ORDER
1. This is a departmental appeal for the assessment year 1993-94 and it arises out of the order of the CIT(A), Cen. II, Mumbai dated 20-11-1997.
2. The first ground of appeal is as follows :
“On the facts and in the circumstances of the case, the ld. CIT(A) erred in law in directing to Assessing Officer to allow the deduction of Rs. 7,50,000 on account of loan processing charges paid to HDFC and Citi Bank even though the Assessing Officer had rightly disallowed the claim since as per the terms and conditions of the loan agreement, these charges of Rs. 7,50,000 are to be spared over the entire period of the term loan which makes it clear that the expenditure of Rs. 7,50,000 has neither accrued nor crystallised during the year under consideration.”
3. The assessee is a private limited company. The assessment year involved is 1993-94 for which the previous year ended on 31-3-1993. In the relevant accounting year, the assessee was involved in the following activities :
(a) Construction project at Tungwa,
(b) Income from Hotel Resort at Mud Island,
(c) Income from consultancy division,
(d) Income from partnership firms,
(e) Sale of unit and parking at Raheja Arcade in Bangalore,
(f) Income from lease rent, etc.
4. The assessee debited loan processing charges to HDFC of Rs. 7,50,000 for processing of term loan of Rs. 5.75 crores for a construction project at Raheja Vihar, Mumbai. The assessee had paid processing and administrative fees of Rs. 6.00 lakhs to HDFC and similar payment of Rs. 1.50 lakhs to Citibank. The Assessing Officer refused to consider the loan processing charges as of revenue nature on the ground that these charges are to be spread over the entire period on the term loan as per the terms and conditions of the loan agreement. As no loan is repaid during the previous year relevant to the assessment year under consideration, the above expenses of Rs. 7,50,000 cannot be considered for the assessment year under appeal. The Assessing Officer observed that the assessee is allowed to claim these charges in future assessments.
5. In appeal, before the CIT(A) it was argued on behalf of the assessee that the view expressed by the Assessing Officer was directly in conflict with the Hon’ble Supreme Court’s decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowal is a long term or short term one. It was contended that the processing charge and administrative fees paid to the two financial institutions were incidental expenditure incurred for procuring loan and the fact that no repayment of loan was made during the year cannot be a factor to disallow the claim during the year. The assessee also relied upon the Supreme Court’s decision in CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465/95 Taxman 73. It was therefore urged that in view of the Apex Court’s decisions, the action of the Assessing Officer in disallowing the claim of expenditure was totally unjustified.
6. The learned CIT(A) examined the facts involved in the case of India Cements Ltd. (supra). In that case, the assessee-company obtained a loan secured by a charge on its fixed assets. In connection therewith, it had incurred certain sums towards stamp duty, registration fees, lawyer’s fees etc. and claimed the same as business expenditure. The Hon’ble Supreme Court held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee’s business and was, therefore, allowable as a revenue expenditure. The act of borrowing money was incidental to the carrying on the business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. The CIT(A) found from the facts on hand that the assessee had obtained a loan of Rs. 6.00 crores and Rs. 1.50 crores from HDFC and Citibank respectively which was utilised for the construction of the project at Raheja Vihar, Powai, Mumbai. The loan was secured on mortgage of fixed assets of the assessee. The assessee was required to spent a sum of Rs. 7.50 lakhs on account of processing and administrative fees to the concerned financial institutions. Thus, the learned CIT(A) found that the facts and circumstances of the assessee’s case were similar to the case of India Cements Ltd. (supra). Relying upon the ratio of the above Supreme Court decision, the CIT(A) held that the Assessing Officer was not justified in disallowing the claim of Rs. 7.50 lakhs made by the assessee representing expenditure incurred towards charges paid for processing of loan and administrative fees paid to HDFC and Citibank, and the repayment of loan has no bearing on the allowability of the claim. Therefore, he directed the Assessing Officer to allow deduction of Rs. 7,50,000.
