2013 (8) TMI 240 - HC - Income Tax

Capital loss as revenue expenditure - Writing off the assets - Tribunal deleted disallowance - Held that - Requirement was of the Government to furnish the bank guarantee from the nationalized bank or the scheduled bank. The Assessee had availed such bank guarantee facilities - The prescribed norms of the bank had noted the purchase of the shares and margin money for using the bank guarantee also was required to be kept as a fixed deposit. This co-operative bank when eventually was declared as sick bank was unable to repay the deposits the membership of the said bank also was cancelled and the steps were taken pursuant to the order of the Reserve Bank of India. Assessee-company thereafter had written off the balance - Therefore expenditure were needed to be spent by the assessee for the purpose of carrying on its business and are incidental to the business therefore any loss shall have to be considered as the revenue cost and not the capital cost - Following decisions of Ramchandar Shivnarayan v. CIT 1977 (11) TMI 2 - SUPREME Court and Indian Aluminium Co. Ltd. v. CIT 1972 (3) TMI 1 - SUPREME Court - Decided against Revenue.

Summary

Issues:
1. Disallowance of writing off assets as revenue expenditure.
2. Determination of loss as capital loss or revenue loss.

Analysis:
1. The case involved a challenge to the order of the Income Tax Appellate Tribunal regarding the disallowance of Rs. 35,66,478 made by the Assessing Officer on account of writing off assets like cash balance, fixed deposit, and shares of a bank. The appellant questioned whether the ITAT erred in confirming the order of the CIT(A) in treating the capital loss as revenue expenditure. The core issue was whether the loss on writing off assets was a capital loss or a revenue loss.

2. The assessee had utilized a bank guarantee facility from a cooperative bank for obtaining tenders from the Government of Gujarat. To secure the bank guarantee, the company had to place fixed deposits and equity shares with the bank. However, due to the liquidation of the bank by the Reserve Bank of India, the company had to write off the balance of the fixed deposit, equity shares, and current account balance. The Assessing Officer disallowed the deduction claimed by the assessee, citing uncertainty regarding recovery from the bank. The CIT(A) reversed this decision, stating that the investments were necessary for obtaining the bank guarantee and were not capital investments but business expenses.

3. The Revenue challenged the CIT(A) and ITAT decisions, arguing that the loss should be considered a capital loss and not a business expense. They contended that there was a possibility of recovery from the bank, and the decisions cited were wrongly applied. However, the Tribunal upheld the earlier decisions, emphasizing that the expenses were essential for conducting business activities and were incidental to the business, following precedents set by the Supreme Court.

4. After considering arguments from both sides and examining the facts, the High Court upheld the decisions of the CIT(A) and ITAT. The Court noted that the expenses were necessary for obtaining the bank guarantee, which was crucial for securing government contracts. The cooperative bank's failure to repay deposits led to the write-off, making the expenses incidental to the business. Citing relevant Supreme Court cases, the Court concluded that the expenses were revenue costs and not capital costs, justifying the decisions of the lower authorities.

5. In the absence of any errors or flaws in the decisions, the tax appeal was dismissed by the High Court, affirming the treatment of the expenses as revenue costs incurred in the normal course of business operations.