Guarantee commission not 'Levy' for the purposes of disallowance under Section 40(a)(iib) of the IT Act

The Income Tax Appellate Tribunal (ITAT) has ruled that guarantee commission paid by a state government undertaking is a contractual payment, not a 'levy' for the purposes of disallowance under Section 40(a)(iib) of the Income Tax Act. The tribunal found that such commission is paid for the state government's potential detriment and is not based on the government's power to impose a levy. Therefore, disallowing the guarantee commission under this section was deemed unsustainable.

In M/s. Krishna Bhagya Jala Nigam Ltd. v. Assistant Commissioner of Income Tax, Bangalore [ITA 3064 /BANG/2018, decided on November 10, 2021], Hon'ble Income Tax Appellate Tribunal, Bangalore ("ITAT") held that guarantee commission paid in consideration for the state government agreeing to suffer a detriment in the event of non-payment of the bonds on its maturity and is merely a contractual paymentand not levy.

M/s. Krishna Bhagya Jala Nigam Ltd ("the Appellant") challenged an Assessment Order dated September 29, 2018 ("Assessment Order") passed by the Assessing Officer ("AO"), disallowing the guarantee commission under Section 40(a)(iib) of the Income Tax Act, 1961 ("IT Act").

The Hon'ble ITAT observed that, for a transaction to qualify as a levy for the purpose of Section 40(a)(iib) of IT Act, the payment to the state government by a state government undertaking should be based on a power on the part of the state government to impose a levy, whereas guarantee commission is paid in consideration for the state government agreeing to suffer a detriment in the event of the assessee not repaying the value of the bonds on its maturity and is merely a contractual payment.

ITAT relied upon the case of Kerala State Beverages Corporation Ltd. v. ACIT [(2020) 116 taxmann.com 555] passed by Hon'ble Kerala High Court and observed that, guarantee is not exclusively given by the state government only to the Appellant, which is a State Government undertaking, but to various government departments, public sector undertakings, local authorities, statutory boards, corporations and co-operative Institutions etc.

Held that, in the present case guarantee commission is not paid directly to the state government and they are not levied exclusively on the Appellant and also held that guarantee commission does not fall under the ambit of levy.

Further held, that disallowance of guarantee commission under Section 40(a)(iib) of the IT Act is not sustainable and directed to delete the addition made in this regard.