Reversal of Amortized Loan Processing Fees: ITAT Bangalore Rules Against Duplicate Deduction Claims

Overview of the Case

In a significant ruling on deduction claims, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, addressed the issue of amortized upfront fees in DCIT Vs GMR Airports Limited. The tribunal determined that claiming one-fifth (1/5th) of upfront fees annually is impermissible when the complete amount has already been claimed and allowed as a deduction in an earlier assessment year.

The revenue's appeal was upheld on this ground, while the cross-objections filed by the assessee were dismissed.

Background and Facts

The assessee company operates in the infrastructure development sector, focusing primarily on investments in shares and securities of entities engaged in infrastructure activities. For Assessment Year 2014-15, the company filed its return on November 29, 2014, reporting a loss of Rs. 35,66,74,072 under regular provisions and book profits amounting to Rs. 211,85,82,199.

Scrutiny Assessment Process

The case underwent detailed scrutiny proceedings with proper service of statutory notices. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) concerning international transactions with Associated Enterprises (AE).

Key Adjustments Made by TPO:

  • Rs. 41,28,60,585 towards corporate guarantee commission
  • Rs. 15,45,49,138 towards Stand-by Letter of Credit (SBLC) commission

The AO incorporated these transfer pricing adjustments in the draft assessment order. Additionally, the AO permitted 1/5th deduction of loan processing charges following the treatment adopted in preceding years. A disallowance under Section 14A amounting to Rs. 1,50,69,25,725 was also made.

Appellate Proceedings

On further appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the additions and disallowances by relying on the coordinate bench's decision in the assessee's own case for Assessment Years 2010-11 to 2013-14, delivered on May 25, 2022.

The revenue challenged this order before the tribunal, while the assessee filed cross-objections supporting the CIT(A)'s findings.

Principal Issues Before the Tribunal

The tribunal consolidated appeals for Assessment Years 2014-15 to 2017-18 due to common issues and disposed them through a consolidated order. Assessment Year 2014-15 was treated as the lead case for adjudication purposes.

Transaction Details:

During Financial Year 2009-10, the assessee raised funds by issuing non-convertible debentures worth Rs. 500 crores to ICICI Bank for a tenure of five years. In connection with this issuance, the assessee paid a non-refundable fee of Rs. 19,13,58,698 to ICICI Bank for structuring, processing, and advisory services.

Accounting Treatment:

While the assessee amortized this expenditure over the five-year debenture period in its books of account, in the return filed for Assessment Year 2010-11, the entire amount was claimed as a deduction.

AO's Treatment:

For Assessment Year 2010-11, the AO disallowed the entire amount and permitted only 1/5th as deduction. Consistently, for the year under consideration (AY 2014-15), the AO allowed 1/5th of the amount, being Rs. 3,84,19,101.

Revenue's Ground:

The revenue appealed against the allowance of this deduction as confirmed by the CIT(A).

Assessee's Submissions

The learned Authorized Representative (AR) fairly conceded that the coordinate bench had directed the AO to allow the entire amount as deduction for Assessment Year 2010-11. Although the CIT(A) provided no specific adjudication on this issue, the amount allowed by the AO for AY 2014-15 should be reversed since the entire expenditure had already been claimed and allowed in AY 2010-11.

Tribunal's Findings on Upfront Fees

The tribunal examined the coordinate bench's decision for Assessment Year 2010-11, which held:

"Ordinarily, expenditure incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years."

The coordinate bench had distinguished between capital and revenue expenditure, rejecting the concept of deferred expenditure as an accounting principle not recognized under the Income Tax Act 1961. Following the principles laid down by the Hon'ble Supreme Court in Madras Industrial Investment Corporation Ltd. (225 ITR 820), CIT vs. Secure Meters Ltd. (2009 TIOL 93), and Taparia Tools, the tribunal directed the AO to allow the entire claim in the year of incurrence.

Tribunal's Direction: