2014 (9) TMI 133 - HC - Income Tax

Deduction u/s 37 - Guarantee commission paid to State Government Payment not provided u/s 7 SFC Act Held that - The record is not clear as to, for how many years the assessee has borrowed amounts, to create additional capital or whether the State Government had offered guarantee u/s 7 of the SFC Act, and if so, the conditions therefor - It was only from the year 1995 onwards, that the deductions were made in the form of the Guarantee Commission, paid to the State Government for its offering guarantee for repayment of amounts referable to Section 7 of the SFC Act - the fund created under the G.O. stands on a higher footing, and sub-serves a greater purpose, since the entire guarantee commission and not part of it, as contemplated u/s 35A is diverted to this - The objective is to make it available for payment of dividends, if in a given financial year, the Corporation did not post any profits. The Tribunal was guided more, by the manner in which the Guarantee Commission came to be paid - it gained an impression that the then Managing Director of the appellant had volunteered to pay the commission with a view to avoid payment of income tax - This can be blushed aside, if one takes into account, the fact that the amount was brought into the fund through a G.O., to be kept at the exclusive disposal of Corporation for payment of dividends, whenever profits are not posted, a different impression becomes possible thus, the order disallowing the Guarantee Commission paid to the State Government as allowable deduction is set aside and the amount is deductible u/s 37 Decided in favour of assessee.

Summary

Issues:
1. Deduction of Guarantee Commission under Section 37 of the Income Tax Act, 1961.
2. Interpretation of Section 7 of the State Financial Corporations Act, 1951 regarding Guarantee Commission.
3. Commercial expediency and legality of the deduction.
4. Comparison with relevant case laws.

Issue 1: Deduction of Guarantee Commission under Section 37 of the Income Tax Act, 1961:
The appeal challenged the order of the Income Tax Appellate Tribunal disallowing the deduction of Guarantee Commission paid to the State Government under Section 37 of the Income Tax Act for the assessment years 1990-91 and 1991-92. The appellant contended that the deduction was legitimate under Section 7 of the State Financial Corporations Act and was within the scope of the law. The Tribunal accepted that the deduction was made but deemed it not warranted under Section 7 of the SFC Act, leading to the appeal.

Issue 2: Interpretation of Section 7 of the State Financial Corporations Act, 1951 regarding Guarantee Commission:
Section 7 of the SFC Act empowers the Financial Corporation to issue bonds and debentures for increasing working capital, with the State Government providing a guarantee for repayment. The controversy arose regarding whether the Guarantee Commission paid to the State Government was a legitimate deduction under this section. The Tribunal held that while the payment was made, it was not provided for under Section 7, leading to the disallowance of the deduction.

Issue 3: Commercial expediency and legality of the deduction:
The appellant argued that the deduction was made in accordance with the SFC Act and was a matter of propriety, not legality. The State Government contended that the deduction was an attempt to evade income tax and lacked bona fides. The High Court analyzed the commercial expediency of the deduction, emphasizing the importance of gaining the confidence of lenders and the presence of business elements in the appellant's activities under the SFC Act.

Issue 4: Comparison with relevant case laws:
The High Court compared the present case with judgments from the Delhi High Court and Bombay High Court to establish the applicability of the deduction. It differentiated the facts of those cases concerning deductions under different provisions of the law, emphasizing the unique circumstances of the present case. The Court highlighted the absence of a prohibition against the levy of Guarantee Commission and the commercial nature of the appellant's activities under the SFC Act.

In conclusion, the High Court allowed the appeal, setting aside the disallowance of the Guarantee Commission deduction, stating it as deductible under Section 37 of the Income Tax Act. The Court emphasized the commercial aspects and the absence of any legal prohibition against such payments, ultimately ruling in favor of the appellant.