Encashment of bank guarantee as performance security in BoT Project was revenue expenditure – ITAT

Encashment of bank guarantee as performance security in BoT Project was revenue expenditure. If property constructed not owned by the assessee, expenditure incurred would not be capital – ITAT 

ABCAUS Case Law Citation:
ABCAUS 2571 (2018) (10) HC

Important Case Laws Cited/relied upon by the parties:
CIT versus Saurashtra Cement Limited, (2010) 325 ITR 422 (SC)
Lakshmi Sugar Mills Co.(P) Ltd. versus CIT, (1971) 3 SCC 526
CIT versus Bombay Dyeing and Manufacturing Co. Ltd., (1996) 3 SCC 496]
Atherton versus British Insulated and Helsby Cables Ltd.,(1925) 10 TC 155

The instant appeal had been filed by the Revenue against the order passed by the Income Tax Appellate Tribunal (Tribunal).

The respondent assessee was primarily engaged in the business of developing, maintaining and operating of Bus-Q-Shelters (BQS), metro stations, highways etc. The assessee entered into a concessionaire agreement with the State Transport Corporation for setting up number of bus shelters on build, operate and transfer (BOT) basis. The respondent-assessee was to construct, operate and maintain the shelters for ten years, after which the shelters were to be handed over to the Transport Corporation.

As per the agreement, the appellant had to pay the Transport Corporation a concessionaire fee per month. In return, the assessee was free to earn revenue through advertising, etc. to be displayed on the bus shelters.

The assessee was required to furnish two bank guarantee of Rs. 1 crore and Rs. 1.5 crores to the Transport Corporation as performance security for construction; and for operation and maintenance of the bus shelters and payment of concessionaire fee, respectively. The first bank guarantee was to be returned 60 days after completion/construction of all shelters and second bank guarantee was to be returned 90 days after shelters were handed over to the Transport Corporation. The agreement had also stipulated and required the respondent-assessee to furnish fresh performance security if the original bank guarantees were encashed.

On the Transport Corporation invoking the bank guarantee, the respondent-assessee approached the High Court and a stay/restraint order against encashment of BG was passed. However, by a subsequent order, the stay order was vacated and the Transport Corporation was permitted and allowed to encash the bank guarantee. As the respondent-assessee had obtained stay, they were directed to pay interest @9% per annum.

The assessee had claimed the encashment of bank guarantee and interest on late payment for failure to perform its part of the concessionaire agreement as revenue expenditure. However, the Assessing Officer (AO) disallowed the said expenditure treating it as capital loss.

The disallowance was upheld by the Commissioner of Income Tax (Appeals).

On assessee’s appeal, the Tribunal by the impugned order had reversed the findings and held that the addition was not justified as it was revenue expenditure.

The Hon’ble High Court observed that the assessee was to construct, operate and maintain bus shelters. The respondent-assessee was also under an obligation to pay per month to the Transport Corporation. The shelters were not owned by the respondent-assessee. The Central Board of Direct Taxes vide Circular No. 9/2014 has inter alia observed that under the BOT schemes the assessees are not entitled to depreciation as they are not owners of the project, which is only constructed by them. Ownership is vested with the Government or its agencies. Therefore, the respondent-assessee was entitled to amortize the amounts spent on construction over the tenure of the agreement.

The Hon’ble High Court opined that whether expenditure is capital or revenue in nature has to be looked at from a commercial point of view. In the instant case as noticed there was failure on the part of assessee to perform its part of the agreement including operation and maintenance of bus shelters and pay concessionaire fee per month. Any expenditure or payment of the said nature would necessarily be revenue in character. Even construction cost of the shelters had to be amortized over a period of 10 years. These would, therefore, not be expenditure of capital nature.

The Hon’ble High Court observed that there are a number of cases holding that where the property constructed is not owned by the assessee but by third party, the expenditure incurred by the assessee would not be capital expenditure but revenue expenditure

Also, the Hon’ble High Court observed that the Assessment Order did not refer to the enduring or permanent benefit acquired by the respondent-assessee and therefore on default and failure to abide by the terms, the expenditure or loss incurred by the respondent-assessee was capital expenditure/loss.

The Tribunal opined that the cost of construction was not capital expenditure. Further, since the respondent-assessee was liable to pay monthly fee to the Transport Corporation, which was certainly revenue expenditure. Additionally, the assessee was under obligation to maintain and operate shelters which again would be revenue expenditure.

The Hon’ble High Court held that the Tribunal rightly held the expenditure claimed as revenue expenditure and not capital expenditure. The Tribunal had also directed that if the respondent-assessee were to succeed in the Arbitration case initiated, the amount refunded would be taxed in the said year. This finding already took care of concern, if any, of the Revenue.

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