of the revenue - when the forfaiting charges had been capitalised by the assessee in its books of account, therefore, the raising of a separate claim for deduction of the said charges by the assessee in its profit and loss account which thereafter was allowed by the A.O while framing the assessment had resulted in a double deduction - HELD THAT - Forfaiting charges were incurred by the assessee wholly and exclusively for the purpose of its business and was not in the nature a capital expenditure, the same, thus, was clearly allowable as a deduction under Sec. 37(1) - At this stage, we may herein observe that as per the settled position of law all expenditure incurred to bring an asset to use is to be capitalised. Analysing the term actual cost‟ as defined in Sec. 43(1) of the Act, as in the case of Challapali Sugars Ltd. 1974 (10) TMI 3 - SUPREME COURT , had held, that as per the accepted rule of accountancy all expenditure that is incurred to bring a fixed asset into existence and put it in a working condition shall be included for determining its cost. It was further observed, that in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed asset which had been created as a result of such expenditure. As regards the observation of the PCIT that the A.O had failed to consider as to whether the forfaiting charges incurred by the assessee were in the nature of a capital expenditure or a revenue expenditure, we are unable to find favour with the same. In our considered view, as the forfaiting expenditure incurred by the assessee had not resulted in any enduring benefit to the assessee company, therefore, the same could not have been considered as capital in nature. In our considered view, as the forfaiting charges borne by the assessee had not brought any capital asset into existence and were incurred merely with a view to carry on the business as per the terms of the EPC contract, the same, thus, was clearly in the nature of a revenue expenditure. Be that as it may, in our considered view as the A.O while framing the assessment had after carrying out necessary verifications arrived at a plausible view and allowed the assessee‟s claim for deduction of forfaiting charges of ₹ 3.85 crores, therefore, the PCIT stood divested of his jurisdiction to revise the assessment order for the purpose of substituting his view as against that arrived at by the A.O. As such, we are of a strong conviction that now when the A.O after making proper and detailed inquiries had arrived at a plausible view that the assessee‟s claim for deduction of forfaiting charges was in order, the PCIT could not have thereafter in the garb of the jurisdiction vested with him under Sec.263 of the Act directed the A.O to carry out further verifications, for the reason, that he held a view different than that arrived at by the A.O. We are of the considered view that as the A.O while framing the assessment had after making exhaustive verifications arrived at a plausible view as regards the assessee‟s entitlement towards claim of deduction of the forfaiting charges therefore, the PCIT could not have invoked his revisional jurisdiction under Sec. 263 - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of the PCIT's order under Section 263 of the Income Tax Act, 1961.
2. Determination of whether the assessment order passed by the AO was erroneous and prejudicial to the interests of the revenue.
3. Classification of forfaiting charges as capital or revenue expenditure.
4. Examination of double deduction claims.

Issue-wise Detailed Analysis:

1. Legitimacy of the PCIT's Order under Section 263 of the Income Tax Act, 1961:
The appeal filed by the assessee company contested the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961. The PCIT had revised the assessment order, claiming it was erroneous and prejudicial to the interests of the revenue. The assessee argued that the PCIT's jurisdiction was ousted because the Assessing Officer (AO) had already examined and satisfied himself regarding the assessee's claim for deduction of forfaiting charges.

2. Determination of Whether the Assessment Order Passed by the AO was Erroneous and Prejudicial to the Interests of the Revenue:
The PCIT observed that the AO had allowed the assessee's claim for deduction of forfaiting charges, which according to the PCIT, resulted in a double deduction. The PCIT believed that since the forfaiting charges were capitalized in the books, their deduction in the profit and loss account was erroneous. The assessee countered this by stating that only the charges incurred before the commencement of commercial operations were capitalized, while those incurred post-commencement were not. The Tribunal found that the AO had conducted a thorough examination of the forfaiting charges and had arrived at a plausible view, thus the assessment order was neither erroneous nor prejudicial to the revenue.

3. Classification of Forfaiting Charges as Capital or Revenue Expenditure:
The PCIT contended that the forfaiting charges should be treated as capital expenditure since they were incurred for developing a capital asset. However, the assessee argued that the charges incurred post-commencement of business operations were revenue in nature. The Tribunal agreed with the assessee, stating that the charges incurred post-commencement were for the purpose of business and did not result in any enduring benefit, thus they were correctly classified as revenue expenditure.

4. Examination of Double Deduction Claims:
The PCIT's primary concern was that the assessee had capitalized the forfaiting charges and also claimed them as a deduction, resulting in a double deduction. The Tribunal found that the assessee had only capitalized the charges incurred before the commencement of commercial operations, and the charges for the year under consideration were not capitalized. Thus, there was no double deduction.

Conclusion:
The Tribunal concluded that the AO had made exhaustive verifications and inquiries regarding the assessee's claim for deduction of forfaiting charges. The PCIT's order under Section 263 was set aside, and the assessment order passed by the AO was restored. The appeal filed by the assessee was allowed, and the Tribunal pronounced the order in open court on 07.01.2021.

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