The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the guarantee commission, being not in the nature of a “levy”, cannot be disallowed under section 40(a)(iib) of Income Tax Act, 1961.
The assessee, Krishna Bhagya Jala Nigam Limited, is a wholly owned company formed by the Govt. of Karnataka for the purpose of implementation of the Upper Krishna Project in the state of Karnataka. The assessee availed certain loans from financial institutions, for which, 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.
The AO, during the course of assessment proceedings, disallowed the guarantee commission under section 40(a)(iib) of the Income Tax Act, 1961.
The Tribunal referred an earlier order wherein it was held that 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,” the Tribunal quoted.
While allowing the plea of the assessee, the Tribunal held that “respectfully following the aforesaid decision, we hold that disallowance of guarantee commission under section 40(a)(iib) of the Act is not sustainable and the addition made in this regard is directed to be deleted.”
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.
