2018 (5) TMI 632 - AT - Income Tax

Accrual of expenditure - contingent liability which crystallized during the subsequent year - Due to the nonperformance of the contract the principal encashed the bank guarantee and recovered the amount. Assessee claimed the above sum as deduction as business expenditure - Deduction u/s 37(1) - Held that - It cannot be said that above expenditure is not allowable to the assessee. It is not the case of the revenue that assessee is not engaged in the business of constructing bus shelters. That is the only business of the assessee. The above loss because of an event of the bank guarantee is also incurred by the assessee during the course of the business of the assessee. Therefore, it cannot be said to be capital expenditure even if the assessee failed to create requisite bus shelters. In fact, for that reason only the assessee was to provide the bank guarantee and same was encashed. Therefore, it cannot be said that the above expenditure is capital expenditure in nature. The order of the Hon ble high court is rendered during the assessment year. Merely because it was to be enforced after 7 days, it cannot be said that the liability has not been crystallized during the year - the liability has been crystallized during the year only in view of the decision of the Hon ble Delhi High Court, which was rendered during the year. Even otherwise if during the arbitration proceedings an award comes and assessee is also entitled to the benefit on account of allowability of this claim, same would be chargeable to tax under section 41 (1) - Merely because of these reasons, it cannot be stated that the claim of the assessee has not crystallized during the year. We allow the claim of the assessee of ₹ 208 Laces on account of encashment of the bank guarantee by the Delhi transport Corporation for non fulfilment of the work awarded to the assessee which is allowable to it as a business expenditure/loss. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of loss/expenditure of ?2,08,92,603/- due to encashment of bank guarantee by Delhi Transport Corporation (DTC).
2. Determination of whether the loss/expenditure is capital or revenue in nature.
3. Timing of the accrual of the loss/expenditure.
4. Contingent liability due to pending arbitration proceedings.

Detailed Analysis:

1. Disallowance of Loss/Expenditure of ?2,08,92,603/-:
The assessee, engaged in operating and running bus shelters, entered into a concession agreement with DTC to set up 400 bus shelters. As part of the agreement, the assessee provided a performance bank guarantee of ?2.5 crores. Due to non-performance, DTC encashed the bank guarantee. The assessee claimed this encashment as a revenue expenditure in its profit and loss account, which was disallowed by the Assessing Officer and confirmed by the CIT(A). The Tribunal, however, held that the encashment of the bank guarantee was compensatory in nature and thus allowable as a business expenditure under Section 37(1) of the Income Tax Act.

2. Nature of the Loss/Expenditure - Capital or Revenue:
The CIT(A) and the Assessing Officer treated the expenditure as capital in nature, arguing that it was not recurring and lacked direct nexus to the business. The Tribunal disagreed, referencing the Gujarat High Court's decision in Neo Constructo Construction Ltd, which allowed similar encashment as business expenditure. The Tribunal concluded that the loss incurred due to the encashment of the bank guarantee was during the course of the assessee's business and thus should be treated as revenue expenditure.

3. Timing of Accrual of Loss/Expenditure:
The CIT(A) argued that the liability did not accrue in the financial year 2008-09 since the High Court's order became effective seven days after its issuance. The Tribunal held that the liability crystallized during the assessment year 2009-10, as the High Court's order was rendered within that year. The Tribunal emphasized that the effective date of enforcement did not change the fact that the liability was established within the relevant financial year.

4. Contingent Liability Due to Pending Arbitration:
The CIT(A) considered the liability as contingent due to ongoing arbitration proceedings. The Tribunal refuted this, stating that the High Court's order had already crystallized the liability. The Tribunal further noted that any future arbitration award in favor of the assessee would be taxable under Section 41(1) of the Income Tax Act, thus affirming that the liability was not contingent but crystallized during the year.

Conclusion:
The Tribunal reversed the findings of the lower authorities and directed the Assessing Officer to allow the claim of ?2,08,92,603/- as a business expenditure. The appeal of the assessee was allowed, recognizing the expenditure as revenue in nature and crystallized within the assessment year 2009-10. The decision underscores the principle that compensatory payments for non-performance of business contracts are deductible as business expenditures.