Encashment of bank guarantee for non performance is Capital Expenditure or revenue Expenditure
Video Tutorial by CA Satbir Singh (Voice in Hindi , Slides in English) explaining Encashment of bank guarantee for non performance allowed as exp under income tax
Issue involved in this appeal is whether the bank guarantee encashed by the Delhi transport Corporation is an allowable expenditure or not or is allowable to the assessee under section 28 of the income tax act or not.
The above loss because of an event of the bank guarantee is also incurred by the assessee during the course of the business of the assessee. Therefore, it cannot be said to be capital expenditure even if the assessee failed to create requisite bus shelters. In fact, for that reason only the assessee was to provide the bank guarantee and same was encashed. Therefore, it cannot be said that the above expenditure is capital expenditure in nature.
IN THE ITAT DELHI BENCH ‘C’
Green Delhi BQS Ltd.
Assistant Commissioner of Income-tax, Central Circle- 12(1), New Delhi
AND PRASHANT MAHARISHI, ACCOUNTANT MEMBER
IT APPEAL NO. 2939 (DELHI) OF 2014
[ASSESSMENT YEAR 2009-10]
MAY 7, 2018
Rohit Jain, Adv. and Deepesh Jain, CA for the Appellant. Amit Jain, Sr. DR for the Respondent.
Prashant Maharishi, Accountant Member – This is an appeal filed by the assessee against the order of the ld CIT (A)-XV, New Delhi dated 28-02-2014 for the Assessment Year 2009-10.
2. The assessee has raised the following grounds of appeal:
“1. That on the facts and circumstances of the case and in law, CIT (A) erred in upholding the disallowance of loss/ expenditure of Rs. 20892603/- suffered/ incurred by the appellant as a result of encashment of bank guarantee furnished to Delhi Transport Corporation (DTC) as security for the due and punctual discharge of obligations under the Concession Agreement.
1.1 That on the facts and circumstances of the case and in law, the CIT(A) erred in confirming the disallowance on the ground that the loss/ expenditure was a capital loss/ expenditure without appreciating that performance guarantee was inextricably linked to business of the appellant and was therefore, an allowable deduction under section 28/37 of the Act.
1.2 That the ld CIT (A) erred in alleging that the aforesaid/ loss expenditure did not accrue during the previous year 2008-09, since the order of High Court became effective seven days after the date of such order.
1.3 That the ld CIT(A) erred in alleging that the payment of performance guarantee alongwith applicable interest thereon was contingent liability as the issue was pending adjudication under arbitration proceedings.”
3. Briefly stated, facts of the case show that assessee is engaged in the business of operating and running of bus shelter and the advertisement. The assessee filed its return of income declaring a loss of Rs. (-) 8,11,91,180/- on 29/9/2009. For the year under consideration, the assessment under section 143 (3) of the income tax act, 1961 was made by the Ld. Assistant Commissioner Of Income Tax, Circle 12 (1), New Delhi on 29/12/2011 wherein an addition of Rs. 2 08,92,603/- was made and total income of the assessee was assessed at Rs. (-) 60059486/-. The assessee, aggrieved with the order of the Ld. AO preferred an appeal before The Commissioner Of Income Tax (Appeals) – XV, New Delhi who per order dated 28/2/2014 dismissed the appeal of the assessee. Therefore, assessee is in appeal before us.
