Law: Income Tax Act, 1961

Section: 37

(a) Income-tax-----Business expenditure---Purchase of machinery by assessee on deferred payment basis---Guarantee executed by Bank for assuring due payment of instalments by assessee---Is allowable as revenue expenditure---Indian Income Tax Act, 1961, S.37. (b) Income-tax--- ----Business expenditure---Purchase of machinery on deferred payment basis---Interest on deferred payment---Revenue expenditure---Indian Income Tax Act, 1961, S.37. The assessee-company purchased from abroad for the purpose of its business some items of machinery on deferred payment terms under which an immediate payment had to be made and the balance was to be paid in instalments. For assuring the due payment of the instalments, the assessee obtained a guarantee executed by a bank in favour of the sellers of the machinery and the bank charged a commission at a percentage of the amount guaranteed. The assessee's claim for deduction of the amount of commission calculated at one per cent. on the outstanding balance and also of the commission on the additional liability guaranteed consequent on the devaluation of the Indian rupee during the year ending December 31, 1967, relevant for the assessment year 1968-69 was negatived by the Income-tax Officer on the ground that it was capital in nature. The Appellate Assistant Commissioner allowed the claim on the ground that though the expenditure for the purchase of the assets was undoubtedly capital, the expenditure for discharging the liability in instalments could not be regarded as capital expenditure. The Tribunal, however, held that the disallowance made by the Income-tax Officer was correct in the view that the payment of guarantee commission was concerned with an expenditure incurred by the assessee in connection with the purchase of the machinery and it went to increase the actual cost of the assessee of the machinery and hence was capital in nature. On a reference at the instance of the assessee, the High Court held that the payment of guarantee commission was unrelated to the working out of the cost of acquisition of any depreciable machinery, plant or other asset but was an expenditure which was incurred in the course of carrying on the…

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