JMC-MSKE(JV),,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-5(2)(3),, AHMEDABAD

Therefore, the allegation of the AO that the expenditure was incurred prior to the commencement of the business is incorrect.

However, the ld. CIT(A) disregarded the contention of the assessee and confirmed the order of AO by observing as under:

“4. 3. I have considered the facts of the case and submission made by the appellant. It is worth here to mention that in appellant's own case in appeal for A.Y. 2010-11, the undersigned vide order in appeal No. CIT(A)- 5/ITO.Wd.5(2)(3)/216/2015-16 dtd. 20.07.2016 has confirmed the disallowance made by the AO in respect of Bank guarantee expenses for the reasons discussed in para -4.3 to 4.15 of the appellate order which is reproduced as under:- "4. 3. During the assessment proceedings the AO has noticed that the assessee has debited an amount of Rs.12,12,525/- under the head bank guarantee expenses. The assessee has paid the same to the bank for procuring bank guarantee in ' favour of Air Port Authority of India as per the terms of tender contract. In the assessment order, the AO has held that performance deposit confers right on the assessee to carry out work and commission borne for providing such deposit is a capital expenditure. Accordingly, the AO has disallowed the same and added to the income of the assessee.

to setting up of the business. It is further contended that the business of developing and executing infrastructure project of the Air Port was set up and commenced in preceding year and during the year further expenditure was incurred which was for the purpose of continuing the guarantee which shows that it was not an expenditure for setting up of business. The appellant has also contended that it was one of the conditions of the agreement that security deposit in performance guarantee work required and the guarantee was given by obtaining the same from a bank for which the bank charged commission. Thus, the expenditure was intimately and directly concerned with carrying on of business year to year until the work was satisfactorily completed. The appellant has relied upon following decisions/judgments as reproduced in the preceding paras of this order.

Since the disallowance made by the AO was confirmed in appellate proceedings for A.Y. 2010-11 and the issue identically involved in the appeal under consideration, the disallowance made in respect of bank guarantee expenses is confirmed. Thus the ground of appeal is dismissed.”

Being aggrieved by the order of Ld CIT(A) assessee is in appeal before us:

At the outset, it is submitted that the learned Commissioner (Appeals) have confirmed above mentioned disallowance on the basis of appellate order of A.Y. 2010-11. However, since the appellant has not received said appellate order till date of A.Y. 2010-11, no further action is taken by the appellant in this regard.

Hence, these submissions may kindly be considered;

With respect to ground of appeal, the contentions of the appellant are as follows: (i) The said expenditure was incurred in order to execute and secure performance of the work awarded to it in the normal course of such work and as per tender terms it is not in the nature of expenditure incurred prior to operations of the business or prior to setting up of the business. (ii) The business of developing and executing infrastructure project of the Airport was set up and commenced in the year 2008-09. During the year, further expenditure was incurred which was for the purpose of continuing the guarantee, which shows that it was not an expenditure for setting up a business. (iii) Evidence in support of the justification of the said expenditure was submitted during both assessment and appellate proceedings. It was one of the conditions of the agreement that security deposit in performance guarantee were required (extract of tender document is enclosed herewith - Page 1). The guarantee was given by obtaining the same from a bank, for which the bank charged commission, which is the impugned expenditure. By furnishing the guarantee instead of depositing 5% of tender cost, the appellant was required under the terms of the agreement to secure due performance of its obligations for developing the Airport. Thus, the expenditure was intimately and directly concerned with carrying on of business from year to year, until the work was satisfactorily completed. Non-performance of the obligations would have resulted into forfeiture of the guarantee amount. (iv) Further, the expenditure did not give rise to any asset or a right but it was an annual expenditure by way of guarantee commission expense paid to the bank for the particular financial year.

(v) In support of the claim as and by way of revenue expenditure, the appellant places reliance upon following decisions: Taxman 0025 (Gujarat) wherein it was held that bank guarantee given for performance of contract was allowable as business expenditure u/s.37(1) of the Act. Hence, in view of above, it is submitted that the disallowance of bank guarantee expenses of Rs.3,94,626/- treated by ITO as capital in nature may kindly be deleted.”

From the preceding discussion, we note certain undisputed facts as detailed under: i. The assessee started its business activities in the year 2008-09 which evidences that the business was setup and commenced in the earlier years.

ii. The assessee claimed before the lower authorities that it has no fixed assets in its business. The argument of the assessee was not disputed by any of the lower authority. iii. The amount of commission expenses was treated as capital in nature but no deduction was allowed either as preliminary expenses or depreciation on account of such expenses. iv. None of the authority below has doubted the genuineness of the expenses. v. There is no allegation from the authority below that the expenditure was not incurred in connection with the business of the assessee. After having regard on the aforesaid facts we note that the authorities below erred in not allowing the deduction of the commission expenses either as revenue or in the form of depreciation. The expenditure is treated as capital in nature if there arises some fixed assets out of such expenditure but it is not so in the case before us.

Therefore we are inclined not to treat such expenses as capital in nature.

“The contractee 'O' encashed the bank guarantee, which was furnished by the assessee as performance guarantee, due to the non-fulfilment of the contract by the assessee. It can be said to be compensatory in nature and not penal in nature. The Tribunal has rightly held that the assessee would be entitled to the deduction of the same as business expenditure under section 37(1). Therefore, the assessee will be entitled to the deduction of the said amount as business expenditure under section 37(1), as the same is compensatory in nature”

From the above judgment, we note that if performance guarantee has forfeited by the concern party then the same is allowable as deduction to the assessee. Therefore, we can draw the principles from the aforesaid judgment which can be applied to the bank guarantee commission expenses incurred by the assessee for providing performance guarantee to the party. Thus, we hold that the expenses incurred by the assessee on account of commission expenses as discussed above is revenue in nature and accordingly the same is allowable for deduction u/s 37(1) of the Act. Hence, we set aside the order of ld CIT(A) and direct the AO to delete the same. Hence, the ground of appeal of the assessee is allowed.

Order pronounced in the Court on __08_ October, 2018 at Ahmedabad. (RAJPAL YADAV) ACCOUNTANT MEMBER Ahmedabad; Dated _08_/10/2018 Priti Yadav, Sr.PS

आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant