2018 (10) TMI 1106 - AT - Income Tax

Disallowing bank guarantee expenses u/s 37(1) - CIT-A treating the same as capital in nature - Held that - We note that the authorities below erred in not allowing the deduction of the commission expenses either as revenue or in the form of depreciation. The expenditure is treated as capital in nature if there arises some fixed assets out of such expenditure but it is not so in the case before us. Once, the assessee has incurred any expense in connection with its business then he has liable for deduction either in the form of revenue expenses, preliminary expenses or depreciation. As we note that no benefit has arisen to the assessee out of such expenses which is enduring in nature. Therefore we are inclined not to treat such expenses as capital in nature. The bank guarantee was furnished by the assessee for satisfactory performance of the work assigned to it. Therefore, in our considered view, it is directly linked with the trading/revenue activities of the assessee. Therefore we are of the view that such expenditure should be treated as revenue in nature. In holding so, we find support and guidance in the case of Neo structo construction Ltd. 2013 (7) TMI 851 - GUJARAT HIGH COURT , thus we note that if performance guarantee has forfeited by the concern party then the same is allowable as deduction to the assessee. - decided in favour of assessee.

Summary

Issues: Disallowance of bank guarantee expenses under section 37(1) of the Act by treating it as capital in nature.

Analysis:
The appeal was filed by the Assessee against the appellate order of the Commissioner of Income-Tax (Appeals) relevant to Assessment Year 2013-14, specifically challenging the disallowance of bank guarantee expenses under section 37(1) of the Act by treating it as capital in nature. The Assessee contended that the bank guarantee expenses were incurred for availing the bank guarantee for executing a project and were exclusively for business purposes, emphasizing that no fixed assets were involved. However, the Assessing Officer (AO) considered the expenses as capital since the bank guarantee was obtained before the project commencement. The Commissioner disregarded the Assessee's arguments, citing a previous order confirming a similar disallowance for a different assessment year. The Assessee, in its appeal, reiterated that the expenses were for normal business operations and were not capital in nature. The lack of representation during the hearing was noted, but written submissions were considered.

The Tribunal analyzed the facts, noting that the Assessee had no fixed assets, and the expenses did not result in any asset or right. It observed that the expenses were not allowed as either preliminary expenses or depreciation and were not disputed for genuineness or business connection. The Tribunal opined that since no enduring benefit arose from the expenses, they should not be treated as capital. It further held that the expenses were directly linked to the Assessee's revenue activities, citing a relevant judgment. The Tribunal emphasized that if the performance guarantee was forfeited, the expenses were compensatory and allowable as business expenditure under section 37(1). Therefore, it concluded that the bank guarantee expenses were revenue in nature and directed the AO to delete the disallowance, allowing the Assessee's appeal.

In conclusion, the Tribunal allowed the Assessee's appeal, setting aside the Commissioner's order and directing the deletion of the disallowed bank guarantee expenses, considering them as revenue expenses eligible for deduction under section 37(1) of the Act.