Harsha Engineers International Limited Vs DCIT (ITAT Ahmedabad)
Bank Processing Fees: The Label Cannot Decide the Tax Treatment
Ahmedabad ITAT Orders Fresh Examination of ₹93.35 Lakh Claim
In Harsha Engineers International Limited v. DCIT, ITA No. 1357/Ahd/2024, concerning Assessment Year 2018-19, the Ahmedabad Bench of the Income Tax Appellate Tribunal examined the disallowance of upfront and processing fees of ₹93,34,795.
The Assessing Officer had treated the expenditure as capital in nature, and the Commissioner (Appeals) had confirmed the disallowance. The Tribunal held that the issue required examination of the period to which the expenditure related and the actual purpose of the corresponding borrowings.
The Bench comprising Dr. B.R.R. Kumar, Vice-President, and Shri Rahul Chaudhary, Judicial Member, pronounced its order on 1 October 2026. It restored the processing-fee issue to the Assessing Officer for fresh adjudication. The decision therefore provides an opportunity for reconsideration; it does not finally allow the expenditure as a revenue deduction.
The Dispute Before the Tribunal
The appellant, Harsha Engineers International Limited, shown in the order as merged from Harsha Abacus Solar Private Limited, challenged the appellate order dated 4 July 2024.
Its grounds concerned an alleged violation of section 144B, disallowance of the processing fees under section 37, and non-grant of TDS credit of ₹2,08,15,442.60.
The principal expenditure dispute arose because the Assessing Officer classified the upfront and processing fees as capital expenditure. The Commissioner (Appeals) accepted that treatment.
Before the Tribunal, the assessee contended that the expenditure concerned services extending into the year under consideration. It relied upon the relevant bank debit advices in support of its explanation.
The dispute thus required closer scrutiny of what the fees represented, the period covered by the services, and the borrowings with which the expenditure was connected.
Payment to a Bank Does Not Establish Capital Expenditure
The Tribunal made a significant observation: the mere fact that payment was made to a bank, or that it was treated as prepaid expenditure, does not by itself establish that the expenditure is capital in nature.
This distinction matters because the identity of the recipient and the accounting description cannot, by themselves, answer the question raised by the disallowance.
A bank debit advice may support the fact and particulars of a charge. However, the Tribunal considered it necessary to examine the underlying transaction before deciding its tax treatment.
Similarly, describing an amount as prepaid expenditure raises a question about the period to which it relates. That description alone does not establish that the payment belongs to the capital account.
The Tribunal accordingly declined to sustain the disallowance without further examination of the relevant documents and the assessee’s explanation.
Purpose of Borrowing and Period of Services Require Verification
The Tribunal identified two matters requiring examination: the period to which the expenditure related and the actual purpose of the corresponding borrowings.
It further directed the Assessing Officer to examine whether the processing fee could form part of the acquisition of capital assets.
The order therefore leaves the substantive classification open. It neither declares all bank processing fees deductible nor rules out their connection with acquisition of capital assets.
Instead, it requires a decision based on the particulars of the borrowing and the expenditure. The assessee’s contention that the services extended into the relevant year must also be considered alongside the supporting records.
The Tribunal set aside the Commissioner (Appeals)’ finding on this issue and restored it to the Assessing Officer for fresh adjudication in accordance with law, after examining the documents and explanation. It expressly directed that the assessee receive a reasonable opportunity of being heard.
Ground No. 2 was consequently allowed for statistical purposes.
TDS Credit: Existing Direction Was Sufficient
The assessee also challenged the non-grant of TDS credit of ₹2,08,15,442.60, claimed under section 199.
The Commissioner (Appeals) had recorded that the assessee made no submission on this issue. Nevertheless, the appellate authority had directed the Assessing Officer to grant credit for TDS deducted while computing the demand payable, in accordance with law.
The Tribunal considered that direction appropriate and declined to interfere.
Thus, it did not independently determine that the entire amount claimed stood verified and allowable. The existing direction to grant lawful credit remained operative.
The section 144B ground was described as general in nature, without a separate substantive ruling. Overall, the appeal was partly allowed for statistical purposes.
Author’s Comments
The useful principle emerging from this order is that classification requires examination, not merely a label. Payment to a bank and treatment as prepaid expenditure cannot independently justify a conclusion that the expenditure is capital.
Equally, taxpayers should avoid presenting the decision as an outright allowance of processing fees under section 37. The Tribunal granted reconsideration, with the ultimate result dependent on verification.
For the fresh proceedings, the assessee’s explanation should connect the bank charges with the relevant borrowing, its actual purpose, and the period covered by the services. The documents must address the questions identified by the Tribunal.
The order also distinguishes timing from character: the period to which an expense relates and whether it is capital or revenue require their own examination. A prepaid entry cannot settle both questions.
The assessee has secured a fresh hearing, but the merits remain to be decided.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals) (hereinafter referred to as “Ld. CIT(A)”), National Faceless Appeal Centre (NFAC), Delhi vide order dated 04.07.2024, under section 250 of the Income-Tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2018-19.
2. The assessee has raised following grounds of appeal:-
“1. Learned CIT(A) has erred in law and on the facts of the case in confirming the action of learned AO in passing the order in gross violation of provisions of Sec. 144B of the Act.
2. Learned CIT (A) has erred in law and on facts of the case in confirming the disallowance on account of processing fees amounting to Rs.93,34,795/- u/s 37 of the Act.
3. Learned CIT(A) has erred in law and on facts of the case in not granting the benefit of TDS amounting to Rs. 2,08,15,442.60/- allowable u/s 199 of the Act.”
Ground No. 1:
3. General in nature.
Ground No. 2:
4. The assessee has challenged the disallowance of Rs.93,34,795/- towards Upfront & Processing Fees. The Assessing Officer disallowed the expenditure treating the expenditure as capital in nature. The Ld. CIT(A) confirmed the disallowance.
5. We have perused the material on record. The assessee has contended that the expenditure related to services extending into the year under consideration and has relied upon the relevant bank debit advices. In our view, the issue requires examination of the period to which the expenditure relates as well as the actual purpose of the corresponding borrowings. The mere fact that the payment was made to a bank or was treated as a prepaid expenditure does not, by itself, establish that the expenditure is capital in nature. The Assessing Officer shall examine that that processing fee can be a part of the acquisition of the capital assets or not. Hence, we set aside the finding of the Ld. CIT(A) on this issue and restore the matter to the file of the Assessing Officer for fresh adjudication in accordance with law after examining the relevant documents and the assessee’s explanation. Needless to say, reasonable opportunity of being heard shall be granted to the assessee.
Ground No. 2 is allowed for statistical purposes.
Ground No. 3:
6. The assessee has challenged non-grant of TDS credit of Rs.2,08,15,442.60/-. The Ld. CIT(A) recorded that no submission was made by the assessee on this issue; however, the Assessing Officer was directed to grant credit of the TDS deducted while computing the demand payable, in accordance with law. Since the Ld. CIT(A) has already issued the appropriate direction, we decline to interfere with the order of the Ld. CIT(A) in this regard.
7. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 01.10.2026.
