Delhi High Court Allows Income Tax Deduction On Upfront Loan Processing Fee To Indus Towers
The Delhi High Court has allowed income tax deduction on the upfront loan processing fee to the assessee, Indus Towers.The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that merely because the loan processing charges were paid upfront but amortized over a period of five years, solely to be in consonance with the mercantile system of accounting, the deduction of...
The Delhi High Court has allowed income tax deduction on the upfront loan processing fee to the assessee, Indus Towers.
The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that merely because the loan processing charges were paid upfront but amortized over a period of five years, solely to be in consonance with the mercantile system of accounting, the deduction of the entire charges in a lump sum in the year in which they were paid could not be denied to the respondent or assessee.
The respondent/assessee is a joint venture company of Bharti Infratel Limited, Vodafone Essar Limited, and Aditya Birla Telecom Limited, with its main object being to share the telecom infrastructure amongst various telecom service providers.
The assessee filed its return of income by declaring total loss, which was revised, and the declared loss was pegged, including unabsorbed depreciation.
The assessee’s case was selected for scrutiny assessment, and a notice under Section 143(2) was issued to it. The assessing officer passed an assessment order by declaring the total loss of the assessee as against the claimed loss.
The assessee, while utilizing the interest-bearing borrowed funds, claimed to have started constructing 14,484 towers, by which time it had taken a few towers on lease from Bharti Airtel, Vodafone, and Idea, and the construction of new towers was merely a part of the existing concern acquiring assets to expand the same business. The objective was that the interest component on the borrowed funds could only be capitalized, i.e., added to the cost of the assets, but could not be claimed for deduction as revenue expenditure under Section 36.
The Assessing Officer was of the view that all towers erected by the assessee might not have been put to use; therefore, in respect of the towers that, in his opinion, were not put to use prior to March 31, 2009, the interest expense for the funds borrowed was to be capitalized.
As regards depreciation, the Assessing Officer was also of the view that not all towers erected by the respondent or assessee might have been put to use, so on an estimated basis, depreciation of approximately 50% of towers could be allowed.
The respondent/assessee claimed an amount of Rs. 20.75 crore towards the upfront loan processing fees as revenue expenditure had debited only Rs. 4,45,38,521 in its profit and loss account and had amortized the loan processing fees over the period of the loan. The deduction allowable to the assessee had to be restricted to Rs. 4,45,38,521, with the liberty to claim disallowance in the subsequent years based on accounting treatment.
The appeal was filed by the assessee before the Commissioner of Income Tax (Appeals). The CIT (A) held that the claim of the respondent or assessee with regard to the interest on the loan as well as the claimed depreciation were allowable deductions. The CIT(A) found that the decision of the Assessing Officer, treating the loan processing fee as a deferred revenue expense, was not in accordance with the law. The Assessing Officer, by mistake, took the loan processing fee as Rs. 20.75 crore as against Rs. 21.875 crore and accordingly made a lesser amount of disallowance.
The order of the CIT(A) was challenged by both sides in an appeal before the Tribunal, which allowed the appeal of the assessee and dismissed the appeal of the department. The Tribunal held that, so far as interest on loans and depreciation are concerned, there was no infirmity in the decision of the CIT (A). So far as the disallowance of loan processing fees is concerned, the assessee had paid one-time upfront processing fees, and the entire amount of loan processing fees was claimed as revenue expenditure, though amortized for accounting purposes over the period of the respective loan by debiting an amount of Rs. 4,45,38,521 to its profit and loss account based on the number of years for which the loan was used in the subject assessment year. Since funding is required in business from time to time, these expenses are regular business expenses, so the claim of the assessee for the loan processing fee in its entirety was allowable.
The department contended that the Tribunal failed to appreciate that the loan taken by the respondent or assessee was to procure assets and not for routine business, so the same cannot be claimed as revenue expenditure under Section 37 of the Income Tax Act.
The court dismissed the appeal of the department and upheld the order of the tribunal.
Counsel For Appellant: Zoheb Hossain
Counsel For Respondent: Rohit Jain
Case Title: PCIT Versus Indus Towers Ltd.
Citation: 2023 LiveLaw (Del) 1043
Case No.: ITA 89/2020