Facts of the Case

  • The respondent-assessee was engaged in the business of developing, maintaining, and operating Bus-Q-Shelters (BQS) and similar infrastructure.
  • It entered into a concessionaire agreement with Delhi Transport Corporation (DTC) for constructing and operating 400 bus shelters on a BOT (Build-Operate-Transfer) basis.
  • The assessee furnished bank guarantees as performance security.
  • Due to failure to comply with contractual obligations, the bank guarantee was encashed and interest was levied.
  • The assessee claimed the amount of ₹2,08,92,603/- as revenue expenditure.
  • The Assessing Officer disallowed it treating it as capital loss/expenditure.
  • CIT(A) upheld the disallowance, but ITAT reversed it and allowed the claim.

Issues Involved

  1. Whether expenditure incurred due to encashment of bank guarantee and interest is capital expenditure or revenue expenditure.
  2. Whether such expenditure is allowable in the relevant assessment year when actual payment was made later.

Petitioner’s Arguments (Revenue)

  • The expenditure was capital in nature as it arose from failure under a concessionaire agreement.
  • Relied on CIT vs Saurashtra Cement Ltd. (2010) to argue that such payments relate to capital assets.
  • Alternatively, argued that even if revenue, deduction is not allowable in AY 2009-10 since payment was made after 01.04.2009.

Respondent’s Arguments (Assessee)

  • The expenditure was incidental to business operations and hence revenue in nature.
  • The BOT project did not confer ownership of assets; therefore, no capital asset was created.
  • Liability crystallized when the High Court permitted encashment of the bank guarantee.

Court Findings / Order

  • The Court held that:
    • The expenditure was revenue in nature, not capital expenditure.
    • The assessee did not acquire any enduring benefit or capital asset.
    • Payments such as concessionaire fees and operational obligations are inherently revenue expenses.
    • Liability accrued when the High Court allowed encashment, irrespective of actual payment date.
  • The appeal filed by the Revenue was dismissed.

Important Clarifications by the Court

  • Ownership of infrastructure under BOT projects remains with the Government; hence expenditure cannot be treated as capital.
  • The “enduring benefit test” must be applied from a commercial perspective.
  • Distinction between capital and revenue expenditure depends on:
    • Nature of advantage
    • Ownership of asset
    • Recurring vs one-time nature
  • Liability accrues when obligation arises, not when payment is made.

Relevant Sections Involved

  • Section 260A – Appeal to High Court
  • General principles under Income Tax Act relating to:
    • Allowability of expenditure
    • Capital vs Revenue classification

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:6508-DB/SKN05102018ITA10672018.pdf

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