TaxTMI 
TaxTMI 
2021 (11) TMI 925
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....of the Upper Krishna Project in the state of Karnataka. The assessee availed certain loans from financial institutions. The Government of Karnataka stood as guarantor for the loans so availed by the assessee. Under section 5(1) of the Karnataka Ceiling on Government Guarantees Act, 1999 (Guarantor Act), the Government shall charge a minimum of one percent as guarantee commission which shall not be waived under any circumstance. 4. Assessee made payment of guarantee commission of Rs. 7,48,39,937/- to Government of Karnataka. The assessee debited in its profit and loss account the sum paid as guarantee commission claiming the same as expenditure wholly incurred for the purpose of business under section 37 of the Income Tax Act. 5. The AO in the course of assessment proceedings for AY 2014-15 was of the view that the assessee ought to have deducted tax at source on the guarantee commission paid to Government of Karnataka as per the provisions of Sec.40(a)(iib) of the Act. The relevant provisions of Sec.40(a)(iib) of the Act which was inserted by the Finance Act, 2013 w.e.f. 1.4.2014 and which is part of Chapter IV of the Act that deals with computation of business income reads a....
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....ate Government Undertaking for this purpose includes- (i) a corporation established by or under any Act of the State Government; (ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government; (iii) a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together); (iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner; (v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;" 7. The AO disallowed the guarantee commission under section 40(a)(iib) of the Act. The CIT(A) confirmed the order of the AO and hence this appeal by the assessee before the Tribunal. 8. We find that an identical issue whe....
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....72 ITR 315 (AP). Even after insertion of Sec.40(a)(iib) of the Act by the Fianance Act, 2013 w.e.f. 1.4.2014, to fall within the ambit of the said provision a payment should be in the nature of "royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called". Guarantee Commission is not "royalty, licence fee, service fee, privilege fee, service charge". It will also not fall within the ambit of the residuary limb "or any other fee or charge, by whatever name called" used in Sec.40(a)(iib) of the Act. It was submitted that guarantee commission is neither a "fee" nor a "charge" which is "levied" within the meaning of item (A) of Sec.40(a)(iib) of the Act because as per the rule of interpretation 'noscitur a socii' which mandates that words in a statute are to be interpreted with reference to accompanying words. The principle of interpretation of statute "ejusdem generis" ('noscitur a sociis') to be adopted where general words follow specific words, is to understand the scope of the meaning of the general words will be restricted to the scope of the meaning of the specific words. To illustrate, in the phrase "apples, oranges, guava....
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....t was rejected both by the AO and the CIT(A) by holding that the ambit of Sec.40(a)(iib) of the Act is very wide and it includes "any other fee or charge by whatever name called" levied on a state government undertaking by the State Government. Conseqently disallowance of expenses was made and the sum disallowed was added to the total income of the Assessee. The reasons given by the CIT(A) for confirming the action of the AO throw some light on the reasons for introduction of the provisions of Sec.40(a)(iib) of the Act. According to CIT(A), the legislative intent behind the introduction of section 40(a)(iib) was to offset the action of certain State Governments / and State government institutions / companies, in reducing the income-tax liability by diverting the same to the State-exchequer by way of notification. It cannot be disputed that the State governments retain the statutory-authority over the state institutions yet, the 'income-tax Act' being the union law is applicable to all State government as a whole and provides the overarching legal-framework for methodology of determination of final income. The legislative intent behind the insertion of the words 'Any charge ....
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.... licence fee and shop rental (kist) levied for the retail business is concerned, both sides have advanced conflicting arguments. The situation is that, the business of retail in foreign liquor is restricted to the appellant and to the Consumer Federation, both being state government undertakings. The trade in toddy or other kind of spirits cannot in any manner be equated with the business of retail sale in foreign liquor, for the purpose of human consumption. Contention of the appellant seems to be that, since the said business is permitted also to one another state government undertaking, namely the Consumer Federation, the exclusivity of the levy for the purpose of Section 40 (a) (iib) will be lost. It was argued that, provision under Section 40 (a) (iib) makes it abundantly clear that the levy imposed or the amount appropriated from a state government undertaking shall not be allowed as deduction when the levy is imposed exclusively on such a state government undertakings. Since the levy is made from one more state government undertakings, the 'exclusivity' is not there. In this regard, findings of the Tribunal is that, the wordings of Section 40 (a) (iib), "which is lev....
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....nd Co-operative Institutions and for promoting fiscal discipline of the State; BE it enacted by the Karnataka State Legislature in the fiftieth year of the Republic of India, as follows:-" 11. The statement of objects and reasons for passing the said Act were as follows: "Statement of objects and Reasons - Act 11 of 1999. - To give effect to the proposals made in the Budget Speech and also for implementing the recommendations of the Technical Committee of State Finance Secretaries to fix limit on Government Guarantees, it is considered necessary to bring out legislation to provide for limits on Government Guarantees issued on behalf of the Government Departments, Public Sector undertakings, Local Authorities, Statutory Boards and Corporations and Co-operative Institutions etc., for promoting fiscal discipline in the State. Hence the Bill. (Obtained from L.A. Bill No.13 of 1999" 12. There was an Amendment to certain provisions of this Act by Act No.15 of 2002 and the reasons for such Amendment have been given in the statement of object and reason for the amendment as follows: "Act No. 15 of 2002. - It is considered necessary to amend the ....
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....cope of Section 40 (a) (iib), it should be an exclusive levy on the assessee, which should be a state government undertaking. Since the licence fee and shop rental (kist) are also levied from the Consumer Federation with respect to the FL-1 licence granted, it becomes out of the purview of the term 'levied exclusively on a state government undertaking, contained in 40 (a) (iib). Therefore we are persuaded to hold that the disallowance made with respect to the licence fee and shop rental (kist) paid with respect to the FL1 licences granted to the appellant for retail trade in foreign liquor, cannot be sustained." 14. 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....