7. Before me, the assessee cited the decision of the Hon’ble Supreme Court in Sivakami Mills Ltd.’s case (supra). In that case, purchase of machinery by the assessee was made on deferred payment terms. Guarantee was executed by the Bank for assuring due payment of instalment by the assessee. Whether the guarantee fee is allowable as revenue expenditure under section 37 was one of the questions which arose for consideration before the Hon’ble Supreme Court. The second question was whether interest on deferred payment was a revenue expenditure allowable under section 37. The Supreme Court, affirming the decision of the High Court, held that the guarantee commission paid to the bank was revenue expenditure and hence was an allowable deduction in computing the total income of the assessee in the asstt. year 1968-69. Interest on deferred payment for purchase of machinery was held to be revenue expenditure by the Madras High Court. Department filed an appeal against it and the Supreme Court dismissed the appeal, affirming the decision of the Madras High Court. Thus, the CIT(A)’s order is supported by the above two Supreme Court decisions. I fully agree with the CIT(A)’s order and the learned D.R. was unable to show us any authority against the soundness of the view taken by the learned CIT(A). Thus, the CIT(A)’s order is confirmed and ground No. 1 is dismissed.
8. Ground No. 2 is the following :
“On the facts and in the circumstances of the case, the ld. CIT(A) erred in law in deleting the disallowance of Rs. 23,19,683 on account of interest of Rs. 19,19,683 debited to financial charges and loan processing charges of Rs. 4,00,000 incurred on appreciation of assets which formed part of block of assets, even though the Assessing Officer had correctly disallowed the amount of account of capital expenditure”
9. The assessee had declared hotel income at Rs. 2.02 crores in this year as compared to Rs. 1.87 crores of last year. The assessee had borrowed from HDFC a loan of Rs. 3 crores for construction of phase-II of the hotel. The total capital WIP (work-in-progress) was shown at Rs. 2,86,42,064. Hence, interest debited to financial charges of Rs. 19,19,683 alongwith loan processing charge of Rs. 4,00,000 was disallowed by the Assessing Officer as capital expenditure. The learned CIT(A) had discussed the relevant facts at para 4.1 of his orders. Before the CIT(A), it was argued by the assessee’s counsel that the Assessing Officer failed to consider the provisions of Explanation 8 to sec. 43(1) of the Act and also the C.B.D.T. Circular No. 461 dt. 9-7-1986 which was also extracted in his order at para 4.1. The relevant portion of the CBDT circular given at para 18.2 is as follows :
“It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowing and not the cost of the asset acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest money which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the asset coming into production, that is relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets in relation to the post production period should be capitalised.”
10. It was contended before the CIT(A) that there is no phase-II of the hotel which is under construction. The Assessing Officer, argued the learned counsel for the assessee, appeared to have been mis-led by the fact that the loan of Rs. 3 crores and Rs. 2 crores were respectively sanctioned by the HDFC towards construction of phase-II and phase-II of Tungwa projection which is no way related to Hotel activity. The addition made to the block of assets is on the existing hotel activity and not to a new project. The hotel business had commenced its activity in the earlier year. As such, it is a running concern and any interest paid on borrowings made for addition to block of assets would be a permissible deduction as the expenses incurred on the assets acquired by a running concern. Reliance was placed on the Supreme Court’s decision in the case of Challapali Sugars Ltd. v. CIT [1975] 98 ITR 167. In that case, the Supreme Court had considered the meaning of expression ‘actual cost’ with reference to provisions of sec. 43(1) of the Act. It was held therein that interest paid before commencement of the production of an amount borrowed for the acquisition or installation of plant and machinery should be treated as part of ‘actual cost’ of acquisition of the capital asset in question. Post production expenditure qualified for deduction as per provisions of Sec. 36(1)(iii) of the Act. It was further contended by the counsel that the borrowings made by an assessee may be towards working capital, such as for the purpose of purchase of raw materials, stock-in-trade or other needs of the working capital. Money can be said to be borrowed for the purpose of business when they are utilised for purchasing or acquiring a capital asset to be used in a business which is being carried on. Even interest paid on borrowings used for extension and expansion of existing business is allowable, and the learned counsel relied upon the following decisions :
(i) CIT v. Suri Sons [1989] 177 ITR 406 (Punj. & Har.)
