1986 (11) TMI 37 - HC - Income Tax

Summary

Issues:
1. Whether the guarantee furnished by the assessee was a normal business transaction?
2. Whether the guarantee was furnished on extra-commercial considerations?
3. Whether the disallowance of the loss claimed by the assessee was justified?

Analysis:
1. The High Court of Calcutta considered whether the guarantee furnished by the assessee, a private limited company, was a normal business transaction. The assessee had furnished guarantees without consideration and had not attempted to recover the amount from the debtor. The Income-tax Officer disallowed the deduction claimed by the assessee as a business expenditure, stating that standing as a guarantor was not part of the normal business of the assessee. The Appellate Assistant Commissioner upheld the disallowance, noting the lack of commercial consideration and absence of any written agreement with the debtor. The Tribunal found that the guarantee was an accommodation to the debtor, not a commercial transaction, and rejected the appeal of the assessee.

2. The Court further examined whether the guarantee was furnished on extra-commercial considerations. The Tribunal found that the guarantee was not related to the sources of income of the assessee, such as rent from property, interest on deposits, and boat hire. The Tribunal noted that the assessee had previously furnished guarantees without consideration and had not taken steps to recover the amount from the debtor. The Court observed that there was no written agreement or evidence of a commission for the guarantee. The Tribunal concluded that the guarantee was not a business activity but an accommodation to the debtor, based on extra-commercial considerations.

3. Lastly, the Court addressed the issue of whether the disallowance of the loss claimed by the assessee was justified. The assessee argued that the Tribunal misinterpreted the memorandum of association and rejected evidence of consideration for the guarantee. The Court, however, found that the Tribunal had sufficient evidence to conclude that the guarantee was not a normal business transaction and was provided on extra-commercial considerations. The Court noted that the majority of the amount paid under the guarantee was in a previous assessment year. Consequently, the Court upheld the decision of the Tribunal, affirming the disallowance of the loss claimed by the assessee.

In conclusion, the High Court of Calcutta upheld the Tribunal's decision, ruling that the guarantee furnished by the assessee was not a normal business transaction but an accommodation based on extra-commercial considerations. The Court found no grounds to overturn the Tribunal's decision and answered the referred question in favor of the Revenue.