2021 (11) TMI 925 - AT - Income Tax

Appeal allowed: Guarantee commission not disallowed under Sec. 40(a)(iib)

M/s. Krishna Bhagya Jala Nigam Limited Versus ACIT, Circle – 4 (1) (1), Bengaluru.

The Tribunal allowed the appeal of the assessee, directing the deletion of the addition made under Sec. 40(a)(iib) of the Income Tax Act. The Tribunal ... Disallowance u/s 40(a)(ia) - Non deduction of TDS on the guarantee commission paid to Government of Karnataka - HELD THAT:-Guarantee commission is not paid directly to the State Government and they are not levies imposed exclusively on the Assessee. The State Government issues Guarantees on behalf of the Government Departments, Public Sector Undertakings, Local Authorities, statutory Boards and Corporations and Co-operative Institutions. Consequently and hold that the disallowance made u/s.40(a)(iib) of the Act cannot be sustained. Disallowance of guarantee commission under section 40(a)(iib) of the Act is not sustainable and the addition made in this regard is directed to be deleted. - Decided in favour of assessee. Issues Involved:1. Whether the revenue authorities were justified in disallowing the guarantee commission paid to the Government of Karnataka on the ground of non-deduction of tax at source under Sec. 40(a)(iib) of the Income Tax Act, 1961.Detailed Analysis:1. Context and Background:The assessee, a wholly-owned company formed by the Government of Karnataka for implementing the Upper Krishna Project, paid a guarantee commission of Rs. 7,48,39,937 to the Government of Karnataka. This payment was debited as an expenditure in the profit and loss account under section 37 of the Income Tax Act. The Assessing Officer (AO) disallowed this expenditure under Sec. 40(a)(iib) on the grounds that tax was not deducted at source.2. Legal Provisions and Interpretation:Section 40(a)(iib) was introduced by the Finance Act, 2013, effective from 1.4.2014, to prevent the erosion of the tax base of State Government undertakings. It disallows deductions of amounts paid by way of royalty, license fee, service fee, privilege fee, service charge, or any other fee or charge levied exclusively on a State Government undertaking by the State Government.3. Tribunal’s Analysis and Precedent:The Tribunal referenced a similar case, Karnataka State Financial Corporation Vs. ACIT, where it was argued that guarantee commission is not a levy but a contractual payment. The Tribunal and the CIT(A) had previously rejected this argument, stating that Sec. 40(a)(iib) covers a wide range of payments, including any fee or charge levied by the State Government on its undertakings.4. Arguments by Assessee:The assessee argued that:- Guarantee commission is not a levy but a contractual payment.- The levy under Sec. 40(a)(iib) should be exclusive to the State Government undertaking, which is not the case here as the State Government issues guarantees to various entities.- Guarantee commission should be allowed as a revenue expenditure under section 37 of the Act.5. Tribunal’s Decision:The Tribunal found that the guarantee commission paid by the assessee to the Government of Karnataka does not fall within the ambit of Sec. 40(a)(iib) because:- The Karnataka Ceiling on Government Guarantees Act, 1999, mandates a guarantee commission for various entities, not exclusively for the assessee.- The guarantee commission is not a levy but a contractual payment for the State Government's guarantee.- The principle of 'exclusivity' required by Sec. 40(a)(iib) is not met as the guarantee commission is charged to various entities.6. Supporting Case Law:The Tribunal relied on the decision of the Hon’ble Kerala High Court in Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd. Vs. ACIT, where it was held that license fee and shop rental (kist) were not exclusively levied on the assessee and thus did not fall under Sec. 40(a)(iib).7. Conclusion:The Tribunal concluded that:- The guarantee commission paid by the assessee is not exclusively levied on the State Government undertaking.- It is a contractual payment and does not fall under the disallowance provisions of Sec. 40(a)(iib).- The disallowance made by the AO and confirmed by the CIT(A) is not sustainable.8. Final Order:The Tribunal allowed the appeal of the assessee, directing the deletion of the addition made under Sec. 40(a)(iib).Pronouncement:The appeal of the assessee was allowed, and the decision was pronounced in the open court.