| Nov-24-2021

Guarantee commission not ‘Levy’ for the purposes of disallowance under Section 40(a)(iib) of the IT Act

In M/s. Krishna Bhagya Jala Nigam Ltd. v. Assistant Commissioner of Income Tax, Bangalore [ITA 3064 /BANG/2018, decided on November 10, 2021], Hon’ble Income Tax Appellate Tribunal, Bangalore (“ITAT”) held that guarantee commission paid in consideration for the state government agreeing to suffer a detriment in the event of non-payment of the bonds on its maturity and is merely a contractual payment and not levy.

M/s. Krishna Bhagya Jala Nigam Ltd (“the Appellant”) challenged an Assessment Order dated September 29, 2018 (“Assessment Order”) passed by the Assessing Officer (“AO”), disallowing the guarantee commission under Section 40(a)(iib) of the Income Tax Act, 1961 (“IT Act”).

The Hon’ble ITAT observed that, for a transaction to qualify as a levy for the purpose of Section 40(a)(iib) of IT 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, whereas 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 and is merely a contractual payment.

ITAT relied upon the case of Kerala State Beverages Corporation Ltd. v. ACIT [(2020) 116 taxmann.com 555] passed by Hon’ble Kerala High Court and observed that, guarantee is not exclusively given by the state government only to the Appellant, which is a State Government undertaking, but to various government departments, public sector undertakings, local authorities, statutory boards, corporations and co-operative Institutions etc.

Held that, in the present case guarantee commission is not paid directly to the state government and they are not levied exclusively on the Appellant and also held that guarantee commission does not fall under the ambit of levy.

Further held, that disallowance of guarantee commission under Section 40(a)(iib) of the IT Act is not sustainable and directed to delete the addition made in this regard.

(Author can be reached at info@a2ztaxcorp.com)

DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose and for the reader’s personal non-commercial use. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon. Further, no portion of our article or newsletter should be used for any purpose(s) unless authorized in writing and we reserve a legal right for any infringement on usage of our article or newsletter without prior permission.