1989 (2) TMI 101 - HC - Income Tax

High Court rules excess guarantee commission not remuneration under Income-tax Act

The High Court of Calcutta ruled against the disallowance of excess guarantee commission in a case involving interpretation of section 40(c)(i) of the ... Business Expenditure, Company Issues: Interpretation of provisions of section 40(c)(i) of the Income-tax Act, 1961 regarding disallowance of guarantee commission exceeding the prescribed limit.Detailed Analysis:The judgment by the High Court of Calcutta involved a dispute regarding the disallowance of guarantee commission exceeding the limit prescribed under section 40(c)(i) of the Income-tax Act, 1961. The Tribunal had consolidated the questions raised by the assessee into one, which formed the crux of the controversy. The question referred to the court was whether the disallowance of Rs. 1,13,000, exceeding the limit of Rs. 72,000, was justified under the provisions of section 40(c)(i. The facts of the case revealed that the assessee company had paid guarantee commission to a director's father, which was restricted by the Income-tax Officer leading to the disallowance. The Appellate Assistant Commissioner upheld the disallowance, which was further affirmed by the Tribunal. The Tribunal reasoned that any expenditure resulting in remuneration or benefit to a person substantially interested in the company would fall under section 40(c). In this case, the guarantee commission was deemed to benefit the director's father, justifying the disallowance.The relevant provision of section 40(c) stipulates that any expenditure resulting in remuneration or benefit to a director or a person with substantial interest in the company falls within its ambit. The key issue was whether the guarantee commission paid to the director's father constituted remuneration or benefit. The court analyzed the nature of the guarantee commission, emphasizing that it was paid in return for the service of standing guarantor for a loan obtained by the company. The court highlighted that the liability of the guarantor is co-extensive with that of the debtor, and by providing the guarantee, the guarantor undertakes a liability for which remuneration is paid, not a benefit. Drawing from a precedent case, the court concluded that the commission paid did not qualify as remuneration for services rendered, thus not falling under the ambit of remuneration or benefit as per section 40(c).The judgment also addressed the contention raised by the Revenue regarding the language used in the reference question. The court dismissed the contention and affirmed that the Tribunal had appropriately consolidated the questions raised by the assessee into a single question for reference. Ultimately, considering the facts and circumstances of the case, the court answered the question in the negative and in favor of the assessee, thereby ruling against the disallowance of the excess guarantee commission. The judgment was a unanimous decision by the judges of the High Court of Calcutta, with no order as to costs.