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2016 (8) TMI 860 - ITAT MUMBAI

2016 (8) TMI 860 - ITAT MUMBAI - TMI - Disallowance of loan processing charges and pre-payment charges paid to the bank - whether ‘prepayment charges’ and ‘processing fee’ shall form part of the word ‘interest’ as used in section 24(b) of the Act? - Held that:- As far as the prepayment charges are concerned, these have been paid for the loans which have been refunded and thus no more utilised by the assessee. It has been clearly provided that any charges incurred even for any credit facility whi .....

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ose of reducing its interest burden by availing loan from the lenders at lower rate of interest. The prepayment charges and processing fee borne by the assessee at this stage were be compensated subsequently by payment of lower amount of interest. In any case, so long as the expenses incurred by the assessee are genuine and not part of any colorable device to make tax evasion, then such expenses should be allowed under the relevant provisions of the Act. - The legal position is clear that th .....

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head as per the provisions of law, then, the minimum duty expected from the assessee is to at least file a revised computation sheet of income offering the income in proper heads and making appropriate claims against each and every head separately. This exercise is not expected to be done by the AO on behalf of the assessee. But nonetheless, with a view to meet the ends of justice and in view of these peculiar facts and circumstances of the case, we find it appropriate to give an opportunity to .....

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6 - Shri Joginder Singh, Judicial Member, and Shri Ashwani Taneja, Accountant Member For The Assessee : Shri Nitesh Joshi, and Shri M.M. Golvala (AR) For The Revenue : Shri C.W. Angolkar (DR) ORDER Per Ashwani Taneja (Accountant Member): This appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals), Mumbai-4 {(in short CIT(A) }, dated 14.08.2013 passed against assessment order u/s 143(3) dated 23.01.2013 for the Assessment Year 2010-11 on the following .....

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ities erred in not allowing deduction under Section 24(b) in respect of prepayment charges paid to bank - ₹ 1,32,44,633/-. 5. Both the lower authorities erred in not considering the specific definition of "Interest" under Section 2(28A). 6.The Appellant submits that the pre-payment charges paid should be allowed as deduction under Section 24(b) while computing "Income from House Property". 7. Both the lower authorities erred in not allowing as a deduction common area ma .....

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mount recovered by the appellant in respect of Common Area Maintenance charges cannot be assessed separately under the head "Income from other Sources". 2. The assessee also filed following additional grounds which were admitted with the consent of both the parties. 1. The learned Commissioner of Income-tax (Appeals) erred in not directing the Assessing Officer to grant full TDS credit on the basis of original TDS certificates which had been furnished to the Assessing Officer at the ti .....

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onnected issues of disallowing loan processing charges and pre-payment charges paid to the bank. 4.1. The brief facts as culled out from the order of the lower authorities are that during the year, the assessee company owned an information technology park at Malad, Mumbai and had leased out its portions to various tenants. The Income earned from the said activity was offered under the head Income from house property and was accepted as such by the AO in the assessment order. In the earlier years .....

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exclusive purpose of repayment of loans to the aforesaid six parties. In the process of change over of the lender, the assessee paid prepayment charges of ₹ 1,32,44,653/- to these six bankers to whom loans were prepaid and also paid processing charges of ₹ 1 crore to Axis Bank for availing the fresh loan. This is where the dispute arose. The AO disallowed both of these amounts i.e. prepayment charges as well as processing fee on the ground that no such deduction is allowable u/s 24 a .....

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loan applicants. Administrative charges and processing fees do not guarantee the sanction of loan and therefore, the said processing fees are not always directly related to the payment of interest. There may be cases where processing charges have been paid by the loan applicant but no loans were actually sanctioned by the banks and therefore, no interest was paid by the loan applicant. On the other hand pre-payment is perceived as a risk, because such prepayment of loan is often linked with rest .....

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e aforesaid decisions, the processing charges and the pre-payment penalty, penalty are held not allowable deduction u/s 24 (b) of the Act. The case laws relied upon by the appellant are distinguishable from the facts and circumstances of the present case, hence they are not squarely applicable in this case. In view of the above, the disallowance of processing charges of ₹ 1 crore and of pre-payment penalty of ₹ 1,32,44,633/- made by the LAO are confirmed. 4.3. Being aggrieved, the as .....

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assessee is eligible to claim the deduction u/s 24 of the Act on the impugned payments or not. In this regard, he drew our attention upon section 24(b) to argue that interest payable on borrowed capital is allowable to the assessee. For the purpose of explaining scope and meaning of the term interest , he referred to provisions of definition clause as contained in section 2(28A) defining the meaning of the term interest , contending that the scope of word interest has been widely adopted under t .....

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. DCIT v. Jammu & Kashmir Bank Ltd. (36CCH 463) 6. CIT vs. Gujarat Guardian Ltd. (177 Taxman 434, Delhi) 4.5. In addition to the above arguments he also distinguished the decision in the case of Haddock Properties Pvt. Ltd. vs. DCIT (ITA No. 3714/M/2010) dated 07.09.2011 which has been relied upon by the AO in his order to decide this issue against the assessee. Per contra, Ld. DR has relied upon the orders of the lower authorities and submitted that these payments were of capital in nature .....

