Hundi discounting charges to carry on business is revenue expenses

Brief of the case:

Delhi High Court held in CIT Vs DLF Universal Ltd held as follows :-

1. If assessee got hundi from its suppliers and get it discounted from the bank ,then the discounting charges paid by the assessee would be treated as a revenue expense;

2. If the assessee had transferred its net assets at the book value then no question of gain would arise because gain only arise if the selling price is in excess of cost price;

3. If the assessee had advanced interest to its subsidiary company and did not claim interest on that then notional interest would not be added to its income provided the funds which had advanced would not be the borrowed funds.

4. Brokerage expense incurred in relation to the real estate would be claimed as an expense even though the conveyance deed had not been registered.

Facts of the case:

1. Assessee used to get hundi from its contractors as a mode of payment and got discounted from its bankers and paid some of the discounting charges to its bankers which it debited in its profit & Loss A/c;
2. Assessee had transferred the net assets of manufacturing unit to its subsidiary company at the book value so it did not shown any of profit/loss in its ROI on the fact that the assets had been transferred at its cost;
3. Assessee had advanced funds to its subsidiary without claiming interest on the same which AO considered the notional interest and added back to its income;
4. Assessee had paid brokerage to its broker without registering the conveyance deed and claimed the expense as a revenue expense.

Contention of the assessee:

1. Assessee was of the view that it had taken services of the bank and so paid the charges which should be treated as a revenue expense;
2. Assessee was of the view that as it had transferred its manufacturing unit net assets to its subsidiary concern at the book value so the question of profit/loss did not arise;
3. Assessee was of the view that the funds which the assessee had transferred to its subsidiary was its own funds not borrowed funds so the addition made by the AO was wrong;
4. Assessee was of the view that as it was the common parlance of the real estate business that the brokerage had to be given in advance so the brokerage expense should be allowed as a finance cost.

Contention of the revenue:

1. Revenue argued that the amount which assessee had discounted was for the construction purposes so the same should be capitalized;
2. Revenue was of that view that as the current assets which had been transferred like stock, debtors etc were not bought into P&L so the net gain should be added to the income of assessee as the same had been transferred to its sister concern;
3. Revenue was of the view as the assessee had advanced funds to its subsidiary so the interest should be claimed by the assessee as an income;
4. Revenue was of the view that as the conveyance deed had not been registered so the brokerage expense related with that property should not be claimed as an expense.

Held by High Court:

1. High Court held that the discounting charges which the assessee had paid in the course of business for business purpose were just in the form of interest on borrowed funds so the discounting charges should be treated as a revenue expense;
2. High court held that it is irrelevant that the current assets had not been bought to the P&L A/c, it was just to see that as the assets had been transferred at the book value no profit/loss would arise because gain would only arise when an asset was transferred above the cost price;

3. High court held that as the advanced funds was owned by assessee and not borrowed one so the notional interest could not be claimed as an income of the assessee;
4. High Court held that the brokerage expense should be treated as an expense irrespective of the fact that the conveyance deed had not been registered as the same were in the form of finance expenses