TMI Blog2001 (10) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... 991-92, the guarantee commission claimed was Rs.1,08,55,210. This commission is claimed to have been paid in the context of the guarantees issued by the State Government on the bonds issued by the assessee-corporation, and the commission was worked out at about 2% of the bond value. The assessee claimed to have been following the cash system of accounting, and so, it claimed deduction of the above-mentioned amounts of guarantee commission on the basis that the amounts were paid during the years of account relevant for the assessment years 1990-91 and 1991-92. The Assessing Officer however, observed that the amounts were not actually paid or disbursed to the State Government as claimed by the assessee, but were only credited to a reserve account called Dividend Subvention Fund Account in these periods. As the reserve account figures in the books of the assessee itself, and as the money remained invested in the business of the assessee itself, the Assessing Officer disallowed the claim for the said deduction of the guarantee commission payments for both the years. 4. For the assessment year 1990-91. the CIT(A) not only upheld the view taken by the Assessing Officer, but also referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accord permission for creation of DIVIDEND SUBVENTION FUND Account in the Corporation and also for crediting to the said fund, the guarantee commission payable to Government for the Financial year 1988-89, as per the orders first read above, in modification of the earlier orders. 2. The DIVIDEND SUBVENTION FUND ACCOUNT shall be maintained and retained by the corporation. The amounts credited to Subvention Fund shall be under the exclusive control of the Government and shall be utilised only on receipt of specific directions from the State Government for payment of minimum guaranteed dividend in the years in which the Corporation could not earn sufficient profit to meet the dividend liability. 3. This order issues with the concurrence of the Finance Planning (Fin. Exp. Ind.) Department, vide their U.C. No. 3722/AFS(R)/88, dated 23-11-1988. (BY ORDER AND IN THE NAME OF THE GOVERNOR OF ANDHRA PRADESH) T.R. PRASAD SECRETARY TO GOVERNMENT .................." It may be observed that it is the above letters dated 30-5-1988 and 14-9-1988 addressed by the Managing Director of the assessee-corporation to the State Government, referred to in the above G.O. of the Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as a tax planning measure to levy guarantee commission on the assessee-corporation. 8. In the subsequent letter dated 14-9-1988, addressed by the Managing Director of the assessee-company to the Secretary to Government, Finance Planning Department of Government of Andhra Pradesh, with copy to Addl. Secretary, Industries Commerce Department, financial position of the assessee-corporation and other related issues are discussed. The said letter reads as under:-- "Sub:--Guarantee Commission on Bonds and Ad hoc Bonds issued by APSFC--Reg. Ref: 1. My D.O. Lr. No. Nil dated 4-5-1988 to Shri R.S. Goel, IAS, Addl. Secretary to Government Industries Commerce Deptt. 2. My D.O. Lr. No. Nil dated 9-8-1988 to Shri S. Narayanan, IAS, Secretary to Government, Finance Planning Deptt. I invite your kind attention to the above referred letters on Guarantee Commission payable by the Corporation to the Government, we have examined the issue of payment of guarantee commission from all the angles with a view to safeguard the interests of the Government, the Corporation and also to take steps for tax planning. The following three alternatives were examined in detail. 1. Waiver o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Government and also to reduce the tax burden on the Corporation, it would be more appropriate to create a reserve fund under the head. " DIVIDEND SUBVENTION FUND". The salient features of the reserve as follows: - The fund would be retained by the Corporation. - The Government would have exclusive over the fund. - The accounting treatment would be that the guarantee commission payable to the Government would be transferred to the fund and kept as a cushion towards the liability of the Corporation for payment of dividend for subvention of dividend. If the guarantee commission is invested or dividend subvention fund, a source gets built up to meet the contingency without any specific budgetory (non-planned) allocation by the Government. To achieve the above, Government may kindly direct the corporation by way of a G.O. 1. Levying guarantee commission and 2. Requiring the corporation to credit the amount of guarantee commission to "DIVIDEND SUBVENTION FUND ACCOUNT" the fund to be utilised only for meeting the contingency of minimum guaranteed dividend under @ specific direction from the Government. Further, the directives proposed shall cover the period from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income tax and to benefit State Government. 5. Whether the Corporation is claiming the expenditure incurred on Guarantee Commission for the first time and how in earlier assessment years Corporation had floated bonds and Guarantee Commission paid to Government. 6. What is the Trade Practice if any third party issues Guarantee for repayment of Principle Interest and whether Guarantee Commission paid is an allowable Business Expenditure." It is argued that it is unfair to conclude, without taking into consideration any of the above factors, on the basis of the letters addressed to the Government by a functionary of the assessee-corporation on the avenues available to raise finances, that the Corporation colluded with the Government and created fictitious liability. He also referred to the remarks of the CIT(A) in his order for the assessment year 1991-92, wherein he pointed out that 'it is monstrous to assume that the Appellant Corporation has entered into a conspiracy with the State Government of Andhra Pradesh to avoid income-tax'. He also contended that where the language of a deed or, as in this case a G.O., is plain, no resort should be taken to the considerations of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n page-5 of the said Opinion that the liability for the payment of guarantee commission is genuine, and in view of the method of accounting followed by the assessee, there is a constructive payment. 12. The learned Departmental Representative, on the other hand, pleaded that the guarantee commission did not leave the coffers of the assessee-corporation and it remained very much a part of the funds of the assessee-corporation, as it was only credited to the Dividend Subvention Fund Account, and there was no payment at all so as to be eligible for deduction. Taking clue from a query raised by the Bench, the learned Departmental Representative also argued that there is no provision in the State Financial Corporations Act, 1951 under which the State Government could charge the Commission. He also mentioned that there was no payment of commission in earlier years and in subsequent years the Department allowed the deduction because it was actually paid and the question as to whether there was any obligation on the part of the assessee to pay the commission was not examined by the Department at any stage. As it is a legal question, it is contended, the Revenue is entitled to raise this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to pay the guarantee commission, for the reasons discussed hereafter. Section 7(1) of the State Financial Corporations Act, 1951, reads as under:-- "7. Additional Capital of the Financial Corporation and its borrowing powers-(1) The Financial Corporation may, in consultation with the Development Bank and the Reserve Bank, issue and sell bonds and debentures carrying interest for the purpose of increasing its working capital and such bonds and debentures shall, if so required by the Financial Corporation, be guaranteed by the State Government as to the repayment of the principal and the payment of interest at such rate as the State Government may, on the recommendation of the Board based on the advice of the Reserve Bank fix." It may be observed from the above provision that the assessee-corporation may or may not issue and sell bonds and debentures for the purposes of increasing its capital. Even if it chooses to issue and sell bonds and debentures, the terms of the bonds as to the repayment of the principal and interest must be, as fixed by the State Government. Further, even after choosing to issue and sell the bonds, the assessee-Corporation has got the option o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ....." It is argued by the learned counsel for the assessee that whatever may be the statutory position in terms of the said Act, the State Government is vested with extensive powers to control the assessee-corporation, and as the G.O., being G.O. Ms. No. 180 dated 12-4-1989, is issued by the State Government, the assessee-corporation has no alternative except to comply with it and pay the guarantee commission in question. 16. We are afraid, we cannot agree with these contentions. The assessee-corporation has a history of over three decades. There was no payment of guarantee commission for almost two decades. It is only subsequently, viz. in 1985 that the State Government started the charging of the Commission for the guarantee extended. It may also be noticed that as is evident from the letter of the Managing Director of the assessee-corporation dated 30th May, 1988, which we have extracted hereinabove, that it was only at the instance and initiative of the assessee-corporation and that too as a tax-planning measure that the Government started charging Commission. So, it is not a case where the assessee sought to exercise its right to get the guarantee free of charge from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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