1976 (8) TMI 12 - HC - Income Tax

Summary

Issues Involved:

1. Whether the guarantee commission paid by the assessee in connection with the purchase of machinery is an admissible deduction u/s 37 of the Income-tax Act, 1961.

Summary:

1. Admissibility of Guarantee Commission as Deduction u/s 37:

The assessee, a public limited company engaged in manufacturing textiles, imported machinery on a deferred payment basis, guaranteed by banks and insurance companies. The assessee paid a guarantee commission of Rs. 10,242 and claimed it as business expenditure. The Income Tax Officer (ITO) disallowed it, considering it capital expenditure. However, the Appellate Assistant Commissioner (AAC) allowed it as revenue expenditure, following the Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52. The Tribunal upheld the AAC's decision, leading to the revenue referring the question to the High Court.

2. Relevant Supreme Court Decisions:

The High Court considered four Supreme Court decisions:
- State of Madras v. G. J. Coelho [1964] 53 ITR 186: Interest on borrowed money for purchasing a plantation was held as revenue expenditure.
- Bombay Steam Navigation Co. (1953) Ltd. v. CIT [1965] 56 ITR 52: Interest paid on the unpaid balance for acquired assets was deemed business expenditure.
- India Cements Ltd. v. CIT [1966] 60 ITR 52: Expenditure for securing a loan was considered revenue expenditure, irrelevant of the loan's purpose.
- Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167: Interest paid before production commencement was part of the actual cost of assets for depreciation purposes.

3. Distinction from Challapalli Sugars Case:

The High Court distinguished the present case from Challapalli Sugars, emphasizing that the assessee was a running concern when the machinery was purchased, unlike in Challapalli Sugars where the interest was paid before business commencement.

4. Conclusion:

Based on the principles from the Supreme Court decisions, the High Court concluded that the guarantee commission of Rs. 10,242 paid by the assessee was revenue expenditure. Therefore, it is an admissible deduction u/s 37(1) of the Income-tax Act, 1961. The question was answered in the affirmative, in favor of the assessee and against the revenue. The Commissioner was directed to pay costs of the reference to the assessee, with an advocate's fee of Rs. 250.