Bank guarantee commission and industrial subsidy treatment clarified: one is revenue expenditure, the other does not reduce actual asset cost.

Guarantee commission paid to a bank for a standing guarantee supporting deferred payment purchase of machinery was treated as revenue expenditure, as it did not create a capital asset or enduring advantage. Central subsidy received under an industrial incentive scheme for backward-area development was held not to reduce the actual cost of capital assets under section 43(1) because it was not an outright grant linked to the purchase price of specific assets. Depreciation therefore had to be computed on the full cost, and the departmental appeal failed on both issues.

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Issues: (i) Whether guarantee commission paid to a bank for standing guarantee in connection with deferred payment purchase of machinery was capital expenditure or revenue expenditure. (ii) Whether Central subsidy received under an industrial incentive scheme was liable to be deducted from the actual cost of capital assets for computing depreciation and development allowance.

Issue (i): Whether guarantee commission paid to a bank for standing guarantee in connection with deferred payment purchase of machinery was capital expenditure or revenue expenditure.

Analysis: The payment was made for securing bank guarantee in relation to the acquisition of machinery on deferred payment terms. The issue was governed by the earlier High Court view treating such commission as an allowable business outgoing and not as a payment bringing into existence a capital asset or enduring advantage.

Conclusion: The guarantee commission was revenue expenditure and the disallowance was not justified.

Issue (ii): Whether Central subsidy received under an industrial incentive scheme was liable to be deducted from the actual cost of capital assets for computing depreciation and development allowance.

Analysis: The subsidy was granted under a scheme intended to promote industrial development in backward areas. It was not an outright grant linked to the purchase price of specific capital assets. In such circumstances, the subsidy did not reduce the actual cost of the assets within the meaning of section 43(1) of the Income-tax Act, 1961.

Conclusion: The subsidy was not deductible from the actual cost and depreciation had to be allowed on the full cost of the assets.

Final Conclusion: The departmental appeal failed on both issues and was dismissed in its entirety.

Ratio Decidendi: A subsidy granted as an industrial incentive for development in backward areas does not reduce the actual cost of capital assets unless it is specifically directed towards meeting the purchase price of those assets, and expenditure incurred for bank guarantee in connection with deferred payment acquisition of machinery is revenue in nature.

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