9911796707
|
Home
Issues Involved:
1. Whether the guarantee commission of Rs. 33,238 paid by the assessee is a capital expenditure or a revenue expenditure. Issue-wise Detailed Analysis: 1. Nature of Guarantee Commission: The primary issue was whether the guarantee commission of Rs. 33,238 paid by the assessee for the assessment year 1968-69 should be considered a capital expenditure or a revenue expenditure. The assessee, a company, purchased machinery on deferred payment terms and had to obtain a bank guarantee for the payment of instalments. The bank charged a commission for this guarantee, which the assessee claimed as a deduction. The ITO disallowed the deduction, treating it as capital expenditure. However, the AAC allowed it as a revenue expenditure, which was later overturned by the Tribunal, following the decision in CIT v. Fort Gloster Industries Ltd. 2. Relevant Case Laws: The court reviewed several Supreme Court decisions to determine the nature of the expenditure: - State of Madras v. G. J. Coelho [1964] 53 ITR 186 (SC): The Supreme Court held that interest on capital borrowed for acquiring a plantation was not capital expenditure and should be allowed as a deduction. - Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 (SC): The interest paid on the balance of consideration for the purchase of assets was allowed as a deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. - India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC): The Supreme Court held that the expenditure incurred for securing a loan was revenue expenditure, not capital expenditure. - Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC): Interest incurred before the commencement of production was capitalized and added to the cost of the fixed assets. 3. Distinguishing Factors: The court distinguished between the interest paid before the commencement of production and after the business had started. It emphasized that the guarantee commission was paid during the course of carrying on the business and was closely related to the business operations. 4. Analysis of Commercial and Accountancy Practices: The court referred to commercial and accountancy practices, including the Institute of Chartered Accountants of India's guidelines, which allow for the capitalization of interest incurred before the commencement of production. However, once production starts, such interest should not be capitalized. 5. Interpretation of Revenue vs. Capital Expenditure: The court concluded that the guarantee commission was not for acquiring an asset of enduring nature but was an integral part of the business operations. It was incurred to facilitate the acquisition of machinery on instalment terms, which was a business necessity. Conclusion: The court held that the guarantee commission paid by the assessee was a revenue expenditure. It did not bring into existence any asset of an enduring nature and was closely related to the business operations. Therefore, the expenditure should be allowed as a deduction in computing the total income for the assessment year 1968-69. The question referred was answered in the negative and in favor of the assessee, entitling the assessee to costs of Rs. 500.
|
