By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
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Section 37 – Payment of pre-closure charges, though not a contractual obligation, to the Bank, in respect of debentures issued are expenses incurred by the assessee for the purpose of business and are allowable. By incurring pre-closure charges the assessee is relieved of further financial obligation.
Facts :
The assessee with an objective to raise funds for general corporate purposes issued unsecured, redeemable, non-convertible debentures to Mahindra & Mahindra Ltd on private placement basis. The principal terms and conditions of the placement specified only the Tenor/Maturity & Coupon Rate. There was no mention for payment of any pre-closure charges. Mahindra & Mahindra Ltd. sold these debentures to Deutsche Bank. Pending utilisation of funds, the proceeds of debenture issue were deposited in short term deposit with Standard Chartered Bank. Upon realising that the company is paying heavy interest on debentures for a period of 3 years, the debentures were cancelled and money paid back to Deutsche Bank. However, in the process, the Company had to pay pre-payment charges of Rs. 43,34,000.
The Assessing Officer (AO) held that the expenditure was not contractual but voluntary since there was no provision in the terms of issue of debentures for payment of pre-closure charges. He held the payment to be discretionary decision by the assessee who was not under any legal compulsion to make the payment. He disallowed the pre-payment charges.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO by relying on the decision of the Punjab & Haryana High Court in the case of Associated Hotels of India Ltd. vs. CIT (231 ITR 134)(P & H). Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that there was no dispute about genuineness of the expenditure. The only dispute was as regards its allowability. The Tribunal did not find any merit in the contentions on behalf of the revenue that there was no contractual obligation to pay the amount under consideration. Also, that the assessee had not incurred the expenditure for raising the money but had incurred it to return the money already raised and that issue of debentures is not the business of the assessee. The Tribunal found merit in the contention of the assessee that the assessee had to incur the expenditure to relieve it from further financial burden and this was a commercial decision.
The Tribunal held that the decision relied upon by the CIT(A) was not applicable to the facts of the present case. In that case the debentures were redeemed before maturity by paying bonus and fresh debentures were issued before maturity. In the instant case, the assessee has not issued fresh debentures after prepayment of the debentures.
The Tribunal held that the sum of Rs. 43,34,000 incurred by the assessee towards prepayment charges in respect of debentures issued to be an expenditure incurred for the purpose of business and therefore allowable.
This ground was decided in favour of the assessee.