(ii) Maharaja Shri Umaid Mills Ltd. (No. 2) v. CIT [1989] 175 ITR 72/[1988] 36 Taxman 258 (Raj.)
(iii) CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.)
(iv) CIT v. Shah Theatres (P.) Ltd. [1988] 169 ITR 499/36 Taxman 335 (Raj.) and
(v) CIT v. Tarai Development Corpn. Ltd. [1994] 205 ITR 421/72 Taxman 153 (All.).
11. The learned counsel further submitted that the borrowed money was utilised in real estate business as well as in hotel business. The hotel business had already commenced its activity in the earlier years and the profit on the hotel business was duly reflected in the preceding year as well as in the year under appeal. As such, the interest paid on borrowed capital is utilised for business and is entirely allowable. Similarly, the processing charges paid on loan of Rs. 2.00 crores towards phase-II of Tungwa project is allowable as revenue expenditure.
12. The CIT(A) held, accepting the contention, that the hotel business had already commenced and profit derived from hotel was declared by the assessee both for the preceding year as well as in this year. Admittedly, the assessee had raised loans from HDFC and other financial institutions for all its business activities and was partly invested in additions and alterations to the hotel division. The cost of additions and alterations were capitalised and shown as work-in-progress for the block of assets. As such, there is no new business or new unit of hotel set up by the assessee. Considering the submissions made by the learned counsel for the assessee and relying upon the decisions of the various courts, the CIT(A) held that assessee has merely been making additions/alterations to its existing hotel business activity and in the facts and circumstances of the assessee’s case, interest paid on borrowings was held to be a permissible deduction as they were incurred by a running concern. He further held that the processing charges of Rs. 4 lakhs paid by the assessee on raising loan of Rs. 2 crores from HDFC was allowable as a revenue expenditure. He accordingly held that the Assessing Officer was not justified in disallowing interest of Rs. 19,19,683 alongwith loan processing charges of Rs. 4.00 lakhs claimed by the assessee on revenue expenditure and holding that they were expenditure on capital in nature. Hence, the disallowance of Rs. 23,19,683 (i.e. interest of Rs. 19,19,683 + process charges of Rs. 4,00,000) made by the Assessing Officer was deleted.
13. I have considered the rival submissions. The case of the assessee is further supported by the decision of the Supreme Court in the case of State of Madras v. G.J. Coelho [1964] 53 ITR 186. The assessee in that case was growing plantations. Amounts were borrowed for purchase of plantations. The question was about the allowability of interest paid. In that connection, the Hon’ble Supreme Court held as per the Head Note at page 187 as follows :
“That it was impossible to dissociate the character of the respondent as the owner of the plantations and as a person working them. He had bought the plantations for working them as plantations. The payment of interest on the amount borrowed for the purchase of the plantations when the whole transaction of purchase and the working of the plantations was viewed as an integrated whole was so closely related to the plantations that the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the plantations.
That, therefore, the interest paid by the respondent was allowable as a deduction under section 5(e) of the Madras Plantations Agricultural Income-tax Act, 1955.
In principle there is no distinction between interest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation : Both are for the purposes of the plantation.”
14. In view of the above clear legal position and in view of the other decisions quoted above, including that the Hon’ble Supreme Court, we hold that allowing of Rs. 19,19,683 as interest and processing charges of Rs. 4,00,000 by the CIT(A) is perfectly justified. Hence, I am unable to find any merit in the second ground of appeal also. Therefore, it is dismissed. The third and 4th grounds are merely consequential and hence, they are all dismissed.
15. In the result, the departmental appeal is dismissed.