TRIVENI ENGINEERING WORKS LTD. VS COMMISSIONER OF INCOME-TAX
2000 P T D 1748
[234 I T R 447]
[Delhi High Court (India)]
Before R. C. Lahoti and J. K. Mehra, JJ
TRIVENI ENGINEERING WORKS LTD.
Versus
COMMISSIONER OF INCOME-TAX
Income-tax References Nos. 19 and 222 of 1980, decided on 05/09/1997.
Income-tax---
----Business expenditure---Reference---disallowance of expenditure-- Company---Remuneration to Director---Guarantee commission paid to Managing Director---Finding by Tribunal that payment was excessive and unreasonable in assessment year 1969-70 and that payment was reasonable in assessment year 1973-74---No challenge to findings---High Court would not interfere with findings on reference---Indian Income Tax Act, 1961, Ss.37, 40 & 256.
Expenses incurred "wholly and exclusively for the purposes of the business" are to be allowed in computing the income chargeable under the head "Profits and gains of business and profession" under section 37(1) of the Income Tax Act, 1961. Section 40 of the Act has been drafted as a proviso to the above said provision. In the case of an assessee which is a company, notwithstanding the provisions of section 37(1) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, cannot be allowed, if in the opinion of the Income-tax Officer any such expenditure or allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom.
The assessee was a public limited company engaged in the business of manufacture and sale of crystalsugar. It was amalgamated with T by an order of the High Court of Delhi with effect from February 1, 1970. In the assessment year 1969-70, the assessee had claimed a deduction of Rs.59,842 on account of guarantee commission paid by it to its managing director, S, for giving a personal guarantee on its behalf. The Income-tax Officer disallowed the claim for three reasons: firstly, that it was for the first time in the accounting year relevant to the assessment year 1969-70 that the board of directors passed a resolution allowing 2 per cent. commission on the limit of, the cash credit .to the directors for furnishing personal guarantee; secondly, the commission was allowed only to S although the other two directors in the company had also furnished personal guarantees; thirdly the company had ample realisiable assets wherefrom the bank could realise the loan advanced by it. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The Tribunal affirmed the findings of the Income-tax Officer, confirmed in the first appeal, and also held that there was no material to suggest that any services were rendered by S to the company so as to warrant the payment of commission. The Tribunal further held that $ did not run any risk and there was no detriment involved in furnishing the personal guarantee. For the assessment year 1973-74, the assessee had taken loans from two banks for its sugar unit on the personal guarantee of director, P. A sum of Rs.2,55,000 was claimed by the assessee as a deduction on account of guarantee commission paid to P. The claim was disallowed by the Income-tax Officer. The disallowance was maintained in appeal by the Appellate Assistant Commissioner. The Tribunal recorded a finding that the guarantee commission of Rs.2,55,000 paid to P was incurred wholly and exclusively for the purpose of business. On a reference:
Held, that, for the assessment year 1969-70, the findings of fact consistently recorded by all the authorities were that the transaction was tainted and the payment of guarantee commission was excessive or unreasonable. For the assessment year 1973-74, the finding of fact was to the contrary. The disallowance or allowance of the guarantee commission had been done on the facts found. For both the years, the findings recorded by the Tribunal were those of facts and hence the questions sought to be referred did not arise as questions of law from the orders of the Tribunal. In the two references the assessee had not challenged the findings of fact alleging perversity or non-consideration of material realiable on record. The High Court is not bound to answer the question if it is a question of fact. Both the references were refused to be answered.
By the Court: "We would like to clarify by way of abundant caution that we may not be taken to mean that condemnation of the practice of the banks asking personal guarantee in the case of public limited companies holding large assets can itself be a ground for disallowance of commission paid to directors. The Assessing Officer has to take an overall view of the facts of each case. "
CIT v. Anusuya Devi (Sint.) (1968) 68 ITR 750 (SC); CIT v. Associated Traders and Engineering Ltd. (1987) 63 CTR 325 (Delhi); CIT v. Indian Aluminium Cables Ltd. (No.l) (1990) 184 ITR 516 (Delhi); George Thomas (K.) (Dr.) v. CIT (1985) 156 ITR 412 (SC) and Sree Meenakshi Mills Ltd. v. CIT (1957) 31 ITR 28 (SC); AIR 1957 SC 49 ref.
Santosh K. Aggarwal for the Assessee.
R.D. Jolly with Ms. Premlata Barisal for the Commissioner.
