The Delhi High Court has dismissed the department’s appeal challenging the deletion of a tax disallowance of ₹3.12 crore paid by the assessee as an upfront fee for obtaining a bank loan, holding that expenditure incurred for securing a loan remains revenue expenditure even when the borrowed funds are utilised for acquiring capital assets.
The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta relied on the Supreme Court’s settled principle in India Cements Ltd. v. CIT, which holds that the purpose for which the loan is ultimately utilised does not alter the character of expenditure incurred for obtaining the loan.
The dispute concerned an upfront fee of ₹3,12,75,000 paid by Escorts Ltd. to a bank for obtaining a loan. The Assessing Officer had treated the expenditure as capital in nature on the reasoning that the payment provided an enduring benefit and consequently disallowed the amount. The Commissioner of Income Tax (Appeals), however, set aside the disallowance, and the ITAT subsequently upheld the assessee’s position.
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The Revenue thereafter approached the Delhi High Court under Section 260A of the Income Tax Act, contending that the appellate authorities had erred in treating the upfront fee as revenue expenditure.
The department argued that the upfront fee paid for obtaining the loan could not automatically be regarded as revenue expenditure.
The department’s principal contention was that the borrowed funds could have been utilised for capital expenditure as well as revenue expenditure. According to the Department, in the absence of a specific finding or bifurcation establishing how the loan was actually utilised, the appellate authorities were not justified in deleting the disallowance made by the Assessing Officer.
The Department therefore sought to distinguish the expenditure associated with obtaining the loan from ordinary revenue expenditure, maintaining that the possibility of utilisation of the borrowed funds for acquisition of capital assets had to be considered.
The assessee on the other hand, submitted that the issue was already settled by the Supreme Court in India Cements Ltd. v. CIT, reported in (1966) 60 ITR 52 (SC).
The assessee argued that the Supreme Court had categorically held that expenditure incurred for obtaining a loan is revenue expenditure. Importantly, the assessee contended that the Assessing Officer was not required to examine the ultimate utilisation of the borrowed funds for determining the character of the expenditure incurred to secure the loan.
The Court examined the Supreme Court’s decision in India Cements and noted that even where the loan had been utilised for purchasing capital assets, the Supreme Court had held that expenditure incurred for securing such a loan was revenue expenditure.
The High Court consequently held that where a loan had been utilised partly for capital expenditure and partly for revenue expenditure, there was even less justification for treating the upfront fee paid for obtaining the loan as capital expenditure.
The Court therefore upheld the concurrent findings of the CIT(A) and the ITAT, both of which had ruled in favour of Escorts Ltd. by following the Supreme Court’s decision.
The High Court also took note of the considerable passage of time involved in the litigation.
The assessment related to Assessment Year 2002-03, while the High Court was deciding the appeal in August 2026. The Court observed that it hardly found any question of law involved in the matter. Even assuming there was some scope for argument, the dispute ultimately concerned whether the expenditure was revenue or capital in nature.
The Court further observed that treating the expenditure as capital expenditure after more than two decades would have significant administrative consequences. Such a conclusion could potentially require revision or rectification of the assessee’s returns and a fresh exercise by both the Assessing Officer and the assessee concerning computation of profits and allowance of depreciation.
According to the Court, undertaking such an exercise after such a long period would result in administrative complications without corresponding revenue generation for the Department.
The department’s appeal also raised several other questions concerning disallowances made during the assessment.
These included whether the ITAT was justified in deleting disallowances under Section 14A in respect of administrative and interest expenses; whether the disallowance relating to redemption of Special Promissory Notes (SPNs) was correctly deleted; whether expenditure on development of existing and prototype products was capital in nature; and whether interest could be disallowed in respect of an interest-free loan advanced to a subsidiary.
While dealing with the earlier appeal, the High Court had observed that several of the questions raised by the Revenue essentially arose from the evidence on record and involved findings of fact concurrently recorded by the CIT(A) and the ITAT.
The Court found no perversity in those findings and concluded that no substantial question of law arose for consideration. Consequently, the appeal concerning those issues was rejected.
The Court also noted that one of the additions had subsequently been taxed in a later assessment year and the assessee had paid the requisite tax, providing an additional reason for rejecting the department’s challenge to that particular issue.
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