Express Infrastructure Private ltd., CHENNAI V. DCIT Company Circle 2(1), CHENNAI

ITA 2854/CHNY/2018

AI Insights

The case involves Express Infrastructure (P) Ltd, which appealed against the orders of the CIT(A) and the AO regarding the disallowance of pre-closure charges amounting to Rs. 10,87,89,746/-. These charges were incurred for switching loans from one bank to another. The AO initially disallowed 50% of these charges, treating them as common expenditure. The CIT(A) upheld this disallowance, leading to the appeal before the Tribunal. The Tribunal found that the CIT(A) and AO had misinterpreted the nature of these charges, which were primarily for the purpose of construction and thus should be treated as interest under section 24(b) of the Act. The Tribunal's decision was influenced by precedents and the specific use of the borrowed funds for construction activities.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135395 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-08-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 07-10-2018
• Other Referred Cases: Infrastructure Development Finance Co. Ltd vs. 67 taxmann.com 61 (Mad), Lakshya Media (P) Ltd vs. 72 taxmann.com 119 (Mum), Windermere Properties (P) Ltd. vs. DCIT [(2013) 155 TTJ (Mum) 1], Subha Singhvi vs. ACIT [ITA No. 691 / De/2014/ dated 19-06-2015], Sarat Chatterjee & Co. (Vsp) (P) Ltd. vs. Asst (2012) 32 CCH 0423, ACIT vs. Tamilnadu Petro-products Ltd (2016) 46 CCH 0068, CIT vs. Gujarat Guardian Ltd (222 CTR 0526)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revenue expenditure
• Section: 37(1); 205; 72; 119

Judgement Text

आयकर अपीलीय अिधकरण, ’सी’ ायपीठ, चे ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH: CHENNAI ी मंजुनाथ. जी , लेखा सद! एवं ी मनोमोहन दास, ाियक सद! के सम& BEFORE SHRI MANJUNATHA G, ACCOUNTANT MEMBER AND SHRI MANOMOHAN DAS, JUDICIAL MEMBER आयकर अपील सं./ITA No.2854/Chny/2018 िनधा'रण वष' /Assessment Year: 2011-12 Express Infrastructure (P) Ltd, No. 2, Express Estates, Club House Road, Mount Road, Chennai-600 002. [PAN: AABCE-5521-G] Vs. The Dy. Commissioner of Income Tax, Company Circle 2-(1), Chennai. ( अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/ Appellant by : Shri G. Baskar, Advocate यथ क ओर से /Respondent by : Shri P. Sajit Kumar, JCIT सुनवाई क तारीख/Date of Hearing : 30.08.2023 घोषणा क तारीख /Date of Pronouncement : 27.09.2023 आदेश / O R D E R PER MANOMOHAN DAS, J.M: This appeal by the assessee is directed against the order of the Learned Commissioner of Income Tax (Appeals)-6, Chennai [CIT(A] dated 08.08.2018 u/s. 250(6) of the Income Tax Act, 1961[the Act] and pertains to the Assessment Year [AY] 2011-12. The grounds raised by the assessee are as under: “1.1 The CIT(A) failed to follow the directions of this Hon'ble Income Tax Appellate Tribunal. The CIT(A) erred in concluding that the disallowance has been upheld by this Hon'ble Tribunal "in principle". ITA No.2854/Chny/2018 :- 2 -: 1.2 The CIT(A) failed to consider the issue before her and the submissions made in the proper perspective. 2.1 The ClT(A) erred in upholding the disallowance of 50% of pre- closure charges of Rs. 8,32,62,500/- (Rs. 4,16,31,25O/-); which comprises of the following: Axis Bank Loan Processing Fees Rs.6,65,12,500 LIC Housing Finance Processing Fess Rs. 2,50,000 Loan Syndicate Charges (to Punjab National Bank), Anil Khandewal & Associates and Alankit Assignments Ltd) Rs.1,65,00,000/ 2.2 The CIT(A) erred in concluding that the amount of Rs.8,32,62,500/- does not pertain to pre-closure expenses; when it has been clearly shown that they were in connection with the loans taken for clearing off the earlier loans. 2.3 The CIT(A) failed to consider the fact that the borrowed money had earlier been utilised towards construction activities only and thus the entire charges paid ought to have been allowed in full either as business expenditure or under the head "income from house property". 3. Any other grounds that may be raised at the time of hearing.” 