TMI Blog1997 (7) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... 86-87, the assessee paid guarantee commission to its bankers who issued guarantees on behalf of the assessee favouring IDBI/ICICI for securing timely repayment of the deferred credit obtained by it under the bills discounting scheme for the propose of buying machinery in its running business. The assessee paid as guarantee commission Rs. 6,98,780 and Rs. 7,03,821 in the previous years relevant to the assessment years 1985-86 and 1986-87, respectively. In its assessment for the above assessment years under the Income-tax Act, 1961 ("the Act"), the assessee claimed deduction of the above amounts of guarantee commission in the computation of its business income. The case of the assessee was that it was a revenue expenditure incurred for the purpose of business which was deductible under section 37(1) of the Act. The above claim of the assessee was negatived by the Income-tax Officer, who held it was a capital expenditure. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the entire amount of guarantee commission was not a capital expenditure but only the portion up to the date of installation of the asset was a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contention on the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, the Andhra Pradesh High Court in CIT (Addl.) v. Akkamba Textiles Ltd. [1979] 117 ITR 294, the Madras High Court in Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211, the Karnataka High Court in CIT v. Gogte Minerals (No. 1) [1997] 225 ITR 57 and the Calcutta High Court in CIT v. Metal Corporation of India Ltd. [1982] 133 ITR 130. In reply Dr. Balasubramanian, learned counsel for the Revenue, submitted before us that the guarantee commission paid by the assessee cannot be held to be revenue expenditure because the loan obtained by the assessee had been used by it for purchasing capital assets, i.e., plant and machinery. According to learned counsel, the guarantee commission in this case was related to the acquisition of a capital asset and hence it was a capital expenditure. Reliance was placed in support of this contention on the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and the decision of the Gujarat High Court in CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. So far as the decision of the Supreme Court in India Cements Ltd.'s case [1966] 60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in India Cements Ltd.'s case [1966] 60 ITR 52 and Challapalli Sugars Ltd.'s case [1975] 98 ITR 167. On a careful consideration of the same, we are of the clear opinion that the ratio of the decision of the Supreme Court in India Cements Ltd.'s case [1966] 60 ITR 52 has in no way been affected by its later decision in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167. On the other hand, in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167, the Supreme Court has specifically referred to its decision in India Cements Ltd.'s case [1966] 60 ITR 52 with approval. The only ground on which the expenditure in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC) was held to be capital expenditure was that it was incurred before the commencement of the business of the assessee. In India Cements Ltd.'s case [1966] 60 ITR 52, the assessee obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation by creating a charge on its fixed assets. In connection therewith, it paid Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. The Income-tax Officer refused to allow the deduction of the above amount as acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture for obtaining the loan was revenue expenditure or capital expenditure." The Supreme Court summarised its opinion in this regard as follows: "(a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained." In view of the above, the Supreme Court held that the expenditure of Rs. 84,633 incurred by the assessee in that case was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business. In Challapalli Sugars Ltd.'s case [1975] 98 ITR 167, the controversy before the Supreme Court was whether interest paid on money borrowed for the acquisition and installation of the machinery of a plant accruing before the commencement of its business could be taken into account in considering the actual cost of the plant. The Supreme Court held that interest paid by the assessee before the commencement of its business on amounts borrowed by it for the acquisition and installation of plant and machinery formed part of the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter, the ratio of the decision of the Supreme Court in India Cements Ltd.'s case [1966] 60 ITR 52 clearly applies and guarantee commission in the instant case has to be treated as a revenue expenditure. We have also perused the decisions of the High Courts of Andhra Pradesh, Madras, Karnataka and Calcutta referred to above. The Andhra Pradesh High Court, in Addl. CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294 has held that the guarantee commission paid by the assessee in connection with the purchase of machinery was a revenue expenditure and not a capital expenditure. While arriving at this conclusion, the High Court followed the decision of the Supreme Court in India Cements Ltd.'s case [1966] 60 ITR 52. In Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211, the Madras High Court also held that guarantee commission paid to a bank for obtaining a loan for acquisition of machinery was a revenue expenditure. While saying so, the High Court summed up the reasoning in support of its conclusion as follows: "The expenditure incurred for the purchase of the machinery was undoubtedly capital expenditure, for it brought in an asset of enduring advantage. But the guarantee commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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