Ghatge Patil Industries Ltd., Kolhapur V. ACIT, Cir.2, Kolhapur, Kolhapur

ITA 639/PUN/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49752 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2001-2002
• Appeal Filed On: 08-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A S SINGH
• Assessee Lawyers: S P JOSHI
• Keywords: Business expenditure; Opportunity of being heard; Revenue expenditure; Capital expenditure
• Section: 43B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER S. NO ITA NO ASSTT.YEAR 1. 639/PN/07 2001-02 2. 642/PN/07 2003-04 GHATGE PATIL INDUSTRIES LTD ., .. APPELLANT PO. UCHAGAON, KOLHAPUR 416 005 PAN AAACG6595R VS. ASSTT. COMMISSIONER OF INCOME-TAX .. RESPOND ENT CIR. 2, KOLHAPUR AND S. NO ITA NO ASSTT.YEAR 1. 699/PN/07 2003-04 2. 786/PN/08 2004-05 3. 1509/PN/08 2005-06 DY./ASSTT. COMMISSIONER OF INCOME-TAX .. APPELLANT CIR. 2, KOLHAPUR, PUNE VS. GHATGE PATIL INDUSTRIES LTD., .. RESPONDENT KOLHAPUR .. ASSESSEE BY : SHRI S P JOSHI RESPONDENT BY : SHRI A. S. SINGH CIT DR ORDER PER D. KARUNAKARA RAO, A.M: FROM THE ABOVE, IT IS OBVIOUS THAT THERE ARE FIVE APPEALS UNDER CONSIDERATION AND THEY INCLUDE TWO BY THE ASSESSEE AND OTHERS BY THE REVENUE. SINCE COMMON ISSUES ARE INVOLVED IN ALL THE ABOVE C ITED APPEALS OF THE ASSESSEE AS WELL AS REVENUE, THEY ARE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE GIST OF THE ISSUES ARE DEPICTED IN THE TABLE FORM. ITA/AY/APPELLANT ASSESSEES ISSUE REVENUES ISSUES -- 639 /P/07 AY2001-02/ASSESSEE INTEREST RESET PREMIUM NIL -- 642 /P/07 - AY 2003-04/ASSESSEE INTEREST RESET PREMIUM (I) MELTING LOSS ISSUE (II) INTEREST RESET 2 -- 699 /P/07-AY AY 2003-04/REVENUE PREMIUM -- 786 /P/07 AY 2004-05/REVENUE NIL INTEREST RESET PREMIUM 1509 /P/07 AY 2005-06/REVENUE NIL INTEREST RESET PREMIUM 3. FROM THE ABOVE, IT IS EVIDENT THAT THERE ARE A C OUPLE OF ISSUES FOR ADJUDICATION AND THEY ARE: (I) ALLOWABILITY OF THE CLAIM OF DEDUCTION OF INTEREST RESET PREMIUM; AND (II) ALLOWABLE EXTENT OF THE BUR NING LOSS. RELEVANT FACTS REGARDING THE FIRST ISSUE OF INTEREST RESET PREMIU M IS AS FOLLOWS. I. ALLOWABILITY OF THE CLAIM OF DEDUCTION OF INTERE ST RESET PREMIUM 4. THIS ISSUE IS THE BONE OF CONTENTION BEFORE US B Y BOTH THE PARTIES. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A PUBLIC LIMITED COMPANY, ENGAGED IN THE RUNNING OF A FOUNDRY BUSINE SS, IN WHICH CASTINGS ARE PRODUCED WHICH ARE USEFUL IN THE AUTOMOBILE INDUSTR IES. IN THE YEARS PRIOR TO AY 2001-02, ASSESSEE RAISED FOREIGN CURRENCY LOANS FROM ICICI WHICH CARRIED INTEREST RATE OF 18%. THESE WERE LATER ON CONVERTED INTO RUPEE LOANS , WHICH ALSO CARRIED AN INTEREST RATE OF 18%. SAID OUTSTAND ING LOANS WORKS OUT TO OVER 20 CRORE RUPEES AND THE INTEREST DUE THEREON WAS OVER RS 2 CRORES IN THE FY 2000- 01. THE COMPANY WAS FACING ACUTE FINANCIAL PROBLEMS AND IT WAS NOT ABLE TO SERVICE THE LOANS AND THE INTEREST THEREON IN TIME. THEREFORE, IN THIS FY 2000-01, THE COMPANY INITIATED CORRESPONDENCE WITH ICICI FOR GRANT OF AN ADDITIONAL LOAN AND ALSO FOR REDUCING THE RATE OF INTEREST BY THEIR LETTERS DATED 5.7.2000 AND 18.7.2000. THESE CULMINATED INTO THE ICICI OFFERIN G TO GRANT AN ADDITIONAL LOAN FACILITY OF RS 13 CRORE BY THEIR LETTER DT 29.9.200 0. IN THIS LETTER, THE ICICI BY THEIR CONDITION NO. 6 ASKED THE ASSESSEE TO PAY INTEREST RE-SET PREMIUM OF RS 75,00,000/-. THIS CONDITION WAS AGREED BY THE ASSE SSEE AND FINALLY, AN AGREEMENT WAS SIGNED BY THE ASSESSEE ON 3.10.2000 F OR THE LOAN OF RS 13 CRORE. THIS ADDITIONAL LOAN CARRIED INTEREST OF 15% ONLY A ND THERE WAS A MORATORIUM OF 3 YEARS AND THE LOAN REPAYMENT ALONG WITH THE INTERES T WAS TO START FROM 15.8.2003 AND END WITH 15.5.2008 (COPY OF THE AGREEMENT DT 3. 