Income Tax Appellate Tribunal - Hyderabad
A.P. State Financial Corporation vs Deputy Commissioner Of Income Tax on 3 October, 2001
Equivalent citations: [2002]81ITD193(HYD)
ORDER
M.V.R. Prasad, A.M.
1. These appeals are filed by the assessee. They are directed against separate orders of the CIT(A)-I, Hyderabad, dt. 17th Feb., 1992, for the asst. yr. 1990-91 and dt. 26th April, 1995, for the asst. yr. 1991-92. As a common issue is involved, these two appeals are being disposed of by this common order for the sake of convenience.
2. The only issue involved in both these appeals relates to disallowance of guarantee commission, claimed as deduction by the assessee for both these years.
3. The appellant-assessee is an undertaking of the Government of Andhra Pradesh and is constituted under the State Financial Corporations Act, 1951, and its shares are held by the State Government, IDBI and the public. For the asst. yr. 1990-91, the assessee claimed deduction by way of guarantee commission paid to the State Government of Rs. 1,06,36,200. For the asst. yr.
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 per cent 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 asst. yr, 1990-91 and 1991-92. The AO 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 AO disallowed the claim for the said deduction of the guarantee commission payments for both the years.
4. For the asst. yr. 1990-91, the CIT(A) not only upheld the view taken by the AO, but also referred to certain correspondence entered into by the assessee-corporation with the State Government, and on the basis of the said correspondence, to which we shall refer presently, he came to the conclusion that the claim for deduction of the guarantee commission is only 'a subterfuge to avoid tax liability' and accordingly directed the initiation of the penalty proceedings under Section 271(1)(c) of the Act.
5. For the asst. yr. 1991-92, the successor CIT(A) also upheld the disallowance, but took the view that there was no culpability about the claims for deduction of the guarantee commission, as it is a transaction involving the State Government and its undertaking.
6. Before us, the learned counsel for the assessee pleaded that the reasoning given by the Revenue authorities for the disallowance of the claims for deduction of the guarantee commission paid to the State Government, is totally wrong. Simply because amounts were credited to a reserve account called Dividend Subvention Fund Account, and shown as reserve in the balance-sheets on the relevant dates, it does not follow that there was no constructive payment of the amounts to the State Government. It is pleaded that the assessee sought waiver of the commission by the State Government, but failed in its attempt, as the State Government passed a G.O. directing the payment of guarantee commission, and also stating that the said commission should be adjusted to the Dividend Subvention Fund Account. In this context, he invited our attention to the G.O. (Ms.) No. 180, dt. 12th April, 1989, issued by the Government of Andhra Pradesh in Industries & Commerce (PE Cell) Department. The said G.O. reads as under:
"G.O, Ms. No. 180 Dt. 12th April, 1989 Read the following :
1. G.O. Ms. No. 150, Industries & Commerce (PE CeU) Department, dt. 27th March, 1985.
2. Managing Director, A.P. State Financial Corporation, Hyderabad, Letters, dt. 30th May, 1988 and 14th Sept., 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 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. 37227AFS(R)/88, dt. 23rd Nov., 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 dt. 30th May, 1988 and 14th Sept., 1988, addressed by the managing director of the assessee-Corporation to the State Government, referred to in the above G.O. of the Government that led the CIT(A) who passed the impugned order for the asst. yr. 1990-91 to take the view that the entire claim for deduction of guarantee commission is only 'a subterfuge to avoid tax liability'.
7. Relevant portion of the letter dt. 30th May, 1988, of the managing director of the assessee-Corporation to the State Government, viz., Principal Secretary to Government, Industries & Commerce Department, Hyderabad, in its annexure, read as under :
"Sub : Payment of Guarantee Commission by APSFC to the State Government,
(i) One of the sources of money to APSFC is the Bonds floated by the Corporation from out of the quota allocated to it by IDBI from their pool. Government have been regularly guaranteeing the repayment as well as the servicing of those Bonds by the Corporation. Roughly 25 per cent of the total quantum of money available to APSFC comes from the source of Bonds. These are subscribed to by the Commission Bankers and LIC.
(ii) Originally, the Government were not levying any guarantee commission on the. Bonds floated by APSFC as is clear from the explicit orders at para 2(i) of G.O. Ms. No. 271 dt. 11th Oct., 1974, of Finance and Planning (W&M) Department (Annexure-1).
(iii) It was only at the instance and initiative of APSFC, as a tax planning measure, that the Government started levying guarantee commission as per orders in G.O. Ms. No. 150 dt. 27th March, 1985, of Industries, Commerce and Planning (PE Cell) Department. (Annexure-E) Now that the circumstances under which APSFC itself requested for levying the guarantee commission, which led to the issue of this GO, have changed, it is necessary to revert to the earlier situation of not levying any guarantee commission as per GO Ms. No. 271 dt 11th Oct., 1974.
