Court said Expenses on Foreclosure Premium for Loan Restructuring and New Loan can be claimed as Business Expenditure

The Madras High Court recently ruled that expenses incurred on paying a foreclosure premium for restructuring a loan and securing a new loan at a lower interest rate can be claimed as business expenditure under Section 37(1) of the Income Tax Act.

Background of the Case

The ruling came in a case where scrutiny proceedings led to a revision of the assessment under Section 263 of the Income Tax Act. The revision was based on the assumption that the original assessment order was prejudicial to the interests of the Revenue Department. As a result, the payment of the foreclosure premium was disallowed as a business expenditure.

Key Observations

A Division Bench comprising Justice Anita Sumanth and Justice G. Arul Murugan made the following points:

1. Disagreement vs. Error: The Bench noted that simply disagreeing with the Assessing Officer (AO) is insufficient to invoke Section 263. Revisional powers can only be used if the AO’s decision is clearly erroneous or contradicts established legal precedents.
2. Reference to Precedents: The Bench referred to CIT v. Gujarat Guardian, where it was held that prepayment premiums represent the present value of the interest differential, which qualifies as revenue expenditure under Section 36(1)(ii) read with Section 2(28A).
3. Nature of the Expenditure: The Bench clarified that the Revenue Department never argued that the loan restructuring or the foreclosure premium was linked to acquiring a capital asset. This perspective was absent from the show-cause notice, the revision order under Section 263, and the ITAT order.
4. Business Decision: The Court emphasized that it is up to the assessee to make business decisions to maximize profits, provided such actions are within the framework of the law.

Commercial Expediency

The High Court underscored that the foreclosure of the loan was a business decision aimed at avoiding excessive charges. This decision, driven by commercial expediency, is valid for claiming the expense as a deduction.

Ruling

The Bench concluded that when two legal interpretations are possible, and the AO’s decision aligns with rulings by higher courts, the Commissioner of Income Tax (CIT) cannot revise the assessment order simply because they hold a different view.

The High Court allowed the assessee’s appeal, affirming that the payment of the foreclosure premium qualifies as a deductible business expense under Section 37(1) of the Income Tax Act.