10.2000 AT PAGES 6 TO 17 ENCLOSED HEREWITH). AS PER CONDITION, THE INTEREST ON THE EXISTING LOANS WAS ALSO REDUCED TO 15% FROM 18%. THUS, THE INTEREST-RE-SET PREMIUM OF RS 75,00,000/- WAS FOR BOTH THE NEW LOAN OF RS 13 CRORE AS ALSO FO R THE REDUCTION OF THE INTEREST RATE ON THE EXISTING OLD LOANS. THE COMPANY BOOKED THIS EXPENDITURE AS A DEFERRED REVENUE EXPENDITURE AS IT THOUGHT THAT THE EXPENDITURE CAN BE SPREAD OVER 8 YEARS AND ACCORDINGLY, SHOWED IT AS A CURREN T ASSET UNDER THE CAPTION MISC. EXPENDITURE IN ITS BALANCE SHEET AS ON 31.3.2 001. HOWEVER, AS THIS INTEREST 3 RE-SET PREMIUM OF RS 75 LAKHS WAS ACTUALLY PAID TO ICICI ON 27.12.2000 AND AS THE PAYMENT IN THE NATURE OF INTEREST WAS MADE TO T HE FINANCIAL INSTITUTE ICICI, A CLAIM WAS MADE FOR THE ENTIRE AMOUNT OF RS 75 LAKH IN THE RETURN OF INCOME FOR ITS DEDUCTION AS A BUSINESS EXPENDITURE ON ACTUAL P AYMENT BASIS. 5. ABOUT RE-STRUCTURING FEES OF RS 2,80,00,000/- (A Y 2003-04 & AY 2004- 05): IN THE FY 2001-02, THE ASSESSEE FOUND ITSELF IN A V ERY BAD FINANCIAL CONDITION DUE TO RECESSION IN AUTOMOBILE INDUSTRY A ND MOUNTING LOSSES YEAR AFTER YEAR. IT FOUND THAT IT WAS NOT POSSIBLE TO PAY THE EXISTING LOAN INSTALLMENTS AS ALSO INTEREST THEREON. IN AN EFFORT TO GET THE LOANS RES TRUCTURED AND TO ALSO REDUCTION IN THE RATE OF INTEREST PAYABLE THEREON, THE ASSESSEE BY ITS LETTER DT 8.3.2002 ADDRESSED TO ICICI LTD REQUESTED THE FINANCIAL INST ITUTE TO RESTRUCTURE THE LOANS AND ALSO REDUCE THE RATE OF INTEREST PAYABLE THEREO N. FURTHER EFFORTS AND NEGOTIATIONS WERE MADE IN VARIOUS MEETINGS WITH THE OFFICIALS OF THE ICICI BANK LTD. THESE EFFORTS RESULTED INTO THE ICICI BANK OFF ERING TO RESTRUCTURE THE EXISTING LOANS AND TO REDUCE THE RATE OF INTEREST TO 12.5% F ROM 15% BY THEIR LETTER DT 11.4.2002. ONE OF THE CONDITIONS IN THIS OFFER LETT ER WAS THAT THE ASSESSEE COMPANY WILL PAY RE-STRUCTURING FEES OF RS 2,80,00, 000/-. THE ASSESSEE COMPANY AGREED TO ALL THE CONDITIONS SET BY THE ICICI BANK LTD AND ACCEPTED THE OFFER ON 29.6.2002 AND THIS AGREEMENT WAS MADE ON THAT DATE. THESE RESTRUCTURING FEES WERE PAYABLE IN 12 EQUAL MONTHLY INSTALLMENTS. ACCO RDINGLY, THE LOANS WERE RESTRUCTURED WITH A MORATORIUM OF 3 YEARS AND 84 EQ UAL INSTALLMENTS PAYABLE COMMENCING FROM 15.7.2005 AND ENDING ON 15.6.2012. THE INTEREST PAYABLE THEREON WAS REDUCED TO 12.5% FROM EXISTING RATE OF 15%. AS AGREED, OUT OF THE RESTRUCTURING FEES OF RS 2 CRORE AND 80 LAKH, THE A SSESSEE PAID 9 INSTALLMENTS TOTALLING TO RS 2,09,00,998/- IN FY 2002-03 RELEVAN T TO AY 2003-04 AND THE BALANCE THREE INSTALLMENTS TOTALING TO RS 70,00,002 /- WERE PAID IN THE FY 2003-04 RELEVANT TO AY 2004-05 . THE ASSESSEE CONSIDERED THE AMOUNT OF RS 2,09,00,998/- PAID IN FY 2002-03 AS DEFERRED EXPEND ITURE FOR 123 MONTHS AND IN ITS BOOKS OF ACCOUNTS FOR AY 2003-04 CONSIDERED PRO PORTIONATE AMOUNT FOR 12 MONTHS AT RS 27,31,709/- AS PERTAINING TO FY 2002-0 3 AND THE BALANCE AMOUNT VIZ. RS 1,74,69,289/- AS DEFERRED EXPENDITURE. SIMI LARLY, THE INTEREST RE-SET PREMIUM OF RS 75 LAKHS PAID IN FY 2000-01 WAS CONSI DERED AS DEFERRED FOR 123 MONTHS AND PROPORTIONATE AMOUNT FOR 12 MONTHS TOTAL ING TO RS 7,31,708/- WAS CONSIDERED AS PERTAINING TO FY 2002-03 AND THE BALA NCE OF RS 67,68,292/- WAS CONSIDERED AS DEFERRED EXPENDITURE. THUS A COMBINED AMOUNT OF RS 34,63,417/- (7,31,708/- + 27,21,709/-) WAS DEBITED TO THE P & L ACCOUNT FOR FY 2002-03 RELEVANT TO AY 2003-04; AND THE BALANCE OF THE TWO AMOUNTS TOTALING TO RS 2,50,36,581/- WAS SHOWN IN THE BALANCE SHEET AS DEF ERRED MISC. EXPENDITURE ON 4 THE ASSETS SIDE. FOR AY 2004-05, THE ASSESSEE CON SIDERED