THE MYSORE SUGAR CO. LTD. vs. ACIT,

Aggrieved, the assessee preferred appeals before the CIT(A) for both the assessment years and the CIT(A) confirmed the order of the AO and the assessee is in appeal before us. & 1835/Bang/2013 The Mysore Sugar Co. Ltd., Page 3 of 5 4. Learned counsel for the assessee submitted that the assessee is a Government of Karnataka undertaking and vide Government order dated 10/01/2000, the State Government had given Government guarantee of Rs.57,26,00,000/- for a loan obtained by the assessee from HUDCO for meeting its capital expenditure on the company’s co-generation plant. He submitted that for this purpose, the assessee was required to pay guarantee commission to the State Government and since the liability had accrued from year to year, the assessee had debited the same in its profits and loss account though the commission was not paid. He submitted that vide Government order dated 31/12/2012, the Government of Karnataka had waived payment of the guarantee commission and had capitalized the same as investment. Copy of the said Government order is also filed before us. Learned counsel for the assessee, thus submitted that the guarantee commission, being an accrued liability, was required to be debited to the profit and loss account, but the AO has treated it as a provisional liability and has brought it to tax. He further submitted that even if the said amount is to be brought to tax since it was not paid, the AO could have disallowed only the provision made during the year and not the entire amount of Rs.2,76,33,530/- including the opening balance. Thus, according to him, the addition confirmed by the CIT(A) is to be set aside for both the assessment years. & 1835/Bang/2013 The Mysore Sugar Co. Ltd., Page 4 of 5 5. The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that the undisputed fact is that the assessee, though has debited the guarantee commission to its profit and loss account, has never paid the same to the Government and therefore ought to have been added back to the total income of the assessee-company and offered to tax. He submitted that the further fact that the Government of Karnataka has capitalized the guarantee commission towards investment also proves the fact that there was no such liability of the assessee and therefore the orders of the authorities below are to be confirmed.

Having regard to the rival contentions and the material on record, we find that the assessee is following mercantile system of accounting and has to account for the liability accrued during the relevant financial year. We find that the assessee was liable to pay guarantee commission to the Government of Karnataka for the guarantee furnished by it towards loan obtained by the assessee from HUDCO. Therefore, the said liability has accrued to the assessee and if the same has not been paid, it remains a liability of the assessee and it cannot be treated as a provisional liability. It is certainly an ascertained liability being 1% of the loan obtained by the assessee. Therefore, disallowance of the same could not have been made. However, we find that the assessee has not paid the said & 1835/Bang/2013 The Mysore Sugar Co. Ltd., Page 5 of 5 guarantee commission even in the subsequent years and vide order dated 31/12/2012, the guarantee commission has been capitalized by the Government of Karnataka and therefore it is not allowable as expenditure. However, the entire amount including the opening balance cannot be brought to tax during the assessment year 2007-08. Only the liability claimed by the assessee for the relevant assessment year can be disallowed by the AO. AO is accordingly directed to restrict the disallowance to the claim of guarantee commission for the relevant assessment years.