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TMI Blog2001 (10) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1991-92, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; ------------------------- 1. G.O. Ms. No. 150, Industries & Commerce (PE.Cell) Department, dated 27-3-1985 2. Managing Director, A.P. State Financial Corporation, Hyderabad, Letters, dated 30-5-1988 and 14-9-1988. ------------------------------------------------------------------- ORDER In the circumstances reported by the Managing Director, Andhra Pradesh State Financial Corporation in his letters read above, the Government hereby 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an equivalent amount in APSFC as special share capital for which IDBI so far has been giving a matching contribution. Inasmuch as IDBI has decided not to give such a matching contribution for financial year 1987-88 onwards, the present practice of levying guarantee commission and reinvesting the same can be dispensed with. There will be no net financial implications to the Government. .........." It may be noticed that the Managing Director has mentioned that it was 'only at the instance and initiative' of the assessee that the Government started 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 Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the State Government may, with the approval of the Central Government, fixed by the notification published in the Official Gazette at the time of issuing the above shares. In accordance with this provision, the State Government shall pay the minimum dividend of 7 1/2% to the shareholders irrespective of whether the Corporation makes profit or loss during any financial year. In the eventuality of corporation making loss in future years the Government is liable to pay the minimum dividend. 3. With a view to safeguard the interest 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 mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pends upon the following factors:-- "1. Whether Corporation is actually floated Bonds and requested Government for issue Guarantee. 2. Whether the Government considers such request and issued Guarantee in respect of the bonds floated by the Corporation. 3. Whether the Government issued Guarantee free of charge or levied any Guarantee Commission, whether any agreement/G.O. issued in this regard. 4. Whether payment of Guarantee Commission is an allowable expenditure or fictitiously created to avoid payment of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI, as the interest payment is accounted for only by way of an adjustment entry. Similar is the situation when the interest is receivable by the assessee from a party, and a fresh loan is sanctioned to the said party. In this situation, the cash outflow is only the fresh loan minus the interest receivable. Such interest receipts and payments have been accounted for in the books, as actual receipts and payments, and the Department did not raise any objection in respect of the same. It is also mentioned on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit to the Dividend Subvention Fund Account were made, and so, it could not be argued that the assessee did not have sufficient cash balances to infer a constructive payment. So, we are of the view that there was constructive payment, and the assessee is eligible for the deduction of the guarantee commission for both the years, if, otherwise, there is valid and genuine liability for the payment of the same. 14. We are, however, are of the view that there is no valid, genuine and legal liability on 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arry out the instructions on the question of policy laid down by the State Government under sub-section (1) of this section or the instructions given to the Board under sub-section (4) of section 37A, the State Government shall have the power to supersede the Board and appoint a new Board in its place to function until a properly constituted Board is set up, and the decisions of the State Government as to the grounds for superseding the Board shall not be questioned in any court. 40 .............." 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 chargin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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