Treatment of Finance cost under ITO 2001

[A.raza]

Asalamu alaikum

Can anyone please tell me the treatment of finance cost, i.e. guarantee commission against margin received for setting up a project under the requirements of Income Tax Ordinance, 2001.


Regards

Ahmed Raza

[student_of_law]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by A.raza</i>
<br />Asalamu alaikum

Can anyone please tell me the treatment of finance cost, i.e. guarantee commission against margin received for setting up a project under the requirements of Income Tax Ordinance, 2001.


Regards

Ahmed Raza
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Walaikum us Salam,

According to s.26 profit on debt is a deductible expenditure. What is profit on debt? According to s.2(46), profit on debt also mean charge or fee for any credit facility. As bank guarantee is a credit facility hence commission paid for it would be profit on debt which is deductible expenditure u/s 26.


According to several judgments in Indian jurisdiction, "Interest and Bank guarantee commission paid are allowable deduction" [1999 PTD 101 KARNATAKA-HIGH-COURT-INDIA; 2000 PTD 2691 BOMBAY-HIGH-COURT-INDIA; 1999 PTD 2538 KERALA-HIGH-COURT-INDIA; 2000 PTD 2119 GUJARAT-HIGH-COURT-INDIA; (1997) 227 ITR 464(Indian Supreme Court)]

However, in your case this expense is incurred for setting up a project. Expense incurred before starting a project will not be revenue expenditure but a capital expenditure.

interest on borrowed capital utilized in acquiring capital asset is a capital expenditure in the pre-production period and will be revenue expenditure after the commencement of the business.[1997 PTD 1454]

If the gurantee commission is paid during the pre-production periond, then in my opinion, it will be a pre commencement expenditures as defined in s.25. On the pre-commencement expenditure you may claim amortisation at rate of 20% according to Third Schedule.