Guarantee commission for machinery purchase deemed revenue expenditure, not capital.

The court held that the guarantee commission paid by the assessee for securing timely repayment of the deferred credit facility for buying machinery in its running business is a revenue expenditure. The Tribunal's decision to treat it as capital expenditure was deemed a manifest error of law. The question was answered in the negative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.

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Issues Involved:
1. Whether the guarantee commission paid to bankers for securing timely repayment of credit facility under bills discounting scheme for the purchase of machinery and equipment required by the running business is a revenue expenditure or capital expenditure.

Issue-wise Detailed Analysis:

1. Nature of Guarantee Commission: Revenue vs. Capital Expenditure

Factual Background:
The assessee, a public limited company engaged in manufacturing mopeds, paid guarantee commission to its bankers for securing deferred credit under the bills discounting scheme to purchase machinery. The amounts were Rs. 6,98,780 and Rs. 7,03,821 for the assessment years 1985-86 and 1986-87, respectively. The assessee claimed these amounts as revenue expenditure under section 37(1) of the Income-tax Act, 1961. However, the Income-tax Officer classified it as capital expenditure. The Commissioner of Income-tax (Appeals) partially agreed, allowing the commission post-installation as revenue expenditure. Both parties appealed to the Tribunal, which upheld the entire amount as capital expenditure, leading to this reference.

Assessee's Argument:
The assessee contended that the guarantee commission was for obtaining a loan in the running business, not for acquiring a capital asset. Reliance was placed on the Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52, which held that expenses for obtaining a loan are revenue expenditures.

Revenue's Argument:
The Revenue argued that since the loan was used to purchase capital assets (machinery), the guarantee commission should be considered capital expenditure. They cited the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which treated pre-commencement interest on loans for acquiring assets as capital expenditure.

Court's Analysis:
The court examined the precedents, particularly the Supreme Court's rulings in India Cements Ltd. and Challapalli Sugars Ltd. It concluded that the ratio in India Cements Ltd. was not affected by Challapalli Sugars Ltd., as the latter dealt with pre-commencement expenses, whereas the former involved a running business. The court emphasized that the act of borrowing is incidental to business, and the loan itself is a liability, not an asset or enduring advantage.

Precedents from High Courts:
The court reviewed decisions from various High Courts:
- Andhra Pradesh High Court in CIT (Addl.) v. Akkamba Textiles Ltd. [1979] 117 ITR 294: Held guarantee commission for machinery purchase as revenue expenditure.
- Madras High Court in Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211: Similar conclusion, distinguishing the nature of guarantee commission from capital expenditure.
- Karnataka High Court in CIT v. Gogte Minerals (No. 1) [1997] 225 ITR 57: Treated guarantee commission for deferred payment schemes as revenue expenditure.

The court also noted the contrary view of the Gujarat High Court in CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389, which it found unpersuasive in light of the Supreme Court's ruling in India Cements Ltd.

Conclusion:
The court held that the guarantee commission paid by the assessee for securing timely repayment of the deferred credit facility for buying machinery in its running business is a revenue expenditure. The Tribunal's decision to treat it as capital expenditure was a manifest error of law. The question referred was answered in the negative, in favor of the assessee and against the Revenue.

Disposition:
The reference was disposed of with no order as to costs.

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