4. Though assessee has raised 3 effective contentions in ground No. 1 only but the solitary issue involved in the appeal is disallowance of loss/expenditure of Rs. 2,08,92,603/- suffered or incurred by the appellant as a result of encashment of bank guarantee furnished to Delhi transport Corporation as security for efficient and punctual discharge of obligations under the concession agreement. The brief facts pertaining to the issue shows that assessee entered into an agreement with the Delhi transport Corporation for setting up 400 bus queue shelters under the build operate and transfer basis. The appellant was to construct the above shelters and operate them for 10 years and thereafter they were to be transferred to the Delhi transport Corporation. The appellant was required to pay Delhi transport Corporation monthly revenue of Rs. 4.09 crores in respect of fees 400 bus shelters and it was free to earn revenue through advertisement etc to be displayed on those bus shelters. The assessee entered into an agreement with Delhi Transport Corporation on 26/7/2007 titled as concession agreement’. According to clause, No. 3.1 of the agreement the assessee was to give a performance security to Delhi transport Corporation. The assessee submitted a total bank guarantee of Rs. 2.5 crores, as an amount of Rs. 1 crore was towards performance security for construction, which was to be returned after 60 days of successful completion of all Shelters. The remaining amount of Rs. 1.5 crores was in the nature of performance security for operation and maintenance and payment of concession fees. This amount was also to be returned after 90 days of handing over of the shelters. The agreement also provides for fresh performance security where the original performance security has been encashed as assessee failed to perform according to the engagement. The Delhi transport corporations encashed the bank guarantee against which the assessee went into appeal before Hon. Delhi High Court to restrain the Delhi transport Corporation. However, the assessee lost the case before the Hon’ble Delhi High Court on 26/03/2009 where in the Hon’ble high court allowed Delhi transport Corporation to keep bank guarantee sum encashed with interest rate of 9% per annum thereon. Assessee has debited a sum of Rs. 20892603/- on account of liability towards cancellation of contracts. Out of the above amount, a sum of Rs. 2 crores is because of bank guarantee liquidated and remaining is the interest for late payment thereof. The assessee explained before the Ld. assessing officer that assessee furnished a performance bank guarantee of Rs. 2 crores on 02/06/2008 to the Delhi transport Corporation towards security for review and punctual performance discharge of its obligation under the concession agreement during the implementation period. As per the agreement yes bank shall without demur pay to the Delhi transport corporations sum not exceeding in aggregate of Rs. 2 crores within 5 days of receipt of the written demand thereof by the Delhi transport Corporation stating that the company had failed to meet its performance obligation under concession agreement during the implementation period. The assessee company submitted that it made default in performing the obligation and therefore Delhi transport Corporation requested for invocation of the bank guarantee of Rs. 2 cross. The assessee contested the claim of the Delhi transport Corporation before the Hon’ble Delhi high court to restrain the Delhi transport Corporation from encashment of the bank guarantee filing an undertaking that in the event of the petitioner ultimately failing in the petition shall pay Delhi transport Corporation interest at such rate for the delay in payment as may be awarded by the Hon’ble court. Subsequently on 26/03/2009, the Hon’ble Delhi High Court released the order to make the encashment of bank guarantee along with the interest at the rate of 9% p.a. for the delay in making encashment of bank guarantee to Delhi transport Corporation. Pursuant to that order of the Hon’ble Delhi High Court, the assessee debited a sum of Rs. 208,92, 603/- in the profit and loss account and claimed it as revenue expenditure . The assessee submitted before the assessing officer that this liquidation of bank guarantee is revenue expenditure and therefore it should be allowed. However, the Ld. assessing officer rejected the contention of the assessee and stated that the above claim is of the capital nature and not r revenue in nature. The main reason given by Ld. assessing officer is at the same is not of recurring nature and it does not have any direct nexus.
5. The assessee contested the above claim before the Ld. CIT (A) who confirmed the findings of the Ld. assessing officer and further held that in the absence of any activity undertaken for construction of the shelters the performance guarantee for construction is also for operation is capital in nature and therefore the disallowance was confirmed. He further held that as Hon’ble high court while deciding the suit against the appellant per order dated 26/3/2009 has held that such order shall be effective from 7 days after the date of such order and further as the arbitration proceedings are pending the amount of performance guarantee is contingent in nature. In view of this, he held that the liability for performance guarantee could not be held to have arisen in financial year 2008 – 09 relating to assessment year 2009 – 10. He further held that the above claim is contingent upon depending arbitration award the same cannot be held as having crystallized in the current year hence disallowance is correctly made. Therefore, assessee aggrieved with the order of the Ld. CIT – A has preferred an appeal before us.
6. The Ld. authorized representative has submitted a detailed paper book wherein the copy of the concession agreement entered into by the assessee with the Delhi transport Corporation in June 2008 at page No. 46 – 216, security for due and punctual performance of its contractual obligation was submitted at page No. 217- 219 of the paper book. The Ld. authorized representative also submitted the copy of the order dated 26/3/2009 by the Hon’ble Delhi High Court allowing encashment of the aforesaid bank guarantee by Delhi transport Corporation and also the letter dated 25/5/2009 by Delhi transport Corporation addressed to the – yes bank requesting to give effect to the aforesaid order of the Hon’ble high court. He also referred to the copy of the bank letter remitting the amount by the bank at page No. 229 of the paper book. He further submitted the copy of the Ledger account of the Delhi transport Corporation in the books of the appellant wherein the amount of bank guarantee along with the bank interest is credited to that account on 31/5/2009. He further reiterated the submission made before the Ld. CIT (A), which is also placed at page No. 232-234 of the paper book. He also submitted a decision paper book wherein he relied on several decisions to submit his claim that payment for nonperformance or breach of a business contract is deductible as business expenditure. He further supported several decisions that expenditure incurred towards a new project, which did not materialize, is not capital expenditure but revenue expenditure. He further stated that the crystallized liability is allowable as deduction even a final adjudication is pending in arbitration. He therefore submitted that above expenditure is allowable as revenue expenditure even though there is no commencement of the setting up of bus shelters as agreed upon. He stated that same cannot be considered as capital expenditure. He further submitted that even the arbitration is pending it cannot be said to be contingent in nature but crystallized. He submitted that the date of the Hon’ble high court’s order is within the year and its effective implementation after 7 days does not have any impact on the allowability of the claim of the assessee in this year. He therefore submitted that the claim of the assessee is allowable during the year only as it is revenue in nature, crystallized during the year and the loss has been incurred by the assessee during the year. Therefore, according to him it fulfils all the conditions prescribed under section 28 of the Income-tax Act.
