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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश / O R D E R Per V. Durga Rao, Judicial Member: These two appeals filed by the assessee are directed against the orders of the Learned Commissioner of Income Tax (Appeals)-7, Chennai in & 153(T)/CIT(A)-7/2017-18 dated 31.01.2019 relevant to the Assessment Years 2014-15 & 2015-16.
& 1046/Chny/2019 :- 2 -: 2. The only issue involved in this appeal relating to provision made by the assessee in respect of guarantee commission paid to the State Government is allowable or not?
In the assessment order, the Assessing Officer (A.O) has noted that the assessee-company has debited a sum of Rs. 8,66,78,575/- as “’Guarantee Commission to the State Government’. In this regard, the assessee has submitted that the guarantee commission to the State Government is a sum due to the Government of Tamil Nadu for the loans transferred to TANTRANSCO with the Government guarantee.
The assessee further submitted that the company is liable to pay commission of 0.5 % on the outstanding balances of loan and that the expenses essentially related to main activity of business of the assessee. He further noted that the assessee is 100% Tamil Nadu State Government undertaking and all its functionaries are Government officials. The assessee is not debarred from making any payment to any person during the course of its business provided that the said money is earned out of the legitimate sources and offered for tax.
However, what needs to be considered here is whether the entire said amount are allowable u/s. 37 (1) of the Income Tax Act, 1961 (hereinafter “the Act”), while computing the total taxable income. He further added that the guarantee commission to the State Government & 1046/Chny/2019 :- 3 -: is paid or payable by the assessee with the state government is an application of its income and cannot be allowed as deduction u/s. 37(1) of the Act or under any other provisions while computing the total income for the A.Y 2014-15 and addition was made. On appeal the Ld. CIT(A) confirmed the order of the A.O by observing that the guarantee commission provided had never been paid to the Government of Tamil Nadu. To this extent, the amount was only a provision and was never a payment. This provision of guarantee commission was never seriously intended to be paid and was not subsequently paid and therefore cannot be allowed as an expenditure.
On being aggrieved, the assessee carried the matter before the Tribunal.
The Ld. counsel for the assessee has submitted that the guarantee commission to the State Government is a sum due to the Government of Tamil Nadu for the loans transferred to TANTRANSCO with the Government guarantee and the company is liable to pay commission of 0.5 % on the outstanding balance of the loans and that the expenses are essentially related to the main activity of the business which has to be kept going. He further submitted that the guarantee commission paid by the assessee which is a legitimate expenditure incurred in the course of the business therefore, it is a business & 1046/Chny/2019 :- 4 -: expenditure which has to be allowed u/s. 37 of the Act. He has also submitted that the assessee had followed the mercantile system of accounting the provision made by the assessee has to be allowed. In support of his argument, he relied on the judgments of Hon’ble Supreme Court in the cases of Addl. CIT vs. Akkamamba Textiles Ltd. [1997] 227 ITR 0464 (SC) and CIT vs. Siwakami Mills Ltd. [1997] 227 ITR 0465 (SC).
On the other hand, the Ld. Departmental Representative has strongly supported the orders of the authorities below and submitted that it is only a provision made by the assessee and not actual payments therefore, the same is not allowable.
We have heard both the parties, perused the material available on record and gone through the orders of the authorities below.
The assessee-company has debited a sum of Rs. 8,66,78,575/- guarantee commission payable to the State Government for the reason that the State of Tamil Nadu stood guarantee for the loans obtained by the assessee and therefore, the assessee has to pay commission of 0.5% of the outstanding balance of the loan. According to the assessee, this expense incurred by the assessee for the purpose of business and it is a revenue expenditure and the same has to be & 1046/Chny/2019 :- 5 -: allowed u/s. 37 of the Act. According to the A.O, it is not allowable expenditure u/s. 37 of the Act, according to him, it is only an application of income. On appeal, the Ld. CIT(A) has confirmed the order of the AO on the ground that the assessee has not paid the payments and it is only a provision. We find that when the assessee is following the mercantile system of accounting, the assessee is under obligation to pay commission of 0.5 % on the outstanding balance of loans. In our view, it is an ascertained liability and therefore, it has to be allowed u/s. 37 of the Act.
In the case of Addl. CIT vs. Akkamamba Textiles Ltd. (supra), the Hon’ble Supreme Court has held that the guarantee commission paid to bank and insurance company for the purpose of machinery, is a revenue expenditure.
In the case of CIT vs. Siwakami Mills Ltd. (supra), the Hon’ble Supreme Court has held that guarantee commission paid to bank for the purpose of machinery is a revenue expenditure. In view of the above, we are of the opinion that the provision made by the assessee in respect of guarantee commission payable to the State of Tamil Nadu is allowable as a business expenditure. Thus, the appeal filed by the I.T.A Nos.1045 & 1046/Chny/2019 :- 6 -: 11. So far as the appeal in for A.Y 2015-16 is concerned, the facts and claim of the assessee are similar for A.Y 2014-15 and therefore, no separate adjudication is required in view of our decision in A.Y 2014-15 as the appeal filed by the assessee is allowed. Hence, the appeal filed by the assessee in ITA No.1046/Chny/2019 for A.Y 2015-16 is also allowed.