JUDGMENT
R. C. LAHOTI, J.---This common order shall govern the disposal of I.T.R. No. 19 of 1980 and I.T.R. No.222 of 1980. The two references are between the same parties though arising out of different assessment years.
I.T.R. No. 19 of 1980 is at the instance of the assessee. It arises out of the assessment years 1969-70 and 1970-71 seeking the opinion of the High Court on the following Common question:
"Whether, on the correct interpretation of law and on facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the disallowance of Rs.59,842 paid to Shri K.L. Sahni as guarantee commission and in interpreting the circular of the Reserve Bank of India as a condemnation of the practice of the banks asking personal guarantee in the case of public limited companies holding large assets?"
The assessee is a public limited company engaged in the business of manufacture and sale of crystal sugar. It was amalgamated with Triveni Engineering Works by an order of the High Court of Delhi with effect from February 1, 1970. In the assessment year 1969-70, the assessee had claimed a deduction of Rs.59,842 on account of guarantee commission paid by it to its managing director, Shri K.L. Sahni, for giving a personal guarantee on its behalf. The assessee-company was being, managed earlier by managing agents, who were none else than the three directors of the assessee-company, namely, Shri. K. L. Sahni, h. C. Sahni and P.C. Sahni. Those managing agents gave the necessary personal guarantee but never charged any commission for the same. The managing agents continued to manage the business of the company up to the assessment year 1967-68. In the assessment year 1968-69, the business was managed by the directors themselves as by that time the managing agency had been abolished. Even in the assessment year 1968-69, the directors did not charge any guarantee commission for furnishing a similar personal guarantee to the Central Bank of India Ltd.
The Income-tax Officer held that the guarantee commission paid by the company to its director was not an admissible deduction. The Appellate Assistant Commissioner has held that the discretion was judicially exercised by the Income-tax Officer. The Tribunal too has rejected the appeal preferred by the assessee.
A perusal of the order of the Tribunal shows the Income-tax Officer having assigned three reasons for disallowing the deduction; firstly, that it was for the first time in the accounting year relevant to the assessment year 1969-70 that the board of directors passed a resolution allowing two per cent commission on the limit of the cash credit to the directors for furnishing personal guarantee; secondly, the commission was allowed only to Shri K.L. Sahni although the other two directors in the company had also furnished the personal guarantees; thirdly, the company had available ample realisable assets wherefrom the bank could realise the loan advanced by it. The Income-tax Officer held that the transaction appeared to be tainted. The Tribunal has maintained the findings recorded by the Income-tax Officer, confirmed in first appeals. In addition, the Tribunal has also held that there was no material to suggest any services were rendered by Shri.K.L. Sahni to the company so as to warrant the payment of commission. The Tribunal further held that Shri Sahni did not run any risk and there was no detriment involved in furnishing the personal guarantee.
In I.T.R. No.222 of 1980, the statement of case has been made by the Tribunal at the instance of the Revenue seeking opinion of the High Court on the following question of law arising out of the assessment year 1973-74:
'Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in allowing the expenditure of Rs.2,55,000 claimed by the assessee-company in this year as guarantee commission paid to one of the directors of the company for securing loans from banks for the assessee's business
The assessee had taken loans from the Central Bank of India and the Punjab National Bank for its sugar unit on the personal guarantee of the director, Shri Puran Chand Sawhney. A sum of Rs.2,55,000 was claimed by the assessee as a deduction on account of guarantee commission paid to Shri Puran Chand Sawhney. The claim was disallowed by the Income-tax Officer. The disallowance was maintained in appeal by the Appellate Assistant Commissioner. The assessee went, in appeal to the Tribunal.
The Tribunal relied on the Delhi High Court judgment in the case of CIT v. Punj. Sons (Pvt.) Ltd. (ITR No.48.of 1966, decided on March 1, 1971), and a judgment of the Allahabad High Court. It also recorded a finding that the guarantee commission of Rs.2,55,000 paid to Shri Puran Chand Sawhney was incurred wholly and exclusively for the -purpose of business. '
We may briefly refer to the relevant legal provisions. Expenses incurred wholly and exclusively for the purposes of the business are to be allowed in computing the income chargeable under the head "Profits and gains of business and profession" under section 37(1) of the Income-tax Act. Section 40 of the Act has been drafted as a proviso to the above said provision. In the case of an assessee which is a company, notwithstanding the provisions of section 37(1), any expenditure which results directly or indirectly in the provision of- any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, cannot be allowed, if in the opinion of the Income-tax Officer any such expenditure or allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom.
