1999 (8) TMI 27 - HC - Income Tax

Summary

Issues:
1. Interpretation of s. 40(c) of the IT Act, 1961 regarding guarantee commission paid to managing director.
2. Determination of disallowance under s. 40(c) or s. 40A(5) of the IT Act, 1961 for employee-directors.

Issue 1 - Interpretation of s. 40(c) of the IT Act, 1961 regarding guarantee commission paid to managing director:
The controversy revolved around whether guarantee commission paid to the managing director should be considered as remuneration under s. 40(c) of the IT Act, 1961. The Tribunal held that the guarantee commission was not covered under s. 40A(5) of the Act. The Revenue contended that the guarantee commission should be included in remuneration for calculating the ceiling specified in s. 40(c). The assessee argued that the guarantee commission was not an expenditure resulting in the provision of remuneration to the managing director but was paid for the guarantee furnished by him, not for his role as a managing director. The Court, relying on various precedents, concluded that the guarantee commission paid for standing guarantee could not be considered as remuneration to the managing director in his capacity as a director.

Issue 2 - Determination of disallowance under s. 40(c) or s. 40A(5) of the IT Act, 1961 for employee-directors:
The second question involved the disallowance out of remuneration, perquisites, etc., of employee-directors. The Tribunal had to decide whether the disallowance should be calculated under s. 40(c) or s. 40A(5) of the IT Act, 1961. The Court referred to a previous decision in CIT vs. Hico Products (P) Ltd. and held that the controversy was settled. Following the precedent, the Court answered question No. 2 in favor of the assessee and against the Revenue.

In conclusion, the Court held that the guarantee commission paid to the managing director was not considered remuneration under s. 40(c) of the IT Act, 1961. Additionally, the Court resolved the second issue in favor of the assessee based on a previous judgment. The reference was disposed of accordingly with no order as to costs.