2025 (6) TMI 1947 - AT - Income Tax

Appeal dismissed: guarantee commission to state government disallowed under section 40(a)(iib) for missing TDS deduction

The HC dismissed the appeal, upholding the disallowance of guarantee commission paid by a state-owned company to the State Government of Kerala under ... Revision u/s 263 - failure of the AO to examine the applicability or otherwise of the provisions of sec.40(a)(iib) in respect of guarantee commission paid to State Government of Kerala - nature of fee or charge or contractual payment - HELD THAT:- As undisputed appellant is a wholly owned undertaking of State Government of Kerala. The appellant company made payment of guarantee commission to the State Government of Kerala. On a careful perusal of the order passed u/s.263 of the Act, it would be clear that the learned PCIT gave a specific direction to the AO to disallow the guarantee commission paid to the State Government of Kerala. The issue was not open before the Assessing Officer, to decide the allowability or otherwise of the expenditure, the order of the learned PCIT passed u/s.263 of the Act had attained finality. Therefore, the issue is no longer alive and cannot be further agitated in an appellate forum. Thus, we do not find any merit in the appeal filed by the same - Decided against assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether guarantee commission paid by a wholly owned State Government undertaking to the State Government is hit by the disallowance provisions of section 40(a)(iib) of the Income-tax Act (i.e., whether such payment is a 'fee or charge' to which section 40(a)(iib) applies). 2. Whether an order of revision passed under section 263 directing the Assessing Officer to disallow an expenditure, and the consequent assessment order passed pursuant to that direction, attains finality such that the validity of the disallowance cannot be further agitated in appeal. 3. Interaction between controlling precedent on the characterisation of guarantee/commission payments to the State and the present appeal (i.e., whether binding precedent governs the issue). ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of section 40(a)(iib) to guarantee commission paid to the State Government Legal framework: Section 40(a)(iib) disallows deduction for certain payments by way of fees or charges to a resident where tax is deductible at source but not deducted. The legal question is whether a guarantee commission payable to the State Government constitutes a 'fee or charge' within the meaning of that provision. Precedent Treatment: The Court recognised that there exists controlling judicial authority holding that similar payments to the State are caught by section 40(a)(iib). The Tribunal relied on that precedent as adverse to the assessee's position. Interpretation and reasoning: The Bench accepted the position that the issue is not open because it is governed by higher authority which treats the payment as falling within the scope of section 40(a)(iib). The appellant's contention that the payment is contractual in nature and not a 'fee or charge' was considered but held to be foreclosed by the existing precedent and by the outcome of the revision under section 263 (see Issue 2). Ratio vs. Obiter: The Court's observation that such guarantee commission is subject to section 40(a)(iib) is treated as supportive of the ultimate decision but is subsumed by the Tribunal's principal holding concerning finality of the section 263 direction. The view on the substantive characterisation of the payment aligns with followed precedent and is thereby effectively ratio to the extent the decision rests on precedent. Conclusion: The substantive contention that the guarantee commission is not a 'fee or charge' was not accepted; the issue was treated as covered against the taxpayer by binding precedent and by the subsequent finding that the assessment had been set aside under section 263. Issue 2: Finality and preclusive effect of a section 263 revision order directing disallowance - can the matter be re-agitated on appeal? Legal framework: Section 263 empowers the Commissioner to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue; the Commissioner can set aside the assessment and direct the Assessing Officer to pass fresh order. The legal consequence of such a revision and a consequent assessment is the subject of the appeal. Precedent Treatment: The Tribunal applied established principles regarding the effect of a valid section 263 revision - namely that once the Commissioner has formed an opinion and issued a direction under section 263, the Assessing Officer's fresh order passed in compliance is not open to independent re-litigation on the same issue in appeal if the matter has attained finality under the revision. Interpretation and reasoning: The Tribunal examined the section 263 order and noted that the Commissioner had given a specific direction to disallow the guarantee commission paid to the State Government. The Tribunal held that because the Commissioner had formed the requisite opinion and directed the AO accordingly, the question of allowability had already been conclusively dealt with in the exercise of revision jurisdiction. Consequently, the point was no longer 'alive' for re-agitation before the appellate forum. The Tribunal emphasised that the Assessing Officer lacked jurisdiction to independently re-decide the issue contrary to the express direction given under section 263, and that the revision order had attained finality for purposes of the present appeal. Ratio vs. Obiter: The holding that a section 263 direction, and the consequential assessment order made pursuant to it, precludes relitigation of the same issue in appeal is the ratio of the Tribunal's decision. Observations about the AO's original allowance of the claim and the Commissioner's view that the assessment was erroneous are factual antecedents; the legal consequence (preclusion of re-agitation) is the operative legal ratio. Conclusion: The Tribunal concluded that the section 263 order directing disallowance attained finality and thereby precluded the appellant from re-agitating the allowability of the guarantee commission in the appellate proceedings. On that basis, the appeal was dismissed as devoid of merit. Issue 3: Effect of controlling Supreme Court authority on the appeal Legal framework: Where higher court precedent squarely decides a point of law, lower tribunals are bound to follow it unless distinguishable on facts. Precedent Treatment: The Tribunal noted an adverse decision of the Supreme Court on analogous facts and accepted that the issue was no longer res integra. The Tribunal treated that authority as applicable and unfavourable to the appellant. Interpretation and reasoning: Given (a) the specific direction under section 263 to disallow the guarantee commission and (b) the existence of controlling higher-court precedent treating such payments as falling within the disallowance provision, the Tribunal found no scope to uphold the appellant's claim. The concurrence of the revision order and precedent removed any basis for appellate interference. Ratio vs. Obiter: The reliance on controlling higher-court authority to conclude the issue is foreclosed is part of the Tribunal's ratio for dismissing the appeal; it is decisive on the substantive point. Conclusion: The Tribunal treated the higher-court precedent as binding and adverse, reinforcing the conclusion that the guarantee commission was not deductible and that the appeal must be dismissed. Overall Conclusion The Tribunal dismissed the appeal, holding that (i) the question whether the guarantee commission paid to the State Government is covered by section 40(a)(iib) is governed by adverse controlling authority, and (ii) the section 263 revision order directing disallowance, and the consequential assessment, attained finality so as to preclude re-agitation of the issue in appeal. The appeal was therefore without merit and dismissed.