TMI Blog2011 (10) TMI 443X X X X Extracts X X X X X X X X Extracts X X X X ..... ny which are offered as a security to the Bank. - It is not a lawful payment in the facts of the case and therefore, the Assessing Authority was fully justified in disallowing the said expenditure under Section 37 of the Act - Decided against the assessee - IT Appeal NO. 404 OF 2009 - - - Dated:- 15-10-2011 - N. KUMAR AND RAVI MALIMATH, JJ. K.V. Aravind and M.V. Seshachala for the Appellant. S. Parthasarathi, P. Dinesh and K. Mallaharao for the Respondent. JUDGMENT N. Kumar, J. The Revenue has preferred this appeal challenging the order passed by the Tribunal holding that the Commission paid to the Managing Director of the assessee Company is allowable as expenditure under Section 37 of the Income Tax Act, 1961. 2. The assessee M/s. United Breweries Ltd., is a public Company, carrying on business in Indian Made Foreign Liquor. The assessee filed the return of income on 31-12-1990 declaring the total income of Rs. 1,32,34,452/-. The return of income was processed under Section 143(1)(a) of the Income-tax Act 1961 (hereinafter referred to as 'the Act' for short). An intimation dated 30-4-1991 was issued to the assessee. Thereafter the assessment was taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company are sufficient to cover the risk element involved. The assessee Company has not ascertained the requirements of these guarantees, but has been paying repeated commissions year after year to its Chairman. The assessee Company contended that there is an element of risk undertaken by Sri Vijaya Mallya, the Chairman by extending these bank guarantees to the bankers. The assessing authority found, that the security offered in the form of assets of the Company adequately covered the risk element and there is no evidence to suggest that the bankers insisted on the personal guarantees of its Chairman. He was also of the view that there was no genuine business necessity of continuing with these guarantees. That they have not been renewed periodically in the light of the actual utilisation of the credit facilities. Therefore, the personal guarantee is a mere signature given long back. Therefore, he concluded by holding that there is no genuine service rendered to the Company. It is commensurate with the payment of commission made. It is an unwarranted benefit bestowed upon the Chairman of the assessee Company which is wholly excessive and unreasonable. Keeping in view the legitimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. None of the Companies have questioned the capability of Mr. Mallya, whether he can repay the loan amount, in case of any default on the part of the assessee Company. Most of the advances, loans, credit facilities to the assessee Company ware by Nationalised Banks, governed by Rules Regulations. When such whooping loans were extended by the Banks to the assessee Company, it is but quite natural to assume that sufficient care should have been taken by them before acceding to the assessee's request. If not, the deficiency would be at the doorstep of the Bank and not with the assessee Company. It was the Revenue's contention that there was no scientific basis for the payment of guarantee commission and it was only an innovative method of diverting the income from the Companies to M/s. Mc Dowell management. If so, the Revenue should have come up with documentary evidence to drive home its assumption. But nothing is forthcoming. On the other hand, in the General Body Meeting the shareholders who are the back bone of any industry for approving the payment of guarantee commission which is in fact being paid for the years. The Company Law Board has also reiterated that the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2) [***] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. (3) [***] (4) Notwithstanding anything contained in sub-section (1) or sub-section (3), - (i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest-house (such residential accommodation being hereafter in this sub-section referred to as "guest-house"); (ii) in relation to the assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest-house or depreciation of any assets in a guest-house: Provided that the aggregate of the expenditure referred to in clause (i) and the amount of any de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x others and thereafter proceed to pass the order in accordance with law. A reading of the aforesaid Judgment makes it clear that in M/s. Mc Dowell's case nothing is decided. On the contrary it is expressly stated that they are not answering the question of law and therefore that Judgment is of no assistance. The appellate Commissioner committed a serious error in setting aside the order passed by the appellate authority relying on the said Judgment which decided nothing. 6. The assessee placed reliance on the Judgment in the case of very same assessee in ITA No. 32/2001 disposed off on 2nd April, 2007, The second substantial question of law which is framed is as under:- "(ii) Whether the Tribunal was right in allowing guarantee commission paid to the Chairman of the Assessee Company, when he was not even competent to afford such guarantee?" It is answered as under:- This question is fully covered by the Judgment rendered in ITA 105/2009 dated 20.7.2006. Following the said judgment, the question No. (ii) is answered in favour of the assessee. In ITA No. 105/1999 the substantial question of law which arose for consideration is as under:- "Whether the tribunal was rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction had resulted in remuneration to the relatives of the Directors of the Company. The guarantee commission paid for securing the finances, and