1989 (1) TMI 14 - HC - Income Tax

Summary

Issues:
- Whether the payment of amounts as guarantee commission to the directors is an allowable deduction in computing the assessee's profits from business.

Detailed Analysis:
The judgment pertains to five applications under section 256(2) of the Income-tax Act, 1961, where the Commissioner of Income-tax sought direction for the Tribunal to refer a common question of law regarding the deductibility of guarantee commission payments to directors. The amounts varied for each year, with Income-tax Case numbers specified for each assessment year. The primary question was whether such payments constituted legitimate business expenses for the assessee.

In the case of Income-tax Case No. 225 of 1984, guarantee commission amounting to Rs. 2,60,416 was paid to two directors for providing personal guarantees to various banks. The Income-tax Officer disallowed the amount, which was upheld by the Appellate Assistant Commissioner. However, the Income-tax Appellate Tribunal allowed the expenditure, considering it a legitimate business expense based on precedents, the necessity of personal guarantees for loans, and commercial expediency.

The Tribunal's decision was supported by various facts, including past allowance of guarantee commission, legal precedents, and the insistence of banks on personal guarantees. Despite a circular from the Reserve Bank of India discouraging personal guarantees, banks continued to require them, affecting the assessee's ability to secure loans. The Tribunal found the guarantee commission payments reasonable, necessary, and not excessive considering the business needs and commercial realities.

The Commissioner of Income-tax challenged the Tribunal's decision under section 256(1) of the Income-tax Act, arguing that the circular from the Reserve Bank of India altered the landscape regarding guarantee commission payments. However, the Tribunal held that the circular did not change the fact that banks still demanded personal guarantees, leading to a finding that the payments were justifiable for business reasons and not for extra-commercial considerations.

Ultimately, the High Court rejected the Commissioner's applications, emphasizing that no question of law arose from the Tribunal's findings. The Court agreed with the Tribunal's assessment that the guarantee commission payments were justified by commercial expediency and legitimate business needs, and therefore, the applications were dismissed without costs.