"1 \n \n \nIN THE INCOME TAX APPELLATE TRIBUNAL \n“C” BENCH, MUMBAI \n \nSHRI AMARJIT SINGH, ACCOUNTANT MEMBER \nSHRI RAHUL CHAUDHARY, JUDICIAL MEMBER \n \nITA No.4674/MUM/2024 \n(Assessment Year: 2019-2020) \n \nCredit Guarantee Fund For Micro Units \nGround Floor, C-11 G Block, Swavalamban Bhavan, \nBandra Kurla Complex, Bandra (East), \nMumbai-400051, Maharashtra \n[PAN:AABTC8975B] \n \n…………. \nAppellant \n \n \nNFAC (Deputy Commissioner of Income \nTax 23(1), Mumbai), Mumbai \nPiramal Chambers, Lalbaug, Parel, \nMumbai-400012 \n \nVs \n \n \n \n…………. \n \n \n \n \nRespondent \nITA No.4713/MUM/2024 \n(Assessment Year: 2019-2020) \n \nAssistant Commissioner of Income Tax 23(1) \nRoom No. 511, 5th floor, Piramal Chambers, \nLalbaug, Lower Parel, Maharashtra, \nMumbai-400012 \n \n…………. Appellant \n \n \n \nCredit Guarantee Fund For Micro Units \nGround Floor, C-11 G Block, Swavalamban \nBhavan, Bandra Kurla Complex, Bandra \n(East), Mumbai-400051, Maharashtra \n[PAN:AABTC8975B] \n \nVs \n \n \n \n…………. \n \n \n \n \nRespondent \nAppearance \nFor the Appellant /Department \n \nFor the Respondent /Assessee \n:\n \n:\nShri Dhaval Shah & \nShri Abhishek Choksy \nShri R.A. Dhyani (CIT-DR) \n \nDate \nConclusion of hearing \nPronouncement of order \n \n \n:\n:\n \n \n 30.01.2025 \n 21.03.2025 \n \n \n \nO R D E R \n \n[Per Rahul Chaudhary, Judicial Member: \n \n1. \nThese are cross-appeals for Assessment Year 2019-2020 preferred \nagainst the order, dated 18/05/2009, passed by the National \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n2 \n \nFaceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the \nCIT(A)’] under Section 250 of the Income Tax Act, 1961 \n[hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had \npartly allowed the appeals against the Assessment Order, dated \n28/09/2021, passed under Section 143(3) read with Section 144B of \nthe Act. \n \n2. \nThe Assessee has raised following grounds of appeal in ITA No. \n4674/Mum/2024 : \n \n“1. The Ld. CIT(A) has erred in law and in facts in not appreciating \nthat the assessment order passed u/s 143(3) r.w.s. 144B of \nthe Act dated 28.09.2021 is invalid and bad in the eyes of \nlaw. \n \n2. \nThe Ld. CIT(A) has erred in law and in facts in passing the \nappellate order u/s 250 of the Act in violation of principles of \nnatural justice. \n \n3. \nThe Ld. CIT(A) has erred in law and in facts in passing the \norder u/s. 250 of the Act dated 15.07.2024 partly confirming \nthe additions made in the assessment order passed u/s \n143(3) r.w.s. 144B of the Act dated 28.09.2021 which is bad \nand invalid in the eyes of law. \n \n4. \nThe Ld. CIT(A) has erred in law and in facts in partly \nconfirming the action of Ld. AO in making disallowance of \nprovision for claim payout amounting to Rs. 682,09,65,697/- \n[Rs. 903,60,99,374/- (-) Rs. 221,51,33,677/-].” \n \n3. \nThe Assessee has also raised the following additional ground on \n21/10/2024: \n \n“1. On the facts and circumstances of the case the Ld. CIT(A) has \nerred in law and in facts in not deleting entire addition of \nRs.978,76,84,517/- made by the Ld. Assessing Officer being \nthe closing balance of provision for claim payout as on \n31.03.2019. \n \n2. \nOn the facts and circumstances of the case, the Ld. CIT(A) \nerred in law and in facts in holding that the expenses to the \nextent of actual payout during the year shall be allowed and \nthe amount if provided in earlier years shall be reversed back \nand added to income.” \n \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n3 \n \n4. \nHaving considered the rival submissions and on perusal of record, \nwe admit the Additional Ground No. 1 & 2 raised by the Assessee in \nview of the judgment of the Hon’ble Supreme Court in the case of \nNational Thermal Power Co. Ltd. Vs. CIT: 229 ITR 383 since the \nadditional ground can be adjudicated on the basis of material \nalready on record. \n \n5. \nThe Revenue has raised following grounds of appeal in ITA \nNo.4713/Mum/2024 : \n“i. Whether on the facts and circumstances of the case and in \nlaw, the ld. CIT(A) has erred in allowing deduction of \nRs.221,51,33,677/- from the assessed income which is not a \npart of assessed income as no disallowance has been made of \nthis amount?. \n \nii. \nWhether on the facts and circumstance of the case and in \nlaw, the Ld. CIT(A) erred in allowing the deletion of unutilized \nprovision of Rs.75,15,85,143/- without giving any proper \nreason.” \n \n6. \nSince all the grounds raised in the cross-appeals are connected