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TMI Blog2021 (3) TMI 1456X X X X Extracts X X X X X X X X Extracts X X X X ..... ses for consideration in this appeal by the Assessee is as to whether the revenue authorities were justified in disallowing a sum of Rs. 13,80,10,000 being guarantee commission paid to Government of Karnataka, on the ground that the Assessee failed to deduct tax at source on the aforesaid payment made to Government of Karnataka by invoking the provisions of Sec. 40(a)(iib) of the Income Tax Act, 1961 (Act). 3. The assessee was formed by the Govt. of Karnataka under the Central Act called State Financial Corporations Act, 1951. The Assessee was formed solely for the purpose of financing industries in Karnataka. The Assessee is authorised to raise working capital by inviting Fixed Deposits from public and floating of bonds at specified interest rates. Such bonds are guaranteed by Government of Karnataka pursuant to section 7 of the State Financial Corporation Act which is reproduced here under: Section 7- Additional capital of Financial Corporation and its borrowing powers- (1) The Financial Corporation may issue and sell bonds and debentures for the purpose of increasing its working capital. (2) The State Government may, on a request being made to it by the Financial Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under review the assessee paid Rs. 11,82,78,750/- as guarantee commission. The Assessee is availing the services of Govt and has been paying guarantee commission right from the inception by debiting its profit and loss account, claiming the expenditure as expenditure wholly incurred for the purpose of business under section 37 of the Income Tax Act. The same procedure is being followed consistently right through the years. In none of years the expenditure was disallowed. 5. The AO in the course of assessment proceedings for AY 2015-16 was of the view that the Assessee ought to have deducted tax at source on the guarantee commission paid to Government of Karnataka as per the provisions of Sec. 40(a)(iib) of the Act. The relevant provisions of Sec. 40(a)(iib) of the Act which was inserted by the Finance Act, 2013 w.e.f. 1.4.2014 and which is part of Chapter IV of the Act that deals with computation of business income reads as follows: "40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession".- (a)in the case of any assessee- (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity referred to in clause (i) or clause (ii) (whether singly or taken together); (iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner; (v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;" 7. The Plea of the Assessee on applying the provisions of Sec. 40(a)(iib) of the Act and disallowing guarantee commission paid to the Government of Karnataka was: (i) Guarantee Commission is not levy on a state Government undertaking by the State Government. It is purely a contractual payment. To qualify as a "levy" within the meaning of Sec. 40(a)(iib) of the Act, the payment to the State Government by a State Government undertaking should be based on a power on the part of the State Government to impose a levy. It should be a compulsory exaction by the State Government from the State Government Undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecific words, is to understand the scope of the meaning of the general words will be restricted to the scope of the meaning of the specific words. To illustrate, in the phrase "apples, oranges, guavas, bananas and other such food-items", the phrase "other such food-items" can only include fruits. This is for the reason that the words "apples, oranges, guavas, bananas" create a genus, being fruits. The succeeding words "other such food-items" must be interpreted to fall only within that genus. The scope of "any other fee or charge" cannot extend beyond the genus created by the words "royalty, licence fee, service fee, privilege fee, service charge". Reliance was placed on the decision of the Hon'ble Rajasthan High Court, in CIT v. Rajasthan State Beverages Corporation Ltd. [2017] 393 ITR 421, wherein the meaning of the term 'privilege fees' used in Sec. 40(a)(iib) of the Act was held to be fee paid for granting right to manufacture and vend the liquor/sale of country liquor/ Indian made foreign liquor and Beer and determination of privilege fee was within the jurisdiction of the State authorities and levy of such fee cannot be termed as application of income or dividend as well. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State-government as a whole and provides the overarching legal-framework for methodology of determination of final income. The legislative intent behind the insertion of the words 'Any charge or fee by whatever name called', clearly indicates that the profits of any taxable entity including a State-government corporation are subject to the norms of the Act, which are applicable across the board. The final observations of the CIT(A) was as follows: * In the present case, it is apparent that, the guarantee commission paid of Rs. 13,80,10,000/- has been debited to the Assessee's P&L account, which has commensurately reduced the net-profit and the consequent income-tax liability! There appears to be no justification for charging commission by the