The Madras High Court recently ruled that 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 u/s 37(1) of the Income Tax Act.
Such ruling came while dealing with a case where scrutiny proceedings were initiated, leading in revisional assessment u/s 263, based on the assumption that assessment order was prejudicial to the interest of Revenue Department, and resultant disallowance of payment of foreclosure premium as a business expenditure.
The Division Bench of Justice Anita Sumanth and Justice G. Arul Murugan observed that “Though mere disagreement with the view taken by the AO would not be a sufficient ground for invoking power u/s 263, it is quite another matter if the conclusion of the authority is palpably erroneous or contrary to settled law or judgment of the superior Courts”.
The Bench referred to the decision of CIT v Gujarat Guardian, where it was held that the prepayment premium represented present value of the differential rate of interest that would be payable by the assessee if the loan had not been restructured.
Hence, applying Sec 36(1)(ii) r/w/s 2(28A), the claim for deduction on prepayment premium, was allowed as revenue expenditure, added the Bench.
The Bench clarified that it was never the case of Revenue Department that the borrowing was deployed towards purchase of capital asset or purchase / acquisition of a capital asset on that the transaction itself should be viewed as being capital in nature.
Such an angle does not find place in either the show-cause notice, order u/s 263 or order of the ITAT, added the Bench.
The Bench went on to reiterate that it is for the assessee to decide what would be the best way of going about its business and maximising its profit subject to such acts being within the four corners of the law.
When two views are possible and the view of the AO in allowing an expenditure is supported by the decision of High Courts & Apex Court, the Bench clarified that the CIT cannot exercise the power of revising the assessment order on the ground that he takes a different view.
The High Court noted that 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.
Hence, the High Court assessee’s appeal and concluded that the payment of foreclosure premium is allowable as an expenditure u/s 37(1) of the Income Tax Act.
Counsel for Appellant/ Assessee: Advocate T. Vasudevan
Counsel for Respondent/ Department: Advocate Avinash Krishnan Ravi
Case Title: EIH Associated Hotels Ltd vs. CIT
Case Number: T.C.A.No.1249 of 2010
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