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TMI Blog1981 (7) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1966-67, the assessee claimed a deduction of the aforesaid three items of expenditure as revenue expenditure. The ITO, however, rejected the claim on the ground that the expenditure incurred was of a capital nature. In the appeal preferred by the assesseecompany, the AAC, however, upheld the claim of the assessee-company and deleted the additions made by the ITO on account of the disallowance as stated above. The Income-tax Appellate Tribunal (hereinafter referred to as " the Tribunal "), before whom the Revenue went in appeal, confirmed the decision of the AAC. Under the circumstances, at the instance of the Revenue, the following questions have been referred to us for our opinion under s. 25(1) of the I.T. Act, 1961 (hereinafter referred to as " the Act"): "(1) Whether, on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in law in holding that the assessee was entitled to deduction of Rs. 24,266, being bank guarantee commission paid to banks in connection with the purchase of machineries on deferred payment basis ? (2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the allowance of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for the acquisition of an asset or a right of a permanent character, the possession of which is a condition precedent to the carrying on of the business, the expenditure may be regarded as revenue expenditure (vide Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 (SC). Therefore, the test to be applied for finding out whether a particular expenditure is revenue expenditure or not is to find out whether the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process. If the expenditure is so connected with the carrying on of the business that it may be regarded as an integral part of the profit-earning process, the expenditure cannot be treated as a capital expenditure. In other words, such expenditure is revenue expenditure. There is, however, no doubt that the expenditure incurred for the acquisition of a capital asset or right of a permanent character or a benefit or advantage of enduring nature, is a capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred payment of price granted by the foreign suppliers was a part of the financial and technical collaboration agreements resulting in a spread over of the payment of the actual price over a long period which in turn necessarily involved the question of payment of interest also. It was held that the expenditure which the assessee had incurred for the payment of interest could be added to the cost of machinery for the purpose of depreciation and development rebate. In other words, the expenditure was held to be capital in nature. We agree with Mr. B. R. Shah, that the reasons for which the expenditure incurred for the interest payment was held to be of capital nature, will apply with equal force to the expenditure incurred in payment of the bank guarantee commission and in obtaining the letter of credit. Expenditure incurred in the payment of bank guarantee commission and obtaining letters of credit would ultimately add to the cost of acquisition of the machineries as was the case with regard to the interest payment in the case of Tensile Steel Ltd. [1976] 104 ITR 581 (Guj). Expenditure of identical nature cannot be regarded as revenue expenditure for one purpose and capital expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sometimes be treated as capital expenditure at the option of the assessee. For example, if the assessee borrows money to purchase plant and machinery and pays interest on the money borrowed after installation of the plant and machinery and commencement of its business, in such a case, the assessee may have an option to treat the expenditure incurred in the payment of interest as either revenue expenditure or capital expenditure. This would be so for the obvious reason that payment of interest ultimately forms part of cost of acquisition of the capital asset, namely, plant and machinery. The expenditure which is incurred in order to acquire capital asset must be treated as a capital expenditure. If the outgoing amount forms an integral part of the cost of acquisition, it must be treated as capital expenditure even if actual payment thereof is deferred to date subsequent to the commencement of the business. The date of commencement of business is a dividing line from a limited point of view. Even if the expenditure incurred before the commencement of business is essentially of revenue nature, it can be treated as capital expenditure as it adds to the cost of acquisition of the asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g depreciation and development rebate. It was further held that the interest which was paid to the foreign suppliers on the deferred payment of price also formed part of the actual cost of the machinery and plant to the assessee. The Bombay High Court thus treated the expenditure incurred for payment by way of bank guarantee commission and interest as capital expenditure. We agree with the view taken by the Bombay High Court. It may be mentioned that the question as to whether or not the interest paid on deferred payment would constitute a capital expenditure does not arise in the present case (of course this court has taken the view that it is part of the Cost of a capital asset and constituted a capital expenditure in Tensile Steel Ltd. [1976] 104 ITR 581 (Guj)). In the instant case also, the payment of bank guarantee commission to the bank and the expenditure incurred in obtaining the letters of credit were necessary items of expenditure to bring the machineries, capital assets, into existence and to put them in working condition. These items of expenditure were incurred as integral part of the payment of the cost price of the machineries. Therefore, the expenditure must be rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t did not lay down any new principle but relied on the principles laid down by the decision of the Supreme Court in reaching the conclusion it did. With great respect, we find ourselves unable to agree with the view taken by the Andhra Pradesh High Court. The expenditure incurred for bank guarantee commission was an integral part of the cost price of the machinery which was admittedly a capital asset as in the instant case. An expenditure will be revenue expenditure only if it is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process. The expenditure in question was not such an expenditure. We are, therefore, not inclined to agree with the view taken by the Andhra Pradesh High Court. We also find ourselves unable to agree with the decision of the Madras High Court in Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211, wherein view similar to the view taken by the Andhra Pradesh High Court in Addl. CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294 has been taken. The Madras High Court has held that payment of guarantee commission was unrelated to the working out of the cost of acquisition of any depreciable machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord to show that the amount of Rs. 5 lakhs was spent in acquiring a capital asset before the commencement of business and that had it been the Revenue's case that the amount spent for acquiring the capital asset was expended by the assesseecompany, prior to the commencement of the business, the matter would have stood on a different footing. Relying on these observations, Mr. J. P. Shah urged that in order to decide the question whether any particular expenditure is capital expenditure or revenue expenditure what is relevant is whether or not the assessee concerned had commenced business or production. He submitted that commencement of business or production is the dividing line, in order to determine the nature of expenditure. . In other words, the decision on the question whether any particular expenditure is revenue or capital expenditure, depends upon whether or not the assessee has commenced business or production. If the business or production has commenced, submitted Mr. J. P. Shah, the expenditure, whether incurred in acquiring a capital asset or not, would be revenue expenditure. No such principle as stated by Mr. Shah is laid down by us in that case. The decision in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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