THE PROPORTIONATE AMOUNT OF RS 34,63,418/- AS PERTAINING TO FY 2003-0 4 OUT OF THE DEFERRED EXPENDITURE AND ALSO THE AMOUNT OF RS 70 LAKHS ACTU ALLY PAID (OUT OF 28- LAKH) IN THIS FY 2003-04 AS PERTAINING TO THIS YEAR AND DEBI TED THE TOTAL AMOUNT OF RS 1,04,63,418/- TO THE P & L ACCOUNT, THE REMAINING A MOUNT OF RS 2,15,73,165/- (OUT OF RS 75 LAKH & RS 280 LAKH) WAS SHOWN AS DEFE RRED REVENUE EXPENDITURE ON ASSETS SIDE IN THE BALANCE SHEET AS ON 31.3.2004 . FOR AY 2005-06, THE ASSESSEE CONSIDERED THE ENTIRE AMOUNT OF THE REMAIN ING AMOUNT OF RS 2,15,73,165/- AS PERTAINING TO THE FY 2004-05 AND A CCORDINGLY DEBITED THIS ENTIRE AMOUNT TO THE P & L ACCOUNT, THEREBY SHOWING DEFERR ED REVENUE EXPENDITURE UNDER MISCELLANEOUS EXPENDITURE AT NII ON THE ASSET SIDE OF THE BALANCE SHEET AS ON 31.3.2005. HOWEVER, IN THE RETURN OF INCOME FOR AY 2004-05, IT CLAIMED RS 70,00,002/- BEING RE-STRUCTURING FEES ACTUALLY PAID (OUT OF RS 280 LAKH) IN THE FY 2003-04 AS ADMISSIBLE BUSINESS EXPENDITURE IN THE N ATURE OF INTEREST PAID TO THE ICICI BANK LTD. ON ACTUAL PAYMENT BASIS. 6 . AOS ACTION: FOR AY 2001-02 REGARDING THE CLAIM OF RS 75 LAKHS, THE AO DID NOT ACCEPT THE CLAIM OF AMOUNT OF INTEREST RE-S ET PREMIUM PAID AS INTEREST PAID ON THE LOANS BORROWED. AO CONSIDERED THAT THE ASSESSEES CLAIM U/S 37 OF THE ACT AND HELD THAT IT IS NOT ADMISSIBLE AS BUSIN ESS EXPENDITURE EVEN U/S 37 OF THE ACT FOR THE REASONS THAT THE (1) IMPUGNED CLAIM IS NOT DEBITED TO P & L ACCOUNT AND HENCE IT IS NOT INCURRED WHOLLY AND EXC LUSIVELY FOR THE PURPOSES OF BUSINESS AND (2) THE ASSESSEE HAS ACQUIRED ENDURING BENEFITS BY INCURRING THIS EXPENDITURE AND HENCE IT IS A CAPITAL EXPENDITURE. FOR THIS PROPOSITION, HE RELIED ON THE SC DECISION IN THE CASE OF SITALPUR SUGAR WO RKS LTD V CIT 49ITR 160. 7. FOR THE AYS 2003-04 & 2004-05 , REGARDING THE CLAIMS OF DEDUCTION OF RS 2,09,00,998/- AND RS 70,00,002/- RESPECTIVELY, THE AO DID NOT ALLOW THE CLAIMS OF THE ASSESSEE TOO. FOR THE AY 2003-04 , REGARDING THE CLAIM FOR DEDUCTION OF RS 2,09,00,998/-, AO HELD CLAIM OF DEDUCTION OF INTER EST IS NOT ACCEPTABLE BECAUSE: (I) THE AMOUNT ACTUALLY PAID TO ICICI BANK IS NOT INTEREST ON CAPITAL BORROWED UNDER THE DEFINITION PROVIDED IN SECTION 2(28A) OF THE EVEN ACT; (II) IN THE BOOKS OF ACCOUNTS, IT IS NOT CONSIDERED AS PART OF THE INTEREST PAID; (III) IT IS NOT ADMISSIBLE EVEN U/S 37 OF THE ACT AS, IT IS A CAPITAL EXPENDITURE, AS THE ASSESSEE HAD ACQUIRED ENDURING BENEFITS BY INCURRING THIS EX PENDITURE. RELIANCE WAS PLACED FOR THE REASONS GIVEN IN THIS RESPECT IN THE ASSESSMENT ORDER FOR AY 2001- 02. FOR THE AY 2004-05, THE CLAIM FOR DEDUCTION OF RS 70,00,002/- IS NOT ADMISSIBLE BECAUSE : (I) THE AMOUNT OF THE RE-STRUC TURING FEES OF RS 70,00,002/- ACTUALLY PAID TO ICICI BANK IS NOT INTEREST PAID ON BORROWED CAPITAL, EVEN 5 CONSIDERING THE DEFINITION OF INTEREST GIVEN IN SEC TION 2(28A) OF THE ACT. (II) THE PAYMENT HAS GIVEN LONG TERM BENEFITS FOR A PERIOD O F ALMOST 7 YEARS. (III) INTEREST IS SEPARATE FROM RE-STRUCTURING FEES AND HENCE THE DEDUCTION IS NOT ADMISSIBLE U/S 43B(D) OF THE ACT. FOR 2005-06 ALSO, AO DID NOT ALLOW THE CLAIM OF RS 30,81,880 IE 1/7 TH OF THE EXPENDITURE OF 2,15,73,165/- INCURRED ON AC COUNT OF THE RESTRICTING FEE. CIT(A) DELETED THE DISALLOWANCES H OLDING THAT THEY ARE ALLOWABLE EXPENDITURE. 