and \narise from same factual matrix, all the grounds are taken up \ntogether hereinafter. \n \n7. \nThe Assessee is a trust set up under the Prime Minister Mudra Yojna \n(PMMY) vide Trust Deed, dated 30/03/2016, with National Credit \nGuarantee Trustee Company Limited as its trustee. The purpose of \nthe Assessee-trust is to provide credit guarantee to various banks in \nthe country in respect of loans given by such banks to customers in \ninformal sectors of the society who find it difficult to access formal \nsystem of credit. The Assessee charges Guarantee Fees from banks \nagainst the aforesaid guarantee cover. The scheme is designed to \ncover guarantees of micro loans upto Rs. 10 lakhs and other \nbenefits. \n \n8. \nFor the relevant previous year, the Assessee filed its return of \nincome declaring total income of INR.127,07,98,130/- which was \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n4 \n \nselected for regular scrutiny. During the course of assessment \nproceedings, the Ld. Assessing Officer observed that the Assessee \nhas claimed deduction in respect of Provision for Claim Pay Out of \nINR.9,03,60,99,374/- and has shown Closing Balance of Provision \nfor Claim Pay Out as INR.9,78,76,84,517/- in the financial \nstatements for the relevant previous year. Therefore, a show cause \nnotice was issued to the Assessee seeking explanation in this \nregard. In the aforesaid notice it was stated that the Assessee had \nclaimed deduction for Provision for Claim Pay Out on accrual basis \nwhereas the Guarantee Fees was accounted for and offered to tax \non receipt basis. It was alleged that the Assessee was following a \nhybrid system of accounting which was not permitted. Thus, the \nAssessee was asked to justify the deduction for Provision for Claim \nPay Out of INR.9,03,60,99,374/- claimed by the Assessee. In \nresponse to the aforesaid show cause notice, the Assessee filed \nreply explaining that Assessee was following accrual system of \naccounting (and not hybrid system of accounting). The Guarantee \nFees accrued to the Assessee and was paid to the Assessee on \nexecution of contract for providing guarantee cover. Thus, in the \ncase of the Assessee the guarantee cover started on payment of \nguarantee fee only and therefore, the accrual as well as the receipt \nwas on the same date. However, the Assessing Officer was not \nconvinced. The Assessing Officer concluded that the Assessee was \nfollowing hybrid system of accounting and made addition of \nINR.978,76,84,517/-, being closing balance of Provision for Claim \nPay Out, in the hands of the Assessee. \n \n9. \nBeing aggrieved, the Assessee preferred appeal before the CIT(A) \nand explained that the Provision for Claim Pay Out was an allowable \nexpense as the Assessee was following accrual system of accounting \nand that the deduction was claimed on the basis of independent \nactuarial report. The CIT(A) partly allowed the appeal preferred by \nthe Assessee vide order dated 15/07/2024. The CIT(A) observed \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n5 \n \nthat in the actuarial report furnished by the Assessee, the Provision \nfor Claim Pay Out was computed on ad-hoc basis. Further, Claim \nPay Out amount would materialised only upon the loan and upon \nguarantee cover being invoked. Therefore, the Provision for Claim \nPay Out was in the nature of a contingent liability in respect of \nwhich deduction could not have been allowed to the Assessee. \nHowever, the CIT(A) allowed deduction in respect of actual Pay Out \nof INR.221,51,33,677/- made during the relevant previous year \nsubject to the condition that deduction in respect of the same was \nnot allowed in earlier years on creation of Provision for Claim Pay \nOut. The CIT(A) granted relief to the Assessee by holding that \naddition of the opening balance of Provision for Claim Pay Out \namount to INR.75,15,85,143/- was not warranted. Thus, in terms of \nthe aforesaid, the CIT(A) granted relief to the extent of \nINR.296,67,18,820/-(INR.221,51,33,677/- + INR.75,15,85,143/-). \n \n10. \nBeing aggrieved, both, the Assessee as well as the Revenue had \ncome in appeal before the Tribunal. \n \n11. \nWe have heard both the sides, perused the material on record and \nexamined the position in law in view of the submissions advanced. \n \n12. \nThe issue that arises for consideration before the Tribunal is \nwhether the Provision for Claim Pay Out created during the relevant \nprevious year was allowable deduction in the hands of the