State government from its own government-controlled corporation, in a strictly commercial sense, especially when such grants, accrue from the state government itself. In this view of the matter, the assessee's stand is not found to be acceptable. In background of the above detailed discussion and facts & circumstances of' the present case and binding nature of the. section 40(a)(iib), I do not see enough justification t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... government undertakings, the 'exclusivity' is not there. In this regard, findings of the Tribunal is that, the wordings of Section 40 (a) (iib), "which is levied exclusively on" indicates that the fee or charge should be one exclusively levied from the state government undertakings, and it is not any fee or charge which is levied exclusively from the assessee by the state government. Therefore the question is whether the 'exclusivity' will be lost if it is levied from more than one State Government undertaking. Sub-clause (iib) of Clause (a) of Section 40 provides that, any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge, or any other fee or charge "which is levied exclusively on" a state government undertaking by the State Government (emphasis supplied) alone will satisfy the ingredients for disallowance. The statute has not used the word; levied exclusively on the state government undertakings by the State Government. Instead, the word used is "exclusively on" "a state government undertaking". Therefore, inorder to bring the disallowance within the ambit and scope of Section 40 (a) (iib), it should be an exclusive levy on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason for the amendment as follows: "Act No. 15 of 2002. - It is considered necessary to amend the Karnataka Ceiling on Government Guarantees Act, 1999 (Karnataka Act 11 of 1999) to provide that no guarantee commission shall be charged in respect of guarantees extended during the period from 1.4.2001 to 31.3.2002 for loans granted by the Karnataka State Cooperative Apex Bank Limited and Karnataka State Co-operative Agriculture and Rural Land Development Bank Limited for the purpose of Agriculture and in turn to require them to reduce one percent interest in their lending rate in respect of the agricultural loans disbursed by them during the said period. Hence the Bill. (L.A. Bill No. 4 of 2002)" 13. It is thus abundantly clear that the Guarantee is not exclusively given by the State Government only to the Assessee which is a State Government undertaking but to various Government Departments, Public Sector undertakings, Local Authorities, Statutory Boards and Corporations and Cooperative Institutions etc., and also to for loans granted by the Karnataka State Co-operative Apex Bank Limited and Karnataka State Co-operative Agriculture and Rural Land Development Bank Limited for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues Guarantees on behalf of the Government Departments, Public Sector Undertakings, Local Authorities, statutory Boards and Corporations and Co-operative Institutions. Consequently, we hold that the disallowance made u/s.4(a)(iib) of the Act cannot be sustained. 15. We are also of the view that Guarantee Commission is not in the nature of a "levy" on a state Government undertaking by the State Government. It is purely a contractual payment. According to Black's Law Dictionary Fifth Edition, the word "levy" means:- "To assess; raise; execute; exact: tax; collect: gather; take". To qualify as a "levy" within the meaning of Sec. 40(a)(iib) of the Act, the payment to the State Government by a State Government undertaking should be based on a power on the part of the State Government to impose a levy. It should be a compulsory exaction by the State Government from the State Government Undertaking. Guarantee Commission is paid in consideration for the State Government agreeing to suffer a detriment in the event of the Assessee not repaying the value of the bonds on its maturity. Guarantee Commission does not fall within the ambit of the mischief that was sought to be remedied by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res Amount 1 The South India Paper Mills ltd (Dividend Received Rs. 1,32,000) 15,000 9,00,000 2 Strides Arco lab Ltd (Dividend Received Rs. 40,78,750) 8,125 6,50,000 3 Silktex Ltd 1,00,000 10,00,000 4 Sri Jayalakshmi Auto spin Ltd 1,00,000 10,00,000 5 Mukunda Industrial Finance Ltd 1,41,500 21,22,500 6 K F S Ltd 40,000 10,00,000 7 B L Industries ltd 50,000 5,00,000 8 I D B I Bank Ltd (Dividend Received Rs. 1,92,259) 34,200 44,46,000 9 Siddhartha Metal Coating Ltd 2,80,000 28,00,000 10 Sandur Laminates Ltd 50,000 10,00,000 11 Sangeetha Granites Ltd 66,600 9,99,000 12 South East Agro Ltd 1,00,000 10,00,000 13 Gujarat Petro Syn Ltd 20,000 10,00,000 14 Twin star Software Ltd 17,700 1,77,000 15 Metropoli Overseas Ltd 1,00,000 15,00,000 16 Laliji Manekji Ltd 2,20,900 22,09,000 Sub-Total 2,23,03,500 17 Kitven Fund (Venture Capital) (Dividend Received Rs. 5,000) 7,50,00,000 18 Karnataka Asset Management Co. Pvt Ltd 1,65,000 16,50,000 19 Karnataka Trustee Co. Pvt Ltd (Dividend Received Rs. 1,65,000) 500 50,000 Sub-Total 17,00,000 Share Application Money: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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