2017 (7) TMI 106 - HC - Income Tax

Allowability of revenue expenditure - guarantee commission paid to the bankers for securing timely repayment of credit facility and loan from Financial Institutions for the purposes of machinery and equipment - Held that - The Division Bench of this Court in case of Kinetic Engineering Ltd (1997 (7) TMI 63 - BOMBAY High Court) was dealing precisely with the said issue wherein in the said case the Assessee had to pay guarantee commission for securing timely repayment of credit facility obtained for the purpose of machinery and equipments required for running business. This Court considering various judgments of the Apex Court categorically came to the conclusion that the expenditure incurred for payment of guarantee commission is revenue expenditure. The act of borrowing money was incidentally to carrying on business.

Summary

Issues:
Interpretation of revenue expenditure - Guarantee commission for securing timely repayment of credit facility and loan for machinery and equipments

Analysis:
The judgment pertains to the Assessment Year 1984-85 and focuses on whether the guarantee commission paid to bankers for securing timely repayment of credit facility and loan for machinery and equipments constitutes revenue expenditure. The Assessee, an ongoing concern, purchased machinery and equipments using foreign exchange loans and deferred credit facilities, requiring guarantee from bankers for timely loan repayment. The Assessee paid a guarantee commission of Rs. 7,52,267, claimed as revenue expenditure. The Assessee's counsel cited relevant case laws, including Kinetic Engineering Ltd. and India Cements Ltd., to support the claim of guarantee commission as revenue expenditure.

The Revenue's counsel argued that any expenditure incurred before production commences should be considered capital expenditure, aligning with basic accounting principles. The court examined the submissions and referred to the Kinetic Engineering Ltd. case, where it was established that guarantee commission for securing timely loan repayment is revenue expenditure. The court emphasized that borrowing money was essential for conducting business operations.

The court highlighted the Andhra Pradesh High Court's decision in Addl. CIT vs. Akkamba Textiles Ltd. and the Madras High Court's decision in Sivakashi Mills Ltd., supporting the view that guarantee commission is revenue expenditure. The court concluded that the guarantee commission paid by the Assessee for securing timely loan repayment for machinery and equipments is revenue expenditure, not capital expenditure. The judgment favored the Assessee, citing the precedent set by the Kinetic Engineering Ltd. case, and disposed of the reference in the Assessee's favor without costs.