Hyderabad ITAT’s Order for Bank Guarantee Encashment & Its Relation to the Business

The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench whilst deleting the addition passing the ruling that the encashment of the bank guarantee has been incurred in the normal course of business.

Here, in this case, the assessee is Ogene Systems India Limited that has debited in books of account an amount of Rs.1,10,61,051/ as a Security deposit for non-performance. It was further found that the assessee had paid a bank guarantee for the execution of the turnkey project with a High Explosive Factory located at Pune. Contrarily, the assessee failed to implement the project. So The encashment of the bank guarantee is in the nature of penalty imposed for the default in executing the project.

Additionally, the assessee did not realize any amount in this project. As the expenditure that has been claimed by the assessee is in the nature of a penalty and as there was the absence of income out of this project; consequently, the expenditure of Rs.1,10,61,051/ that has been claimed by the appellant was not allowed and finally added to the income.

The assessee, thereafter, challenged the order of the lower authorities claiming they had defaulted in law and on facts also in “disallowing its security deposit encashment claim of Rs.1,10,61,051/-” that is treated as of nature of penalty. The Revenue department put forth the contention that the lower authorities have been right in disallowing the impugned encashment of bank guarantee that is being penal in nature on the basis of non-performance of contract at assessee’s instruction.

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On the other hand, The assessee put forth the contention that the impugned encashment of bank guarantee is the after-effect of failure to execute its contractual obligation without involving any offence or penal component as per section 37(1) of the Act.

The Coram of S.S.Godara and Lakshmi Prasad Sahu held that the aforesaid encashment of bank guarantee has been incurred in the normal course of business rather than pertaining to any penalty element at all.