TMI Blog1996 (9) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of purchase price of machinery as an assurance on regularity in the payment of instalments by the assessee. The Income-tax Officer acted under section 143(3) of the Income-tax Act. He held that while considering the claim of the assessee treating the amount of Rs. 78,913 as a revenue deduction paid to the bank as the bank guarantee for regularity in payment of instalments, that were payable under the deferred payment scheme. The Income-tax Officer took the view that since the expenditure has been incurred for acquisition of capital items, the same has to be treated as capital in nature. In reaching the above conclusion, the Income-tax Officer observed that in fact, the Commissioner of Income-tax (Appeals) had upheld the disallowance of guarantee commission as a revenue expenditure in the earlier years and, accordingly, had chosen to follow the practice for the year in question also treating the guarantee commission as capital expenditure. This was by the order dated March 26, 1985. The further travel of the proceedings before the Commissioner of Income-tax (Appeals) appears to have received a rubber stamp endorsement on the basis that for the earlier years, the guarantee comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the construction period or the pre-commencement period of a business would have to be naturally treated as capital expenditure, and not the expenditure that is incurred during the subsistence of the business after its commencement. Following this logic, the Tribunal held that the assessee is entitled to a deduction of Rs. 78,913 on the basis that it is in the process of incurring of revenue expenditure. This decision of the Tribunal required the Revenue to bring the proceeding before us, expecting our answer to the question formulated at the outset. We have heard learned senior tax counsel in extenso and with regard to the necessary aspects, we have heard learned counsel for the assessee. Learned senior counsel referred to the necessary statutory provisions, firstly of section 37 of the Income-tax Act, 1961, specifying that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head " Profits and gains of business or profession ". Learned senior counsel was particular enough to emphasise the bracketed portion as an exception to the allowance of expenditure conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 211. The Tribunal has made the following factual observations : " ... The payment was so closely related to the business that it could be viewed as an integral part of the conduct of the business and would be a revenue expenditure. It did not bring into existence any asset of an enduring nature nor did it bring in any other advantage of an enduring benefit. The acquisition of the machinery on instalment terms was only a business exigency. The very nature of the expenditure and the time at which it had been incurred would justify the claim of the expenditure as revenue expenditure. We may add that in this case guarantee commission was paid after the commencement of business and during the subsistence of business as it was incurred by an existing business undertaking. It is only when guarantee commissions are paid in relation to acquisition of assets prior to the commencement of the business itself that would call for treating the same as capital expenditure and not the expenditure that is incurred after the commencement of the business. In other words, guarantee commission which is payable during the construction period or the pre-commencement period of a business alone would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an expenditure attributable to capital assets and revenue character. Our court has observed in the following manner : " The question that we have to consider is whether the amount sought to be deducted represents a capital expenditure or a revenue expenditure. The problem is a familiar one that has haunted the courts time and again for determination, and which, each time has proved to be an elusive will-of-the-wisp. Decisions are numerous, which have dealt with, and explained, the principles to be applied in telling one type of expenditure from the other. We do not propose at this point of time, and at this stage of the development of the law, to survey the history of these decisions. " Our court, when faced with the problem as to whether the expenditure in question represented capital or revenue character, was very much aware that the problem has haunted the court from time and again. In fact, in making the above ringing observations, reliance is placed on the observations of the apex court in Abdul Kayoom's case [1962] 44 ITR 689, 703, made by Justice Hidayatullah, which are also quoted immediately thereafter and they are to the following effect : " None of the tests is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,932 in obtaining letters of credit in favour of the parties from whom the machinery were purchased on deferred payment. Apparently, the question before the Gujarat High Court was as to whether the assessee was entitled to deduction of the said amount being bank guarantee commission. The Gujarat High Court has considered the relevant decisions of the apex court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52, and the decision of the other High Courts. On the basis of the decision of the apex court, it is observed that the question whether a particular expenditure is a revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, 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. Thus, on the basis of the decision of the apex court, the profit earning process was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Andhra Pradesh High Court and we find that the Andhra Pradesh High Court has drawn the principles governing the situation from three decisions of the apex court, Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 ; State of Madras v. G. J. Coelho [1964] 53 ITR 186 and India Cements Ltd. v. CIT [1966] 60 ITR 52. It is specifically observed with reference to the factual matrix therein that on the facts, it was not a question of the assessee-company having borrowed money or entered into any agreement prior to the commencement of the business. It is specifically observed that the Andhra Pradesh High Court in Akkamba Textiles Ltd.'s case [1979] 117 ITR 294, in fact, did not lay down any new principle, but relied on the principles laid down by the decision of the Supreme Court in reaching the conclusions it did. In fact, the Gujarat High Court has also considered the decision of the Madras High Court on which the Tribunal in the proceedings before us has relied upon. It is pertinent to observe that the Madras High Court held that payment of guarantee commission was unrelated to the working out of the cost of acquisition of any depreciable machinery, plant or o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the strength is from the decision of the apex court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. There cannot be any dispute when the Patna High Court observes that in view of the law laid down by the Supreme Court in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167, laying down the mode of determining the cost of a capital asset, it is now no more open to evolve new principles in this regard. In our judgment, there is no question of evolving any new principles and, as stated at the outset, there would not be any occasion to evolve new principles when the principles are already declared by the apex court by as many as four decisions referred to above by us. The question will be application of the above principles to the factual matrix which is more than well, settled before us. It must be stated that in adopting and applying the new principles, the High Court, and it cannot be forgotten that it is the High Court that is applying the principles, has before it necessarily a meaningful attitude. Even purchasing luxury and conspicuous goods, the established tendency is to run after available easy instalments or deferred payment schemes. The days of thinking about asking for l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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