2010 (11) TMI 502 - AT - Income Tax

Addition - Service charges paid to the Government of Kerala - Held that - the service charges paid by the assessee company to the Government of Kerala is an allowable business expenditure under s. 37(1) of the Act.

Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition of Rs. 583.90 lakhs made by the AO being service charges paid to the Government of Kerala.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Deleting the Addition of Rs. 583.90 Lakhs:

The Revenue filed an appeal against the appellate order dated 19th March 2007 of CIT(A)-I, Trivandrum, for the assessment year 1998-99, challenging the deletion of Rs. 583.90 lakhs added by the AO as service charges paid to the Government of Kerala. Both parties conceded that a similar issue had been considered by the Tribunal in the assessee's own case for the assessment years 1991-92 to 1997-98 and 1999-2000 to 2002-03, where the Tribunal decided in favor of the assessee, observing that the payment made by the assessee company was on account of commercial expediency. The Tribunal upheld the CIT(A)'s findings, stating that the business of the assessee was inextricably linked with the support and patronage provided by the Government of Kerala, and thus the assessee had never challenged the levy of service charges.

Upon hearing rival submissions and considering the facts and materials on record, it was noted that the assessee, a Government of Kerala undertaking engaged in the manufacture of titanium dioxide, was bound to pay service charges as per the Government order from 1st April 1987. The controversy arose from the assessment year 1991-92 onwards, and the Tribunal had previously upheld the CIT(A)'s findings for the preceding and subsequent years on the same set of facts and circumstances. Therefore, the Tribunal decided to follow the same reasoning and uphold the CIT(A)'s findings for the assessment year 1998-99 as well. Consequently, the Revenue's appeal was dismissed.

Separate Judgment by Judicial Member:

The Judicial Member dissented from the Accountant Member's view, emphasizing that the service charges amounting to Rs. 5,83,90,000 paid to the Government of Kerala were highly disproportionate compared to the declared income of Rs. 44,32,760. The Judicial Member referred to the Hon'ble Kerala High Court's direction to ascertain the actual basis for the Government's demand for service charges and whether it qualified for deduction under Section 37 of the IT Act. The Judicial Member argued that the assessee failed to prove the nature of services rendered by the Government of Kerala, suggesting that the payment was an attempt to avoid tax. Therefore, the Judicial Member opined that the service charges should be disallowed as they were not incurred wholly and exclusively for business purposes.

Reference to Third Member:

Due to the difference of opinion, the matter was referred to the Hon'ble President of the Tribunal, who nominated a Third Member to resolve the issue. The Third Member, after considering the submissions and perusing the orders of the learned Members, noted that the identical issue had been decided by the Hon'ble Kerala High Court in favor of the assessee for the assessment years 1991-92 to 1997-98 and 1999-2000 to 2002-03. The Third Member highlighted that the assessee, being a State Government undertaking, paid service charges as per the State Government's directive, and the High Court had held that the payment was a business expenditure allowable under Section 37(1) of the Act. Consequently, the Third Member agreed with the Accountant Member's view and held that the service charges were allowable as business expenditure.

Final Decision:

In view of the majority opinion, the claim of the assessee was allowed, and the Revenue's appeal was dismissed. The service charges paid by the assessee company to the Government of Kerala were deemed an allowable business expenditure under Section 37(1) of the IT Act.

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