TaxTMI 
TaxTMI 
2014 (9) TMI 133
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....created under the State Financial Corporations Act, 1951 (for short the SFC Act), for the State of Andhra. It is also an assessee under the Act and was filing returns year after year. For the assessment years 1990-91 and 1991-92, apart from other amounts, it claimed deduction of what is known as Guarantee Commission paid to the State Government towards its obligation for providing guarantees to the lenders under Section 7 of the SFC Act. The State Government, in turn, issued a G.O., on a request made by the appellant herein, to constitute a fund with the amount representing Guarantee Commission under the head Dividend Subvention Fund Account (for short the Fund), so that it can be utilised for payment of dividends in the years in which t....
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.... in law, it is immaterial as to at whose instance and in what manner such deduction was made. Sri S.R.Ashok, learned Senior Counsel for the Income Tax Department, on the other hand, submits that the State Government is under obligation to provide guarantee under Section 7 of the SFC Act for the loans borrowed by the appellant and it was not supposed, much less entitled in law, to levy guarantee commission. He contends that for a period of about two decades, ever since the appellant came into existence, no such commission was paid and only from the year 1985, almost an inducement was made for making of payments and claiming deductions with the objective of evading income tax. He submits that the Tribunal recorded a finding of fact to the ....
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.... As observed at the threshold, the appellant is the creature under the SFC Act. It is brought into existence with an objective of making available finances to the entrepreneurs within the State and thereby, to encourage industrial development. Chapter II of the SFC Act prescribes the manner in which the appellant can pool its resources or capital. The principal contributors to the capital are the State Government, the Reserve Bank of India (RBI) and the Development Bank (DB). In addition to that, it can also borrow loans from Scheduled Banks, Insurance Companies etc., as provided for under Section 4 of the SFC Act. The Parliament recognised that a State Financial Corporation may need additional capital, to run its activity. Section 7 of ....
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....sessment years 1990-91 and 1991-92, the ITO did not allow the deduction. The reason therefor is that no amount in the form of Guarantee Commission, in fact, was paid in cash, or otherwise. This conclusion was arrived at, by making reference to G.O.Ms.No.180, dated 12.04.1989. The G.O. is to the effect that the amount received by the State Government towards guarantee commission is made part of the Fund. The purpose for which the fund was created is to ensure that the dividends are paid to the shareholders in any year, during which, profits are not earned. The Tribunal, in a way, has reversed the observation, if not, the finding of the ITO, as well as of the Commissioner, on this aspect. It accepted the contention of the appellant that the a....
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....C Act itself. Viewed in this context, the levy or payment of guarantee commission to the State Government cannot be said to be something foreign, or unrelated to the activities contemplated under the SFC Act. The gaining of the confidence of a lender, is an important step, to be taken by a borrower, notwithstanding the fact that the borrower is a statutory undertaking and the lenders. The appellant lends the amount from out of its capital, to the entrepreneurs or companies, for establishment of industries. There is always an element of uncertainty as to the repayments, as per schedule. Instances are galore, wherein quite large number of borrowers of the appellant have become non-performing assets. The impact thereof would certainly be fe....
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....m out of the dividends paid to them by the appellant at an agreed proportion. The fund so created would be utilised, to meet the unforeseen contingencies. In the same manner, a fund was created under the G.O., with the guarantee commission, received by the State Government. In a way, the fund created under the G.O., stands on a higher footing, and sub-serves a greater purpose, since the entire guarantee commission and not part of it, as contemplated under Section 35A, is diverted to this. The objective is to make it available for payment of dividends, if in a given financial year, the Corporation did not post any profits. From a reading of the order under appeal, we find that the Tribunal was guided more, by the manner in which the Guara....