Assessee. \nAll the grounds/additional ground raised by the both the sides \npertain to the aforesaid issue and in order to address the same, it \nwould be pertinent to ascertain the nature of Claim Pay \nOut/Provision for Claim Pay Out. \n \n13. \nWe find that the finding retuned by the CIT(A) that a copy of Trust \nDeed was not filed before the Assessing Officer is factually incorrect. \nA copy of the Trust Deed was filed by the Assessee before the \nAssessing Officer along with submission, dated 23/09/2021 [placed at \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n6 \n \nPage No.173 and 15-40 of the Paper Book]. On perusal of the Trust Deed \nalong with Notification [S.O.1443(E)], dated 18/04/2016, whereby \nthe Scheme known as Credit Guarantee Funds for Micro Units \n(hereinafter referred to as ‘Scheme’) was notified, it becomes clear \nthat the Assessee-trust was established to increase access to and \navailability of micro-loans to the eligible micro units and by \nproviding guarantee cover to lenders (Banks/NBFCs/Financial \nIntermediaries) giving loans and advances without collaterals and/or \nthird party guarantees to the eligible Micro Units. As per paragraph \n4.1 of the Trust Deed the Scheme was to be operationalised and \nimplemented by the Trustees (National Credit Guarantee Trustee \nCompany \nLimited). \nThe \nScheme \nguaranteed \npayment \nto \nBanks/NBFCs/MFIs/Other financial intermediaries in the event of \ndefault in repayment of micro loans extended to the eligible \nborrowers. The relevant extract of the Scheme reads as under: \n \n \n“CHAPTER II : SCOPE AND EXTENT OF THE SCHEME \n \n3. \nGuarantees by the Fund \n \ni. \nSubject to the other provisions of the Scheme, the \nFund undertakes in relation to loans extended to an \neligible micro unit by a lending institution which has \nentered into the necessary agreement for this purpose \nwith the Fund, to provide guarantee against default in \nrepayment of micro loans extended by the lending \ninstitutions. \n \nii. \nThe Fund reserves the discretion to accept or reject \nany proposal referred by a leading institution which \notherwise satisfies the norms of the Scheme. \n \n4. \nMicro loans eligible under the Scheme: \n \nThe Fund shall cover micro loans up to the specified limit \n(currently \nRs.10 \nlakh) \nextended \nby \nMember \nLending \nInstitution(s) to an eligible borrower, provided that the \nlending institution applies for guarantee cover in respect of \nsuch loans so sanctioned within such time period and as per \nprocedures prescribed by the Pond for the purpose. Further, \nOverdraft loan amount of Rs.5,000/- sanctioned under PMJDY \naccounts shall also be eligible to be covered under Credit \nguarantee Fund. \n \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n7 \n \nIt may be noted that micro loans under PMMY inclusive of \noverdraft under PMUDY, sanctioned since April 2015 would \nqualify for guarantee cover under the scheme \n \nThe Fund may, at its discretion, approve/frame a list of \nMember Lending Institutions and for their schemes, for which \nthe guarantee cover will be available, or a negative list for \nwhich the guarantee cover shall not be available \n \n5. \nxx \nxx \n6. \nAgreement to be executed by the lending institution \nA landing institution shall not be entitled to a guarantee in \nrespect of eligible Micro Loan granted by it unless it has \nsubmitted an undertaking with the Fund in such form as may \nbe required by the Fund for covering by way of guarantee, \nunder the Scheme all the eligible Micro Loans granted by the \nlending institution, for which provision has been made in the \nScheme. \n7. \nResponsibilities of lending institution under the Scheme \ni. \nThe lending institution shall evaluate Micro Loans in \naccordance with the guidelines issued by Reserve Bank \nof India/the Fund and conduct the account(s) of the \nborrowers with normal lending prudence. \nii. \nThe lending institution shall pool all its outstanding micro \nloans extended against sanctioned effected on or after \nApril 08, 2015 as the end of the quarter (quarter ended \nMarch, June, September and December) as part of the \nportfolio during the base year and ensure to submit the \ninformation required by NCGTC for giving guarantee \ncover with regard to the micro borrowal account during \nthe currency of the portfolio. \niii. The MLI would need to furnish a Statutory Auditor \nCertificate/ Management Certificate as prescribed by the \nFund from time to time, certifying the following: \n(a) All accounts in the portfolio conform to eligible \nmicro loans sanctioned after the date of April 08, \n2015. \n(b) All accounts covered in the initial portfolio as well \nas \nnew \naccounts \nadded \nin \nthe \nportfolio \nsubsequently, are standard accounts. \n(c) All accounts which have turned NPA within the \nportfolio and for which claim has not been lodged \nhave to be included in the portfolio on which the \nguarantee fee is payable. \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n8 \n \niv. The statutory auditor/management shall certify the \namount of non-performing asset of the crystallized \nportfolio as on the date of March 31 every year, by the \nsecond quarter of every financial year from the date of \ncrystallization of the portfolio, during the currency of the \nportfolio. \nv. \nThe lending institution shall closely monitor the borrower \naccount and follow up for repayment. \nvi. The payment of guarantee claim by the Fund to the \nlending institution does not in any way take away the \nresponsibility of the lending institution to recover the \nentire outstanding amount of the credit from the \nborrower with applicable interest. The lending institution \nshall exercise all the necessary precautions and maintain \nits recourse to the borrower for entire amount of micro \nloan owed to it and initiate such necessary actions for \nrecovery of the outstanding amount, including such \naction as may be advised by the Fund. \nvii. The lending institution shall comply with such directions \nas may be issued by the Fund, from time to time, for \nfacilitating recoveries in the guaranteed account, or \nsafeguarding its interest as a credit guarantor, as the \nFund may deem fit and the lending institution shall be \nbound to comply with such directions. \nviii. The lending institution shall, in respect of any guaranteed \naccount, exercise the same diligence in recovering the \ndues, and safeguarding the interest of the Fund in all the \nways open to it as it might have exercised in the normal \ncourse if no guarantee had been furnished by the Fund. \nThe lending institution shall, in particular, refrain from \nany act of omission or commission, either before or \nsubsequent to invocation of guarantee, which may \nadversely affect the interest of the Fund as the \nguarantor. In particular, the lending institution should \nintimate the Fund while entering into any compromise or \narrangement, which may have effect of discharge or \nwaiver of personal guarantee(s) or primary security. \nFurther, the lending institution shall secure for the Fund \nor its appointed agency, through a stipulation in an \nagreement with the borrower or otherwise, the right to \npublish the defaulted borrowers' names and particulars \nby the Fund. \nix. The lending institution shall provide the performance \nreview of the portfolio at the transaction level as at the \nend of every financial year, including base year, in the \nmanner as prescribed by the Fund. \nCHAPTER III: FEE STRUCTURE \n \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n9 \n \n8. \nGuarantee Fee \n \ni. \nFor availing the guarantee coverage, the Member \nLending Institution shall pay guarantee fee as under: \n \na) \n During the base year (year of portfolio built-up) - \nGuarantee fee will be paid on the sanctioned \namount corresponding to the outstanding balance \nof the quarterly built up balance of the portfolio of \nmicro loans for the full year or the broken period \ni.e. till March 31 of subsequent year, as the case \nmay be, and the Guarantee will be valid upto the \nend of that financial year. It may be noted that for \nsuch \nsanctioned \ncases \nwhich \nhave \nbeen \ncancelled/repaid/pre-paid/taken over during the \ncurrency of the portfolio, no guarantee fee shall be \ncharged for such sanctioned cases in the portfolio \nand no guarantee cover would be applicable. \n \nb) During subsequent years. The guarantee fee will be \npaid on the sanctioned amount corresponding to \nthe outstanding balance (including on accounts \nwhich have turned NPA) of the crystallized portfolio \nduring the currency of the portfolio and Guarantee \nwill be valid unto the end of that financial year \nGuarantee fee with respect to NPA accounts in the \nportfolio would continue to be paid till lodgment of \nclaim for such accounts, at a rate specified by the \nFund on the amount or fee based on risk based \npricing/such other amount on such reference dates \nor specified rate act by the Fund from time to time \n(risk