The current practice is to levy guarantee commission and to reinvest an equivalent amount in APSFC as special share capital for which IDBI so far has been giving a matching contribution. In as much 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 dt. 14th Sept., 1988, addressed by the managing director of the assessee-company to the Secretary to Government, Finance & Planning Department of Government of A.P., 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 dt. 4th May, 1988 to Shri R.S. Goel, IAS. Addl. Secretary to Government Industries & Commerce Department.
2. My D.O. Lr. No. Nill dt. 9th Aug., 1988 to Shri S. Narayanan IAS, Secretary to Government Finance & Planning Department.
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 of guarantee commission.
2. Extension of loan to the corporation by Government to extend guarantee commission which is payable after specific period, say 20 years without payment of any interest.
3. Creation of a special fund under the name "Dividend Subvention Fund". The merits and dements of the above alternatives are summarised hereunder :
1. Waiver of guarantee commission If the Government waives guarantee commission, the Corporation's gross profit increases commensurately and tax is levied on the profits so guaranteed. For the year 1987-88 the tax paid by the Corporation as a sequel of not paying the guarantee commission is of the order of Rs. 27.00 lakhs. So in this alternative the Corporation is paying tax due to higher gross profits.
II. Extension of loan to the Corporation The Corporation would be first paying guarantee commission to the Government and the Government in turn would give the same amount in the form of a loan which is repayable after 15 or 20 years without interest depending upon the financial position of the Corporation at that point of time. In this alternative, even though the tax burden on the Corporation is reduced, the Corporation has to pay the amount after this specific stipulated period.
This would result in the cost of Bonds equal to 11.5 per cent interest + 2 per cent guarantee commission, which is 13.5 per cent as against the Corporation's average lending rate of 13 per cent. Therefore, the cost of funds is more than the lending rate of the Corporation and it is detrimental to the long-term growth prospects of the Corporation.
III. Creation of a special fund under the name "Dividend Subvention Fund"
As per s. 6(i) of the SFCs Act, the shares of the financial Corporation shall be guaranteed by the State Government as to the repayment of principal and the payment of annual dividend at such minimum rate as 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 per 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 are 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 a specific direction from the Government.
Further, the directives proposed shall cover the period from 1987-88 and onwards.
4. The careful consideration of the alternatives as given above has confirmed that creation of dividend subvention fund would be in the Interest of the Corporation as well as that of Government. Therefore, we request you to kindly consider :
Creation of dividend subvention fund by the Corporation and the Government. Order may kindly be issued to this effect from the financial year 1987-88 onwards. The salient points which need to be covered in the G.O. are enclosed for favour of kind consideration.
We shall be highly obliged for Government's approval for the proposal of creation of the reserve, as detailed above........,...."
As already mentioned above, it is the above two letters addressed by the managing director to the State Government, that promoted the CIT(A) who passed the impugned order for the asst. yr. 1990-91, to take an adverse view of the matter and even to direct initiation of proceedings, imputing concealment of income by the assessee.
9. The learned counsel for the assessee contended that the Revenue authorities went wrong on both the counts, viz., in questioning the genuineness of the liability towards payment of guarantee commission; and in holding that there was no constructive payment. On the question of the genuineness of the liability, it is argued that the above-mentioned two letters constitute internal correspondence between the assessee-corporation and the Government, and such correspondence does not constitute 'orders of the Government', whereas the GO(Ms) No. 180, dt. 12th April, 1989, which we have extracted hereinabove, is an order enforceable in law. It is contended that the third parties are required to take cognisance of the G.O. Ms. of the State Government and not of the internal letters. It is also pleaded that the allowability of the expenditure by way of guarantee commission depends upon the following factors :
"1. Whether Corporation 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 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 asst. yr. 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 avoidance. For this proposition, he relied on the decision of the Supreme Court in CWT v. Arvind Narottam (1988) 173 ITR 479 (SC).
10. In his written submissions before us, the learned counsel for the assessee, also pleaded as under;
"The agreement between the assessee-company and the Andhra Pradesh Government is a valid and legal contract under the Indian Contract Act of 1872. The guarantee commission paid by the assessee-company to the Andhra Pradesh was a valid consideration under the Indian Contract Act. There was benefit to the promissor (Andhra Pradesh Government) and detriment to the promisee (APSFC). Neither the AO nor the CIT(A) has stated anywhere that the contract between the ASPFC and the Andhra Pradesh Government was a void contract or was an illegal contract."
It is also argued that as long as the expenditure is incurred for promoting business and to earn profit, assessee-corporation can claim deduction under the provisions of the IT Act, if it satisfies otherwise the tests laid down by the law for this proposition, he placed reliance on the decisions of the Supreme Court in Sassoon David & Co. (P) Ltd. v. CIT (1979) 118 ITR 261 (SC), and in Eastern Investments Ltd. v. CIT (1951) 20 ITR 1 (SC).
