2025 (6) TMI 1947 - AT - Income Tax

Revision u/s 263 - failure of the AO to examine the applicability or otherwise of the provisions of sec.40(a)(iib) in respect of guarantee commission paid to State Government of Kerala - nature of fee or charge or contractual payment - HELD THAT - As undisputed appellant is a wholly owned undertaking of State Government of Kerala. The appellant company made payment of guarantee commission to the State Government of Kerala. On a careful perusal of the order passed u/s.263 of the Act it would be clear that the learned PCIT gave a specific direction to the AO to disallow the guarantee commission paid to the State Government of Kerala. The issue was not open before the Assessing Officer to decide the allowability or otherwise of the expenditure the order of the learned PCIT passed u/s.263 of the Act had attained finality. Therefore the issue is no longer alive and cannot be further agitated in an appellate forum. Thus we do not find any merit in the appeal filed by the same - Decided against assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the payment of guarantee commission made by the appellant company to the State Government of Kerala is deductible under the Income-tax Act, 1961, or is hit by the provisions of section 40(a)(iib) of the Act.
• Whether the Principal Commissioner of Income-tax (PCIT) was justified in exercising revisional jurisdiction under section 263 of the Act to set aside the original assessment order for failure of the Assessing Officer (AO) to examine the applicability of section 40(a)(iib) to the guarantee commission payment.
• Whether the issue of allowability of guarantee commission payment can be re-agitated before the Appellate Tribunal after the PCIT's order under section 263 has attained finality.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of section 40(a)(iib) to guarantee commission paid to the State Government of Kerala

Relevant legal framework and precedents: Section 40(a)(iib) of the Income-tax Act disallows any expenditure by way of fees or commission paid to a resident, if tax is not deducted at source. The provision aims to ensure tax compliance on payments made to residents by mandating tax deduction at source (TDS).

The appellant contended that the guarantee commission paid was a contractual payment and not a fee or charge within the meaning of section 40(a)(iib). The respondent relied on a binding Supreme Court precedent wherein the issue was considered and the payment was held to be covered under the said section.

Court's interpretation and reasoning: The Tribunal noted that the appellant is a wholly owned undertaking of the State Government of Kerala and had paid guarantee commission to the State Government. The original AO had allowed the deduction for guarantee commission. However, the PCIT, on review, opined that the AO failed to examine applicability of section 40(a)(iib) and directed disallowance.

The Tribunal observed that the Supreme Court's decision in Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd. v. ACIT (2022) 440 ITR 492 (SC) squarely covers the issue against the appellant. The Court emphasized that the issue is no longer res integra and stands settled against the appellant company.

Key evidence and findings: The payment was made to the State Government, and the Supreme Court precedent directly addresses the nature of such payments and their treatment under section 40(a)(iib).

Application of law to facts: Since the Supreme Court has held that such guarantee commission payments are covered under section 40(a)(iib), the payment made by the appellant to the State Government is liable to disallowance if TDS was not deducted.

Treatment of competing arguments: The appellant's argument that the payment was purely contractual and not a fee or charge was rejected in light of the authoritative Supreme Court ruling. The Tribunal found the respondent's reliance on this precedent to be well-founded.

Conclusion: The guarantee commission payment is hit by section 40(a)(iib) and not deductible as claimed by the appellant.

Issue 2: Validity of revisional order passed under section 263 of the Act and its finality

Relevant legal framework and precedents: Section 263 empowers the Principal Commissioner or Commissioner of Income-tax to revise an assessment order if it is erroneous in law and prejudicial to the interests of the revenue. The revisional order can set aside the assessment and direct the AO to pass a fresh order.

Court's interpretation and reasoning: The Tribunal noted that the PCIT exercised jurisdiction under section 263 to revise the original assessment order on the ground that the AO failed to examine the applicability of section 40(a)(iib) to the guarantee commission payment. The PCIT directed the AO to disallow the guarantee commission.

The Tribunal held that the order passed under section 263 had attained finality, and the AO's subsequent order disallowing the guarantee commission was pursuant to the PCIT's directions. Therefore, the issue of allowability was no longer open for reconsideration before the Tribunal.

Key evidence and findings: The revisional order specifically directed the AO to disallow the guarantee commission. The AO complied by passing the consequential order under section 143(3) read with section 263.

Application of law to facts: Once the revisional order under section 263 attains finality, the matter cannot be reopened in appeal before the Tribunal. The Tribunal found no jurisdiction to entertain the appellant's challenge on the allowability of guarantee commission.

Treatment of competing arguments: The appellant sought to challenge the allowability of the guarantee commission payment before the Tribunal. However, the Tribunal emphasized that the revisional order is binding and final, precluding further adjudication on the same issue.

Conclusion: The revisional order under section 263 is valid and final; the issue cannot be re-agitated before the Tribunal.

3. SIGNIFICANT HOLDINGS

"It is an undisputed fact that the appellant is a wholly owned undertaking of State Government of Kerala. The appellant company made payment of guarantee commission to the State Government of Kerala. In the original assessment order, the claim for deduction for guarantee commission was allowed by the AO. However, subsequently on review of the assessment records, the learned PCIT, formed an opinion that the assessment order is erroneous and prejudicial to the interests of the revenue, as the AO had failed to examine the applicability or otherwise of the provisions of sec.40(a)(iib) of the Act in respect of the payment of guarantee commission paid to the State Government of Kerala. Accordingly, the PCIT directed the AO to disallow the same."

"On a careful perusal of the order passed u/s.263 of the Act, it would be clear that the learned PCIT gave a specific direction to the AO to disallow the guarantee commission paid to the State Government of Kerala. The issue was not open before the Assessing Officer, to decide the allowability or otherwise of the expenditure, the order of the learned PCIT passed u/s.263 of the Act had attained finality. Therefore, the issue is no longer alive and cannot be further agitated in an appellate forum."

Core principles established include:

• Payments characterized as guarantee commission to the State Government are subject to the provisions of section 40(a)(iib) and can be disallowed if TDS is not deducted.
• The revisional power under section 263 can be exercised to set aside an assessment order if it is erroneous and prejudicial to revenue, and such revisional orders, once passed and complied with, attain finality.
• Once a revisional order under section 263 attains finality, the issue decided therein cannot be reopened before the Appell