TMI Blog1999 (8) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the circumstances of the case, the Tribunal was justified in holding that the disallowance out of remuneration, perquisites, etc. of the employee-directors of the assessee-company has to be worked out under s. 40(c) and not under s. 40A(5) of the IT Act, 1961 ?" 2. The assessee is a limited company. The controversy in this reference pertains to the asst. yr. 1978-79. During the relevant previous years, the assessee-company paid guarantee commission of Rs. 91,194 to its managing director for giving personal guarantee to various banks and insurance companies for the loans advanced by them to the assessee-company. The ITO included the above amount in the remuneration paid to the managing director for the purpose of working out the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sections. Mr. Bhogani, learned counsel for the assessee, on the other hand, submits that the ceiling prescribed under s. 43(c) or 40A(5) of the Act is only in respect of the expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company. In this case, the guarantee commission paid to the managing director, according to learned counsel for the assessee, is not an expenditure which results directly or indirectly in the provision of any remuneration to the managing director who stood guarantee for the loans given by the banks to the assessee-company. The contention of learned counsel is that the guarantee commission is paid fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Our attention has also been drawn to the circular dt. 16th Feb., 1994, issued by the Department of Company Affairs of the Government of India by which in view of the decision of the Delhi High Court in Suessen Textile Bearing Ltd. vs. Union of India (1984) 55 Comp. Cas, 592, the earlier circular dt. 16th Feb., 1969, according to which guarantee commission payable to the directors for personal guarantee on loans to the company was to be treated as remuneration under s, 309(1) of the Companies Act, 1956, has been withdrawn. 4. We have carefully considered the rival submissions. The controversy is in a narrow compass. There is no dispute about the fact that the guarantee commission of Rs. 91,194 was paid to the managing director of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of that firm. The question was whether the ceiling prescribed by s. 40(c) was applicable to the royalty paid by the company to the firm or three directors who were its partners, The High Court held that payments to the firm were in reality payments made to the directors. The Supreme Court reversed the above finding of the High Court and held that the payments were made in consideration of a valuable right parted with by the firm in favour of the company. It was further held that the payments could not be treated as payments made to directors as directors and hence would not fall within s. 40(c) of the Act. This decision was followed by this Court in Pai Paper Allied Industries (P) Ltd. vs. CIT. In that case, it was held by this Court th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rantee commission paid to the father of the director can be regarded as remuneration within the meaning of s. 40(c) of the Act. The Calcutta High Court held : "That the guarantee has been given by the father of a director is not in dispute but the amount of guarantee commission has been paid in return for service rendered by M.L. Jalan, who stood guarantor for a loan obtained by the company. The liability of the guarantor is co-extensive with that of the debtor. If the debtor fails to pay the loan, the guarantor will be liable to pay the loan, if the guarantor fails to pay the loan, his personal assets and properties may be attached and sold in execution of any decree that may be passed in respect of that loan. Therefore, by giving the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in the payment of any salary to an employee or a former employee or in the provision of any perquisite As stated earlier, the expenditure will fall within the purview of s. 40(c) or 40A(5) of the Act only if it results in payment to the director or the employee in his capacity as director or employee. If the payment is made for the services rendered by any of them which they were not required to do in the capacity of managing director, director or employee or for parting with the valuable rights, such expenditure would not fall within the purview of s. 40(c) or 40A(5) of the Act. In view of the above, we are of the clear opinion that the guarantee commission paid to the managing director is not a remuneration, etc., to the managing di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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