8. CIT(A)S DECISION : A. SO FAR AS THE AY 2001-02 IS CONCERNED, WE FI ND THAT THE CIT(A) RELIED ON HIS FINDINGS ON THE ISSUE GIVEN IN HIS ORDER FOR THE AY 2003-04 AND 2004-05, WHERE AN COMPARABLE ISSUE AROS E. EVENTUALLY, THE CIT(A) CONFIRMED THE DISALLOWANCES STATING THAT THE FOLLOWING THE DECISION TAKEN IN AYS 2003-04 AND 2004-05, NO DEDUCTION IS HELD TO BE ALLOWED IN VIEW OF THE FACT THAT THERE WAS NO WRITE OFF BY DEBIT TO THE PR OFIT AND LOSS ACCOUNT FOR THE PARTICULAR YEAR. THE CLAIM IS DISMISSED. (EXTR ACT FROM PARA5.2 OF IMPUGNED ORDER). B. REGARDING THE CLAIM FOR THE AY 2003-04 AND 2004-05 , IN HIS COMPOSITE ORDER, THE CIT(A) DECIDED THE ISSUE ABOUT THE RE-STRUCTURING FEES/INTEREST RE-SET PREMIUM AND IT IS THE SUBJECT MATTER OF APPEAL BY THE REVENUE VIDE ITA NO 699/PN/07 AND IN THE ASSESSEES APPEAL AT ITA NO 642/PN/07. IN PARA 3 TO 13, THE CIT (A) HELD THAT THE RE-STRUCTURING FEES OF RS 2,80,00,000/- PAID TO ICICI BANK WAS IN THE NATURE OF INTEREST IN VIEW OF THE DEFINITION OF INTEREST LAID DOWN IN SECTION 2(28A ) OF THE I.T. ACT, 1961. FOR THIS, HE RELIED ON THE ITAT, PUNES DECISION IN CHINTAMAN I HATCHERIES LTD V. DCIT 75 ITD 117 IN WHICH, THE ITAT HAD HELD THAT BANK EVALUATION FEES PAID IN RESPECT OF LOAN BY A BANK IS IN THE NATURE OF INTEREST IN VIEW OF THE DEFINITION GIVEN IN SECTION 2(28A) OF THE ACT. ON HAVING HELD THAT THE PAYMENT WAS ALLOWABLE AS INTEREST U/S 36(1)(III) OF THE ACT, HE REJECTED THE AOS CLAIM THAT IT IS A CAPITAL EXPENDITURE. HOWEVER, HE HELD THAT THE DEDUCTION WILL BE ALLOWAB LE AS DEFERRED REVENUE EXPENDITURE , AS ACTUALLY DEBITED TO THE P & L ACCOUNT. FOR THIS TREATMENT, HE RELIED ON THE SC DECISION IN MAD RAS INDUSTRIAL INVESTMENT CORPORATION 225 ITR 802 (SC) AND THE BOMBAY HIGH COURT DECISION IN TAPARIA TOOLS V JCIT 260 ITR 102 (BOM). C. REGARDING THE SAME CLAIM FOR THE AY 2005-06, THE CIT(A) MERELY RELIED ON HIS DECISION ON THE ISSUE FOR THE EARLIER AYS AND AS PE R THE PARA 6 OF THE IMPUGNED 6 ORDER, CIT(A) DIRECTED THE AO TO VERIFY AND ALLOW T HE CLAIM IN TUNE WITH THE CLAIM IN EARLIER YEARS. 9. THUS, THE CIT(A) IS OF THE OPINION, THAT THE CLA IM OF THE ASSESSEE IS NOT ALLOWABLE AS THE SAME IS NOT DEBITED THE EXPENDITUR E TO P& L ACCOUNT OR IN VIEW OF THE BINDING JUDGMENTS OF THE MUMBAI HIGH COURT I N TAPARIA TOOLS ( SUPRA ) . AS SEEM FORM THE ABOVE TABLE, THE BOTH REVENUE AND THE ASSESSEE ARE AGGRIEVED AGAINST THE FINDINGS OF THE CIT(A). CROSS APPEALS F OR THE AY2003-04 VOUCH FOR THE SAME. WHILE THE REVENUE IS NOT HAPPY WITH THE F INDING THAT THE CLAIM IS ALLOWABLE FINDING BUT AS THE DEFERRED REVENUE EXPEN DITURE; THE ASSESSEE IS NOT HAPPY WITH THE FINDING THAT THE CLAIM IS FULLY ALLO WABLE ON PAYMENT BASIS AND ALSO IN VIEW OF THE PROVISIONS OF SECTION 43B OF THE ACT . WE SHALL TAKE UP THE ISSUE IN THESE CROSS APPEALS FIRST AS THE OUTCOME OF THE SA ME HELPS THE ISSUE FOR THE OTHER AYS. CROSS APPEALS FOR THE AY 2003-04 10. AN AMOUNT OF RS 34,63,417/- IS ACTUALLY DEBITED TO P & L ACCOUNT, OUT OF THE DEFERRED REVENUE EXPENDITURE. THE CIT(A) HAS DI RECTED THAT THE AMOUNT ACTUALLY WRITTEN OFF IN THE BOOKS BE ALLOWED. THE R EVENUE HAS TAKEN GROUND NO 2 AGAINST THIS DIRECTION. (AS EARLIER CLARIFIED, THIS FIGURE OF RS 34,63,417/- IS MADE UP OF TWO AMOUNTS, VIZ. RS 27,31,709/- OUT OF RS 28- L AKH AND RS 7,31,708/- OUT OF THE AMOUNT OF RS 75 LAKH MENTIONED IN THE FACTS). T HE REVENUE HAS ALSO RAISED A GROUND NO 3 CLAIMING THAT THE DIRECTION AS ABOVE IS GIVEN WITHOUT HOLDING WHETHER THE WRITTEN OFF AMOUNT IS ALLOWABLE AS INTE REST U/S 36(1)(III) OR U/S 37, WHEN THE DEPARTMENTS CASE IS THAT IT IS CAPITAL EX PENDITURE. THE ASSESSEE IS IN APPEAL, CLAIMING THAT AS THE NATURE OF THE FEES PAI D IS INTEREST ALLOWABLE U/S 36(1)(III), THE ENTIRE PAYMENT OF RS 2,09,00,998/- ACTUALLY MADE TO THE SCHEDULED BANK ICICI BANK LTD DURING THE FY 2002-03 RELEVANT TO AY 2003-04 BE ALLOWED U/S 43B(D) OF THE ACT. 11. SUBMISSIONS BY THE ASSESSEE FOR AY 2003-04: THE PAYMENT OF LOAN RE- STRUCTURING FEES IS IN THE NATURE OF INTEREST ALLOWABLE U/S 36(1)(III) OF THE ACT RELIANCE PLACED ON (I) ITAT DECISION IN CHINTAMANI HATCHERIES LTD 75 ITD 116 (SMC) (PAGES 82 TO 85 OF THE COMPILATION OF CASE LA WS) AND (II) DELHI HIGH COURT DECISION IN GUJARAT GUARDIAN LTD . 