based guarantee for components given at \nAttachments in respect of 5 Models). \n \nThe portfolio as at the end of third year from the \ndate of crystallization will be finally settled and \nterminated. \nThe \noutstanding \nbalance \nof \nthe \nterminated portfolio at the end of the third year will \nbe deemed to be a new portfolio and could be \nmerged with the current portfolio of that year at \nthe discretion of the lending institution. \nii. \nGuarantee fee shall be paid within 16 days from the end \nof the quarter. (The MLI would need to furnish a \nManagement Certificate within 7 days from the of the \nthe quarter, after which, a Credit Guarantee Demand \nAdvice Note [CGDAN] would be issued by NCGTC within \n3 day of receipt of Management Certificate and \nsubsequently, the guarantee fee shall be payable within \n3 days from the issue of CGDAN) \niii. \nAll cases within the portfolio for which the guarantee \nfee has been paid by MLI, would be covered under the \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n10 \n \ncredit guarantee scheme subject to the loan accounts \nwithin the portfolio being eligible micro loans. \n \niv. \nThe Fund may at its discretion, charge risk based \npricing i.e., different guarantee fees for different \nMember Lending Institutions depending on their credit \nrating, NPA levels, claim payout ratio, geographical \nspread, etc; or such other parameters as per the \nexperience of the Fund based on the performance of \nthe portfolios of the respective MLIs. \n \nv. \n Provided further that in the event of non-payment of \nguarantee fee within the stipulated time or such \nextended time that may be agreed to by the Fund on \nsuch terms, liability of the Fund to guarantee such credit \nfacility would lapse in respect of those credit facility \nagainst which the fee is due and not paid. \n \nvi. \nThe amount equivalent to the guarantee fee payable by \nthe eligible lending institution may be recovered by it, at \nits discretion from the eligible borrower \n \nvii. The guarantee fee once paid by the lending institution to \nthe Fund shall be non-refundable, except under certain \ncircumstances like. \n \n \nExcess remittance, \n \nRemittance made more than once against the \nsame portfolio, \n \nFee paid in advance but application not approved \nfor guarantee cover under the scheme, etc \n \nCHAPTER IV: GUARANTEES \n \n9. \nExtent of the guarantee \n \ni. \nIn the nature of 'First Loss Portfolio Guarantee, wherein \nfirst loss to the extent of 5% of the crystallized \nportfolio of the MLI, will be borne by the MLI and \ntherefore, will be excluded for the claim. Out of the \nbalance portion, the \"extent of guarantee' will be to a \nmaximum extent of 50% of \"Amount in Default' in the \nportfolio or such other percentage as may be specified \nby the Fund from time to time on a pro-rata basis. \n \nii. \nThe guarantee cover will commence from the date of \npayment of guarantee fee and shall run through the \nagreed tenure of the repayment of Micro loan or the \ntermination date of the portfolio, whichever is earlier, \nsubject to yearly renewal of the guaranteed portfolio. \n \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n11 \n \niii. \nThe overall guarantee payout for an MLI would be linked \nto exposure norms/payout caps as may be specified by \nthe Fund from time to time \n \nCHAPTER V: CLAIMS \n \n10. \nInvocation of guarantee \n \ni. \nThe lending institution may invoke the guarantee in \nrespect of the 'amount in default' out of the crystallized \nportfolio of micro loans, subject to the condition of first \nloss guarantee, after 1 year from the date of \ncrystallization of the portfolio and thereafter, at the end \nof every financial year. \n \nii. \nThe MLI shall furnish a statutory auditor/management \ncertificate confirming that the amount due and payable \nto the lending institution in respect of the micro loan has \nnot been paid and the dues have been classified by the \nlending institution as Non Performing Asset. Provided \nthat the lending institution shall not make or be entitled \nto make any claim on the Fund in respect of the said \nmicro loan if the loss in respect of the said credit facility \nhad occurred owing to actions/decisions taken contrary \nto or in contravention of the guidelines issued by the \nFund. The certificate shall also mention the percentage \nof the amount in default borne by the MLI towards first \nloss. \n \niii. \nThe claim should be preferred by the lending institution \nin such