Guarantee fees payable to government converted into equity capital is allowable expenditure u/s 37

The Income Tax Appellate Tribunal (ITAT) in the case of Maharashtra State Road Development Corporation Ltd. Vs. ACIT held that conversion of guarantee fee paid to the government into equity capital by Government of Maharashtra does not change the character of expenditure, therefore it is an allowable expenditure u/s 37 (1) of the Income Tax Act (the Act).

In this matter, the assessee is a company owned by Government of Maharashtra. Government of Maharashtra had taken a decision in its meeting to provide government guarantee to the assessee by charging a guarantee fee at the rate of 0.25% for the projects. Further, the government of Maharashtra in a cabinet meeting decided to charge guarantee fee and subsequently to convert guarantee fee into equity share capital of the assessee. In terms of those resolutions assessee was to pay ₹ 9000 283 lakhs as a guarantee fee to government of Maharashtra which was to be converted into equity share capital of the assessee company. In the return filed by the assessee, guarantee fee was claimed as expenditure. The ld. Assessing Officer disallowed the claim made by the assessee stating that this arrangement is nothing but increasing revenue loss on one hand and simultaneously increasing capital of the company.

Assessee preferred appeal before the ld. CIT (A) who also confirmed the same.

Aggrieved by the above order, assessee filed appeal before the tribunal. ITAT stated that mere conversion of  guarantee fees payable to the government of Maharashtra into equity capital does not change the character of expenditure and it is just a manner of payment to government. Further, the conversion of guarantee fee is als

o backed by the Cabinet committee decision of the government of Maharashtra. Therefore, it cannot be stated that these are mere paper transactions. In view of this, corporate guarantee fee payable by the assessee to the government of Maharashtra is an expenditure incurred by the assessee during the year for the purposes of the business therefore it is allowable to the assessee under the provisions of Section 37 (1) of the Act.

To Read More Download PDF Given Below: