In a recent decision, the division bench of the Punjab & Haryana High Court has held that the guarantee commission paid by the assessee for acquiring an asset on installment terms is revenue expenditure which is deductible under section 37(1) of the Income Tax Act.
In the instant case, the assessee, Haryana State Road &Bridges Development Corporation Ltd has filed its income tax returns by claiming deduction in respect of commission paid by it to the State of Haryana in respect of a guarantee issued by the State of Haryana in favour of the Housing Urban Development Corporation Limited (HUDCO). The assessing officer disallowed the above claim of deducting guarantee fee by treating it as capital expenditure. The officer further disallowed certain payments claimed by the assessee by invoking Section 40(a)(ia) and observed that no TDS is paid on such amount.
While examining the nature of “guarantee fee”, the Court cited the decision in Sivakami Mills Ltd. Vs Commissioner of Income Tax, in which the Madras High Court refused to treat the guarantee fee as capital expenditure.The same view was subsequently, upheld by the Apex Court.
Following the above decision, the Court arrived at a conclusion that the claim of deduction of ‘guarantee fee’ as claimed by the assessee is eligible to be deducted from theirtotal income.in this connection, it was observed that “It is clear, therefore, that the Supreme Court held that the guarantee commission paid by an assessee is a revenue expense and, therefore, allowable as a deduction in computing the total income. It is important to note that even in that case, the Madras High Court came to the conclusion that the purchase of machinery was a capital expenditure, but the guarantee commission stands on a different footing. We will assume that in the case before us also the guarantee was issued in respect of loans taken for acquiring capital assets. In view of the judgement of the Supreme Court, it would make no difference as far as the guarantee commission is concerned. As we mentioned earlier, the guarantee was issued by the State of Haryana at the assessee’s request in favour of HUDCO.”
Read the full text of the Judgment below.
