1982 (2) TMI 144 - AT - Income Tax

Summary

Issues:
- Disallowance of guarantee commission under s. 40(C) of the IT Act
- Reasonableness of guarantee commissions paid by the assessee

Analysis:
- The appeals by the Revenue involved disallowance of guarantee commission payments under s. 40(C) of the IT Act for consecutive assessment years 1971-72 to 1973-74. The CIT (Appeals) consolidated the appeals due to common connections.
- The ITO disallowed portions of guarantee commission payments under s. 40(C) and 40A(2) of the IT Act, which were upheld by the AAC. The Appellate Tribunal held that guarantee commission falls under s. 40(C) and not s. 40A(2), directing further adjudication by the AAC.
- The Revenue contended that the CIT (Appeals) erred in ignoring the pending reference under s. 256(1) of the IT Act before the High Court, arguing for consideration of s. 40A(2) applicability.
- The Tribunal dismissed the Revenue's appeal, citing its earlier finding that s. 40A was not applicable and the matter was restored solely based on s. 40(C).
- The second ground of appeal questioned the reasonableness of guarantee commissions paid by the assessee. The Revenue argued for disallowance based on s. 40(C) provisions, emphasizing the risk involved and linking commission to amount guaranteed.
- The assessee contended that the payments were not covered by s. 40(C) and highlighted previous Tribunal rulings supporting their position.
- The Tribunal agreed with the CIT (Appeals) that s. 40(C) applied, focusing on the reasonableness of the commissions paid. Detailed financial data and judicial precedents were presented to support the assessee's position.
- Considering the substantial financial arrangements made by the guarantors and the link between turnover and finances, the Tribunal found the guarantee commissions reasonable. The commissions, when combined with interest payments, were below market rates, supporting the business's financial stability.
- Ultimately, the Tribunal upheld the CIT (Appeals) decision to delete the disallowances made by the ITO for all three assessment years, dismissing the Revenue's appeals.