The Income Tax Appellate Tribunal (ITAT) Mumbai bench directed the allowance of a deduction for the claim of guarantee provided by the Credit Guarantee Fund Trust for Micro and Small Enterprises, an irrevocable trust settled by the President of India through the Ministry of Small Scale Industry (SSI) & Average Rate Index (ARI), Government of India, and Small Industries Development Bank of India (SIDBI).
This trust aims to offer effective credit guarantee and/or counter-guarantee for Micro, Small & Medium Enterprises (MSME) without collateral security and/or third-party guarantee.
Following the filing of the income tax return, the case underwent scrutiny. The Assessing Officer (AO) disallowed the deduction for the provision of guarantee claims, based on collateral valuation, restricting it to actual payments. The AO argued that provisions of expenses are not allowable under the Income Tax Act.
The assessee’s claim for a deduction of guarantee provisions amounting to Rs. 9,67,79,67,223/- was challenged.
The CIT(A) confirmed the disallowance, leading the assessee to file an appeal. During the proceedings, the counsel for the assessee argued that the AO misunderstood the accounting system, asserting the use of the mercantile system rather than the cash system.
K.C. Selvamani, Counsel for Revenue, supported the decision of the lower authorities. The tribunal, considering the Supreme Court’s decision in Rotrock Control India Pvt. Ltd. vs. CIT, recognized provision for warranty as a legitimate deduction.
After reviewing the facts, the two-member bench directed the allowance of the deduction for the guarantee provided by the trust to lending institutions, supporting the ground raised by the assessee.
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