Guarantee commission allowable as Revenue expense

CA Saurabh Chokhra

Brief of the case:

• The Hon’ble Punjab & Haryana HC in the above cited case held that guarantee commission by itself does not bring into existence any asset of an enduring nature. Therefore, guarantee commission is allowable as revenue expenditure.

Facts of the case:

• During the course of assessment proceedings the AO found that assessee claimed an amount of Rs. 96.91 lacs as adeduction under Section 37 of the Act being the commission paidby it to the State of Haryana in respect of a guarantee issuedby the State of Haryanafor on its request in favour of the Housing Urban Development Corporation Limited (HUDCO).
• The Assessing Officer disallowed the expenditure treating the same as capital expenditure.CIT(A) as well as tribunal upheld the disallowance made by AO. Aggrieved assessee is in appeal before the High court.

Contention of the Revenue:

• The learned counsel for the revenue relied on the decision of Patna High Court in Chhabirani Agro Industrial Enterprises Ltd.Vs Commissioner of Income Tax wherein the court held that guarantee commission paid for acquisition of machinery to form part of cost of acquisition of machinery.

Held by Hon’ble Punjab & Haryana HC:

• High court relied on the decision of Hon’ble Madras HC given in the case of Commissioner of Income Tax Vs Sivakami Mills Ltd. [1979] 120 ITR 211 wherein the court held that guarantee commission stands on a different footing. By itself, it does not bring into existence any asset of anenduring nature; nor did it bring in any other advantage of an enduring benefit. Therefore, guarantee commission is allowable as revenue expenditure. The same decision was upheld by Hon’ble Supreme Court.
• However , the view taken Madras HC was not followed by Hon’ble Patna HC in the case of Chhabirani Agro Industrial Enterprises Ltd.Vs Commissioner of Income Tax [1991] 191 ITR 226 . This judgement was prior to the judgement of the Supreme Court in Commissioner of Income Tax Vs Sivakami Mills Ltd.
• But as of today, since the judgement of Supreme court is in the favour of assessee , the court is bound by the view taken by the Supreme Court in Commissioner of Income Tax Vs Sivakami Mills Ltd.
• In result the appeal of assessee was allowed.