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TMI Blog2024 (11) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure in view of the judgment in the case of Aztec Software Technology Services (107 ITD 441)? C. Whether in the facts and circumstances of the case the provision for bad and doubtful debts is required to be added back in view of the law laid by the Supreme Court in the case of Vijaya Bank (323 ITR 166)? 2. The appellant challenges an order of the Income Tax Appellate Tribunal (ITAT/Tribunal) confirming an order passed by the Commissioner of Income-Tax under Section 263 of the Income-Tax Act, 1961 (Act) for Assessment Year (AY) 05 06. 3. An order of assessment was passed on 30.11.2007 in respect of AY 05 06. The assessing authority notes in the scrutiny order that notices under Section 143(2), including on 09.10.2006, had been issued. The appellant had been represented at the time of assessment and all particulars as sought for had been submitted. The assessment had been completed on 30.11.2007 making certain adjustments to the claim of depreciation and a disallowance under Section 43B of the Act. As a consequence, the loss returned had been reduced. 4. While so, notice u/s 263 dated 25.02.2010 had come to be issued, proposing revision of the assessment. The notice proceeded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich Rs. 21.2 crores carried interest rate of 13.10% p.a. and the balance amount of Rs. 18.8 Crores carried interest rate of 12.75%. Since the rate of interest charged by HSBC was too high and loan was available in the market at that time at a substantially lower rate from other banks so it was decided to foreclose the term loan of HSBC by taking fresh loan of Rs. 40 Crores from UTI Bank Limited at the rate of 8%. As per terms of the loan agreement with HSBC a prepayment premium of Rs. 3.41 Crores was required to be paid as the loan was paid before due date. Evidently, the payment was made on the grounds of commercial expediency for the ultimate benefit of the business as the loan restructuring would result in saving of interest of around 5% p.a. In terms of section 36(1)(iii) read with section 2(28A) prepayment charges, being interest paid on moneys AO was satisfied with our explanation and allowed the claim in assessment. You have raised the issue that as the loan from HSBC was squared up during the relevant assessment year the question of payment of interest does not exist . The loan was repaid on 11.6.2004 as would be evident from our letter of even date to HSBC. So the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation Ltd 147 CTR (Mad) 433, (iv) The Commissioner of Income Tax (Central II) v Goetze (India) Limited [2014 II AD Delhi 81] and (v) Commissioner of Income Tax, Central I v Maithan International [(2015) 277 CTR (Cal) 65]. 10. On merits, the appellant would reiterate the submissions advanced in the earlier round, drawing attention to the fact that the transaction of pre-closure premium was on the basis of commercial and business expediency. Reliance is placed on the decision of the Delhi High Court in the case of CIT v Gujarat Guardian [177 Taxman 434] where the ratio of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Limited vs CIT [225 ITR 802] is applied. 11. The decision of the Madras Bench of the ITAT in the case of Overseas Sanmar Financial Limited vs Joint Commissioner of Income Tax [2001 (2) TMI 303] is also relied upon by the appellant as a direct authority on the proposition in question. 12. Reference is also made to the judgments of the Supreme Court in Sassoon J.David and Co. Pvt Limited v Commissioner of Income- Tax, Bombay [118 ITR 261], which reiterate the settled position that expending of money for commercial expediency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,56,523. It is seen from the P L Q/C the s had debited a sum of Rs. 3.41 crores as premium paid on preclosure on prepayment of loan. Any espouse related connect with raining and loan or any interest payment in allowed.. Premium paid on preclosure of loan cannot be allowed or revenue expenditure in 37 of the IT act. DC may kindly consider this observation. Sd/- Audit officer 19. The assessing authority has called for a specific reply to the audit objection and the appellant has supplied a detailed explanation on 03.10.2007, in the following terms:- 5. Prepayment of Term Loan of HSBC The Company had borrowed from The Honkong Shanghai Banking Corporation Limited, 31, B.B.D. Bag, Kolkata 700001 (HSBC) a sum of Rs. 40 crores of which 21.2 crores (First Instalment) carried attracted interest rate of 13.10% p.a whereas the second instalment of Rs. 18.8 crores attracted interest rate of 12.75% p.a. The said loan was prepaid during the assessment year under review by taking a new loan of Rs. 40 crores from UTI Bank Limited, 7, Shakespeare Sarani, Kolkata 700071 at a lower rate of interest of 8% p.a. approximately. This fact can be verified from Annexure X of Tax Audit Report. Basically, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e officer to the objection raised, the call for response from the assessee and rebuttal of the objection raised, are prior to passing of the order of assessment on 30.11.2007. The settled position in regard to assumption of jurisdiction under Section 263 is that the Commissioner of Income Tax would be vested with the proper authority to revise an assessment only in matters where an issue has been decided erroneously and in a manner prejudicial to the revenue. The twin conditions would have to be satisfied concurrently. 