2. The facts of the case are that the assessee filed its return of income for AY 2011-12 on 28.09.2011 and the same was revised on 20.03.2012 declaring a loss of Rs.38,86,77,645/-. Subsequently, the case was selected for scrutiny under CASS. The learned Assessing Officer [AO] noticed that the appellant claimed Rs. 10,87,89,746/- in the profit and loss account under the head “Financial Cost”. These charges were claimed to have been incurred for switching of loans from one set of bankers (State Bank of India being the led banks) to Axis Bank. The Ld. AO observed that they are in the category of common expenditure and treated 50% of the expenditure amounting to ITA No.2854/Chny/2018 :- 3 -: Rs. 5,43,94,873/- as relatable to income disclosed under the head “Income from House Property” and accordingly disallowed and added to the total income of the assessee. Aggrieved, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) vide order dated 19-01- 2016 directed the Ld. AO to allow the claim of the assessee u/s 24b of the Act subject to verification by the Ld. AO that the impugned borrowed capital was utilized for acquisition, construction, repairs, renewal or re-construction of the property. However, the Ld. AO vide order dated 06-06-2016 confirmed the disallowance holding that the pre-closure charges are not an allowable expenditure u/s 24(b) of the Act. 3. In the meantime, both the parties filed appeal before the Tribunal as ITA Nos. 691 & 690/Mds/2016. The Hon’ble ITAT vide order dated 28-02-2017 for AYs 2011-12 and 2012-13 directed the Ld. CIT(A) to consider the appeal independently and in accordance with law on the issue. The relevant observations of the Hon’ble Tribunal read as under: “.... We have considered the rival submissions on either side and perused the material available on record. The assessee claimed deduction in respect of pre-closure charges for moving one vendor to another. From the material available on record, it appears the assessee borrowed loans for the purpose of construction. The question arises for consideration is whether the pre-closure charges would form part of the principal borrowed or it is an interest. If the pre-closure charges are to be treated as interest, then, it has to be allowed under section 24b of the Act. Revenue however contends ITA No.2854/Chny/2018 :- 4 -: that the pre-closure cannot be construed as interest and would be construed only as principal amount. As rightly submitted by the Ld. Counsel for the assessee even after the impugned order of the Commissioner, the Assessing Officer has passed the order disallowing the claim of the assessee and now the appeal is pending before the CIT(Appeals). Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has to consider the appeal independently in accordance with law without being influenced by any of the observation made by the CIT(Appeals) in the order which is impugned before this Tribunal. With the above observation, the order of the CIT(Appeals) is vacated .....”. 4. Before proceeding to adjudicate the matter on merit, we want to consider the issue No. 1.1. The assessee vide this ground of appeal raised an issue that the Ld. CIT(A) erred in concluding that the disallowance has been upheld by this Tribunal “in principle”. We observe that the Ld. CIT(A) under para No. 4.3.4 of the impugned order dated 08-08-2018 observed that the disallowance of 50% pre- closure charges made by the AO, prima facie has been upheld in principle by the ITAT. 5. We further observe that, the Hon’ble Tribunal has directed the Ld. CIT(A) to consider the appeal on the issue of pre-closure charges. Therefore, it cannot be said that the Hon’ble Tribunal has upheld the disallowance. Thus, the aforesaid observation of the Ld. CIT(A) is incorrect. Now, we proceed to adjudicate the case on merit. ITA No.2854/Chny/2018 :- 5 -: 6. Heard the representatives of both the parties and perused the materials on record. The Ld. AR submitted that there is no difference whether pre-closure charges paid to the earlier banks and the present bank. The Ld. AR in support of his case has strongly relied on certain case laws including the following cases: (i) Infrastructure Development Finance Co. Ltd. 67 taxmann.com 61 (Mad), 104 taxmann.com 205 (Mad); and (ii) Lakshya Media (P) Ltd 72 taxmann.com 119 (Mum) 7. Per contra, the Ld. DR submitted that the loan pre-closure charges paid by the assessee were not interest but penalty charges and therefore, the same is not allowable. 8. We carefully considered the rival submissions of the parties, perused the materials on record including the orders of the lower authorities. The submissions of the assessee before the Ld. CIT(A) were as under: “....10.1 In the original order of assessment the AO disallowed 50% of the common expenses. Following the same logic, the AO disallowed 50% of the pre-closure charges. 10.2 On appeal, the CIT(A) in para 7 of his order sustained the disallowance of 50% of the common expenses. However, on further appeal the Hon’ble Tribunal in para 4.3 of its order dated 28 th February 2017 in ITA Nos. 690 and 691 of 2016 (pages 112 –119 of PB) reversed the order of the CIT(A) and deleted the disallowance of 50% of the common expenditure. Therefore, the disallowance of 50% of the pre-closure charges made by the AO also cannot be sustained. 