19 DTR 785 (DEL) (PAGES 23 TO 29A OF THE COMPILATION OF CASE LAW). THE ENTIRE AMOUNT OF RS 2 ,80,00,000/- WAS INCURRED AS LIABILITY DURING THE PREVIOUS YEAR 2002-03 RELEVANT TO AY WHEN THE AGREEMENT WAS REACHED ON 29.6.2002 AS PER AGREEMENT DT 11.4.2002. ALLOWABILITY OF THE EXPENDITURE SHOULD NOT BE ON THE BASIS OF THE TREAT MENT GIVEN TO THE EXPENDITURE 7 IN THE BOOKS OF ACCOUNTS BY THE ASSESSEE BUT ON THE CONTRACTUAL OBLIGATION UNDERTAKEN BY THE ASSESSEE (RELIANCE PLACED ON SC D ECISION IN KEDARNATH JUTE 82 ITR 363 (SC) (PAGES 15 TO 17 OF THE COMPILAT ION OF CASE LAW) AND THE BOMBAY HIGH COURT DECISION IN THE CASE OF BACKOU WO LF NEW INDIA ENGINEERING WORKS (PAGES 18 TO 22 OF THE COMPILATION OF CAS E LAW). CASE LAW RELIED BY THE CIT(A) ARE DISTINGUISHABLE. THE DEDUCTION, HOWEVER, IS ADMISSIBLE SUBJECT TO THE PROVISIONS OF SECTION 43B(D ) I.E. ON ACTUAL PAYMENT BASIS HENCE THE AMOUNT CLAIMED AT RS 2,09,00,008/- BE HELD AS ALLOW ABLE FOR AY 2003-04 (RELIANCE AGAIN PLACED ON DELHI HIGH COURT DECISION IN THE CASE OF GUJARAT GUARDIAN LTD (SUPRA). EVEN ASSUMING BUT NOT ADMITTI NG THAT THE LOAN RE- STRUCTURING FEES ARE ALLOWABLE AS DEFERRED REVENUE EXPENDITURE BASIS AS HELD BY THE CIT(A) RELYING ON BOMBAY HIGH COURT DECISION IN TAPARIA TOOLS LTD (SUPRA), STILL THE CLAIM OF RS 2,09,00,998/- BE ALLOWED FOLL OWING THE ITAT CHANDHIGARH SPECIAL BENCH DECISION IN DCIT V GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD 103 ITD 343 (CHD)(SB) PLACED AT PAGES 50 TO 53 OF T HE COMPILATION OF THE CASED LAW WHICH HAS BEEN FOLLOWED BY THE ITAT PUNE IN THE CASE OF FORCE MOTORS LTD (PAGES 74 TO 81 OF THE COMPILATION CASE LAW). THE QUESTION OF WHETHER AN EXPENDITURE IS OF CAPITAL NATURE ARISES ONLY WHEN I T IS TO BE CONSIDERED U/S 37 OF THE ACT. THE AOS CLAIM THAT THE RE-STRUCTURING OF THE LOAN AND REDUCTION IN INTEREST RATE IS AN ENDURING BENEFIT RESULTING IN T HE EXPENDITURE ON FEES THEREFORE INTO CAPITAL EXPENDITURE IS NOT CORRECT AS PER LAW. THE RELIANCE PLACED ON SC DECISION IN SITALPUR SUGAR WORKS LTD 49 ITR 160 PLA CED AT PAGES 92 TO 94 OF THE COMPILATION OF CASE LAW IS MISPLACED BECAUSE THAT C ASE WAS OF SHIFTING OF THE MACHINERY AND THE FACTORY TO A NEW PLACE MORE ADVAN TAGEOUS TO THAT ASSESSEE. IT HAD CONNECTION WITH THE FIXED CAPITAL OF THAT AS SESSEE. IN THE ASSESSEES CASE, THE RE-STRUCTURING IS OF A LIABILITY AND IT HAS NOT IN ANY WAY AFFECTED THE FIXED ASSETS OF THE ASSESSEE. THE TRUE TESTS ARE LAID DOW N IN THE SUBSEQUENT SC DECISION IN EMPIRE JUTE 124 ITR 1 (SC) PLACED AT PAGES 4 TO 11 OF THE COMPILATION OF CASE LAW. THE BENEFITS RECEIVED BY THE RE-STRUCTURING OF THE LOANS IS TOWARDS SMOOTH AND EFFICIENT RUNNING OF THE ASSE SSEES BUSINESS AND HAS RESULTED INTO EASING PRESSURE ON ITS CIRCULATING CA PITAL AND THE DEDUCTION OF INTEREST IN THE REVENUE FIELD. (RELIANCE PLACED ON THE RATIO OF THE SC DECISION IN THE CASE OF CIT V ASSOCIATED CEMENT CO 172 ITR 257 (SC) PLACED AT PAGES 95 TO 98 OF THE COMPILATION OF THE CASE LAW. THUS APPL YING THE TESTS LAID DOWN IN EMPIRE JUTE BY THE SC, THE EXPENDITURE IS FULLY REV ENUE EXPENDITURE AND NOT AT ALL OF CAPITAL NATURE. THE EXPENDITURE IS ALSO APPARENT LY AND WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS AND HENCE CANNOT B E DISALLOWED EVEN U/S 37 OF THE ACT. THE LOAN FROM THE BANK IS A LIABILITY. EXP ENDITURE INCURRED FOR DISCHARGING THE LIABILITY IN SUITABLE INSTALLMENTS