22. Thus, we find the reliance placed on the judgement in Malabar Industrial Co., Ltd (supra) to be well conceived as in the present case the issue relating to pre-closure premium has not slipped the attention of the officer. The response to the audit objection reveals that the officer has applied his mind to the legal issue that arises, has considered the stand of the assessee and thereafter come to the conclusion that the claim of the appellant is correct and liable to be allowed. 23. Though courts have held that mere disagreement with the view taken by the assessing authority would not be a sufficient ground for invoking power under Section 263, it is quite anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority for Advance Ruling (AAR) holding that the gains on the sale of equity shares and Compulsorily Convertible Debentures (CCDs) held by that petitioner were not exempt from income-tax and were to be characterised as interest within the meaning of Section 2(28A) of the Act and Article 11 of the applicable Double Taxable Avoidance Convention and would be taxable under both domestic and international law. 29. According to the Revenue, the expression interest as used in that matter would be apposite to interest , which is the subject-matter of the present case as well and the observations of the Delhi High Court at paragraph 13 are pressed into service. However, we do not believe that this decision advances the case of the Revenue. The observations in paragraph 13 extracted below are unique to the case of CCDs which was the subject-matter of that writ petition. There is no dispute as to the nature of Compulsorily Convertible Debentures. A debenture indisputably creates and recognizes the existence of a debt and till it is discharged, either by payment or by conversion, the debenture would essentially represent a debt. A Compulsorily Convertible Debenture is a debt which is compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 022 and Chennai Petroleum Corporation Limited v Assistant Commissioner of Income-Tax, Company Circle I(3) in TCA 521 of 2018 dated 13.10.2020. According to the revenue, the very question that arises in the present case has been decided adverse to the assessee in the latter appeal. 32. The substantial questions of law answered in the case of Chennai Petroleum Corporation Limited were the following:- (i) Whether the Tribunal was right in law in holding that the expenditure incurred during the year towards prepayment charges for substituting high cost debt for low cost debt is in the nature of interest as defined under Section 2 (28A) of the Act and hence not allowable as deduction under Section 37 of the Act? And (ii) Whether the 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) of the Act, without appreciating that the expenditure in question was not incurred in raising a debt but incurred for extinguishment/liquidation of borrowings? 33. Referring to the decision of the Supreme Court in the case of Deputy Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected as there was an enduring benefit to the assessee. 37. In appeal, it was argued that the amount may be treated as processing charges for the new loan and was accepted by the Commissioner of Income-Tax (appeal) relying on the judgment of the Supreme Court in Madras Industrial Corporation Limited (supra). However, he took an adverse view with regard to the argument of allowability of the loan, confirming the view of the assessing authority that the pre-closure premium had an enduring benefit. The Tribunal, however, accepted the contention of the assessee in second appeal as follows: The rival contentions on this issue together with the case laws as referred to have been given our very careful consideration. The fact as is evident from the record is that the loan that was taken in earlier years was repaid in full in the previous year relevant to the assessment year and this resulted in the payment of charges levied by the financial institutions to the tune of Rs. 56,15,126. It is also evident from the record that the reduction in the rate of interest for fresh loans to be advanced by the financial institutions led the assessee company to pay off the entire loan that carried the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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