Where various banks advanced loans to assessee-company on basis of its assets offered as a security to banks and not on basis of personal guarantee of Managing Director of company, guarantee commission paid to Managing Director would not be deductible under section 37(1)

[2012] 17 taxmann.com 6 (Kar.) 

HIGH COURT OF KARNATAKA 

 Commissioner of Income-tax v. United Breweries Ltd.

* N. KUMAR AND RAVI MALIMATH, JJ. 

IT APPEAL NO. 404 OF 2009 OCTOBER 15, 2011 

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1990-91 - Assessee was a public company, carrying on business in Indian made foreign liquor - In return of income, assessee claimed deduction in respect of guarantee commission paid to its Chairman/Managing Director as he gave personal guarantee to various bankers with which assessee enjoyed credit facilities - Assessing Officer taking a view that it was only an innovative method of diverting income from companies under his management, rejected assessee's claim - Tribunal, however, allowed claim raised by assessee - On revenue's appeal, it was seen that though Chairman had stood as a guarantor in his personal capacity, banks had lent money not on personal guarantee but on assets of company which were offered as a security to banks - It was also noted that assessee and its group companies borrowed a sum of Rs. 115.32 crores whereas net wealth of Chairman, on basis of which he gave personal guarantee, was hardly Rs. 70.47 lakhs - Whether in aforesaid circumstances, merely because Managing Director agreed to stand as a guarantor on payment of certain commission , it would not constitute a lawful expenditure so as to claim deduction under section 37(1) - Held, yes [In favour of revenue]

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