IS EXPENDITU RE OF REVENUE NATURE AND DOES NOT 8 BRING IN ANY BENEFIT OF ENDURING NATURE SO AS TO HO LD THAT THE EXPENDITURE INCURRED IS OF CAPITAL NATURE. (RELIANCE PLACED ON SC DECISI ON IN CIT V SHIVKAMI MILLS LTD. 227 ITR 227 (SC) COPY PLACED AT PAGES 12 TO 14 OF T HE COMPILATION OF CASE LAW. 12. ASSESSEES SUBMISSIONS FOR AY 2001-02: ONLY THE ASSESSEE IS IN APPEAL BEFORE THE ITAT FOR THIS YEAR CLAIMING THAT THE ENTIRE INTEREST RE-SET PREMIUM OF RS 75 LAKH (WHICH IS CONSIDERED BY THE C IT(A) UNDER THE TERM RE- STRUCTURING FEES), BE SLOWED AS A DEDUCTION U/S 36( 1)(III) AS INTEREST READ WITH THE PROVISIONS OF SECTION 43B(C) OF THE ACT, THE SAID A MOUNT IS ACTUALLY PAID ON 27.12.2000 I.E. DURING THE PREVIOUS YEAR 2000-01 RE LEVANT TO AY 2001-02, THE PAYMENT BEING IN THE NATURE OF INTEREST AND AS IT I S PAID TO A FINANCIAL INSTITUTE. IT MAY BE STATED THAT THERE IS NO RE-STRUCTURING OF AN Y LOAN INVOLVED IN THIS YEAR. THE REVENUE AS NOT COME IN APPEAL BUT AS IT CAN SUPPORT THE CIT(A)S ORDER ON OTHER GROUNDS DECIDED AGAINST IT, MY SUBMISSIONS ARE SAME AS FOR THE AY 2003-04. 13. ASSESSEES SUBMISSIONS FOR A.Y 2004-05: THERE IS APPEAL ONLY BY THE REVENUE. THE ASSESSEE HAS RECEIVED DEDUCTION IN RES PECT OF THE INTEREST RE-SET PREMIUM AND LOAN RESTRUCTURING FEES AT RS 1,04,63,4 18/- AS IT IS ENTITLED TO A DEDUCTION OF ONLY RS 70,00,002/- IT HAS NOT COME IN APPEAL. BUT WHILE DECIDING THE REVENUES APPEAL, THE DEDUCTION ALLOWABLE BE RE STRICTED TO THE ACTUAL PAYMENT OF RS 70,00,002/- UNDER THE PROVISIONS OF SECTION 4 3B(D) OF THE ACT. 14. ON THE OTHER HAND, LD DR FOR THE REVENUE ARGUED STATING THAT THE CLAIM IN QUESTION IS NOT INTEREST ALTHOUGH IT HAS THE SHADE OF IT. THE EXPENDITURE CLAIMED IS CAPITAL NATURE IN VIEW OF THE SUPREME COURTS DECIS ION IN THE CASE OF EMPIRE JUTE (SUPRA). OTHERWISE, HE STRONGLY RELIED ON ORDERS OF THE AO. FINDING OF THE TRIBUNAL: 15. WE HAVE HEARD THE PARTIES ON THE ISSUES OF INT EREST RESET PREMIUM AND THE BURNING LOSS CLAIMS. IN BRIEF, THE STAND OF THE ASSESSEE IS THAT THE SAID EXPENDITURE INCURRED OR FEE PAID TO THE BANKS/FINAN CIAL INSTITUTIONS FOR RESTRUCTURING OF THE INTEREST, ACCRUED INTEREST AND THE BORROWED CAPITAL FOR THE BENEFITS OF THE ASSESSEE IS NOT A CAPITAL EXPENDITU RE AND THE SAME IS AN ALLOWABLE EXPENDITURE AS THE SPENT FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. SUCH EXPENDITURES WHICH ARE AKIN TO THE U NDER REFERENCE IS ALREADY HELD ALLOWABLE REVENUE EXPENDITURE IN OTHER CASES B Y THE TRIBUNAL. FURTHER, THE PROVISIONS OF SECTION 2(28A) R W S 43B OF THE ACT P ROVIDES LEGAL SUPPORT TO THE CLAIMS OF THE ASSESSEE. 9 16. ON THE OTHER HAND, CASE OF THE REVENUE IS THAT THE EXPENDITURE IN QUESTION IS OUTSIDE THE SAID DEFINITIONS. THE EXPENDITURE UN DER REFERENCE CONSTITUTES CAPITAL EXPENDITURE AS EXPENDITURE IS INCURRED NOT ONLY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE FOR THE ONE AY BUT FOR THE PERIOD OF SEVEN YEARS AND THEREFORE, CLAIM IS NOT ALLOWABLE. AT THE LEVEL OF THE CIT(A), THE EXPENDITURE IS IN THE NATURE OF DEFERRED REVENUE EXPENDITURE WHICH IS ALLOWABLE OVER THE PERIOD OF 7 YEARS IN VIEW OF THE JUDGMENTS IN THE CASES OF MI IC (SUPRA) AND TAPARIA TOOLS (SUPRA). OTHER OBJECTION OF THE REVENUE IS THAT THE EXPENDITURE WHICH IS NOT CLAIMED TO THE P&L ACCOUNT BUT CLAIMED AS EXPENDITU RE ONLY THROUGH THE COMPUTATION OF INCOME, IS NOT AN ALLOWABLE EXPENDIT URE. 17. IN OUR OPINION, MOST OF THE OBJECTIONS ARE SQUA RELY SETTLED IN FAVOUR OF THE ASSESSEE. THERE IS NO BAR FOR THE ASSESSEE TO MAKE THE CLAIM BY WAY OF COMPUTATION OF INCOME AND IN FACT, IT IS THE DUTY OF THE AO TO MAKE THE