2001 (10) TMI 268 - AT - Income Tax

Issues Involved:
1. Disallowance of guarantee commission claimed as deduction by the assessee for the assessment years 1990-91 and 1991-92.
2. Validity and genuineness of the liability towards payment of guarantee commission.
3. Constructive payment of guarantee commission.
4. Legal authority of the State Government to charge guarantee commission under the State Financial Corporations Act, 1951.

Detailed Analysis:

1. Disallowance of Guarantee Commission:
The primary issue in both appeals is the disallowance of the guarantee commission claimed as a deduction by the assessee for the assessment years 1990-91 and 1991-92. The assessee, a government undertaking, claimed deductions of Rs. 1,06,36,200 and Rs. 1,08,55,210 respectively, for guarantee commissions paid to the State Government. The Assessing Officer disallowed these claims, observing that the amounts were credited to a reserve account called Dividend Subvention Fund Account and not actually paid to the State Government.

2. Validity and Genuineness of the Liability:
For the assessment year 1990-91, the CIT(A) upheld the disallowance and concluded that the claim for deduction was a "subterfuge to avoid tax liability," initiating penalty proceedings under section 271(1)(c) of the Act. For the assessment year 1991-92, the successor-CIT(A) also upheld the disallowance but did not find culpability in the claim. The assessee argued that the G.O. (Ms.) No. 180 dated 12-4-1989 mandated the payment of guarantee commission and its adjustment to the Dividend Subvention Fund Account, constituting a valid liability.

3. Constructive Payment:
The assessee contended that the amounts credited to the Dividend Subvention Fund Account should be considered constructive payment to the State Government. The learned counsel for the assessee argued that the G.O. was an enforceable order and that the internal correspondence between the assessee-corporation and the State Government did not negate the liability. The counsel also cited the opinion of Dr. N.R. Sivaswamy, which supported the view that there was constructive payment.

4. Legal Authority under the State Financial Corporations Act, 1951:
The Tribunal examined Section 7(1) of the State Financial Corporations Act, 1951, which mandates the State Government to guarantee bonds issued by the corporation without charging a commission. The Tribunal concluded that the State Government was under a statutory duty to extend its guarantee free of consideration, and there was no legal provision allowing the State Government to charge a commission. The Tribunal held that the G.O. charging the commission could not override the statutory provisions of Section 7(1).

Conclusion:
The Tribunal found that there was constructive payment of the guarantee commission, as the amounts were credited to the Dividend Subvention Fund Account. However, it concluded that there was no valid, genuine, or legal liability for the payment of the guarantee commission, as the State Government was statutorily obligated to provide the guarantee free of charge. Consequently, the Tribunal upheld the disallowance of the guarantee commission for both assessment years and dismissed the assessee's appeals.

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