In this case, the Ahmedabad Bench of the ITAT has remanded the matter of processing and the advance fee of ₹93.35 lakh concerning Harsha Engineers International Limited for re-examination by the Assessing Officer.
The reasoning provided was that the mere fact of paying a sum of money to the bank or treating it as prepaid expenditure does not necessarily make the expenditure capital expenditure. The AO has been asked to look into the real intention behind the borrowing, the period in respect of which the expenditure has been made, and the relation between the processing fee and the capital asset.
Case involves ₹93.35 Lakh Processing Fee
The case involved Harsha Engineers International Limited, which had raised an objection against an order issued by the Commissioner of Income Tax (Appeals) for Assessment Year 2018-19.
Disallowance of ₹93,34,795 for upfront fee and processing fee was one of the main issues before the Ahmedabad Income Tax Appellate Tribunal (ITAT). The Assessing Officer had taken the view that the expenditure was capital expenditure and thus disallowed it. Commissioner (Appeals) had confirmed his view.
Disallowed Expenditure Relates To Services in Relevant Assessment Year: Harsha Engineers Contends It has been contended by Harsha Engineers before the Tribunal that the expense relates to services provided in the relevant assessment year and is supported by bank debit advice.
ITAT Rules Bank Payments Are Not Necessarily Capital Expenses
A notable aspect about the ruling of the Tribunal’s ruling is that the recipient of payment does not necessarily become a determining factor for the tax treatment of expenditure.
Just because the payments are made to a bank does not make it a capital expenditure. Similarly, just considering the expense as pre-paid expenditure also would not determine whether it is capital or revenue expenditure. According to the Tribunal, the transaction needs to be considered.
Purpose of Borrowing to Be Examined
It is significant in view of the fact that the tax treatment of the processing fee will depend upon the purpose for which the underlying borrowings were made.
The Tribunal further observed that it is necessary for the Assessing Officer to find out whether the processing fee forms any part of the cost of acquisition of capital assets.
In this connection, the Tribunal has not arrived at the conclusion that the total amount of ₹93.35 lakh shall be allowable as revenue expenditure. Rather, the issue has been remanded for a fresh decision after considering all relevant facts and documentary evidence.
ITAT Remands: Period of the Expenditure Is Another Factor
One other issue noticed by the Tribunal is that of the period during which the said expenditure took place. It has been contended by Harsha Engineers that the service for which the expenditure was made extended to the relevant assessment year based on bank debit advices.
The Tribunal believed that there was a need to verify the matter. The Assessing Officer has accordingly been instructed to consider relevant documentary evidence as well as the case of the assessee in this regard.
ITAT Restores Matter to Assessing Officer
After hearing out the above arguments, the ITAT held the finding of the Commissioner (Appeals) regarding the processing fee inadmissible and set it aside. The case has therefore been restored to the Assessing Officer for further determination in accordance with law.
It will be necessary for the Assessing Officer to consider the relevant documents, the reason for the borrowing, the period during which the expense was made and any relation between the processing fee and the acquisition of capital assets. The Tribunal also ordered that the Assessing Officer should give Harsha Engineers a reasonable chance of being heard during the re-determination.
Credit of Over ₹2.08 Crore of TDS also Challenged
While there was the challenge of processing fee, Harsha Engineers was also objecting to the failure to grant a credit of over ₹2.08 crore in terms of TDS. The Assessing Officer had claimed the credit in terms of Section 199 of the Income Tax Act.
However, the Commissioner (Appeals) had already directed the Assessing Officer to grant a credit of the TDS while computing the demand payable. The ITAT did not see a necessity to intervene in the matter because of the directions which had already been issued.
Appeal Partly Allowed for Statistical Purposes
However, the Tribunal finally allowed the appeal to some extent in terms of statistics. The processing fee aspect has been remanded for re-examination, whereas the direction regarding the TDS credit was allowed to be taken.
The judgment was delivered by the Ahmedabad Bench on October 1, 2026. Thus, this judgment provides Harsha Engineers yet another chance to prove the treatment of the processing fee, although not a conclusive judgment allowing the ₹93.35 lakh expenses to be deducted.
ITAT Remands: Significance of the ITAT Order
It shows how it is crucial to look into the actual purpose of the expenditure and not only in its accounting form. As far as taxpayers go, the above case also demonstrates why documents related to borrowings, bank charges, processing fee, and the purpose of a loan may become important in income-tax proceedings.
The point of the order of the Tribunal is that an expense cannot be simply classified because it was paid to the bank and treated as prepaid expenditure.