ASSESSMENT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, WHETHER THE ASSESSEE MAKES CLAIM OR NOT. THE CONCEPT OF THE DEFERRED RE VENUE EXPENDITURE OF THIS KIND IS NOT SUPPORTED BY THE EXPRESS LEGAL PROVISIO NS IN THE ACT AND IT VARY CASE TO CASE BASED OR FACTS OF EACH CASE. SO FAR AS THE CAPITAL NATURE OF EXPENDITURE IS CONCERNED, IT IS A DECIDED LAW AT THE LEVEL OF THE SUPREME COURT AS HELD IN THE CASE OF EMPIRE JUTE (SUPRA) THAT THE CAPITALIZATION OF EXPENDITURE HAS TO BE DECIDED BASED ON THE FACTS OF EACH CLAIM OF EXPENDI TURE AND IT IS DIFFICULT TO EVOLVE A RULE ON THIS POINT. THUS, WE ARE LEFT WITH ONLY ONE CORE ISSUE FOR ADJUDICATION AND IT RELATES TO IF THE IMPUGNED EXPE NDITURAL CLAIM OF THE ASSESSEE CONSTITUTES INTEREST OR NOT. 18. WE FIND THAT THE EXPRESSION INTEREST IS DEFIN ED IN SECTION 2(28A) OF THE ACT AND IT HAS AN INCLUSIVE SIDE OF THE DEFINITION TOO. THE SAME IS INSERTED VIDE THE FINANCE ACT 1976 AND THE SAME READS AS FOLLOWS. 2(28A) INTEREST MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A DEPOS IT, CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE MONIES BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILIZED;. 19. IN THE PRESENT APPEAL, THE SAID INCLUSIVE SIDE OF THE DEFINITION IS RELEVANT. IN OTHER WORDS, THE EXPRESSIONS ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE MONIES BORROWED ARE RELEVANT. IT IS FACT THAT THE SAID EXPRESSIONS ARE NOT DEFINED IN THE ACT. BUT THEY ARE QUALIFIED BY CERTA IN EXPRESSIONS AND THEY ARE (I) IN RESPECT OF THE MONIES BORROWED , (2) IN RESP ECT OF THE DEBT INCURRED, (3) IN 10 RESPECT OF ANY CREDIT FACILITY OR (4) IN RESPECT O F ANY CREDIT, WHICH HAS NOT BEEN UTILIZED . THESE EXPRESSIONS INDICATE THAT THE SCOPE OF THE EXPRESSION INTEREST IS VERY WIDE. THE EXPRESSION ANY BORROWAL/DEBT/ C REDIT FACILITY UTLISED OR NOT, COME UNDER THE SAID SCOPE. THE EXPRESSION ANY SERV ICE FEE OR OTHER CHARGES, WHICH ARE UNDEFINED, IN OUR OPINION, COVERS FEE OR CHARGES OF ANY OR EVERY KIND WHICH ARE PAYABLE BY THE ASSESSEE IN RESPECT OF SUC H BORROWAL/DEBT/ CREDIT FACILITY UTLISED OR NOT. 20. THEREFORE, WE AFFIRM THE VIEW OF THE CIT(A) WHO HELD THAT THE EXPRESSIO NS SERVICE FEE AND OTHER SUCH CHARGES WHICH ARE LEV IED BY THE LENDER IN THE COURSE OF SUCH LOAN PROCESSING, MANAGING, RE-STRUCTURING E TC. EXPRESSIONS USED IN CLAUSE (28A) ARE OF WIDER CONNOTATION AND USE AND T HE IMPUGNED EXPENDITURE FALLS WITHIN THE SCOPE OF THE SAID CLAUSE. HOWEVER, THE SAID AFFIRMATION DOES NOT COVER HIS FINDING ON THE TREATMENT OF DEFERRED REVE NUE EXPENDITURE. WE FIND THAT THE SAID PAYMENT BY THE ASSESSEE CANNOT BE SAID TO BE NOT INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE LOAN-INTEREST TR ANSACTIONS FOR THE REASONS THAT THE ASSESSEE GOT THE INTEREST RATES RESTRUCTURED TO HIS ADVANTAGE AND LOAN IS DEFINED IN TERMS OF THE USEFUL INSTALLMENTS TO THE BENEFIT OF THE ASSESSEE, CERTAIN CONCESSIONS TO THE ASSESSEE ETC. IN OUR OPINION, TH E WE AFFIRM THE VIEWS OF THE CIT(A) IN THIS REGARD, WHO HELD THAT THE INTEREST RESET PREMIUM IS IN THE NATURE OF THE SERVICE CHARGES AND SUCH OTHER CHARGES AS DEFIN ED IN 2(28A) OF THE ACT AND THEREFORE THE DECISION OF THE TRIBUNAL IN THE CASE OF CHINTAMANI HATCHERIES P LTD (SUPRA) HAS USEFUL RELEVANCE TO THE FACTS OF THIS C ASE. ACCORDINGLY, ON THIS ISSUE OF THE NATURE OF THE IMPUGNED PAYMENTS AND ALLOWABI LITY OF EXPENDITURE CLAIM, IN PRINCIPLE, WE ARE OF THE VIEW THAT THE DECISION AS HELD BY THE CIT(A) IS REQUIRED TO BE UPHELD. HOWEVER, THE SAME IS SUBJECTED TO THE FO LLOWING. 