Holding

Commitment charges and finance charges are revenue expenditures deductible under section 37 of the Income‑Tax Act, 1961, not under section 36(1)(iii).

Summary

Gujarat Alkalis & Chemicals Ltd borrowed Rs 30 crore from IDBI, which was refinanced by the foreign company COFACE. COFACE levied interest, commitment charges and insurance charges. The assessee claimed the commitment charges as a deduction under section 36(1)(iii) of the Income‑Tax Act, 1961, while the tax department disallowed them, arguing they should be treated as capital expenditure. The Tribunal allowed the deduction under section 37, not under section 36(1)(iii). On appeal, the Supreme Court held that commitment charges are revenue expenditure deductible under section 37 and that the finance charges are akin to interest, also deductible under section 37. Consequently, the Department's civil appeals were dismissed.

Issues considered

Whether commitment charges payable to a foreign refinancer can be allowed as a deduction under section 36(1)(iii) of the Income‑Tax Act, 1961.
Whether finance charges paid to the foreign company are similar to interest and therefore deductible under section 36(1)(iii) of the Income‑Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 36(1)(iii), s. 37, s. 43(1)

Subjects

commitment chargesfinance chargesinterestdeductionsection 36section 37income taxforeign loanrevenue expenditurecapital expenditure

Judgment

.x
[2008) 2 S.C.R. 654

A DEPUTY COMMISSIONER, INCOME TAX, BARODA
v.
GUJARAT ALKALIES & CHEMICALS LTD.
(Civil Appeal Nos. 3957-3958 of 2002)
FEBRUARY 8, 2008
B
[S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ.]

Income Tax Act, 1961: ++
s. 36 (1 )(iii) and 37 - 'Commitment charges' on borrowed
C capital from a bank- Refinanced by foreign bank- Claim of,
as deduction under s. 36 (1 )(iii) - Held: Allowed as deduction
uls 37 and not uls 36 (1 )(iii) of the Act.
s. 36 (1 )(iii) - 'Finance charges' on borrowed capital -
-o Nature of - Held: Is similar to payment of interest - Equated
with commitment charges and treated as revenue expenditure
- Hence, deductible uls 37 of the Act.
Words and Phrases: ·~

'Commitment charges' - Meaning of
E
The questions which arose for consideration in these
appeals were as to whether 'commitment charges'
payable by the assessee to a foreign company which had "
refinanced foreign currency loan obtained by assessee
F for its business activities from IDBI bank, could be allowed
as deduction under section 36(1 )(iii) of the Income-tax Act,
1961; and as to whether 'charges' paid to foreign company
was similar to payment of interest under section 36(1 )(iii)
of the Act and, therefore, was to be allowed as deduction.
G Dismissing the appeals, the Court
HELD: 1.1 The 'commitment charges' was upfront
payment. The Tribunal allowed the claim under section
37 and not under section 36(1 )(iii), hence there is no
H~ 654
'j.
DEPUTY COMMNR., INCOME TAX, BARODA v. 655
GUJARAT ALKALIES & CHEMICALS t TD. [KAPADIA, J.]

"'"~ infirmity therein. [Para 3] [656-D, F] A
Addi. Commr. Of Income-tax v. Akkamamba Textiels Ltd.
1997 (227) ITR 464; Commr. Of Income-tax v. Sivakami Mills
Ltd. 1997 (227) ITR 465 - relied on.
1.2 On facts and circumstances of the instant case, B'
once the Department equated the charges payable to the
foreign company with interest, the judgment of this Court
+ in *Dy Commr. of Income Tax, Ahemdabad v Mis. Core Health
•
Care Ltd. comes in and the second issue is answered as
claimed by assessee that the finance charges payable to c
foreign company was similar to payment of interest.
[Para 4] [657-C, D]
'•

*Dy Commr. of Income Tax, Ahemdabad v Mis. Core
~ Health Care Ltd. decided by Supreme Court in Civil Appeal
No, 3952-55 of 2002 - relied on. D
_).. 1.3 The finance charges paid by the assessee to the
foreign company have also been equated by the
.f, -
Department with commitment charges which are held to
be revenue expenditure and deductible under Section 37
of the Income-tax Act, 1961. [Para 5] [657-D, E] E

CIVIL APPELLATE JURISDICTION : Civil Appeal
Nos.3957-3958 of 2002.

---t From the Judgment and Order dated 25.04.2001 of the
High Court of Gujarat at Ahmedabad in Tax Appeals Nos. 39- F
----4
40 of 2001 .
........
P. Vishwanatha Shetty, Gaurav Agrawal and B.V. Balaram
~ Das for the Appellant.
J.P. Shah, Manish J. Shah, Jatin Zaveri and Harish J. G
Jhaveri for the Respondent.
I i- The Judgment of the Court was delivered by
~
• KAPADIA, J. 1. These civil appeals are filed by the
Department against decision dated 25.4.01 in Tax Appeal H
656 SUPREME COURT REPORTS [2008] 2 S.C.R.

A 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
B 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.
c 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
D 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 Addi. Commr. of Income-
tax v. Akkamamba Textiles Ltd. - (1997) 227 ITR 464, this
...
Court has held that commission paid by the assessee to the
E 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. - (1997) 227 ITR 465. For the
aforestated reasons, we answer question No.(1) in favour of
F 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 I-
37 and not under Section 36(1 )(iii), hence there is no infirmity
G 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
H purpose obtained foreign currency loan from IDBI which in turn

)
DEPUTY COMMNR., INCOME TAX, BARODA v. 657
GUJARAT ALKALIES & CHEMICALS LTD. [KAPADIA, J.]

was refinanced by COFACE subject to the assessee paying A
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 paid to
COFACE on foreign currency loan was in the nature of interest
and commitment charges and since the charges have been paid B
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 c
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,
Ahmadabad v. M/s. Core Health Care Ltd. in Civil Appeal
Nos.3952-55 of 2002 comes in. Accordingly, the said question D
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 E
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 F
Department.

6. For the aforestated reasons, the Department's civil
appeals are accordingly dismissed with no order as to costs.
N.J. Appeals dismissed. G

.-J