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2025 (5) TMI 1172 - AT - Income TaxDisallowance of guarantee commission paid to the State Government of Kerala under the provisions of section 40(a)(iib) - HELD THAT - This issue is no longer res integra as it stood covered against the assessee by the decision of the Hon ble Apex Court in the case of Kerala State Beverages (Manufacturing Marketing) Corporation Ltd. 2022 (1) TMI 184 - SUPREME COURT Hon ble Apex Court clearly held that having regard to the intention of the Legislature that any fees paid by the State Government Undertaking to the State Government is hit by the provisions of section 40(a)(iib) of the Act. The provisions of section 40(a)(iib) of the Act contemplates disallowance of any amount paid by way of royalty licence fee service fee privilege fee service charges or any other fee or charge by whatever name called which is levied exclusively on or which is appropriated directly or indirectly from a State Government undertaking by the State Government. Undoubtedly the guarantee commission paid by the appellant company falls within the ambit and scope of the terms any other fee and hit by the provisions of section 40(a)(iib)of the Act and therefore we do not find any reason to interfere with the orders passed by the lower authorities. This grounds of appeal stands dismissed. Disallowance of provision for bad and doubtful debts - AO had disallowed the claim for deduction in respect of provision for bad and doubtful debts by holding that the appellant had failed to substantiate that this amount was offered to tax in the earlier years and the amounts were written off irrecoverable - HELD THAT -CIT(A) while accepting the contention of the appellant that debiting the provisions for bad and doubtful debts to the profit and loss account and reducing the same from the advances in the balance sheet constitute a write off however mixed up the issue with the deduction u/s. 36(1)(vii) and 36(1)(viia) of the Act which is patently wrong as both the deductions stand a different footing and the material on record does not indicate that the appellant made out claim of deduction u/s. 36(1)(viia) of the Act. Therefore we are of the considered opinion that the matter requires remand to the file of the AO to decide the issue of allowbility or otherwise of the provisions of bad and doubtful debts in the light of the decision of the Hon ble Supreme Court in the case of Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT after affording a reasonable opportunity of being heard to the appellant. This grounds of appeal stands partly allowed for statistical purposes.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these cross appeals for the assessment years 2020-2021 and 2021-2022 are:
2. ISSUE-WISE DETAILED ANALYSIS Guarantee Commission Paid to the State Government of Kerala - Disallowance under Section 40(a)(iib) Relevant Legal Framework and Precedents: Section 40(a)(iib) of the Income-tax Act, inserted by the Finance Act, 2013, disallows deduction of any amount paid by a State Government undertaking to the State Government by way of royalty, licence fee, service fee, privilege fee, service charges or any other fee or charge levied exclusively on such undertaking. The constitutional protection under Article 289 of the Constitution of India exempts the property and income of a State from Union taxation, which has led to legislative amendments to prevent shifting or diversion of profits from State Government undertakings to the State treasury in a manner that circumvents taxation. The Apex Court's decision in the case of Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd. v. ACIT (2022) 440 ITR 492 (SC) is the leading precedent. The Court held that the levy of fees such as gallonage fee, licence fee, and shop rental (kist) on State Government undertakings falls within the ambit of section 40(a)(iib), even if such levies are also imposed on other State-owned undertakings. The Court emphasized that the "exclusivity" of the levy should be understood in the context of the nature of the undertaking (State Government undertakings collectively), not narrowly on the basis of the number of undertakings. Court's Interpretation and Reasoning: The Tribunal applied the Apex Court's reasoning, holding that the guarantee commission paid by the appellant company to the State Government is "any other fee" within the meaning of section 40(a)(iib). The Tribunal rejected the assessee's argument that the guarantee commission should be deductible, emphasizing that the legislative intent behind section 40(a)(iib) is to prevent State Government undertakings from shifting profits to the State treasury in a manner that avoids taxation. The Tribunal noted that the guarantee commission is a fee levied exclusively on the State Government undertaking and hence disallowable. Key Evidence and Findings: The appellant company is a State Government undertaking engaged in chit investment services. The guarantee commission was paid to the State Government and treated as an expense in the books. The Tribunal found that this payment falls squarely within the ambit of section 40(a)(iib) as interpreted by the Apex Court. Application of Law to Facts: The Tribunal applied the Apex Court's ruling directly, concluding that the guarantee commission is not deductible and the disallowance upheld by the CIT(A) and AO was justified. Treatment of Competing Arguments: The appellant's contention that the guarantee commission is a legitimate business expense was rejected. The argument that the levy is not exclusive because other State undertakings also pay similar fees was dismissed based on the Apex Court's clarification that exclusivity is to be viewed in terms of the nature of the undertaking rather than the number of undertakings. Conclusion: The disallowance of guarantee commission under section 40(a)(iib) was upheld for both assessment years. Provision for Bad and Doubtful Debts - Allowability under Section 36(1)(vii) Relevant Legal Framework and Precedents: Section 36(1)(vii) allows deduction for provisions made for bad and doubtful debts. The Apex Court's decision in Vijaya Bank v. CIT (2010) 323 ITR 166 (SC) clarified that debiting the provision for bad and doubtful debts to the profit and loss account and reducing the same from sundry debtors/advances in the balance sheet constitutes a "write off" and is allowable as deduction under section 36(1)(vii). Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) accepted the appellant's contention that the provision for bad and doubtful debts was debited to the profit and loss account and reduced from advances in the balance sheet, thus constituting a write off as per the Apex Court's decision. However, the CIT(A) restricted the deduction by holding that the same provision cannot be utilized for deductions under both sections 36(1)(vii) and 36(1)(viia). The Tribunal found this reasoning flawed because the appellant had not claimed deduction under section 36(1)(viia), and these two provisions stand on different footing. Therefore, the Tribunal remanded the matter to the Assessing Officer for fresh adjudication in light of the Apex Court's decision, after affording the appellant a reasonable opportunity of being heard. Key Evidence and Findings: The appellant claimed a deduction of Rs. 227,48,76,260 towards provision for bad and doubtful debts. The AO disallowed the claim on the ground that the appellant failed to substantiate that the amount was offered to tax in earlier years and that the debts were actually written off irrecoverable. Application of Law to Facts: The Tribunal directed the AO to reconsider the allowability of the provision in the light of the Apex Court ruling, ensuring procedural fairness to the appellant. Treatment of Competing Arguments: The Tribunal did not accept the AO's contention that the provision was not substantiated, but also did not accept the CIT(A)'s approach of mixing up sections 36(1)(vii) and 36(1)(viia). Instead, it emphasized adherence to the correct legal principles and procedural fairness. Conclusion: The issue was remanded for fresh consideration by the AO, leading to a partial allowance of the appeal for statistical purposes. Disallowance under Section 40A(3) The disallowance under section 40A(3) of the Act was mentioned in the assessment order but was not specifically addressed or elaborated upon in the Tribunal's order. Therefore, no detailed analysis or conclusion was recorded on this issue. 3. SIGNIFICANT HOLDINGS Regarding the guarantee commission, the Tribunal relied on the Apex Court's authoritative pronouncement, preserving the following crucial legal reasoning verbatim: "Section 40 of the Income-tax Act, 1961 is a provision which deals with the amounts which are not deductible while computing the income chargeable under the head 'Profits and gains of business or profession'. Section 40 of the Act is amended in the year 2013, and 40(a)(iib) is inserted by Amending Act 17 of 2013, which has come into force from 1-4- 2014. In terms of Article 289 of the Constitution of India, the property and income of a State shall be exempt from Union taxation. Therefore, in terms of Article 289, the Union is prevented from taxing the States on its income and property. It is the constitutional protection granted to the States in terms of the abovesaid Article. This protection has led the States in shifting income/profits from the State Government Undertakings into Consolidated Fund of the respective States to have a protection under Article 289. In the instant case the KSBC, a State Government Undertaking, is a company like any other commercial entity, which is engaged in the business and trade like any other business entity for the purpose of wholesale and retail business in liquor. As much as these kind of undertakings are under the control of the States as the total shareholding or in some cases majority of shareholding, is held by States. As such they exercise control over it and shift the profits by appropriating whole of the surplus or a part of it to the Government by way of fees, taxes or similar such appropriations. From the relevant Memorandum to the Finance Act, 2013 and underlying object for amendment of Income-tax Act by Act 17 of 2013, by which section 40(a)(iib)(A)(B) is inserted, it is clear that the said amendment is made to plug the possible diversion or shifting of profits from these undertakings into State's treasury. In view of section 40(a) (iib) of the Act any amount, as indicated, which is levied exclusively on the State owned undertaking (KSBC in the instant case), cannot be claimed as a deduction in the books of State owned undertaking, thus same is liable to income tax." The Tribunal established the core principle that any fee or charge paid by a State Government undertaking to the State Government, which is levied exclusively on such undertaking, is disallowable under section 40(a)(iib) to prevent tax avoidance through profit shifting. On the issue of provision for bad and doubtful debts, the Tribunal clarified that deductions under sections 36(1)(vii) and 36(1)(viia) are distinct and cannot be conflated. It emphasized adherence to the Apex Court ruling in Vijaya Bank (supra) and remanded the matter for fresh consideration, preserving the principle of procedural fairness and correct application of law. Final determinations:
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