21. REGARDING OTHER ASPECTS OF THE ISSUE ON THE ISS UE OF EXTENT OF ALLOWABILITY , IN OUR OPINION, THESE ISSUES ARE CONSEQUENTIAL IN NATURE AND THE TREATMENT THAT SHOULD BE GIVEN TO THE INTEREST HA S TO BE GIVEN TO THESE PAYMENTS ALSO IN VIEW OF THE DEFINITION GIVEN IN 2(28A) OF T HE ACT. AS SEEN FROM THE PARAGRAPHS 7 TO 13 OF THE IMPUGNED ORDER, THE CIT(A ) HAS NOT HARMONIOUSLY INTERPRETED THE PROVISIONS OF SECTION 2(28A), 43B A ND THE JUDGMENTS IN THE CASES OF MIIC (SUPRA) AND TAPARIA TOOLS (SUPRA). IN OTHER WORDS, IF THE IMPUGNED EXPENDITURE CONSTITUTES INTEREST WITHIN THE MEANI NG OF SECTION 2(28A) OF THE ACT, THE SAME ATTRACTS THE PROVISIONS OF SECTION 43B AS ARGUED BY THE LD COUNSEL AND CLAIM HAS TOBE ALLOWED IN ACCORDANCE WITH THE PROVI SIONS OF SECTION 43B OF THE ACT. WE FIND FORCE IN THE SAID ARGUMENTS. CIT(A) HA S NOT ATTENDED TO THESE ARGUMENTS AS NOTED ABOVE. FROM THE PERUSAL OF THE SAID JUDGMENTS RELIED UPON 11 BY THE CIT(A), PRIMA FACIE WE FIND THE FACTS OF THO SE CASES ARE ENTIRELY DIFFERENT AND THEY ARE NOT IN THE CONTEXT OF THE ISSUE OF IN TEREST AS DEFINED IN 2(28A) R W S 43B OF THE ACT. CONSIDERING THE IMPORTANT SLIP REGA RDING THE ASPECTS OF THE 43B OF THE ACT IN HIS ORDER, WE FIND THAT THIS ISSUE ON TH E ASPECTS OF THE EXTENT OF ALLOWABILITY HAS TO GO TO THE FILES OF THE CIT(A) F OR THE ADJUDICATION AFRESH FOR DETERMINING IF THE MATTER HAS TO BE DECIDED DIFFERE NTLY IN VIEW OF THE PROVISIONS OF SECTION 43B OF THE ACT AND ALSO ON THE NECESSITY OF HARMONIOUS INTERPRETATIONS. ACCORDINGLY, FOR THIS LIMITED PURPOSE, THE MATTER I S SET ASIDE . THE CIT(A) IS DIRECTED TO GRANT THE AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THE SAME. HE SHALL PASS A SPEAKING ON THE SAID ISSUES AFTER CONSIDERING THE ENTIRE GAMUT OF THE ARGUMENTS AND CITATIONS IN LINE WITH THE PROVISIONS OF SECTION 250(6) OF THE ACT. THUS, THIS PART ISSUE OF THE ISSUE WITH RELEVANT GROUNDS OF BOTH REVENUE AND ASSESSEE IN THEIR APPEALS IS SE T ASIDE IN ALL THE APPEALS UNDER CONSIDERATION WHERE EVER APPLICABLE. ACCORDI NGLY, THE RELEVANT GROUNDS ARE PARTLY SET ASIDE. II. ADDITION FOR EXCESS MELTING LOSS BEING SUPPRESS ED GROSS PROFIT: 22. THIS ISSUE IS SPECIFIC TO THE REVENUES APPEAL VIDE THE ITA NO 699 /P/07 FOR THE AY 2003-04. IN THIS REGARD, LD DR RELIED ON THE ORDER OF THE AO. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE MENTIONED T HAT ISSUE OF MELTING LOSS VIS A VIS THE GP WAS SUBJECT MATTER OF THE APPEAL BEFOR E THIS TRIBUNAL IN CONNECTION WITH THE APPEAL BY THE REVENUE VIDE THE ITA 697 769 8/P/07NFOR THE AYS 2001-02 AND 2002-03 WHERE THE TRIBUNAL HELD THAT THE CLAIM OF MELTING LOSS IN EXCESS OF 8.50% IS NOT ALLOWED BY THE TRIBUNAL IN THOSE APPEA LS. IT WAS SO DECIDED BY THE TRIBUNAL ALSO CONSIDERING THE FACT OF SUBMISSION O F BURNING LOSS OF 8% AS ADMITTED BY THE VP (TECH) OF THE COMPANY DURING THE ASSESSMENT PROCEEDINGS IN THE ASSESSEES OWN CASE. THUS, IT IS OUR DECISION I N THE OTHER AYS OF THIS ASSESSEE, THE BURNING LOSS UPTO THE UPPER LIMIT OF 8.5% SHOULD BE ALLOWED. IN THE INSTANT AY, THE IMPUGNED DISCREPANCY OF 51.150MT AM OUNTS OT LESS THAN THE SAID LIMIT. THEREFORE, WE ARE OF THE OPINION, THE REVENU E HAS NOT ESTABLISHED THE FACT OF SUPPRESSED GROSS PROFIT BY THE ASSESSEE. THEREFO RE, WE ARE OF THE OPINION, RELEVANT GROUNDS OF THE REVENUE FOR THE AY 2003-04 HAS TO BE DISMISSED . 12 23. IN THE RESULT, THE ALL THE FIVE APPEALS OF THE REVENUE (THREE) AND ASSESSEE (TWO) ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 23 RD MAY, 2011 SD/- SD/- (I.C. SUDHIR) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT ME MBER PUNE DATED THE 23 RD MAY, 2011 B COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), KOLHAPUR 4. THE CIT, KOLHAPUR 5. THE D.R. ITAT B BENCH 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE