In a recent ruling the Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) directed the remand of the matter to the AO to analyse whether the payment of the guarantee commission is an admissible deduction under Section 37(1) of the Income Tax Act.
The assessee M/s. The Karnataka State Co-operative Agriculture and Rural Development Bank Ltd incurred guarantee commissions in favour of Government of Karnataka and debited the same to its Profit & Loss Account. The Government of Karnataka guarantees long term borrowings made by the assessee. The .AO treated the guarantee commission as Income from other sources. The AO also disallowed the claim under Section 43B, by invoking clause (a) covering “tax, duty, cess or fee, by whatever name called, under any law for the time being in force.
Mr. K Sheshadri, representing the assessee submitted that in the present facts of the case, the State Government is not a statutory authority, and the guarantee commission is not an imposition. Further submitted that the State Government is acting as a contracting party and receiving the payments voluntarily for services rendered by it by means of extending the guarantee.
It was submitted that the assessing officer assessed the guarantee commission under the head income from other sources. Further submitted that Section 43B says that deductions disallowed by it “shall be allowed. Only in computing the income referred to in section 28”. It is thus clear that the provision only applies to computation of income under the heard, “income from business and profession.
Section 43B falls in Part-V of the Income Tax Act. What is apparent is that the scheme of the Act was such that Sections 28 to 38 deal with different kinds of deductions, whereas Sections 40 to 43B spell out special provisions, laying out the mechanism for assessments and expressly prescribing conditions for disallowances. In terms of this scheme, Section 40 (which too starts with a non obstante clause overriding Sections 30-38), deals with what cannot be deducted in computing income under the head profits and gains of business and profession.
The two member bench of the tribunal comprising Chandra Poojari (Accountant member) and Beena Pillai (Judicial member) remanded this issue to the AO to carry out necessary verification, based on the agreement entered into by the assessee with the state Government and to analyse if the payment of guarantee Commission was an admissible deduction under section 37(1) of the Act. Accordingly, appeal of the assessee was partly allowed.
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