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TMI Blog2011 (10) TMI 443X X X X Extracts X X X X X X X X Extracts X X X X ..... questionnaire dated 29-6-1992 was issued. The assessee was represented by his Tax Consultants who furnished the required information. The dispute which is the subject matter of the proceedings is guarantee commission paid to Sri Vijaya Mallya. He was the Chairman of the assessee Company. He has been paid guarantee commission of Rs. 13,96,580/- for the year ending 31st March, 1990 by the assessee. This guarantee commission was worked out on the personal guarantee given by Sri Vijaya Mallya, to various bankers with which the assessee enjoys the credit facilities. The enquiry revealed the personal guarantee of Sri Vijaya Mallya are nothing but mere signatures on documents and not backed by any specific assets. In fact, the same is the position as regards the guarantees extended by him to other bankers with whom the credit facilities have been enjoyed by the Company under his management namely, M/s. Mc Dowell & Company Ltd., and M/s. Kissan Products Ltd. The total of such guarantees given to the bankers of all the Companies under his management works out to Rs. 115.32 Crores. On the above guarantees he has earned a Commission of Rs. 1,15,32,059/- at the rate of 1%. It is seen that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He also took note of the fact that the necessary permission from the RBI as required under FERA was not obtained and Commission to any person residing outside India cannot be made. The amount in question has not accrued or crystallised into income but they are in the process of accrual. The amount in question has not become due and payable. Therefore, the payment of guarantee commission cannot be called as accrued liability and at best can be termed as a contingent liability which would become payable only on granting permission by RBI and therefore it does not require any provisions in the Accounts. However, the assessee has debited guarantee commission even much before the liability has accrued. Therefore he disallowed the said expenditure. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income-Tax(Appeals-II) Bangalore. The Appellate Commissioner discussed all these questions in his order as under:- "The ground number 1 regarding allowance of the guarantee commission payable to Shri Vijay Mallya and ground number 2 regarding application of section 49(c) of the Act are assuredly covered by the appellate order of the Commissioner of Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the view that guarantee commission paid to Mr. Vijaya Mallya for the assessment years 1990-91, 1992-93 are allowable expenditure under Section 37(1) of the Act. Aggrieved by the said order, the Revenue is in appeal. 3. The learned counsel appearing for the Revenue assailing the impugned order contends that the undisputed material on record discloses that Mr. Mallya is a Non-Resident Indian. His net wealth is Rs. 70,47,200/-. The Group of Companies which he represents have borrowed a sum of Rs. 115.32 Crores from various financial institutions. Mr. Vijaya Mallya has been paid Rs. 1.15 Crores as guarantee commission, as against the net wealth as on 31-3-1990 of a sum of Rs. 70,47,200/-. Therefore it is a ploy to divert the income under his management and it is a colourable devise. Admittedly, it is not a remuneration paid to the Managing Director. Therefore, the payment made is not lawful and would not fall within the mischief of Section 37 of the Act. The appellate Commissioner as well as the Tribunal in order to appreciate these undisputed facts have erroneously held that the assessee is entitled to the said expenditure. Therefore, he submits that a case for interference is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount, if any, received from persons using the guest house: Provided further that nothing in this sub-section shall apply in relation to any guest-house maintained as a holiday home if such guest-house- (a) is maintained by an assessee who has throughout the previous year employed not less than one hundred whole-time employees in a business or profession carried on by him; and (b) is intended for the exclusive use of such employees while on leave. Explanation.-For the purposes of this sub-section,-- (i) residential accommodation in the nature of a guest-house shall include accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty-two days during the previous year; and (ii) the expenditure incurred on the maintenance of a guest-house shall, in a case where the residential accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation'. A perusal of the aforesaid provision makes it very clear that any expenditure allowed or expended wholly and exclusively for the purpose of business shall be allowed in computing the Income chargeable under the head prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ec. 40C and in the light of Sec.40-A(2) of the Income Tax Act in the given circumstances ?" The answer to the said question of law is as under: "We in somewhat identical circumstances, in the case of this very assessee have chosen to accept the deletion in the order dtd 8-6-2006 passed in ITRC No. 839-841/1998. The said judgment would equally apply with regard to the finding in respect of assessment year 1988-89" Therefore it is clear that in neither case this Court has answered the said issue. Reliance is placed on the Judgment of Delhi High Court in the case of Suessen Textile Bearings Ltd. v. Union of India [1984] 55 Comp. Cas. 492 (Delhi) where the question for consideration was "Guarantee commission paid by a company to its Director for standing surety for loans and credit facilities taken by the company from financial institutions is not remuneration for services rendered within the meaning of Section 309 of the Companies Act, 1956, and approval of the Central Government or the Company Law Board is not necessary." Answering the said question it was held that "The payment in consideration of the pledging of the credit or assuming the financial liability would not be remu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Section 40(c)(i) of the Act is applicable where the expenditure results in the provision of remuneration to a relative of the director of the Company. A close examination of Section 40A(2) and Section 40(c)(1) shows that they are not applicable to the persons who are not relatives within the meaning of Section 2(41) of the Act. Therefore this judgment rendered under Section 40(c) of the Act, the said provision is no more in the Statute book as it has been deleted with effect from 1-4-1989. 