2011 (10) TMI 443 - HC - Income Tax

Addition - Guarantee commission - AO on verification of documents with bankers came to the conclusion that the GC paid cannot be treated as an allowable expenditure u/s 37(1) of the Act - AO was of the view there was no scientific basis for payment of GC and it was a ploy to divert the income of the companies under his management - it is clear that the assessee has paid his Chairman Mr. Vijaya Mallya guarantee commission on the basis of the loan which they have obtained from the Banks - The payment of guarantee commission is not a remuneration under Section 309 of the Companies Act - 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 - The expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business - 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 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

Summary

Issues Involved:
1. Allowability of guarantee commission paid to the Chairman under Section 37 of the Income Tax Act, 1961.
2. Competency of the Chairman to afford such guarantee.
3. Deletion of disallowance of 50% of expenditure reimbursed for aircraft maintenance.
4. Allowability of interest on loans taken to set up a new unit without factual finding of business extension.

Issue-wise Detailed Analysis:

1. Allowability of Guarantee Commission:
The primary issue was whether the commission paid to the Chairman for standing as a guarantor for loans taken by the assessee company is allowable as an expenditure under Section 37 of the Income Tax Act, 1961. The assessing authority disallowed the commission, arguing that the guarantees were not backed by specific assets and were merely signatures on documents. The Tribunal, however, noted that banks often insist on personal guarantees as additional security and held that the commission paid to the Chairman was allowable under Section 37(1). The High Court, upon review, found that the payment was a ploy to divert income and was not a lawful expenditure. The Court noted that the Chairman's net wealth was insufficient to support the guarantees and that the payment was a means to circumvent RBI guidelines and statutory provisions. Consequently, the High Court set aside the Tribunal's order, restoring the assessment authority's decision to disallow the expenditure.

2. Competency of the Chairman to Afford the Guarantee:
The Tribunal had allowed the guarantee commission, assuming that the banks had taken sufficient care before accepting the Chairman's guarantee. However, the High Court found that the Chairman's net wealth was significantly lower than the amount guaranteed, raising doubts about his competency to afford such guarantees. The Court concluded that the guarantees were not genuine and were used as a method to divert company income to the Chairman.

3. Deletion of Disallowance of 50% of Expenditure for Aircraft Maintenance:
The Tribunal had deleted the disallowance of 50% of the expenditure reimbursed to M/s. McDowell & Company for aircraft maintenance. The High Court did not specifically address this issue in detail in its judgment, focusing primarily on the allowability of the guarantee commission.

4. Allowability of Interest on Loans for New Unit:
The Tribunal had allowed interest on loans taken by the assessee to set up a new unit, without giving a factual finding that such activity constituted an extension of the business. The High Court did not delve deeply into this issue, concentrating instead on the guarantee commission matter.

Conclusion:
The High Court found that the guarantee commission paid to the Chairman was not a lawful expenditure and was a method to divert income. The Court restored the assessment authority's decision to disallow the expenditure, answering the substantial question of law in favor of the Revenue and against the assessee. The Tribunal's order was set aside, and the assessment authority's order was reinstated.