We have perused the decision of the Delhi High Court in CIT v. Punj. Sons (Pvt.) Ltd. (ITR No.48 of 1966, decided on March 1, 1971). Therein it has been held:
"An inquiry has to be made into the excessiveness or unreasonableness of the amount paid to the director or the person having a substantial interest in the assessee-company."
The Tribunal had found that the payment of the amount was for due consideration and was neither excessive nor unreasonable. In this background, the Court opined in favour of the deduction being allowed.
Learned counsel for the Revenue have invited attention of the Court to two decisions of the Delhi High Court namely, CIT v. Indian Aluminium Cables Ltd. (No. 1) (1990) 184 ITR 516 and CIT v. Associated Traders and Engineering Ltd. (1987) 63 CTR 325.
In Indian Aluminium Cables Ltd. (No. 1)'s case (1990) 184 ITR 516 (Delhi) the Tribunal had recorded a finding that the guarantee commission was actually paid to the directors and it was neither excessive, nor unreasonable having regard to the legitimate needs of the assessee. Rejecting the reference sought for by the Revenue, the Division Bench held that the findings recorded by the Tribunal were of facts and no question of law arose out of the Tribunal's order.
In Associated Traders and Engineering Ltd.'s case (1987) 63 CTR 325 (Delhi). also the Tribunal had found it as a fact that the guarantee commission was paid to the directors in view of personal risks they undertook in furnishing guarantee on behalf of the assessee and hence the payment of commission was liable to be deducted on the basis of such finding of fact.
It is, thus, clear that in both the cases the Division Benches have proceeded on the findings of fact recorded by the Tribunal.
In the two ITRs at hand also, the issues are concluded for each of the respective assessment years by findings, of fact. As we have already noticed in the factual part of this order, for the assessment year 1969-70, the findings of fact consistently recorded by all the authorities are that the transaction was tainted and the payment of guarantee commission was excessive or unreasonable. For the assessment year 1973 the finding of' fact is to the contrary. The disallowance or allowance of the guarantee commission has been so done on the facts found. There are several factual considerations relevant to section 37(1) which have to be kept in view by the Assessing Officer. One of them, is whether the expenditure was excessive or unreasonable. We are, therefore, of the opinion that for both the years the findings recorded by the Tribunal are those of facts and hence the questions sought to be referred do not arise as questions of law from the orders of the Tribunal. It is pertinent to note that in the two references none of the petitioners has challenged the findings of fact alleging perversity or non- consideration of material available on record.
In Dr. K. George Thomas v. CIT (1985) 156 ITR 412 (SC), their Lordships of the Supreme Court have held (head-note):
"Facts must be found by the Tribunal and the High Court must proceed on the basis of the facts found by Tribunal. The High Court cannot afresh go into the facts overruling the fact found by the Tribunal unless there is a question to that effect challenging the facts found by the Tribunal. "
In Sree Meenakshi Mills Ltd. v. CIT (1957) 31 ITR 28 (SC); (1957) AIR 1957 SC 49, it has been held by their Lordships (headnote of AIR 1957 SC):
"Under section 66(1) it is only a question of law that can be referred for decision of the Court. A finding on a question of fact is open to attack as erroneous in law only if it is not supported by any evidence, or if it is unreasonable and perverse; but where there is evidence to consider, the decision of the Tribunal .is final even though the Court might not: on the materials, have come to the same conclusion if it had the power to substitute its own judgment. When the finding is one of fact the fact that it is itself an inference from other basic facts will not alter its character as one of fact.
The High Court is not bound to answer the question if it be a question of fact and/or if the question be not arising out of the order of the Tribunal merely because the High Court had called upon the Tribunal to state a case on that question (see CIT v. Anusuya Devi (Smt.) (1968) 68 ITR 750 (SC)).
For the foregoing reasons, both the references are refused to be answered. No order as to the costs.
Though we have dismissed the applications, we would like to clarify by way of abundant caution that we may not be taken to mean that condemnation of the practice of the banks. asking personal guarantee in the case of public limited companies holding large assets can itself be a ground for disallowance of commission paid to directors. The Assessing Officer has to take an overall view of the facts of each case.
One copy each of this order shall be placed on the records of the two references.
M.B.A./4007/FC Order accordingly.