High Court Of Karnataka
CIT vs. Mcdowell & Co. Ltd.
Sections 37(1), 37(4), 40(c)
Asst. Years 1985-86, 1986-87, 1987-88
R. Gururajan & Jawad Rahim, JJ.
IT Ref. Case Nos. 839, 840 & 841 of 1998
8th June, 2006
Counsel Appeared
M.V. Seshachala, for the Petitioner : S. Parthasarathi, for the Respondent
ORDER
R. Gururajan, J. :
The Revenue is before us in the light of the following questions of law framed by the Tribunal in the light of the order of the Tribunal passed in ITA Nos. 2020, 2021 and 2022 of 1990 :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the guarantee commission paid to Sri Vijay Mallya, the chairman/director of the company, was not covered by the provisions of s. 40(c) of the IT Act, 1961 as it then existed ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of the amounts of depreciation, insurance premium, rent on furniture relating to the residential accommodation ‘Niladri’ on the ground that inasmuch as the expenses were not allowable specifically under s. 37(1) of the IT Act, the provisions of s. 37(4) would not apply thereto ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that expenses relating to the building ‘Niladri’ at Bombay were allowable as expenses incurred for the purpose of the business of the assessee, even though it had been found out on inspection that the said premises was being used as residential accommodation of chairman of the company ?”
2. Sri Vijay Mallya, chairman and director of M/s McDowell & Co. Ltd., Bangalore was paid guarantee commission at the rate of 1 per cent of the amount of loan on guarantee furnished by him in his personal capacity against the loans taken by the assessee-company from various concerns for its business purpose. The amount of guarantee commission was considered as a remuneration, benefit or amenity accruing to the chairman/director for purposes of limiting the total amount of such benefits in accordance with the provisions of s. 40(c), as it existed at the relevant time. The AO did not accept the contention of the assessee and passed an adverse order. Aggrieved by the same, an unsuccessful appeal was filed. Thereafter, the matter was taken to the Tribunal by the assessee by way of appeals. The Tribunal has chosen to hold in favour of the assessee. In the light of the order of the Tribunal, the Department sought for a reference of three questions of law. Those questions have already been extracted in the earlier portion of our order.
The Tribunal accepted the application and referred the questions of law in these three references. Facts are same in all these references and hence, we pass a common order.
From the material on record, it is seen that the respondent-assessee contended that the guarantee commission is not to be a subject to any disallowance under s. 40(c) of the Act. The same was not accepted both by the AO as well as by the appellate authority. The Tribunal has accepted the same in the light of the judgment of the Calcutta High Court reported in India Jute Co. Ltd. vs. CIT (1989) 77 CTR (Cal) 81 : (1989) 178 ITR 649 (Cal). According to the Tribunal, the said payment of commission would not fall within s. 40(c) of the Act. Heard the learned counsel for the parties and perused the material placed on record.
At this stage, we have to notice that in somewhat similar circumstances, a Division Bench of this Court in ITRC No. 136 of 1994 dt. 25th March, 1996 has chosen to consider this very issue and this Court has also noticed the judgment as referred to in the order of the Tribunal. After referring to the facts and in the light of the judgment of the Supreme Court, the Division Bench has chosen to hold as under : “The precise question as to the nature of the commission paid came up for consideration before the Supreme Court in CIT vs. Indian Engineering & Commercial Corporation (P) Ltd. (1993) 112 CTR (SC) 56 : (1993) 201 ITR 723 (SC). The Supreme Court, on examination of the matter, was of the view that any payment of cash amount by way of commission on sales directly to an employee could not be said to fall within that expression, where an assessee incurs any expenditure which results directly or indirectly in such a payment could also not fall within contemplation of s. 40A(5) (a). It is thus clear that a guarantee commission paid to a chairman of a company who is not obliged to offer such guarantee for the benefit of the company cannot be treated as part of his functions as a chairman and director of the company. Therefore, we are of the view that such amount cannot be treated as one coming under the provisions of s. 40(c) of the IT Act. The decisions referred to by the learned counsel for the Department were the same which were relied upon by the Tribunal. The Tribunal did not consider the scope of the said decisions. All that was considered therein was that it was one of the legitimate activity of the director of the company to offer personal guarantee and therefore, the same could be treated as an admissible deduction. The issue before us is whether the chairman and director is expected to incur such expenditure and on offering of such personal guarantee if any commission is paid, whether such amount could be treated as remuneration paid for such activity. When it cannot be treated as a remuneration paid to the chairman and director, we do not think it would be appropriate to hold that the same should be subjected to limitations of provision of s. 40(c) of the IT Act. Therefore, we answer the question referred for our opinion against the Department and in the affirmative.” The said judgment is equally applicable to the facts of this case. In the light of the answer in identical circumstances by the Division Bench, we deem it proper to answer the first question in favour of the assessee and against the Revenue.
6. Insofar as the second and third questions are concerned, we see from the order of the Tribunal that the Tribunal has chosen to notice that the premises in question was used as a residence by the chairman. This finding was in the light of the inspection conducted by the Department itself. The Departmental Representative after inspection has come to a conclusion that the premises ‘Neeladri’ at Bombay was found to be used as residence by the chairman.
In the light of the premises used as residence by the chairman, the Tribunal has come to a conclusion that the various expenses claimed by the assessee is allowable in terms of s. 37 of the IT Act. We also see a judgment of the Supreme Court in Britannia Industries Ltd. vs. CIT (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC). The Supreme Court has noticed a similar provision in the matter of allowing expenses under s. 37 of the Act. The Supreme Court notices that disallowance is permissible only in the case of the premises being a guest house in the said judgment. On facts, the Tribunal has come to a conclusion that the premises was used by the chairman in terms of the findings in para 8 of the order. Therefore, the judgment in (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC) (supra) would not be applicable if the premises is used as a residence of the chairman. We, on the facts of this case, do not find any legal errors in the orders of the Tribunal.
7. In these circumstances, we deem it proper to answer questions 2 and 3 as well in favour of the assessee on the facts of this case. In these circumstances, these appeals stand dismissed. All the three questions as referred to us are answered in favour of the assessee and against the Revenue. No costs.
[Citation : 288 ITR 666]
