Law:

Section:

section 37 of the income-tax act, 1961-business expenditure-whether guarantee commission paid to directors and substantial shareholders for their giving personal security against cash credit arrangements of assessee-company with bank could be allowed as business expenditure-held, yes Facts The directors and substantial shareholders of the assessee-company gave personal guarantee to the bankers to provide additional security for cash credit agreements of the assessee-company with the bank. For these services, the assessee-company paid Rs. 1,49,884 to its directors and substantial shareholders as guarantee commission at the rate of 10 per cent of the interest payable to the bank and claimed deduction of the amount as business expenditure. The ITO rejected the claim under section 40(c) on the ground that it was a remuneration, e benefit or amenity paid to a director or shareholder and that the amount was unreasonable keeping in view the legitimate business needs and the benefits derived by the assessee. The AAC upheld the ITO's order partly and allowed 50 per cent of the claim. The Tribunal, however, held that guarantee commission was fully allowable as the directors had in effect pledged their personal assets as a security and it was commercially proper that they should be compensated. The Tribunal found that having regard to the volume of business and preponderance of loans in the structure of liabilities, the payment of guarantee commission was reasonable. On reference : Held 1.Having regard to the business…

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