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2024 Supreme(Mad) 1851
IN THE HIGH COURT OF JUDICATURE AT MADRAS
ANITA SUMANTH, G. ARUL MURUGAN, JJ.
M/s. EIH Associated Hotels Limited - Appellant
Versus
Commissioner of Income Tax – I, Chennai – Respondent
T.C.A.No.1249 of 2010
Decided On : 28-10-2024
For the Appellant : Mr. T. Vasudevan.
For the Respondent: Mr. Avinash Krishnan Ravi, Junior Standing Counsel.
Pre-closure premium for loan restructuring is allowable as business expenditure under Section 37(1) of the Income Tax Act, 1961, based on commercial expediency.
Headnote:(A) Income Tax Act, 1961 - Section 37(1) - Revision of assessment order under Section 263 - Allowability of pre-closure premium as business expenditure - The Tribunal confirmed the Commissioner’s order revising the assessment, stating the expenditure was not allowable as it was deemed erroneous and prejudicial to revenue interests. (Paras 1, 6, 8, 22)
(B) Jurisdiction of Commissioner - The Commissioner can revise an assessment only if it is erroneous and prejudicial to revenue; mere disagreement with the assessing officer's view is insufficient. (Paras 21, 23)
Facts of the case:
The appellant challenged the ITAT's confirmation of the Commissioner’s order revising the assessment for AY 05-06, which disallowed the pre-closure premium as business expenditure. The appellant argued the premium was incurred for commercial expediency. (Paras 2, 4)
Findings of Court:
The court found the assessing officer had considered the claim of pre-closure premium and concluded it was allowable as business expenditure. The Tribunal's reliance on previous judgments was deemed misplaced. (Paras 22, 38)
Issues: The main issues were whether the pre-closure premium could be claimed as revenue expenditure and the validity of the Commissioner’s jurisdiction under Section 263. (Paras 1, 6)
Ratio Decidendi: The court ruled that the pre-closure premium was incurred for commercial expediency and should be allowed as a deduction under Section 37(1). The Commissioner’s order was found to be erroneous. (Paras 38, 42)
Result: Tax Case Appeal allowed.
JUDGMENT :
(Anita Sumanth, J.)
(Prayer : Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of Income-Tax Appellate Tribunal 'A' Bench, Chennai dated 06.08.2010 passed in I.T.A.No.654/Mds/2010.)
The substantial questions of law admitted in this appeal are as follows:-
“A. Whether in view of the fact that when two views are possible and the view of the Assessing Officer in allowing the expenditure is supported by the decision of the jurisdictional Tribunal in Overseas Sanmar Financial Limited – vs – JCIT (2003) 86 ITD 602 (Chennai), decision of the High Court in CIT – vs- Gujarat Guardian Ltd. [2009] 177 Taxman 434 (Del), decision of Supreme Court in CIT v Madras Auto Service (P) Limited (1998) 233 ITR 468 (SC), the Commissioner of Income Tax can exercise the power of revising the assessment order on the ground that he takes a different view and particularly when two views are possible whether the order can be said to be erroneous in so far as it is prejudicial to the interest of revenue and therefore is liable to be quashed and / or set aside?
B. Whether in the facts and circumstances of the case the expenditure incurred for payment of foreclosure premium for restructuring loan and obtaining fresh loan at a lower rate of interest is allowable as business expenditure under Section 37(1) of the Income Tax Act in view of the judgment of the Jurisdictional Tribunal in the case of Overseas Sanmar (86 ITD 602) and the judgment of the Delhi High Court in the case of Gujarat Guardian (177 Taxman 434) or should such expenditure be treated as capital 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 on the basis that the assessment was erroneous and prejudicial to the interests of the Revenue for the following reasons:-
“1) Perusal of the records shows that the assessee borrowed loan from HSBC Bank to the tune of Rs.40 crores at higher interest rate (around 13%). However, during the relevant year, the said loan was repaid by taking a new loan of Rs.40 Crores from UTI Bank which carries lower interest of 8% per annum. In the P&L Account, the assessee company debited Rs.3,41,00,000/- under head ‘Premium on Term Loan’, and it was explained by the assessee that it was wrongly classified as repayment of premium but it actually represents additional interest charged by HSBC for pre-closure of loan.
Interest, however is to be paid to the bank, only if any amount is due to the bank alone. Whereas in your case, the loan was squared up. Therefore, the payment of interest does not exist. Further, if at all any interest is to be paid, it has to be paid to the Bank of UTI only. Besides, the charges for pre-closure would be on the basis of percentage of loan sanctioned earlier by HSBC and not additional interest as stated by you. Therefore, the expenditure claimed by you of Rs.3.41 crores is not allo