manner and within such time as may be \nspecified by the Fund in this behalf. \n \niv. \nThe Fund shall pay eligible claim amount on preferring of \nclaims by the lending institution, within 60 days, subject \nto the claim being otherwise found in order and \ncomplete in all respects. The Fund shall pay to the \nlending institution interest on the eligible claim amount \nat the prevailing Bank Rate for the period of delay \nbeyond 60 days. On a claim being paid, the Fund shall \nbe deemed to have been discharged from all its liabilities \non account of the guarantee in force in respect of the \nborrower concerned. \n \nv. \nThe lending institution shall be liable to refund the claim \nreleased by the Fund together with penal interest at the \nrate stipulated by the Fund, if such a recall is made by \nthe Fund in the event of deficiencies having existed in \nthe matter of appraisal/renewal/follow-up/conduct of the \nmicro loan or where lodgment of the claim was more \nthan once or where there existed suppression of any \nmaterial information on part of the lending institutions \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n12 \n \nfor the settlement of claims. The lending institution shall \npay such penal interest, when demanded by the Fund, \nfrom the date of the initial release of the claim by the \nFund to the date of refund of the claim. \n \n11. \nSubrogation of rights and recoveries on account of claims \npaid \n \ni. \nThe lending institution shall furnish to the Fund, the \ndetails of its efforts for recovery, realizations and such \nother information as may be demanded or required from \ntime to time. \n \nii. \nEvery amount recovered and due to be paid to the Fund \nshall be paid without delay, and if any amount due to \nthe Fund remains unpaid beyond a period of 30 days \nfrom the date on which it was first recovered, interest \nshall be payable to the Fund by the lending institution at \nthe rate stipulated by the Management Committee for \nthe period for which payment remains outstanding after \nthe expiry of the said period of 30 days.” \n14. \nOn perusal of the above we find that the Guarantee Fee is paid for a \ncontract between the Assessee and Member Lending Institution \n(MLI) for providing guarantee cover to the MLI. The accounting \npolicy on ‘Revenue Recognition’ states – ‘Guarantee fees is accrued \non receipts of contacted amount from the member lending \ninstitutions’. The Assessing Officer has interpreted the same to \nmean that the Guarantee Fee is recognized by the Assessee on \nreceipt basis. In our view, the aforesaid interpretation adopted by \nthe Assessing Officer is not correct given the \nfacts and \ncircumstances of the present case. Paragraph 9. ii. of the Scheme \n[reproduced hereinabove] specifically states – ‘The guarantee cover \nwill commence from the date of payment of guarantee fee….’. Thus, \nthe guarantee cover generally commences on payment of Guarantee \nFee only. Therefore, it cannot be said that the Assessee is following \nreceipt basis of accounting for recognition of Guarantee Fee since in \nthe present case there is (a) either no difference in the accrual and \nreceipt of Guarantee Fee, or (b) the receipt of Guarantee Fee \nprecedes the accrual of corresponding risk to providing guarantee \ncover. We also find merit in the contention of the Assessee that \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n13 \n \nGuarantee Fee is akin to insurance premium which is payable at the \nstart of the period covered. The moment Guarantee Fee is received \nthe corresponding liability to pay the guarantee amount in case of a \nClaim Pay Out as per the terms of the Scheme and the applicable \nagreement gets triggered. Thus, while the liability to pay Claim Pay \nOut is a ‘liability in presenti’, the actual quantum of the aforesaid \nliability as well as the time of the actual Claim Pay Out would \ndepend upon the facts and circumstances of each case of event of \ndefault committed by the eligible borrower and corresponding claim \nmade by the MLI in terms of Chapter IV of the Scheme dealing with \nthe extent of Guarantee. Therefore, we reject the contention of the \nRevenue that the liability to make payment towards Claim Pay Out \nis a contingent liability. \n \n15. \nIn the present case the Assessee follows accrual basis of accounting \nand makes a provision for making payment towards Claim Pay Out \ncorresponding to the Guarantee Fee recognized as income during \nthe relevant previous year on the basis of actuarial