Court rules guarantee commission for loan repayment as revenue expenditure, aligning with precedent.

The court ruled in favor of the Assessee, determining that the guarantee commission paid for securing timely loan repayment for machinery and equipment constitutes revenue expenditure rather than capital expenditure. Citing relevant case law and emphasizing the necessity of borrowing for business operations, the court concluded that the expenditure was allowable as revenue expenditure. The judgment aligned with precedents such as Kinetic Engineering Ltd., Addl. CIT vs. Akkamba Textiles Ltd., and Sivakashi Mills Ltd., ultimately disposing of the reference in the Assessee's favor without costs.

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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.

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