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h as the term interest has been defined in section 2(28A) as under: Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised; 4.7. Perusal of the above said definition shows that the term interest has been defined in a manner giving it a .....

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. As far as the prepayment charges are concerned, these have been paid for the loans which have been refunded and thus no more utilised by the assessee. It has been clearly provided that any charges incurred even for any credit facility which has not been utilised shall also form part of the term interest . Even, otherwise, both of these payments have been made for the purpose of availing of the loan at lower interest cost. It is for the assessee to plan its financial affairs in the best possibl .....

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so long as the expenses incurred by the assessee are genuine and not part of any colorable device to make tax evasion, then such expenses should be allowed under the relevant provisions of the Act. 4.8. It is noted that our view is supported by plethora of judgments. In the case of Pentagram Properties Pvt. Ltd. (supra), the Mumbai bench of the tribunal while allowing the claim of the assessee on account of payment of processing fee observed as under: The assessee is in appeal questioning the de .....

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des any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. It is seen from the definition that even a service fee paid in respect of the moneys borrowed is included in the definition of interest . The processing fee is charged by the lender since the processing of the loan application and connected documents involves a service rendered by him to the borrower. By virtue of the definition of the word inte .....

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ition. The assessee s contentions are also supported by the order of the Single Member, Pune Bench in the case of Chintamani Hatcheries (P) Ltd. vs. DCIT (2000) 75 ITD 116 (Pune) (SMC), where it has been held that processing fee for obtaining a loan is a service fee and has to be allowed as interest in view of the definition in section 2(28A). The Circular No. 202, dated 5th July 1976, issued by the CBDT (copy filed) while explaining the provisions of section 2(28A) also clarify the position. We .....

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pute on the fact that the assessee availed loan for acquisition of certain premises, the income from which was shown and accepted under the head Income from house property . The assessee claimed deduction of ₹ 11.05 crore u/s 24(b) of the Act. The Assessing Officer did not allow deduction of ₹ 1.56 crore paid as prepayment charges for the closure of the loan account which was taken for acquisition of property fetching the extant house property income. Under these circumstances the qu .....

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st payable in any manner in respect of any moneys borrowed or debt incurred …. and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized . The definition of interest u/s 2(28A) makes it manifest that it has basically two components, viz., firstly, the amount with nomenclature of interest for moneys borrowed and secondly, the amount paid by whatever name called in respect of the money bor .....

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acquisition of property. Later on it arranged the money from other sources and repaid the loan which was taken for acquisition of property. The bank accepted the early repayment of loan on receipt of prepayment charges. By such repayment, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction u/s 24(b) during the continuation of loan. It is obvious that these prepayment charges have live and direct link with the obtainin .....

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t interest and prepayment charges are species of the term interest . We, therefore, set aside the impugned order on this issue and order for the grant of deduction. 4.10. Similar view has been taken by the Hon ble Delhi High Court in the case of Gujarat Guardian Ltd.(supra). Similar view has been taken in few other cases also as relied upon by the Ld. Counsel. 4.11. In the case of Haddock Properties Pvt. Ltd., as was relied upon the lower authorities, loan processing charges were disallowed by t .....

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elow: Therefore, these processing charges in our view are not paid for obtaining funds or loan amount. Further the debenture issued by the assessee cannot be equated with the direct loan for acquiring the property in question but the funds raised through the debentures were partly applied for repayment of loan taken for acquisition of the property. 10. As regards the decisions relied upon by the learned AR on the point that any charges in respect of money barrowed by the assessee would fall in t .....

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r repayment of the loan. Accordingly, we are of the view that the processing charges for issue of debenture cannot be treated as interest paid on debenture and consequently cannot be allowed as a deduction u/s 24(b). 4.11. Thus, perusal of the above clearly shows that the bench has rather supported the case of the assessee by observing that in case processing charges would have been paid for obtaining loan, then, the same would have been indeed allowable. Thus, in our considered view, the legal .....

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mpugned year as well as subsequent years, though the assessee has been showing its total income under the head income from house property , but by way of note given in the computation sheet, the assessee has stated that the assessee company reserves its right to claim common area maintenance charges amounting to ₹ 3,70,62,516/- as deduction to arrive at the annual value u/s 23 relying upon the Mumbai Tribunal judgment in the case of Sharmila Tagore vs. JCIT 93 TTJ 483 (Del). It is an admit .....

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as income from other sources and accordingly allow the corresponding expenses incurred for earning income from other sources i.e. aforesaid maintenance expenses be allowed as a deduction. Both of the lower authorities did not accept the submissions of the assessee. 5.2. Being aggrieved the assessee filed appeal before the Tribunal. 5.3. During the course of hearing, assessee has vehemently submitted that income should be assessed as per the provisions of law and no tax can be collected without t .....

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