KINETIC ENGINEERING LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under s. 256(1) of the IT Act, 1961, made at the instance of the assessee, the Tribunal has referred the following question of law to this Court for opinion : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire guarantee commission paid to the Bankers for securing timely repayment of credit facility under bills discounting scheme for the purpose of machinery and equipment required by the running business is not a revenue expenditure'.

(2.) THIS reference pertains to asst. yrs. 1985 -86 and 1986 -87. The assessee is a public limited company engaged in the business of manufacturing mopeds. It follows the accounting year ending on 30th June. During the asst. yrs. 1985 -86 and 1986 -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 purpose 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 asst. yrs. 1985 -86 and 1986 -87, respectively. In its assessment for the above assessment years under the IT Act, 1961 ('Act'), the assessee claimed deduction of the above amounts of guarantee commission in 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 s. 37(1) of the Act. The above claim of the assessee was negatived by the ITO. According to ITO, it was a capital expenditure. The assessee appealed to the CIT(A). The CIT(A) held that the entire amount of guarantee commission was not a capital expenditure but only the portion upto the date of installation of the asset was a capital expenditure and the balance was to be allowed as a revenue expenditure. He, therefore, directed the ITO to allow the guarantee commission till the date of installation or user of the plant and machinery to be capitalised and allow the guarantee commission relatable to and payable thereafter during any particular year as a revenue expenditure for that year. Both the assessee and the Revenue appealed to the Tribunal against the above order of the CIT(A). The contention of the assessee before the Tribunal was that the guarantee commission was a revenue expenditure and no part of it could be regarded as a capital expenditure, whereas the contention of the Revenue was that the whole of it was a capital expenditure as it was incurred for acquisition of capital asset. The Tribunal accepted the contention of the Revenue as it was also of the opinion that the guarantee commission was an expenditure relatable to the acquisition of capital asset and hence it was a capital expenditure and not a revenue expenditure. The Tribunal, therefore, held that no part of the guarantee commission was deductible under s. 37 of the Act. Hence this reference at the instance of the assessee.

(3.) 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 the 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 Sugar Ltd. vs . CIT : [1975]98ITR167(SC) , and the decision of the Gujarat High Court in CIT vs. Vallabh Glass Works Ltd. (1982) 137 ITR 389 ) : TC 17R.1021. So far as the decision of the Supreme Court in India Cements Ltd. (supra) is concerned, it was contended that the ratio thereof was not applicable in view of the decision of the Supreme Court in Challapalli Sugar Ltd. (supra). So far as decisions of the Andhra Pradesh, Madras, Karnataka and Calcutta High Courts, in which guarantee commission has been held to be a revenue expenditure, are concerned, the submission of the learned counsel for the Revenue was that the law laid down in those cases was not in consonance with the decision of the Supreme Court in Challapalli Sugars Ltd. (supra). According to the learned counsel, the decision of the Gujarat High Court in Vallabh Glass Works Ltd. (supra) lays down the correct law and the same should be followed.