2020 (2) TMI 1223 - AT - Income Tax

Appellate Tribunal affirms CIT(A)'s decision on capital vs. revenue expenditure, allows deduction for guarantee fees.

The Dy. CIT Circle-1 (1) (1), Vadodara Versus Gujarat Energy Transmission Corp. Ltd.

The Appellate Tribunal upheld the CIT(A)'s decision in both issues, ruling in favor of the assessee and dismissing the Revenue's appeal. The Tribunal ... Nature of expenditure - claim of guarantee fees paid to Government of Gujarat - revenue or capital - HELD THAT:- As decided in own case [2015 (6) TMI 1096 - ITAT AHMEDABAD] the assessee has certified that no new project was started or commissioned during the year for which above guarantee was paid, and the guarantee fees was in respect of loans for acquisition of capital assets, which were already put-to-use prior to 1.4.2007. The guarantee fees is directed to be allowed as revenue expenditure, subject to verification by the AO of the certificate filed during the appellate proceedings i.e. there was no capital work-in-progress in respect of loans on which guarantee fees was paid. Disallowance of claim of cost of raising finance for specialized job as revenue expenditure - expenditure incurred for securing the use of money for a certain period was revenue expenditure. In the instant case, the assessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance - Decided against revenue. Issues:Disallowance of guarantee fees paid to Government of Gujarat as capital expenditure under section 37 of the Income Tax Act, 1961.Disallowance of cost of raising finance for specialized job as capital expenditure.Issue 1: Disallowance of guarantee fees paid to Government of Gujarat as capital expenditure under section 37 of the Income Tax Act, 1961:The Revenue challenged the deletion of addition of guarantee fees paid to Government of Gujarat, amounting to Rs. 262.93 lakhs, by the CIT(A). The AO disallowed the claim as revenue expenditure, considering it capital in nature due to enduring benefits. The Tribunal referred to a similar case from AY 2008-09 where it was held that guarantee fees were annual recurring expenditure and not resulting in enduring benefits. The Tribunal emphasized that loans cannot be treated as assets with enduring benefits. It was noted that the guarantee fees were in connection with raising loans and did not result in enduring benefits. The Tribunal directed the guarantee fees to be allowed as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, citing previous Tribunal decisions and the principle of enduring benefits.Issue 2: Disallowance of cost of raising finance for specialized job as capital expenditure:The Revenue also challenged the deletion of addition of Rs. 42.86 lakhs for the cost of raising finance for specialized job as revenue expenditure. The AO argued that the expenditure resulted in enduring benefits and hence was capital in nature. However, the CIT(A) allowed the deduction as revenue expenditure, following the decision in the case of India Cements Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the expenditure for obtaining a loan was irrelevant to consider the purpose of the loan. The Tribunal emphasized that the expenditure incurred for securing the use of money for a certain period was revenue expenditure. The Tribunal confirmed the order of the CIT(A) and dismissed the Revenue's appeal.In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision in both issues, ruling in favor of the assessee and dismissing the Revenue's appeal. The Tribunal emphasized the distinction between capital and revenue expenditure based on enduring benefits and upheld the deductibility of guarantee fees and cost of raising finance as revenue expenditure.