report obtained \nfrom independent actuarial valuer. While the Assessing Officer had \nmade disallowance in respect of Provision for Claim Pay Out on the \nground that the Assessee follows hybrid system of accounting, we \nnote that the CIT(A) has observed that the Provision for Claim Pay \nOut made by the Assessee is based upon actuarial valuation report \nwherein ad-hoc rate has been used for creating the provision. On \nperusal of the material on record, we find that the fact the actuarial \nvaluation report had used the expression ‘ad-hoc rate’ has lead to \nthe formation of opinion by the CIT(A) that the Provision for Claim \nPayout has been prepared on ad-hoc basis. However, in our view, \nthat it not the case in the matter before us. We find that in the \n‘Actuarial Valuation Report’ (as at 31/03/2018), the independent \nactuary had noted that out of expected defaults, the Assessee is \nliable to make payments after excluding 1st 5% of the gross loan \namount which will be borne by the MLI, thereafter, out of balance \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n14 \n \nportion, the extent of guarantee is maximum to the extent of 50% \nof the amount of default. Further, there is an upper cap on the total \nClaim Pay Out at 15% of the total loan sanctioned amount. The \nindependent actuary had further observed that the relevant \nprevious year was the second year of valuation and there was a \nlock-in-period of 18 months for lodging the claims with the \nAssessee. It was opined that the using proxy default rates sourced \nfrom similar loans given was considered but rejected in view of the \ndifference between the terms of the Scheme and the target \nborrower. Thereafter, default rates, which were reasonable in the \nopinion of the actuary, were adopted to arrive at the total expected \nClaim Pay Out (as on 31/03/2018) of INR.296,67,18,820/-. The \nRevenue has not doubted the bonafides of the actuarial valuation. \nThe contention of the Revenue is that the rate of default has been \ndetermined on an ad-hoc basis. We note that the CIT(A) has \nallowed deduction for actual amount of Claim Pay Out. In our view, \nthe CIT(A) has, in effect, allowed the Assessee to claim deduction \nfor Pay Out on payment basis even though the Assessee was \nfollowing accrual basis of accounting and therefore, the approach \nadopted by the CIT(A) cannot be countenanced. \n \n16. \nDuring the course of hearing the Learned Authorised Representative \nfor the Assessee had also submitted that Trustee of the Assessee-\nTrust (i.e., National Credit Guarantee Company) is also a trustee of \nother similar schemes of the Government wherein identical \naccounting, provisioning etc was carried out. In all other entities \nwhere assessment proceedings are carried out, the Ld. Assessing \nOfficer had, after making inquiries relating to provision for claim \npayouts, has allowed the deduction claimed in the assessment \norder. Copies of the following assessment orders were placed on \nrecord during the course of hearing [at Page 92-144 of the paper-\nbook]: \n \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n15 \n \nSr. \nNo. \nName \nof \nthe \nassessee \nAssessment \nYear \nDate of \nOrder \nPage No. of \npaperbook \n1. \nEmergency Credit \nLine \nGuarantee \nScheme Trust \n2023-24 \n19.11.2024 \n93-99 \n2. \nEmergency Credit \nLine \nGuarantee \nScheme Trust \n2022-23 \n23.02.2024 \n100-105 \n3. \nLoan \nGuarantee \nTrust \nFund \nfor \nCovid \nAffected \nSectors \n2022-23 \n22.01.2024 \n106-111 \n4. \nCredit Guarantee \nTrust Fund For \nMFIS \n2022-23 \n28.02.2024 \n112-117 \n5. \nCredit Guarantee \nFund \nFor \nEducation Loans \n2022-23 \n22.03.2024 \n118-131 \n6. \nCredit Guarantee \nFund \nFor \nskill \nDevelopment \n2022-23 \n22.03.2024 \n132-140 \n7. \nCredit Guarantee \nFund For Stand \nUP India \n2022-23 \n05.03.2024 \n141-144 \n \nIt was submitted that considering the uniform stand adopted by \nRevenue, in the present case also the deduction for Provision for \nClaim Payout be allowed in the case of the Assessee. It was further \nsubmitted \nthat \nfor \nimmediately \npreceding \nassessment \nyear \n(Assessment Year 2018-2019) and for immediately succeeding \nassessment year (Assessment Year 2021-2022) no addition on \naccount of Provision for Claim Pay Out was made has been made in \nthe assessment order passed under Section 143(3) of the Act. We \nhave perused copy of the assessment orders passed under Section \n143(3) of the Act in case of the Assessee for Assessment Years \n2017-18, 2018-19 and 2021-22 [placed at Pages 85 to 91 of the Paper-\nBook] to support the above facts. We find that similar language has \nbeen used in the actuarial valuation report of for the Assessment \nYear 2018-2019 issued by the same actuary. Therefore, we find \nmerit in the contention advanced on behalf of the Assessee to the \neffect that even on the principle of consistency addition made on \naccount of Provision for Claim Pay Out should be deleted. \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n16 \n \n \n17. \nDuring the course of hearing, the Assessee was directed to submit \nthe details regarding the actual Claim Pay Outs and in response to \nthe same the Assessee furnished following details: \nSr. \nNo. \nAssessment \nYear \nOutstanding \nguarantee \nissued \ntowards loans \nas on year \nend \n(INR Crores) \nProvisions for \nclaim payout \nmade during \nthe year \n(claimed as \nexpense) \n(INR Crores) \nAmount of \nNPAs of \nrespective \nyears settled \nand paid on \napproval \n(INR Crores) \n1. \n2016-17 \n6,705.55 \n- \n489.80 \n2. \n2017-18 \n16,902.08 \n37.13 \n506.18 \n3. \n2018-19 \n39,966.46 \n425.44 \n1,077.26 \n4. \n2019-20 \n50,848.61 \n903.61 \n926.55 \n5. \n2020-21 \n54,990.46 \n1,431.66 \n529.65 \n6. \n2021-22 \n71,067.94 \n2,667.30 \n1,817.50 \n7. \n2022-23 \n74,262.57 \n6.78.77 \n687.41 \nTotal \n6,170.91 \n6,034.56 \nDifference between provision and claims settled \n136.56 \n% Difference between provision and claims settled \n2.21% \n \n18. \nWe note that the CIT(A) had allowed deduction for actual Claim Pay \nOut. On perusal of the above details, it can be seen that the \nProvision for Claim Payout created for Assessment Year 2019-2020 \nwas less than the actual Claim Pay Out. Further, on an overall basis \n(i.e. from A.Y. 2016-2017 till A.Y. 2022-2023), the aggregate \ndifference between the Provisions for Claims Pay Out and actual \nClaim Payout was only 2.21% only. Further, the Assessee has been \ngranted exemption from income tax under Section 10(46B) of the \nAct by the Finance Act, 2023. \n \n19. \nIn view of the aforesaid, we overturn the finding returned by the \nCIT(A) that the Provision for Claim Pay Out has been created on ad-\nhoc basis. In our view, the Assessee has created provisions for the \nliability to make payment towards Claim Pay Out on the basis of \nactuarial report furnished by an independent actuary after \napplication of mind to the attendant facts and circumstances. The \nProvision for Claims Pay Out so created is an ascertained liability \nkeeping in view the provisions of the Trust Deed, the Scheme and \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n17 \n \nthe applicable agreement. Therefore the order passed by the \nAssessing Officer and the CIT(A) in relation to Provision for Claim \nfor Pay Out is set aside and the Assessing Officer is directed to grant \ndeduction for Provisions for Claim Pay Out created during the \nrelevant previous year. \n \n20. \nOur above view draws strength form the following decision of the \nCo-ordinate Bench of the Tribunal in the case of (a) Credit \nGuarantee Fund for Micro and Small Enterprises v. ITO (157 \nTaxmann.com 417(Mum), and (b) Credit Guarantee Fund for Micro \nand Small Enterprises v. DCIT [169 Taxmann.com 471(Mum)]. \n \n21. \nIn view of above (a) Ground No.4 and Additional Ground No.1 and 2 \nraised by the Assessee are allowed. Consequently, Ground No.1, 2 \nand 3 raised by the Assessee are dismissed as having been \nrendered infructuous and not pressed and (b) Ground No.1 to 2 \nraised by the Revenue are dismissed. \n \n22. \nIn \nresult \nappeal \npreferred \nby \nthe \nAssessee \n[ITA \nNo.4674/Mum/2024] is partly allowed & appeal preferred by the \nRevenue [ITA No.4713/Mum/2024] is dismissed. \n \nOrder pronounced on 21.03.2025. \n \n \n \n \n \n \n \nSd/- \nSd/- \n(Amarjit Singh) \nAccountant Member \n \n \n(Rahul Chaudhary) \n Judicial Member \n \n \n \nमुंबई Mumbai; िदनांक Dated : 21.03.2025 \nMilan, LDC \n \n \n\nITA No.4674/Mum/2024 & ITA No.4713/Mum/2024 \nAssessment Year 2019-2020 \n \n18 \n \n \n \nआदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : \n1. \nअपीलाथŎ / The Appellant \n2. \nŮȑथŎ / The Respondent. \n3. \nआयकर आयुƅ/ The CIT \n4. \nŮधान आयकर आयुƅ / Pr.CIT \n5. \nिवभागीय Ůितिनिध ,आयकर अपीलीय अिधकरण ,मुंबई / DR, \nITAT, Mumbai \n6. \nगाडŊ फाईल\n \n / Guard file. \n \n \n आदेशानुसार/ BY ORDER, \n \nसȑािपत Ůित //True Copy// \n उप/सहायक पंजीकार /(Dy./Asstt. Registrar) \n आयकर अपीलीय अिधकरण, मुंबई / ITAT, Mumbai \n \n \n \n \n"