1981 (7) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of bank guarantee commission as revenue expenditure.
2. Deduction of expenses incurred for obtaining letters of credit as revenue expenditure.
3. Deduction of survey fee paid for surveying imported machinery as revenue expenditure.

Summary:

Issue 1: Deduction of Bank Guarantee Commission
The assessee, a public limited company, claimed a deduction of Rs. 24,266 paid as bank guarantee commission for purchasing machinery on a deferred payment basis. The Income Tax Officer (ITO) rejected the claim, treating it as capital expenditure. The Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal (the Tribunal) upheld the assessee's claim, treating it as revenue expenditure. The High Court, however, held that the expenditure was capital in nature, citing the precedent set in CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 (Guj), where similar expenses were treated as capital expenditure. The court reasoned that such expenditures add to the cost of acquiring capital assets and must be treated as capital expenditure.

Issue 2: Deduction of Expenses for Obtaining Letters of Credit
The assessee incurred Rs. 1,932 for obtaining letters of credit for purchasing machinery on a deferred payment basis and claimed it as revenue expenditure. The ITO rejected the claim, but the AAC and the Tribunal upheld it. The High Court, applying the same reasoning as in Issue 1, held that this expenditure was also capital in nature. The court emphasized that expenditures related to the acquisition of capital assets, even if incurred after the commencement of business, should be treated as capital expenditure.

Issue 3: Deduction of Survey Fee
The assessee paid Rs. 645 as a survey fee to an expert for surveying imported machinery to ensure it met contractual specifications. The assessee claimed this as revenue expenditure. The Revenue contended it was capital expenditure. The High Court held that the survey fee was revenue expenditure, as it was incurred in the course of carrying on the business and formed part of the profit-earning process. The court distinguished this from expenditures directly related to the acquisition of capital assets.

Conclusion:
The High Court answered questions (1) and (2) in the negative, holding the expenditures as capital in nature, and question (3) in the affirmative, treating the survey fee as revenue expenditure. The court certified the case as fit for appeal to the Supreme Court due to conflicting decisions from other High Courts.