thus deduction was upheld." In Ayurvedic Sevasharam (P.) Ltd.'s case (supra) the question for consideration was whether the guarantee commission paid to the relatives of Directors for securing finances to the assessee, is it in the nature of remuneration for services rendered and is covered under Section 40(1). It was held that "Section 40(c) apply to the payments in so far as the relatives of the Directors. Section 40A(2), Clause (b)(ii), refers to an expenditure incurred by an assessee which is a company in respect of which payment has been or is to be made to any director or a relative of such director. This clause, thus, would apparently be applicable to the payments of guarantee commission to the relatives of the directors appearing in the list mentioned above. But the proviso to Section 40A(2) which controls it lays down that the provisions under the section shall not apply in the case of an assessee which is a company in respect of an expenditure to which Section 40(c)(i) applies. It follows that if the expenditure falls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company, when he was not even competent to afford such guarantee? (f) Whether the Tribunal was justified in deleting the disallowance of 50% of expenditure reimbursed to M/s. McDwell Company in regard to aircraft maintenance? (g) Whether the Tribunal was right in allowing the interest on loans taken by the respondent/assessee to set up a new unit without giving a factual finding that such activity constituted an extension of the business of the respondent/assessee? Insofar as guarantee commission paid to the chairman is concerned, in the impugned order they have set out the facts of the case, they have summarized the contention of both the parties, they have also summarized the contents of the annexures on which reliance is placed. They have also set out the orders/judgments on which reliance is placed and recorded the following reasons: "It is an undisputed fact that many banking institutions are insisting for a personal guarantee as an additional security for granting loans. In the instant case, Mr. Mallya stood guarantee for the credit facility availed by the assessee company for which Mr. Mallya had insisted for guarantee commission, As averred by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... originally during 1983-1985 were not renewed thereafter. In the case of Citi Bank, the credit facilities were reviewed from time to time and the maximum credit allowable was reduced. However, in the case of M/s. McDowell Co., the same GC from the beginning was paid even though credit facility was lowered; (iii) None of the banker had obtained the details of assets and liabilities of the guarantor in India; (iv) As per the Circulars of RBI dated 29/7/90 and in June, 86, the banks were required to ensure that the practice of giving guarantees was not used by the Directors as a source of remuneration from the borrowing Co. and the banks were also advised to obtain such an undertaking from the borrowing company; (v) As per the exchange Control Manual, prior permission of RBI was required to accept the guarantees of NRIs; and (vi) In view of changed status of Mr. Mallya from Resident to NRI, the bankers were not able to state as to whether the guarantee could be enforced against Mr. Mallya in the event of default. 12. Again at Para 4.7, the Tribunal has summarized the contents annexed to the appellate order as under: "Shri Vijay Mallya, Chairman of various companies incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as per the exchange Control Manual, prior permission of RBI was required to accept the guarantees of NRI's. The position of Mr. Mallya has changed from the status of a resident to NRI. The payment of guarantee commission is not a remuneration under Section 309 of the Companies Act. 13. In the light of the aforesaid observations the assessee has chosen to pay its Managing Director the commission on the pretext of his standing as a guarantor in respect of the loans borrowed by the assessee from various banks. In this context, the question that would arise for our consideration is, (i) Whether the guarantee commission paid to the Managing Director of a Company is allowable as an expenditure under Section 37 of the Act? (ii) Even if it is allowable, in the facts of the case it warrants such allowance? 14. In the instant case, we do not propose to go into the first question as we could dispose of the second question from the undisputed facts. 15. What is paid to the Chairman of the Company is a guarantee commission. The total amount borrowed from his group companies is to the extent of Rs. 115.32 crores and the guarantee commission paid is Rs. 1.15 crores i.e., 1% of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. The word "Commission" also fall for consideration in the said judgment and after referring to dictionary meaning it was held as under: 16. The word "Commission" is used occasionally to mean 'discount'. What is called 'commission', is a percentage deducted in the case of goods which are consigned the ordinary invoice price. It is in the nature of compensation paid to a person who has rendered service instead of paying remuneration. He has been paid compensation on percentage basis or on a price basis. The word "Commission" has some what different connotation and is used differently in different contexts. 17. In this background, if we look into the facts of this case, though the Chairman has stood as a guarantor in his personal capacity, the Banks have lent money not on the personal guarantee but on the assets of the Company which are offered as a security to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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