10.3 In our submissions the pre-closure charges take the same color as that of the interest and therefore it is allowable in its entirety. The loan had been borrowed at the time when the construction was in progress. Thus the entire loan had been utilized for the purpose of ITA No.2854/Chny/2018 :- 6 -: construction of the building, which gives rise to income from business, income from house property and income from other sources. Even if a part of the interest and / or the pre-closure charges is allocated towards income from house property, it is still an allowable deduction u/s 24(b) of the Income Tax Act. 10.4 The issue as to whether the pre-closure charges paid on pre- payment of loan to bank could be allowed as a deduction in computing the income from house property came up for consideration of the Hon’ble Tribunal in Windermere Properties (P) Ltd. v. DCIT [(2013) 155 TTJ (Mum) 1]. The Tribunal held that the pre-payment charges made for early disposal of the loan are deductible as interest u/s 24(b) of the Income Tax Act. This decision was followed by the Delhi Bench in Subha Singhvi v. ACIT [ITA No. 691 / De/2014/ dated 19-06-2015. 10.5 In the case of Sarat Chatterjee & Co. (Vsp) (P) Ltd. vs. Asst (2012) 32 CCH 0423, the Kolkata Bench of the Hon’ble Tribunal held as follows: 11.2. On careful perusal of the above material, we are of the view that there is no need to further capitalize the upfront fee for term loan in connection with the transfer of loans from one bank to another against pre-payment penalty charges paid to the existing banks. Especially when the subsequent loan as bearing is having less rate of interest i.e. 10 percent as against the existing term loan of three banks which is 15 percent. (As recorded by the AO in the assessment order). Under these circumstances though by a nomenclature the expenditure may be capitalize in the facts and circumstances of the present case, we are of the view that there is no justification on the part of the revenue to capitalize the said expenditure”. 10.6 during this year switched over from consortium of banks led by State Bank of India which funded the project. Further, certain other loans were also foreclosed during the year for which it paid foreclosure charges totaling Rs.10,87,89,746/-. The assessee had also taken these loans of financial assistance from a consortium of banks led by State Bank of India for meeting h cost of construction of the Mall and the Office Complex EA Chambers. 10.7 We also place reliance upon the decision of the Jurisdictional ITAT in the case of ACIT vs. Tamilnadu Petro-products Ltd (2016) 46 CCH 0068 wherein the Hon’ble Tribunal, while following the ratio laid down by the Jurisdictional High Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT 225 ITR 802, held that the redemption by pre-payment closure for a premium at the rate of 10% was a revenue expenditure u/s 37(1) as the liability was incurred by the assessee for its business purposes. ITA No.2854/Chny/2018 :- 7 -: 10.8 Furthermore, the Hon’ble Delhi High Court in the case of CIT vs. Gujarat Guardian Ltd (222 CTR 0526), held as follows; “17.1. The assessee’s claim for deduction had to be allowed, in one lump sum, keeping in view the provisions of s. 43B(d) which provides that any sum payable by the assessee as interest on any loan or borrowing from any financial institution shall be allowed to the assessee in the year in which the same is paid irrespective of the provisions (sic-previous year) in which the liability to pay such sum is incurred by the assessee according to the method of accounting regularly applied by the assessee. Since the authorities below have not disputed that pre-payment premium paid to IDBI, in the instant case, is nothing but “interest or that it was paid to public financial institution i.e ..., IDBI then, in terms of s. 43B(d) the assessee’s claim for deduction could only have been allowed in the year in which the payment had actually been made. It is not disputed that payment has been made in the previous year relevant to the assessment year under consideration i.e., asst. yr. 1996-97”. 10.9 To clarify things we submit that the work was already in progress on the Financial Year in which the loans were availed. From this it is clear that the entire borrowed capital had gone only towards construction of the building. Hence, in view of the submissions made and decisions relied upon herein above, the appeal may be allowed ...”. 