Law: Income Tax Act, 1961

Section: 40(c)

Income tax]----Business expenditure Company Disallowance of expenditure ¬Expenditure resulting in benefit to relative of Director Bank guarantee for loan to company furnished by relative of Director Guarantee commission ¬Remuneration for undertaking liability cannot be disallowed under section 40(c) Indian Income tax Act, 1961, S.40(c). The assessee company had paid MLJ, the father of a Director, guarantee commission with effect from April 1, 1969, at the rate of percent., in each of the financial years of the company upon the maximum amount of loan for which he had furnished guarantee. In the assessment year 1972 73, the Income tax Officer disallowed the guarantee commission in excess of Rs. 72,000 and this was upheld by the Tribunal. On a reference: Held, that the liability of the guarantor is co extensive 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, MLJ had exposed himself to a liability. It was for undertaking this liability that the remuneration had been paid. It could not be described as a "benefit" within the meaning of section 40(c) of the Income tax Act, 1961. The disallowance of the amount paid in excess of Rs.72,000 was not justified. Suessen Textile Bearings Ltd.. v. Union of India (1984) 55 Comp. Cas. 492 (Delhi) ref. JUDGMENT SUHAS CHANDRA SEN, J. The assessee has sought for reference of as many as three questions but the Tribunal has referred only one question which was not exactly in terms of the language of the three questions raised by the assessee. The Tribunal has refrained the question and this question covers the entire controversy in this case. The question referred by the Tribunal under section 256(1) of the Income tax Act, 1961, to this Court is as follows: "Whether, on the facts and in the circumstances of the case and on a correct interpretation of the provisions of section 40(c)(i) of the Income tax Act, 1961, the Appellate Tribunal was right in upholding the…

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