2021 (3) TMI 1456 - AT - Income Tax

Guarantee commission to state government not a levy under section 40(a)(iib), TDS deduction not required

M/s. Karnataka State Financial Corporation Versus ACIT/DCIT, Circle – 4 (1) (1), Bengaluru.

ITAT Bangalore ruled in favor of the assessee on two issues. First, regarding addition under section 40(a)(iib) for non-deduction of TDS on guarantee ... Addition u/s 40(a)(iib) - non deduction of TDS on guarantee commission paid to Government of Karnataka - HELD THAT:- Guarantee is not exclusively given by the State Government only to the Assessee which is a State Government undertaking but to various Government Departments, Public Sector undertakings, Local Authorities, Statutory Boards and Corporations and Cooperative Institutions etc., and also to for loans granted by the Karnataka State Co-operative Apex Bank Limited and Karnataka State Co-operative Agriculture and Rural Land Development Bank Limited for the purpose of Agriculture and in turn to require them to reduce one percent interest in their lending rate in respect of the agricultural loans disbursed by them. The decision in the case of Kerala State Beverages Corporation Ltd. [2020 (5) TMI 176 - KERALA HIGH COURT] clearly supports the plea of the Assessee that there is no “exclusivity” in terms of charging of “Guarantee Commission”. We therefore accept the argument of the Assessee that for applying the provisions of Sec. 40(a)(iib) of the Act there should be a levy of “royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called” , which is levied exclusively on State Government undertaking by the State Government. 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, we hold that the disallowance made u/s.4(a)(iib) of the Act cannot be sustained. Guarantee Commission is not in the nature of a “levy” on a state Government undertaking by the State Government. It is purely a contractual payment. According to Black's Law Dictionary Fifth Edition, the word 'levy' means:- “To assess; raise; execute; exact: tax; collect: gather; take”. To qualify as a “levy” within the meaning of Sec. 40(a)(iib) of the Act, the payment to the State Government by a State Government undertaking should be based on a power on the part of the State Government to impose a levy. It should be a compulsory exaction by the State Government from the State Government Undertaking. Guarantee Commission is paid in consideration for the State Government agreeing to suffer a detriment in the event of the Assessee not repaying the value of the bonds on its maturity. Guarantee Commission does not fall within the ambit of the mischief that was sought to be remedied by the legislature by inserting Sec. 40(a)(iib) of the Act. We do not wish to deal with the other contention of the Assessee that the Guarantee fee does not fall with the ambit of the expression “royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called” is not taken up for consideration. Assessee appeal allowed. Disallowance u/s 14A r.w.r. 8D - quantum of disallowance to be made - plea of the Assessee before CIT(A) that the average value of investments should be computed by taking only those investments which yielded dividend income - HELD THAT:- CIT(A) directed the AO not to consider the sum being investments in shares of Karnataka Neeravari Nigam Limited and Krishna Bhagya Jala Nigam while calculating average value of investments because these investments did not yield any dividend during the previous year. In doing so he followed the decision of the Tribunal [2018 (10) TMI 352 - ITAT BANGALORE] wherein it was held following decision of M/S. REI. AGRO LTD.[2014 (4) TMI 713 - CALCUTTA HIGH COURT] and Special Bench of the Delhi Tribunal in the case of ACIT v. Vireet Investments Private Limited [2017 (6) TMI 1124 - ITAT DELHI] held that only those investments which yielded dividend income are to be considered for computing average value of investments for the purpose of Rule 8D(2) of the Rules. The grievance of the revenue in the grounds of appeal is that the decision of the Tribunal for AY 2011-12 has not been accepted by the department and an appeal has been filed against the said order. In our view the decision of the Tribunal is applicable to the present AY 2014-15 also as the facts and circumstances are identical. We therefore do not find any grounds to interfere with the order of the CIT(A). Hence, revenue’s appeal is dismissed Issues Involved:1. Disallowance of Guarantee Commission under Section 40(a)(iib) of the Income Tax Act.2. Quantum of disallowance under Section 14A of the Income Tax Act.Summary:Issue 1: Disallowance of Guarantee Commission under Section 40(a)(iib) of the Income Tax Act1. Background: The assessee, a State Financial Corporation formed by the Government of Karnataka, paid a guarantee commission to the Government of Karnataka. The revenue authorities disallowed this payment under Section 40(a)(iib) of the Income Tax Act, 1961, as the assessee failed to deduct tax at source.2. Assessee's Arguments: - Not a Levy: The guarantee commission is not a levy but a contractual payment. - Exclusivity: The commission is not levied exclusively on the assessee but also on other entities like public sector undertakings and cooperative institutions. - Nature of Expenditure: The commission is a revenue expenditure deductible under Section 37 of the Income Tax Act.3. Revenue's Arguments: The revenue authorities argued that the guarantee commission falls under 'any other fee or charge' as per Section 40(a)(iib) and should be disallowed.4. Tribunal's Decision: - Not Exclusively Levied: The Tribunal agreed with the assessee that the guarantee commission is not exclusively levied on the assessee, referencing the Kerala High Court's decision in Kerala State Beverages Corporation Ltd. Vs. ACIT. - Not a Levy: The Tribunal also held that the guarantee commission is not a compulsory exaction but a contractual payment, thus not falling under Section 40(a)(iib). - Conclusion: The Tribunal allowed the appeal of the assessee, holding that the disallowance under Section 40(a)(iib) cannot be sustained.Issue 2: Quantum of Disallowance under Section 14A of the Income Tax Act1. Background: For the Assessment Year 2014-15, the AO disallowed Rs. 29,26,30,066 under Section 14A, which included disallowances under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules.2. Assessee's Arguments: The assessee contended that only investments yielding dividend income should be considered for computing the average value of investments for disallowance under Rule 8D.3. CIT(A)'s Decision: The CIT(A) directed the AO to exclude investments that did not yield any dividend during the relevant year, following the Tribunal's decision in ITA No. 427/Bang/2017 and the Calcutta High Court's decision in the case of REI Agro Ltd.4. Revenue's Arguments: The revenue argued that the Tribunal's decision for AY 2011-12 was not accepted and an appeal was filed against it.5. Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, stating that the facts and circumstances for AY 2014-15 were identical to those in AY 2011-12.Conclusion: The Tribunal allowed the appeals of the assessee and dismissed the appeal by the revenue.