Money spent on getting loans is revenue expense

CHAT ROOM

Our firm is in construction business. The state government invited tender for setting up infrastructure for a project and said loan would be provided to the selected company by the state financial corporation.

For getting loan with the tenders, a blue print of the infrastructure proposed to be constructed, was to be furnished with architect's report and details about securities to be offered for the loan.

Certain sum was also required to be paid for scrutinising the blue prints and the report and getting our accounts audited for loan.

The firm also paid fees to the architect for preparing the blue print and report. Our tender was accepted and we have also been sanctioned loan, for which expenses on stamp duty and registration have been paid.

In our income tax assessment, we have claimed these expenses as revenue expenditure. The assessment officer has raised a query saying expenses on loan are not of a revenue nature and proposed to treat these as capital expenditure. Is he correct?

No. The question whether obtaining a loan could be regarded as an advantage for enduring benefit of business of an assessee and whether expenditure incurred in connection thereof towards the stamp duty, registration fees and lawyers fees could be claimed as business expenditure was considered by the Supreme Court in the India Cements Ltd vs Commissioner of Income Tax, (1966) 60 ITR 52 (SC).

In this case, the assessee, during the accounting year, had obtained a loan of Rs 40 lakh from the Industrial Finance Corporation of India. It was secured by charge on the company's fixed assets. A sum of Rs 84,633 was incurred on stamps, registration fee, charges for certified copy of the mortgage and indemnity deed, lawyer's fees in drafting deed and legal fees for the getting loan.

The income tax officer refused to allow the said deduction saying the amount of loan was paid in discharge of the amount borrowed and used on capital assets of the company.

The apex court rejected the stand saying the loan obtained couldn't be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan was a liability and had to be repaid. It would be erroneous to consider the liability as an asset or an advantage, the court said.

According to the apex court, a loan is not an asset or advantage of an enduring nature and the expenditure was made for securing the use of money for a certain period. Also it is irrelevant to consider the object with which the loan was obtained. Thus the expenditure was revenue expenditure in nature.

When a building can be treated as a plant and can become entitled for depreciation at the higher rate prescribed for "plant and machinery" in the depreciation schedule under the income tax rules?

A building can be treated as a plant if it can be considered as means of business. When a building is an apparatus or a tool of taxpayer as against merely a space only from where the taxpayer does business, it can be treated as a plant. A building, which is an integral part for the business of manufacture is a plant.

But if the structure plays no part in the manufacture, it will only be a place where the business is carried on and it cannot be recognised as plant. If the assessee, with a definite purpose considering the nature of his business, constructs a building with specific design keeping in view the technical requirement, without which assessee's business cannot be carried out, the building will qualify as a plant.

On this reasoning, cinema houses, cold storages, hotels, nursing homes have been held to be a plant. But such views do not hold any longer because the definition of a plant in Section 43(3) has been amended by the Finance Act, 2003, saying a plant will not include buildings, furniture and fixtures.

When an asset is acquired on the deferred payment basis, can the interest payable on the loan be included in the cost of the asset and capitalised for claiming depreciation allowance?

No. In the Commissioner of Income Tax vs Textool Co Ltd case, (2003) 263 ITR 523 (Madras), the Madras High Court said the assessee had availed of the loan facility for purchasing machinery and the interest payable was on the loan, which has been capitalised.

Though the seller of the machinery might have issued a bill for the consolidated amount including the principal and interest, in view of the Explanation 8 of Section 43(1), any amount paid as interest for the acquisition of assets shall not be included and shall never be deemed to have been included as part of the actual cost of the asset.

The words of Explanation 8 to Section 43(1) are fairly wide to include any amount paid as interest in connection with the acquisition of an asset.

Thus, even if the seller has issued a consolidated bill, if the amount paid by the assessee represents the interest payment, then it is not open to the assessee to capitalise the same and claim it as a part of the actual cost of the machinery for depreciation on the amount.

In the Coimbatore Pioneer Mills Ltd vs Commissioner of Income Tax case, (1999) 236 ITR 69, and the Commissioner of Income Tax vs India Pistons Ltd case, (2000) 242 ITR 672 (Madras), the court considered the scope of Explanation 8 to Section 43 (1) and held that the Explanation had been couched in the widest possible terms to avoid any further controversy with regard to the manner or mode of payment of interest or the time of payment for the interest.

Following the said decisions of this court in the cases of Coimbatore Pioneer Mills Ltd and India Pistons Ltd (supra), it has been held that the interest on the future instalments under the deferred payment scheme cannot be added to the cost of the asset for claiming depreciation allowance.

Under Section 260A, the high court can be moved against a tribunal's order. Is it necessary for the high court to hear the respondent before admitting an appeal or before framing a substantial question of law?

No. In terms of Section 260A, the court has to be satisfied that a question of law arises from the tribunal's decision and therefore, such a question needs to be formulated. There is no mandatory requirement of issuing notice before admission of appeal or before framing a substantial question of law in terms of Section 260A of the Income Tax Act, 1961.