2016 (10) TMI 325 - HC - Income Tax

Guarantee Fee - allowable expenditure u/s 37 - Held that - Interest on deferred payment and Guarantee commission paid to the bank are revenue expenditure and hence allowable as deduction. See Commissioner of Income-Tax Versus Sivakami Mills Limited 1997 (2) TMI 13 - SUPREME Court Disallowance u/s 40(a)(ia) when the same expenses have been paid by the appellant - Held that - The assessee, however, alleges to have discovered later that it had in fact deducted the tax at source and paid the same to the government treasury. The assessee relies upon a challan in that regard and has produced the same in this appeal as Annexure A-9. The assessee sought to produce the same before the Tribunal, but the Tribunal did not permit it to do so. In our opinion, this was a fit case for the Tribunal to have exercised its powers under Rule 29 of the Appellate Tribunal Rules, 1963 requiring the production of the challan evidencing the payment of the tax deducted at source in the government treasury. All that was required was to direct the authorities to examine whether the challan was genuine and whether the amount was paid into the government treasury or not in accordance with law. The ends of justice certainly required the same. Even if the assessee had contended before the Assessing Officer and the CIT (Appeals) that the amount was not payable, it would make no difference, if, in fact, the amount had been paid. In these circumstances, question (b) is decided by quashing the order of the Tribunal refusing to allow the appellant to adduce additional evidence. On this issue, however, the Assessing Officer shall examine the challan and determine whether the requisite amount of tax was deducted at source and paid over to the government treasury or not in accordance with law. If the same has been done, the assessee shall be entitled to the deductions. If not, the disallowance shall stand.

Summary

Issues:
1. Deductibility of guarantee fee under Section 37 of the Income Tax Act.
2. Disallowance of expenses under Section 40(a)(ia) for failure to deduct tax at source.

Analysis:

Issue 1: Deductibility of guarantee fee under Section 37 of the Income Tax Act:
The High Court considered whether the commission paid in respect of a guarantee is on revenue or capital account. Referring to the judgment of the Supreme Court in Commissioner of Income Tax Vs Sivakami Mills Ltd., it was established that guarantee commission paid by an assessee is a revenue expense and allowable as a deduction in computing total income. The Madras High Court's view in Sivakami Mills Ltd. case was upheld by the Supreme Court, emphasizing that guarantee commission does not bring an asset of enduring nature and is distinct from capital expenditure. The Patna High Court's dissenting view in Chhabirani Agro Industrial Enterprises Ltd. was noted, but the Supreme Court's decision prevails. Consequently, the High Court ruled in favor of the assessee, allowing the deduction of the guarantee fee.

Issue 2: Disallowance of expenses under Section 40(a)(ia) for failure to deduct tax at source:
Regarding the disallowance under Section 40(a)(ia) due to failure to deduct tax at source, the High Court acknowledged the assessee's claim that tax was indeed deducted and paid to the government treasury. The Tribunal had not allowed the production of the challan evidencing the tax payment, which the High Court deemed as a crucial piece of evidence. The High Court opined that the Tribunal should have exercised its powers to examine the challan's authenticity. Therefore, the High Court quashed the Tribunal's decision and directed the Assessing Officer to verify the tax deduction and payment based on the challan. The High Court held that if the tax was deducted and paid as per law, the assessee is entitled to the deductions; otherwise, the disallowance would stand. This issue was resolved by allowing the assessee to provide additional evidence and directing the Assessing Officer to verify the tax payment for final decision.

In conclusion, the High Court allowed the appeal on the deductibility of the guarantee fee under Section 37 and directed further examination of the tax deduction issue under Section 40(a)(ia) based on the provided evidence. The judgment clarified the legal position on guarantee commission deductibility and emphasized the importance of verifying tax deductions for expense allowances.