1980 (12) TMI 62 - AT - Income Tax

Summary

Issues:
- Deduction of guarantee commission paid to directors
- Legitimacy of guarantee commission as a business expenditure
- Compliance with Section 310 of the Companies Act, 1956
- Adequacy of the 1% commission paid to directors
- Services rendered by directors in giving guarantee

Analysis:
The appeals before the Appellate Tribunal ITAT Allahabad involved the deduction of guarantee commission paid to directors by a company for obtaining overdraft facilities. The Tribunal found that the directors provided a personal guarantee to the bank, which was a requirement for obtaining the overdraft. The key issue was whether the commission paid to the directors for this guarantee was reasonable considering the business needs and services rendered. The Tribunal observed that the directors did undertake some risk by providing the guarantee, and it was necessary to determine the value of the services rendered.

The Tribunal remanded the case back to the AAC for a fresh determination. The CIT (Appeals) later concluded that the 1% commission paid to the directors was reasonable based on the company's legitimate business needs. However, the Department contested this decision, arguing that the payment of commission was void as it lacked approval under Section 310 of the Companies Act, 1956. The Department also claimed that the commission was excessive and that no services were rendered by the directors.

The company defended its position by stating that legal advice confirmed no need for government approval under Section 310 for the guarantee commission. The company argued that the commission was not remuneration but a payment for the guarantee provided. The company also highlighted that the payment was in line with industry practices, as even banks charge a similar commission for guarantees.

The Tribunal held that Section 310 did not apply as the payment was not remuneration but a guarantee commission. It distinguished between remuneration for services and the commission paid for financial commitment. The Tribunal also noted that the issue of services rendered had been previously decided and upheld the adequacy of the 1% commission considering the business needs. Consequently, the departmental appeals were dismissed, affirming the decision of the CIT (Appeals).