2016 (7) TMI 1622 - HC - Income Tax

Addition on account of the commission paid on the bank guarantee issued by the VTB bank - bank guarantee commission to be treated as a payment of interest in terms u/s 2(28A) or addition 40(a)(i) - HELD THAT - As pointed out by the CIT (A) there was no warrant for treating the bank guarantee commission as a payment of interest in terms of Section 2(28A) of the Act. The bank guarantee commission paid to the foreign bank could not have been disallowed under Section 40(a)(i) of the Act on the above basis. The Court is unable to find any legal infirmity in the above determination by the CIT(A) which has been affirmed by the ITAT. Method of accounting - Substantial question of law OR fact - HELD THAT - Revenue does not dispute that the method of accounting has been consistently followed by the Assessee and has been accepted by the Revenue for the AYs previous to and subsequent to the AYs in question. Consequently this Court does not see any reason to frame any question on this issue as well.

Summary

Issues:
1. Appeal against the common order of the Income Tax Appellate Tribunal for three Assessment Years.
2. Treatment of bank guarantee commission as interest under Section 2(28A) of the Act.
3. Disallowance of bank guarantee commission under Section 40(a)(i) of the Act.
4. Consistency in the method of accounting by the Assessee.

Analysis:
1. The appeals before the Delhi High Court were filed by the Revenue against the common order of the Income Tax Appellate Tribunal for three Assessment Years. The Tribunal's order dated 5th February 2016 in ITA No. 3834/Del/2009, 53/Del/2011, and 1815/Del/2011 for the AYs 2006-07, 2007-08, and 2008-09 respectively was under challenge.

2. One of the key issues raised by the Revenue was the treatment of bank guarantee commission as interest under Section 2(28A) of the Act. The Commissioner of Income Tax (Appeals) had deleted the addition made by the Assessing Officer on this account. The Court noted that the bank guarantee commission paid to the foreign bank could not be disallowed under Section 40(a)(i) of the Act as a payment of interest. The CIT(A)'s decision, upheld by the ITAT, was found legally sound by the High Court.

3. Regarding the disallowance of the bank guarantee commission under Section 40(a)(i) of the Act, the Court concurred with the CIT(A) and the ITAT's decision. It was observed that there was no legal basis for treating the bank guarantee commission as a payment of interest, as per Section 2(28A) of the Act. Therefore, the disallowance made by the Assessing Officer was not upheld.

4. Another issue addressed was the consistency in the method of accounting followed by the Assessee. The learned counsel for the Revenue acknowledged that the method of accounting had been consistently applied by the Assessee and accepted by the Revenue for the relevant Assessment Years. Consequently, the Court found no reason to question the Assessee's accounting method and dismissed the appeals.

In conclusion, the High Court dismissed the appeals by the Revenue, upholding the decisions of the CIT(A) and the ITAT regarding the treatment of bank guarantee commission and the consistency in the Assessee's method of accounting.