Law:

Section:

Section 40(c) of the Income-tax Act, 1961 - Business disallowance - In case of companies - Assessment year 1972-73 - Whether guarantee commission paid by assessee-company to one M, who was father of one of its directors, for being a guarantor to bank for extending cash credit facilities, could not be termed as remuneration, benefit or amenity provided to a relative of director, so as to attract provisions of section 40(c) - Held, yes FACTS The assessee-company paid guarantee commission to one M, who was the father of one of its directors, for being one of the guarantors to the bank for extending cash credit facilities to the company and claimed deduction of the same. The ITO applying the provisions of section 40(c), restricted the assessee's claim to the permissible limit and disallowed the balance. On appeals, both the AAC and the Tribunal upheld the disallowance. On reference: HELD In the instant case, there was no dispute that the guarantee commission was given to the father of a director. Therefore, the only question was whether this guarantee commission would come within the ambit of the expression 'remuneration or benefit or amenity' to a director. No case had been made out that any remuneration or amenity had been given to a director or his father. Thus, the only question was whether the father of the director had enjoyed any benefit of any expenditure incurred by the company. That the guarantee commission had been given to the father of a director was not in dispute, but the amount of guarantee commission had been paid in return for services rendered by M, who stood guarantor for a loan obtained by the company. The liability of the guarantor is coextensive with that of the debtor. If the debtor fails to pay the loan the guarantor will be liable to pay the loan. If the guarantor fails to pay the loan his personal assets and properties may be attached and sold in execution of any decree that may be passed in respect of that loan. Therefore, by giving the guarantee M had exposed himself to a liability. It was for his undertaking that liability that remuneration was being paid. This could not be described as a benefit. If anything he had taken upon himself…

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