Guarantee Commission Paid for Acquisition of Fixed Assets – Allowable as Revenue Expenditure

Relevant Sections:

Section 37(1): (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession“. [RELEVANT EXTRACT – EMPHASIS ADDED]

Section 40(a)(ia):  Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—

(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.[RELEVANT EXTRACT]

Brief Facts:

1. The appellant files its return of income for the relevant assessment year under consideration declaring a loss and filed a revised return too, declaring the same.

2. The appellant’s case went under scrutiny assessment and order under section 143(3) was passed by the Assessing Officer, disallowing the following expenditure:

• Rs. 96.91 lakhs as guarantee commission paid by the appellant to the State of Haryana in respect of guarantee issued by the State in favour of the Housing Urban Development Corporation Limited (HUDCO), treating it as capital expenditure.
• Rs. 4.03 Lakhs in respect of certain payments on the ground that the appellant had failed to deduct tax at source in respect of those payments.

3. The case went before the Income Tax Appellate Tribunal which upheld the order and accepted the additions, treating guarantee commission as capital expenditure in the first case and not allowing the appellant to produce TDS challan evidencing the payment, before it, in the second case.

Questions of Law Raised:

“(a) Whether “Guarantee Fee” can be allowed deduction under Section 37 of the Income Tax Act?

(b) Whether in view of the facts and circumstances of the case, the Tribunal has erred in law and on facts in upholding the order of the assessing officer in disallowing Rs. 4,03,129/- u/s 40(a)(ia) of the Act when the same expenses have been paid by the appellant?”

[RELEVANT EXTRACT FROM THE JUDGMENT]

IN RELATION TO QUESTION (a)

Appellant’s Contentions:

Guarantee Commission is squarely allowable as revenue expenditure as it does not provide a benefit of enduring nature, by citing and relying upon the judgment of Madras High Court in case of Sivakami Mills Ltd. Vs Commissioner of Income Tax, [1979] 120 ITR 211which was upheld by the Hon’ble Supreme Court later.

Revenue’s Contentions:

Guarantee Commission is a capital expenditure as decided by Patna High Court in case of Chhabirani Agro Industrial Enterprises Ltd. vs. Commissioner of Income Tax [1991] 191 ITR 226, wherein it was held that

the incurring of this expenditure is solely attributable to the acquisition of the plant as an asset of enduring benefit. In the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, at page 175, it has been held by the Supreme Court that:

“The accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition.”

Since the bank guarantee commission in question was paid for the purpose of acquiring the plant, it has to be treated as an integral part of its cost.

“With respect, I find myself unable to agree with this view. In view of thelaw laid down by the Supreme Court in Challapalli’s case [1975] 98 ITR 167, laying down the mode of determining the cost of a capital asset, it is now no more open to evolve new principles in this regard.”[RELEVANT EXTRACT FROM PATNA HIGH COURT ORDER]

A similar view was also taken by Gujarat High Court in case of Commissioner of Income Tax vs. Vallabh Glass Works Ltd. [1982] 137 ITR 389.

Punjab & Haryana High Court’s Judgment:

a) Hon’ble Supreme Court in case of Sivakami Mills Ltd. Vs Commissioner of Income Tax [1997] 227 ITR 465 held that the guarantee commission paid by an assessee is a revenue expense and, therefore, allowable as a deduction in computing the total income. Even Madras High Court concluded that purchase of machinery was a capital expenditure bur guarantee commission stands on a different footing. Payment of guarantee commission neither brings an advantage nor a benefit of enduring nature. When interest paid on credit purchase of machinery can be held to be revenue expenditure, guarantee commission also gets the same color.

b) As the Supreme Court upheld the view taken by Madras High Court in case of Sivakami Mills Ltd. Vs Commissioner of Income Tax,the High Court is bound to take similar view as taken by the Supreme Court.

c) Thus, the first substantial question of law is answered in favour of the appellant.

IN RELATION TO QUESTION (b)

Appellant’s Contentions

a) It was discovered by the assessee on a date later than the date of assessment order that the tax was duly deducted on the payments and deposited with Government treasury.

b) Deduction of the expenditure from total income cannot be denied by the Revenue in presence of valid TDS challan, which was not permitted to be produced before the ITAT, as ITAT did not consider it to be an additional evidence.

Revenue’s Contention

Revenue contended that the disallowance is to be upheld by the Court as neither tax has been deducted nor payment of TDS has been made by the assessee.

Punjab & Haryana High Court’s Judgment:

a) The ITAT had all the powers under Rule 29 of the Appellate Tribunal Rules, 1963, which it could have exercised, thereby permitting the assessee to produce the necessary evidence depicting payment of TDS to the Government Treasury.

b) The only requirement was to direct the authorities to examine the genuineness and authenticity of the challan. Even if the assessee had contended before the Assessing Officer and the CIT (Appeals) that the amount was not payable,it would make no difference, if, in fact, the amount had been paid.

c) The Assessing Officer shall thus examine the genuineness of the challan and if found correct, bonafide and authentic, the appellant is squarely entitled to all the deductions of expenses under consideration.

d) The appeal is thus, disposed off.