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CASE NO.: Appeal (civil)  3957-3958 of 2002

PETITIONER: Deputy Commissioner, Income Tax,Baroda

RESPONDENT: Gujarat Alkalies & Chemicals Ltd

DATE OF JUDGMENT: 08/02/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

CIVIL APPEAL NOS.3957-3958 OF 2002

KAPADIA, J.

These civil appeals are filed by the Department against  decision dated 25.4.01 in Tax Appeal Nos.39 and 40 of 2001  delivered by Gujarat High Court.

2.      Two questions of law arise for determination in these civil  appeals which are as follow:  (1)     Whether "commitment charges" can be allowed  as deduction under Section 36(1)(iii) of the  Income-tax Act, 1961? (2)     Whether "charges" paid to COFACE is similar to  payment of interest under Section 36(1)(iii) of  the Income-tax Act, 1961 and, therefore, has to  be allowed as deduction?

3.      Regarding question No.(1), we may state that assessee  had borrowed Rs.30 crores (approximately) from IDBI which in  turn was refinanced by COFACE which foreign company had  charged interest, commitment charges and insurance charges  payable by the assessee.  The said "commitment charges" was  upfront payment.  We have also examined the contract  between IDBI and the assessee.  In the case of Addl. Commr.  of Income-tax v. Akkamamba Textiles Ltd. \026 (1997) 227  ITR 464, this Court has held that commission paid by the  assessee to the banker and the insurance company was  admissible deduction under Section 37 of the Income-tax Act,  1961.  To the same effect is the judgment of this Court in the  case Commr. of Income-tax v. Sivakami Mills Ltd. \026 (1997)  227 ITR 465.  For the aforestated reasons, we answer  question No.(1) in favour of the assessee and against the  Department.  We may clarify that both the above judgments  allows deductions under Section 37 of the 1961 Act and not  under Section 36(1)(iii) of the 1961 Act.  In this case, the  Tribunal has allowed the claim under Section 37 and not only  Section 36(1)(iii), hence there is no infirmity therein.  

4.      As regards question No.(2) is concerned it may be stated  that the assessee established phosphoric Acid Project as an  extension to its present business activities and for that  purpose obtained foreign currency loan from IDBI which in  turn was refinanced by COFACE subject to the assessee  paying finance charges to COFACE which according to the  assessee was similar to payment of interest.  The Department  disallowed the said item on the ground that finance charges

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paid to COFACE on foreign currency loan was in the nature of  interest and commitment charges and since the charges have  been paid in relation to the project of manufacturing  phosphoric acid which did not commence production during  the assessment year under consideration, the expenses  incurred were capital in nature.  The Department also placed  reliance in this connection on Explanation 8 to Section 43(1) of  the Income-tax Act, 1961.  On facts and circumstances of this  case, once the Department equated the charges payable to  COFACE with interest, our judgment in the case of Dy.  Commr. of Income Tax, Ahmedabad v. M/s. Core Health  Care Ltd. in Civil Appeal Nos.3952-55 of 2002 comes in.   Accordingly, the said question No.(2) is also answered in  favour of the assessee and against the Department.   

5.      Before concluding, we may also mention that in this case  the finance charges paid by the assessee to COFACE have also  been equated by the Department with commitment charges  which, as stated above, are held to be revenue expenditure  and deductible under Section 37 of the Income-tax Act, 1961  [See: Akkamamba Textiles Ltd. (supra) and Sivakami Mills  Ltd. (supra)].  Therefore, on either counts the above question  No.(2) is answered in favour of the assessee and against the  Department.   

6.      For the aforestated reasons, the Department’s civil  appeals are accordingly dismissed with no order as to costs.