Case Law Details

Case Name : Bajaj Tempo Ltd. Vs The Commissioner of Income Tax (Bombay High Court)
Appeal Number : Income Tax Reference No. 128 Of 2000
Date of Judgement/Order : 22/06/2017
Related Assessment Year :
Courts : All High Courts (3793) Bombay High Court (681)
The only question is whether the guarantee commission paid to the bankers for securing timely repayment of credit facility and loan from financial institutions for the purpose of machinery and equipments is revenue expenditure.
The Division Bench of this Court in case of Kinetic Engineering Ltd (supra) was dealing precisely with the said issue, wherein, in the said case, the Assessee had to pay guarantee commission for securing timely repayment of credit facility obtained for the purpose of machinery and equipments required for running business. This Court considering various judgments of the Apex Court categorically came to the conclusion that the expenditure incurred for payment of guarantee commission is revenue expenditure. The act of borrowing money was incidentally to carrying on business.

Full Text of the High Court Judgment / Order is as follows:-

1] The matter pertains to the Assessment Year 1984­- 85.
2] Reference is made to this Court on the following question.
“Whether on the facts and in the circumstances of the case, the Appellant Tribunal was justified in law in holding that the entire guarantee commission paid to the bankers for securing timely repayment of credit facility and loan from Financial Institutions for the purposes of machinery and equipments, is not a revenue expenditure.”
3] The learned counsel for the Assessee submits that the Assessee is a ongoing concern. To expand its existing business equipments and machinery were purchased by obtaining foreign exchange loan from financial institutions and deferred credit facilities under IDBI Bills discounting scheme. The company was required to secure by way of guarantee, from its bankers, the timely repayment of the loan. For these services, it had to pay guarantee commission to the banker amounting to Rs. 7,52,267/­, which was claimed as revenue expenditure.
4] The learned counsel relies on the judgment of the Division Bench of this Court in Kinetic Engineering Ltd. Vs. Commissioner of Income Tax, reported in (1998) ITR Vol.233 Page 762. Which has relied on the judgment of the Apex Court in a case of India Cements Ltd. Vs. CIT, reported in (1996) 60 ITR 52 (SC). The learned counsel also relies on the another judgment of the Division bench of this Court in Income Tax Reference No. 752 of 1998.
5] The learned counsel for the Revenue submits that relevant question is whether production had commenced pursuant to the acquisition of the said machinery and any expenditure incurred prior to production would be capital expenditure and the same would be in consonance with basic accounting principle.
6] We have considered the submissions.
7] This Court in Kinetic Engineering Ltd (supra) has observed as under;
“11. We have also perused the decisions of the High Courts of Andhra Pradesh, Madras, Karnataka and Calcutta referred to above. The Andhra Pradesh High Court, in Addl. CIT vs. Akkamba Textiles Ltd. (supra) has held that the guarantee commission paid by the assessee in connection with the purchase of machinery was a revenue expenditure and not a capital expenditure. While arriving at this conclusion, the High Court followed the decision of the Supreme Court in India Cements Ltd. (supra). In Sivakashi Mills Ltd. vs. CIT (supra) the Madras High Court also held that guarantee commission paid to a bank for obtaining a loan for acquisition of machinery was a revenue expenditure. While saying so, the High Court summed up the reasoning in support of its conclusion as follows :
“The expenditure incurred for the purchase of the machinery was undoubtedly capital expenditure, for it brought in an asset of enduring advantage. But the guarantee commission stands on a different footing. Byitself, it does not bring into existence any asset of an  enduring nature nor did it bring in any other advantage of an enduring benefit. The acquisition of the machinery on installment terms was only a business exigency. If interest paid on a credit purchase of machinery could be held to be revenue expenditure, we fail to see how guarantee commission paid to a bank for obtaining easy terms for acquisition of the machinery could be regarded as capital payments”.
14. In the light of the foregoing discussion, we are of the clear opinion that the bank guarantee commission paid by the assessee for securing timely repayment of the deferred credit facility for buying machinery in its running business is a revenue expenditure and not a capital expenditure. The Tribunal, in our opinion, committed a manifest error of law in holding it to be a capital expenditure. We accordingly answer the question referred to us in the negative, i.e., in favor of the assessee and against the Revenue.”
8] The undisputed facts as has been referred in the reference is that the Assessee is a existing running company engaged in the business of manufacturer of light commercial vehicles. For expansion of its business, it obtained foreign exchange loan from financial institutions and deferred credit facilities under IDBI bills discounting scheme. In the ordinary course of business the company was required to secure by way of guarantee from its bankers timely repayment of the said loan and for the said purpose the company had to pay the guarantee commission.
9] The only question is whether the guarantee commission paid to the bankers for securing timely repayment of credit facility and loan from financial institutions for the purpose of machinery and equipments is revenue expenditure.
10] The Division Bench of this Court in case of Kinetic Engineering Ltd (supra) was dealing precisely with the said issue, wherein, in the said case, the Assessee had to pay guarantee commission for securing timely repayment of credit facility obtained for the purpose of machinery and equipments required for running business. This Court considering various judgments of the Apex Court categorically came to the conclusion that the expenditure incurred for payment of guarantee commission is revenue expenditure. The act of borrowing money was incidentally to carrying on business.
11] The question under reference has been adequately dealt with in the case of Kinetic Engineering Ltd (supra). The facts in the said case and the present care are identical.
12] In the light of the above the reference is answered in favor of the Assessee. Reference is,  accordingly, disposed of. No costs.
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