7. The Ld. departmental representative vehemently supported the orders of the lower authorities and submitted that as the assessee did not start the work the above amount of expenditure cannot be considered as revenue in nature but it is a capital expenditure. It was further submitted that the assessee’s claim is pending in the arbitration proceedings subject to arbitration claim which is not final and therefore the liability is not crystallized and therefore it is contingent in nature and hence not allowable. He further relied upon the order of the Ld. CIT (A) and reiterated all the reasons given by the Ld. CIT (A) confirmation of the disallowance. In the end, he submitted that the claim of the assessee is not allowed and the orders of lower authorities are correct.
8. We have carefully considered the rival contention and perused the orders of the lower authorities. The simple issue involved in this appeal is whether the bank guarantee encashed by the Delhi transport Corporation on the facts submitted above is an allowable expenditure or not or is allowable to the assessee under section 28 of the income tax act or not. The identical issue has been considered by the Hon’ble Gujarat High Court in case of CIT v. Neo Structo Constructo Construction Ltd.  wherein the fact that the assessee company was engaged in the business of construction and development of plants. It entered into a contract with the contractee. At the time of entering into the contract entered, bank guarantee was furnished as performance guarantee. Subsequently the assessee having noticed that it would not be possible for it to perform the contract took a decision to not to proceed further with the contract and informed the contractee. Accordingly, Due to the nonperformance of the contract the principal encashed the bank guarantee and recovered the amount. Assessee claimed the above sum as deduction as business expenditure. The Hon’ble high court held that such encashment of the bank guarantee which was furnished by the assessee as a performance guarantee due to non-fulfillment of the contract by the assessee can be said to be compensatory in nature and therefore allowable as business expenditure under section 37 (1) of the act. The identical view has also been followed by the coordinate bench in case of SIS Live v. Asstt. CIT  (Delhi) wherein it has been held that the assessee contract providing coverage of Commonwealth Games pay certain amount to Prashar Bharathi as the performance guarantee provided on account of inadequate performance of the said contract, be allowed as a deduction under section 37 (1) of the act. Therefore, it cannot be said that above expenditure is not allowable to the assessee. Furthermore it is not the case of the revenue that assessee is not engaged in the business of constructing bus shelters. That is the only business of the assessee. The above loss because of an event of the bank guarantee is also incurred by the assessee during the course of the business of the assessee. Therefore, it cannot be said to be capital expenditure even if the assessee failed to create requisite bus shelters. In fact, for that reason only the assessee was to provide the bank guarantee and same was encashed. Therefore, it cannot be said that the above expenditure is capital expenditure in nature. Furthermore, the order of the Hon’ble high court is rendered during the assessment year. Merely because it was to be enforced after 7 days, it cannot be said that the liability has not been crystallized during the year or even for the reason that the assessee also approached the arbitration proceedings, same is unascertained liability. According to us, the liability has been crystallized during the year only in view of the decision of the Hon’ble Delhi High Court, which was rendered during the year. Even otherwise if during the arbitration proceedings an award comes and assessee is also entitled to the benefit on account of allowability of this claim, same would be chargeable to tax under section 41 (1) of the income tax act. Merely because of these reasons, it cannot be stated that the claim of the assessee has not crystallized during the year. In view of the above facts, we reverse the findings of the lower authorities and direct the Ld. assessing officer to allow the claim of the assessee of Rs. 208 Laces on account of encashment of the bank guarantee by the Delhi transport Corporation for nonfulfilment of the work awarded to the assessee which is allowable to it as a business expenditure/loss. In the result ground No. 1 of the appeal of the assessee is allowed.
9. In the result appeal of the assessee is allowed.