8. Then we have the Judgment of Gauhati High Court in the case of (A) Pheros & Co. (P.) Ltd. v. CIT [1980] 124 ITR 188, wherein the question for consideration was whether the guarantee commission at the rate of 2 1/2% paid by the Company to the Managing Director for his personal guarantee is deductible under Section 37. 9. We have gone through the entire Judgment. No law is laid down therein. They have simply affirmed the order of the Tribunal which has permitted deduction. 10. A perusal of the impugned order shows that this Court set aside the earlier order passed by the Tribunal, formulated the issues for consideration and remanded the matter back to the Tribunal for fresh considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allya is backed up by his personal assets and the assessee company has got nothing to do. After referring to the general form of guarantee of Bank of Baroda, it is observed that Mr. Mallya stood guarantee for the assessee company on the insistence of the Bank. None of the banks have questioned the capability of Mr. Mallya whether he could repay the loan amount in case of any default on the part of the assessee company. Most of the banks, lent loan/credit facilities to the assessee company, were nationalized banks governed by rules and regulations. When such whopping loans were extended by the banks to the assessee company, it is nothing but quite natural to assume that sufficient care could have been taken by them before acceding to the assessee's request. If not, the deficiency would be at the doorstep of the Banks and not with that of the assessee company. It was the revenue's apprehension that there was no scientific basis for the payment of guarantee commission and it was only an innovative method of diverting the income from the companies under Mr. Mallya's management. If so, the revenue should have come up with documentary evidence to drive home its assumption. However, nothi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee commission (GC) for the assessment year to the tune of Rs. 67.97 lakhs The 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. The credit facilities availed by the companies were secured by the assets of the respective companies. Total guarantee amounts received from the bankers were Rs. 115.32 crores on which Mr. Mallya got Rs. 1.15 crores as CC From 1/5/88 to 31/3/90 against his net wealth as on 31.3.90 of Rs. 70.47 lakhs. Hence, the 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. The banks had extended loans and credit facilities based on promissory notes, hypothecation of machineries, mortgaging of lands/buildings, counter indemnities etc., Guarantee documents were executed during 1984-85 but not renewed consequent to upward limits of loans sanctioned. The AO had countered the assessee's contention for the allowability of GC to Mr. Mallya for an element of risk undertaken by him by extending guarantees to the banks, the security offered in the form of assets of the companies hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Rs. 70.47 lakhs. It is a clear case, as rightly pointed out by the Assessing Authority; a ploy to divert the income of the companies under his management. As the circular of the RBI apprehended remuneration being paid to the Directors on the basis of the guarantee offered by them and when the banks were advised to obtain an undertaking from the borrowing company that they will not pay remuneration as a consideration for the Directors standing as guarantee who siphon out the amount of the company, the phrase used is 'Guarantee Commission'. 16. This Court had an occasion to consider the meaning of the word 'Expenditure' used in Section 37 in the case of J.K. Panthaki & Co. v. ITO in IT Appeal Nos. 213 and 214/2010 and held as under: 9. "Expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. To be an allowance within clause XV, the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business and further (b) must not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration to the Managing Director for which he was otherwise not entitled to. It is to overcome the directions issued by the RBI. It is to overcome the statutory provision contained in Section 309 of the Companies Act. This payment is characterized as a guarantee commission and the amount is paid. 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. The said expenditure incurred is not for the purpose of earning profits of the business. Merely because the banks insisted on such guarantee and the Managing Director agreed to stand as a guarantor on payment of such commission, the commission is actually paid. That would not constitute a lawful expenditure so as to claim deduction under Section 37 of the Act. 18. In that view of the matter, the order passed by the Tribunal is contrary to the material on record. There is no application of mind. The order is vitiated because of not appreciating the facts of this case in a proper perspective and thus, it is not sustainable, hence, we pass the following order: The substantial questions of law is answered in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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