11. On the question of the constructive payment of the said guarantee commission, the learned counsel for the assessee filed before us an opinion dt. 19th May, 2001, given by Dr. N.R. Sivaswamy, Advocate and former Chairman, CBDT. It is mentioned in the said opinion that the assessee has been passing several adjustment entries for receipts and payments, even though it is actually following the cash system of accounting. For example, when some interest is payable to IDBI and there is a fresh loan sanctioned by IDBI to the assessee, there may be cash inflow of only loan minus interest payable to IDBI, as the interest payment is accounted for only by way of an adjustment entry. Similarly is the situation when the interest is receivable by the assessee from a party, and afresh 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 para 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 argument on the basis of the provisions of the Act. He further argued that as the commission in question is only credited to a reserve account, it cannot be allowed as a deduction. In this context, he relied on the decision of the apex Court in the case of Vellore Electric Corporation v. CIT (1997) 227 ITR 557 (SC). He also. referred to the correspondence exchanged between the assessee-corporation and the State Government, which we have extracted hereinabove, and mentioned that the entire exercise smacks of a tax planning device or subterfuge as held by the CIT(A) in the order for the asst. yr. 1990-91. He further pleaded that the device adopted by the assessee to reduce its tax liability is hit by the decision of the apex Court in the case of McDowell & Co. v. ITO (1985) 154 ITR 148 (SC).
13. We are of the view that the Revenue deserves to succeed, though we do not agree with some of the reasons that weighed with the Revenue authorities. Firstly, we hold that there is a constructive payment inasmuch as the amounts of the guarantee commission in question have been credited to the Dividend Subvention Fund Account, at the instance of the State Government. This can only be regarded as a payment by the assessee and redeposit by the State Government with the assessee. If the amount has been simply credited to the account of the Government in the books of the assessee, it would have remained a liability for the payment of guarantee commission. As the amount has been received back as credit to the Dividend Subvention Fund Account, the amount has changed its character and has come back to the assessee not as commission payable, but as credit to the Dividend Subvention Fund Account. We have also satisfied ourselves that there was sufficient cash balance with the assessee on the last day of the concerned accounting year, when the relevant adjustment entries by way of credit 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, 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 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 of approaching the State Government with a request to guarantee the said bonds and debentures. The State Government, when approached by the assessee-corporation for the guarantee of its bonds and debentures, has no opinion in respect of the said guarantee. In other words, the State Government cannot withhold its guarantee. It may be observed that the State Government is under a statutory obligation to extend its guarantee, and further, such guarantee has to be free. In other words, the State Government has no right to charge any commission. On the other hand, it is under a statutory duty to extend its guarantee free of consideration. When that is the statutory position, the question of considering the payment of guarantee commission by the assessee-corporation in the light of commercial principles or practices canvassed by the learned counsel for the assessee, does not arise. Commercial practices cannot override statutory position.
15. We have not been shown any statutory provision which enables the State Government to charge commission for the guarantee extended by it. We may however, mention that the learned counsel for the assessee has invited our attention to Section 39 of the State Financial Corporations Act, 1951, under which the State Government is empowered to give instructions to the assessee-corporation. The said provision reads as under :
"39. .Power to give instructions to Financial Corporation on questions of policy--
(1) In the discharge of its functions, the Board shall be guided by such instructions on questions of policy as may be given to it by the State Government in consultation with and after obtaining the advice of the Development Bank.
(2) If any dispute arises between the State Government and the Board as to whether a question is or is not a question of policy, the decision of the State Government shall be final.
(3) If the Board fails to carry 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, dt. 12th April, 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 dt. 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 State Government in terms of Section 7(1) of the State Financial Corporation Act. It is not a case where the State Government, overriding the stand of the assessee-corporation sought to impose on the assessee-corporation and extract from it the guarantee commission. The State Government started to charge the said commission 'at the instance and initiative of the assessee-corporation, as mentioned by the managing director of the assessee-corporation in his letter dt. 30th May, 1988. The said letter cannot be brushed aside as a simple piece of internal correspondence between the assessee-corporation and the State Government. While undoubtedly it is a piece of internal correspondence as claimed, it also highlights the background leading to the issue of the concerned G.O., relating to charging of the commission. No correspondence has been placed before us, which indicates that the assessee-corporation at any stage has sought to exercise its right in terms of Section 7 of the State Financial Corporations Act. The above correspondence reveals that it is the assessee who initially sought the charging of the said commission. Subsequently, the State Government declined to withdraw the said commission. The assessee-corporation sought the waiver only as a measure of concession from the Government. It never stood up to its statutory right in terms of s. 7 of the State Financial Corporations Act, to get free service of guarantee from the State Government. In the circumstances of the case, we are of the view that the said G.O. of the State Government charging the guarantee commission cannot override the statutory provisions as contained in Section 7 of the State Financial Corporations Act. Any Government order cannot be beyond the statutory provisions. In this view of the matter, we are of the view that there is no valid or legal liability on the part of the assessee to pay the guarantee commission in question for both the years. As such, it cannot be said that the amounts of guarantee commission are reasonable business expenditure of the assessee, allowable as deduction under the IT Act. We accordingly uphold the disallowance of the assessee's claims for the guarantee commission for both these years, and reject the contentions of the assessee in these appeals.
17. In the result, assessee's appeals are dismissed.