The assessee-company had borrowed foreign currency loan from IDBI which in turn was refinanced by the foreign company. It paid commitment charges and finance charges to the said foreign company. The questions that arose for consideration were as to (1) whether commitment charges could be allowed as deduction under section 36(1)(iii); and (2) whether finance charges paid to the foreign company were similar to payment of interest under section 36(1)(iii) and, therefore had to be allowed as deduction.
Deputy Commissioner of Income-tax, Baroda
Gujarat Alkalies & Chemicals Ltd.
CIVIL APPEAL NOS. 3957 & 3958 OF 2002
DECIDED ON 8-2- 2008
As regards question No. 1, the payment of commitment charges was up-front payment. The contract between IDBI and the assessee was also examined. In Addl. CIT v. Akkamamba Textiles Ltd.  227 ITR 464, the Supreme Court has held that commission paid by the assessee to the banker and the insurance company was an admissible deduction under section 37(1). To the same effect is the judgment of the Supreme Court in CIT v. Sivakami Mills Ltd.  227 ITR 465/95 Taxman 73. In both the above judgments, deductions in question were allowed under section 37(1) and not under section 36(1)(iii). In the instant case, the Tribunal had also allowed the assessee’s claim under section 37(1) and not under section 36(1)(iii) and, hence, there was no infirmity therein. For the aforestated reasons, commitment charges could be allowed as deduction under section 37(1) instead of under section 36(1)(iii). [Para 3]
As regards question No. 2 the department disallowed the finance charges on the ground that finance charges paid to foreign company on foreign currency loan were in the nature of interest and commitment charges and since the charges had been paid in relation to the project of manufacturing phosphoric acid which did not commence production during the assessment year in question, the expenses incurred were capital in nature. The department also placed reliance on Explanation 8 to section 43(1). On the facts and circumstances of the instant case, once the department equated charges payable to foreign company with interest, the judgment of the Supreme Court in Dy. CIT v. Core Health Care Ltd.  167 Taxman ? would come into picture. Accordingly, the finance charges paid to foreign company were similar to payment of interest under section 36(1)(iii) and, therefore, had to be allowed as deduction. [Para 4]
Further, in the instant case, the finance charges paid by the assessee to foreign company had also been equated by the department with commitment charges which, as stated above, were held to be revenue expenditure and deductible under section 37(1) in view of the Supreme Court’s decision in Akkamamba Textiles Ltd.’s case (supra) and Sivakami Mills Ltd.’s case (supra). Therefore, on either counts the assessee was entitled to the deduction of finance charges.