1979 (1) TMI 166 - AT - Income Tax

Summary

Issues:
- Treatment of guarantee commission as revenue or capital expenditure.

Analysis:
The appeal before the Appellate Tribunal ITAT MADRAS-D involved the treatment of guarantee commission as revenue or capital expenditure for the assessment year 1973-74 concerning a Public Limited Company. Initially, the Income Tax Officer (ITO) added back an amount of Rs. 19,231 as capital expenditure related to deferred purchase of machinery. However, the Assistant Commissioner of Income Tax (AAC) held, based on a Tribunal order, that guarantee commission was allowable as revenue expenditure and deleted the addition. The Department contended that the expenditure should be disallowed as capital expenditure, citing relevant court decisions.

The Department argued that based on decisions by various courts, the guarantee commission should be treated as capital expenditure. On the other hand, the counsel for the assessee referred to a Tribunal order and contended that the expenditure was rightly allowed as revenue expenditure, especially in the case of a continuing business. The Tribunal examined the records and found that the guarantee commission was paid to insurance companies for policies issued in favor of banks for bills drawn by specific companies. The Tribunal also considered the company's financial reports showing the acquisition of machinery and liabilities guaranteed by the insurance company.

The Tribunal referred to various court judgments, including those by the Calcutta High Court and the Supreme Court, regarding the interpretation of "actual cost" for capital assets. The Tribunal emphasized that costs essential for acquiring a capital asset should be included in the actual cost. Considering the specific circumstances of the case, where guarantee commission was paid for acquiring machinery, the Tribunal concluded that such expenditure forms part of the actual cost of machinery and should not be allowed as a revenue deduction. Therefore, the Tribunal allowed the appeal by the Department, upholding the disallowance of the guarantee commission as made by the ITO.

In summary, the Tribunal's decision clarified the treatment of guarantee commission as capital expenditure, emphasizing the inclusion of essential costs in the actual cost of acquiring assets. The Tribunal's analysis of relevant court judgments and the specific circumstances of the case led to the conclusion that the guarantee commission should be considered part of the actual cost of machinery, warranting disallowance as a revenue deduction.