The Income Tax Appellate Tribunal (ITAT) in a recent case ruled that prepaid finance charges made for business purposes are deductible in the year of payment, and thus amortization is not necessary.
The assessee/appellant,Cholamandalam Investment & Finance Co. Ltd., is a company engaged in financing and investment.
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For several assessment years (2012-13, 2017-18, and 2018-19), the assessee claimed deductions for certain prepaid finance charges—fees related to securing loans.
These loans typically extended over multiple years, and in the financial accounts the assessee company spread the expenses over the entire loan period.
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When it came to filing tax returns, the entire amount of prepaid finance charge (Rs.19,96,29,043) was claimed under section 37(1) of ITA, since it represented the amount expended over the year for the business purposes of the assessee company.
The Assessing Officer (AO) during assessment took issue with this. It was observed that since the expenses provided benefits over multiple years, the deduction should also be spread over those years rather than being claimed all at once.
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Accordingly, the claim for deduction amounting to Rs.19,96,29,043/-. was disallowed.
Aggrieved by the AO’s order, the assessee appealed before Commissioner of Income Tax (Appeals) [CIT(A)].
However the CIT(A) also upheld the AO’s order, citing a past Supreme Court judgment in Madras Industrial Investment Corp. Ltd. vs. CIT (1997), which said that if an expenditure benefits more than one financial year, it should be spread accordingly.
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Aggrieved with this decision, the assessee company took the matter to the Income Tax Appellate Tribunal (ITAT).
Before ITAT, the assessee contended that under Section 37(1) of ITA, once it is established that the expenditure is for business purposes, there is no legal requirement to amortize the expense. The section allows for the entire amount to be claimed in the year it is paid, as long as the expense is not capital in nature.
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The assessee company referred to the Supreme Court decision in Taparia Tools Ltd. vs. JCIT (2015), which clarified that taxpayers have the discretion to claim the full deduction in the year of payment if they choose to do so, even if the benefit extends over several years.
The Revenue, however, insisted that the expenses should be proportionately spread over the loan’s tenure, as this was more in line with accounting principles and avoided any mismatch in revenue and expenditure.
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The division bench of Mr Mahavir Singh and Mr SR Raghunatha, after considering both sides, noted that the key issue was whether the prepaid finance charges could be fully claimed in the year of payment or should be distributed across the loan period.
The tribunal observed that in a previous case involving the same assessee for assessment year 2011-12, it was ruled that finance charges should be allowed as a deduction in the year of payment, even if they were treated as deferred revenue expenditure or prepaid expenditure in the books of accounts.
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In light of these observations it was held that deduction on prepaid finance charges in the year of payment are allowable, and pro rata amortization is not necessary.
Accordingly, the disallowance was deleted and the appeal of assessee was allowed on this ground.
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