9. The Ld. CIT(A) considered the submissions of the assessee and observed that the cases relied on by the assessee are distinguishable and not applicable to the facts of the assessee’s case. The observations of the Ld. CIT(A) read as under: “ 4.3.6 From a perusal of the details furnished, it can be seen that out of the total amount of Rs.10,87,89,746/- claimed, a sum of Rs.2,55,27,246/- paid to Andhra Bank, Bank of Baroda, State Bank of Mysore, Syndicate Bank and IDB Bank only pertains to the actual pre-closure charges and the balance amount of RS. 8,32,62,500/- (Rs.10,87,89,746/- -- Rs. 2,55,27,246/-) does not pertain to pre- closure charges as claimed. For example, a sum of Rs. 6,65,12,500/- relates to Loan Processing Fees paid to Axis Bank, a sum of Rs. 2,50,000/- relates to Processing Fees paid to LIC Housing Finance Ltd and a sum of Rs.1,65,00,000/- pertains to Loan Syndication Charges paid to Banks/ financial institutions. That is to say that these charges amounting to Rs.8,32,62,500/- have not been made to banks for early disposal of loans or for non-availing of credit facility in future and hence cannot be said to be covered by the definition of interest u/s 2(28A) of the Act. Thus, the disallowance to the tune of ITA No.2854/Chny/2018 :- 8 -: Rs. 4,16,31,250 (i.e. 50% of Rs. 8,32,62,500/-) representing Loan Processing Fees, Loan Syndication Charges etc. which are not akin to direct or indirect interest payments or payments mad towards unutilized credit facility cannot be considered for deduction u/s 24b of the Act as the section provides only for deduction of interest amounts paid/payable on loans borrowed. Accordingly, the disallowance made to that extent is treated as upheld. As regards the judicial rulings relied upon by the appellant, it is to state that the same are not applicable to the facts of the appellant’s case as discussed above and are thus held to be distinguishable”. 10. We after carefully considering the submissions of the parties and findings of the Ld. CIT(A) observe that, the Ld. CIT(A) failed to consider the purpose for which the assessee had to pay disallowed amount of Rs. 8,32,62,500/-. The Ld. CIT(A) ought to consider the purpose for which the assessee had paid the amount of Rs. 8,32,62,500/- which is disallowed by him. Again, the time of making payment of that amount was also to be considered. Here, we may refer the contents of para No. 4 of the Ld. AO’s order dated 06-06- 2016 which was submitted before the Ld. CIT(A) as desired by the Ld. CIT(A). The contents of para No. 4 read as under: “4. In order to give effect to the directions of the ld. CIT(A) on this issue, the assessee was required to furnish the details of the loan processing charges. Vide letter dated 09-02-2016, the assessee had furnished the details of loans availed, processing charges and utilization of the same. The details were perused. The processing charges of Rs.10,87,89,746/- claimed by the assessee was not actually incurred for repayment of loan taken originally but they are pre-closure charges for switching over of loan from one lender to another lender. Section 24 of the Income Tax Act, 1961 is reproduced as under: "Income chargeable under the head Income from house property" shall be computed after making the following deductions, namely: (a) A sum equal to thirty per cent of the annual value (b) Whee the property has been acquired, constructed, repaired, ITA No.2854/Chny/2018 :- 9 -: renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital" 11. From the aforesaid contents of para No. 4 of the AO’s order dated 06-06-2016, it is clear that, the Ld. AO observed that Rs.10,87,89,746/- was incurred by the assessee for pre-closure of existing loans and that amount was paid at the time of pre-closure of the existing loans. Therefore, it is our considered opinion that, the claim of the assessee has to be allowed, because this amount was incurred at the time of pre-closure of existing loans for switching over to another lender. Further, it is our considered opinion that the loan processing charges and loan syndication charges as paid by the assessee was for the business of the assessee and is allowable expenditures. Accordingly, we set aside the order of the Ld. CIT(A) dated 08-08-2018 as well as order of the Ld. AO dated 06-06-2016 and decide the appeal in favor of the assessee. 12. In the result, the appeal of the assessee is allowed. Order pronounced on 27 th September, 2023. Sd/- Sd/- (मंजुनाथ. जी) (Manjunatha G) लेखा लेखालेखा लेखा सद य सद यसद य सद य /Accountant Member (मनोमोहन दास) (Manomohan Das) ाियक सद /Judicial Member चे ई/Chennai, दनांक/Dated: 27 th September, 2023. EDN/- आदेश क ितिलिप अ ेिषत/Copy to: 1. अपीलाथ)/Appellant 2. *+थ)/Respondent 3. आयकर आयु,/CIT 4. िवभागीय *ितिनिध/DR 5. गाड' फाईल/GF ITA No.2854/Chny/2018 :- 10 -: