2012 (10) TMI 841 - HC - Income Tax

Nature of expenditure - Revenue or Capital expenditure - Bank guarantee for commission paid by the assessee for securing timely repayment of the deferred credit facilities for buying machinery for its running business - Issued Deep Discount Bond (DDB) for financing the DND project - DDB holders were given an option under the offer to redeem the bonds in the 5th or 9th year of its allotment Company entered into an agreement with another company the take out assistance against charges @ 1.6% per annum Held that - Following the decision in case of India Cements Limited (1965 (12) TMI 22 - SUPREME COURT) that the take out assistance fees computed @ 1.6% per annum of the respective amount to take out obligation of both the entities were by way of guarantees on an exit option, independent of the financial position of the assessee company. The fees covers the event, in which the assessee-company may not have sufficient cash flow at the time of premature redemption of the DDBs after the end of the 5th and 9th year respectively at a pre-determined price. The guarantee fee was by way of assistance from financial institution; it was not an asset or advantage of an enduring nature. In favour of assesse

Issues Involved:
1. Whether the ITAT is justified in holding that the expense incurred on account of take-out assistance fee is revenue expenditure.
2. Whether the ITAT correctly interpreted Section 37(1) of the Income Tax Act, 1961 in deleting the addition made by the AO.

Issue-wise Detailed Analysis:

1. Justification of Take-Out Assistance Fee as Revenue Expenditure:
The primary issue revolves around whether the take-out assistance fee of Rs. 1,18,01,923/- incurred by the assessee can be classified as a revenue expenditure. The assessee-company is engaged in the development, construction, operation, and maintenance of the Delhi-Noida Link Bridge under the "Build-own-operate-transfer" (BOOT) basis. The assessee issued Deep Discount Bonds (DDBs) to finance the project, providing bondholders the option to redeem the bonds in the 5th or 9th year. To manage this potential redemption, the assessee entered into agreements with IL&FS and IDFC, who guaranteed the purchase of these bonds if the redemption option was exercised. The assessee paid a take-out assistance fee at the rate of 1.6% per annum of the cumulative value of DDBs to these financial institutions.

The Deputy Commissioner of Income Tax classified this fee as capital expenditure, arguing it was related to the fixed capital of the assessee. This decision was upheld by the Commissioner of Income Tax (Appeals), who emphasized that the fee was paid for bond redemption, directly affecting the fixed capital.

However, the Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, asserting that the loan obtained through DDBs and the expenditure for obtaining such a loan are revenue deductions. The ITAT referenced the Supreme Court's decision in India Cement Ltd., which established that loans do not constitute capital assets. The ITAT concluded that the take-out assistance fee was a prudent business measure to avoid default and did not result in any enduring capital advantage or asset acquisition.

2. Interpretation of Section 37(1) of the Income Tax Act, 1961:
The second issue concerns the interpretation of Section 37(1) of the Income Tax Act, 1961, which pertains to deductions of expenses incurred wholly and exclusively for business purposes. The Tribunal's reasoning was challenged by the revenue, which argued that the fee altered the capital structure of the assessee and provided an enduring benefit.

The Tribunal, however, found that the fee was incurred to ensure the smooth operation of the business and did not result in any capital asset or enduring benefit. The Tribunal's decision was supported by precedents, including the Supreme Court's ruling in India Cements Ltd., which clarified that the purpose of the loan is irrelevant to the nature of the expenditure. The Tribunal also cited the Bombay High Court's decision in Kinetic Engineering Ltd., which held that guarantee commissions for securing loan repayments are revenue expenditures.

The Tribunal emphasized that the take-out assistance fee was a business expenditure aimed at securing the DDBs against premature redemption, ensuring the company's financial stability without acquiring any capital asset or enduring benefit.

Conclusion:
The High Court upheld the Tribunal's decision, concluding that both questions of law were decided in favor of the assessee. The take-out assistance fee was deemed a revenue expenditure, and the Tribunal's interpretation of Section 37(1) was found to be correct. The appeal by the Commissioner of Income Tax was dismissed, affirming that the expenses incurred were for the purpose of business and did not result in any capital asset or enduring benefit.

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