2006 (6) TMI 93 - HC - Income Tax

Summary

Issues:
1. Guarantee commission paid to the chairman/director not covered by section 40(c) of the Income-tax Act, 1961.
2. Disallowance of depreciation, insurance premium, rent on furniture for residential accommodation.
3. Allowability of expenses related to a building used as residential accommodation.

Issue 1:
The case involved the payment of guarantee commission to the chairman/director of a company and whether it should be covered by section 40(c) of the Income-tax Act, 1961. The Tribunal held in favor of the assessee, relying on the judgment of the Calcutta High Court in India Jute Co. Ltd. v. CIT [1989] 178 ITR 649. Additionally, a Division Bench of the High Court considered a similar issue in a previous case and referred to the judgment of the Supreme Court in CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723. The Division Bench concluded that such guarantee commission paid to a chairman who is not obliged to offer the guarantee for the benefit of the company cannot be treated as falling under section 40(c) of the Income-tax Act. Therefore, the High Court answered the first question in favor of the assessee and against the Revenue.

Issue 2:
The second issue revolved around the disallowance of amounts of depreciation, insurance premium, and rent on furniture relating to a residential accommodation named 'Niladri'. The Tribunal found that the premises were used as a residence by the chairman, based on the Department's inspection. The High Court referred to the judgment of the Supreme Court in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546, which stated that disallowance is permissible only if the premises are a guest house. Since the premises in question were used as a residence by the chairman, the expenses claimed by the assessee were deemed allowable under section 37 of the Income-tax Act. The High Court found no legal errors in the Tribunal's orders and thus answered questions 2 and 3 in favor of the assessee based on the specific facts of the case.

In conclusion, the High Court dismissed the appeals, ruling in favor of the assessee on all three questions referred, highlighting the application of relevant legal precedents and factual findings to support its decision.