By TIOL News Service

AHMEDABAD, NOV 19, 2013: THE issue before the Bench is - Whether sum paid to financial consultant as Corporate Debt Restructuring fees for securing waiver of interest is to be treated as capital in nature and Whether remission of loan amount taken can be taxed as a revenue receipt. And the verdict goes against the Revenue.

Facts of the case

There was a payment of Corporate Debt Restructuring expenses to financial consultants in connection with waiver of loans. During assessment, AO had noted that assessee paid an amount to the financial consultant M/s. Brescon Corporate Advertisers Ltd., who provided their professional services in connection with the scheme of CDR by negotiating with the banks and financial institutions, which eventually helped the reduction of interest burden of the assessee. They were claimed to be the revenue expenditure aimed at reduction of recurring revenue expenditure of interest. The AO held that the assessee would derive benefit of enduring nature as a result of CDR exercise and, therefore, it was of the opinion that all the expenses are to be treated as capital expenditure and the same were needed to be disallowed and added to the income of the assessee. On appeal, CIT(A) had noticed that the amount of Rs.60.13 crore had been waived under the CDR and interest had also been reduced for the FY 2003-2004. Thus, it was held that same cannot be considered to be having an enduring benefit. On further appeal, Tribunal had relied on the decision of the Madras Industrial Investment Corporation Ltd. v. CIT, (2002-TIOL-290-SC-IT-LB), wherein the question arose, whereby SC was deciding whether a particular expenditure was revenue expenditure incurred for the purpose of business or capital in nature. It held that such question needs to be determined on a consideration of all the facts and circumstances of the case and by application of principle of commercial trading. While holding the expenditure as revenue in nature, it spread the same over a period.

Next question pertains to excluding the waived amount of Rs.11.63 crore out of the principal loans. During assessment, AO dismissed the claim of assessee of Rs.11.63 crore as a capital receipt essentially on two grounds. Firstly that the waiver of the principal amount of loan had made assessee richer by that amount and the liability to pay had seized. Therefore, this being a benefit or perquisite arising from the business, had to be construed as an income u/s 28(iv). In the case of Chetan Chemicals Pvt. Ltd., during the course of his business of inorganic chemicals procured unsecured loans from various creditors. Due to financial crunch of the company, the creditors arrived at a compromise before the competent court and they remitted the unsecured loans amounting to Rs.1.77 lakh along with interest that had accrued in its favour. The interest was an income liable to tax but not the remission of loan. This loan amount was taxed by invoking provisions of Section 28(iv) of the Act. The Tribunal held in favour of the assessee. On reference, HC upheld the version of the Tribunal and held that it was an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there was no question of applying the provision as such. Section 28 deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under head 'Profits & Gains of business or profession. As the assessee company was not found to be carrying on the business of obtaining loan, the Court held that the remission of such loan by the creditors was a benefit arising out of such business and, therefore, such remission of unsecured loan was not taxable at the ends of the assessee. On appeal, CIT(A) decided in favour of assessee. On further appeal, Tribunal also upheld the CIT(A)'s order.

Held that,

++ the CDR expenses to the tune of Rs.2.57 crore have been rightly held by both the CIT (Appeals) and the Tribunal as revenue in nature and the same has rightly not been held to be capital in nature. For the waiver of the loan, the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable u/s 37(1). Having held the said amount to be revenue in nature applying the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd., when the amount has been spread over a period of six years, no error is committed by both the authorities. Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business, it can be allowed in its entirety in the year in which it is incurred. However, considering the the decision in the case of Madras Industrial Investment Corporation Ltd., when the spreading is done for over a period of six years and as the assessee has no objection to such revenue expenditure being spread out, though it could have insisted for this amount allowed in the year under consideration, with no such objection having been raised, the Revenue would not succeed in this issue as the expenditure is held to be revenue in nature. Thus, the second question also does not merit any consideration;

++ we are of the firm opinion that the issue is squarely covered by the decision of this Court rendered in Chetan Chemicals Pvt. Ltd. In the present case also, the facts are almost identical and, therefore, the CIT (Appeals) and the Tribunal have rightly held in favour of the respondent-assessee. No error is committed requiring any indulgence from this Court.

(See 2013-TIOL-901-HC-AHM-IT)