Loss due to Encashment of Bank Guarantee for Non-Fulfilment of the Work awarded to the assessee is allowable Expenditure: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) New Delhi, in Green Delhi BQS Limited vs. ACIT, held that loss due to encashment of bank guarantee for non-fulfilment of the work awarded to the assessee is allowable expenditure.

The appellant engaged in the business of operating and running of bus shelter was awarded a contract by the Delhi Transport Corporation (DTC) for the construction and operation of 400 bus shelters. According to the Contract, the assessee had to finish the construction of the bus shelters in a pre-determined period and could operate it for 10 years after paying requisite fees. They in turn are allowed to earn revenue by displaying advertisements in the bus shelters. The Contract also contained a provision by which if the assessee failed to finish the project within the determined period, the bank guarantee security which is to be provided by the assessee would be encashed.

The assesses failed to perform the contract and thus after a legal battle, the High Court allowed the DTC to encash the bank guarantee with interest. The assessee filed returns declaring a loss of Rs.8.11 Crores. However, the Assessing Officer (A.O) disallowed loss of Rs.2.08 Crores 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 Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the addition made. Aggrieved, the assessee filed appeal before the Tribunal.

The Counsel for the assessee argued 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.

The Counsel for the Revenue contended that the assessee’s claim was pending in the arbitration proceedings subject to arbitration claim which was not final and therefore the liability was not crystallized and therefore it was contingent in nature and hence not allowable.

The Bench comprising of Judicial Member Amit Shukla and Accountant Member Prashant Maharishi relying on the decision of the High Court in Neo Constructo Construction Ltd observed that 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 Income Tax Act, 1961.