COMMISSIONER OF INCOME TAX Vs. UNITED BREWERIES LTD

JUDGEMENT

(1.) The Revenue has preferred this appeal challenging the order passed by the Tribunal holding that the Commission paid to the Managing Director of the assessee Company is allowable as expenditure under Section 37 of the Income Tax Act, 1961. The assessee M/s. United Breweries Ltd., is a public Company, carrying on business in Indian Made Foreign Liquor. The assessee filed the return of income on 31-12-1990 declaring the total income of Rs. 1,32,34,452/-. The return of income was processed under Section 143(1)(a) of the Income-tax Act 1961 (hereinafter referred to as 'the Act' for short). An intimation dated 30-4-1991 was issued to the assessee. Thereafter the assessment was taken up under Section 143(3) of the Act by issuing a notice dated 30-4-1991, under Section 143(2) of the Act. A questionnaire dated 29-6-1992 was issued. The assessee was represented by his Tax Consultants who furnished the required information. The dispute which is the subject matter of the proceedings is guarantee commission paid to Sri Vijaya Mallya. He was the Chairman of the assessee Company. He has been paid guarantee commission of Rs. 13,96,580/- for the year ending 31st March, 1990 by the assessee. This guarantee commission was worked out on the personal guarantee given by Sri Vijaya Mallya, to various bankers with which the assessee enjoys the credit facilities. The enquiry revealed the personal guarantee of Sri Vijaya Mallya are nothing but mere signatures on documents and not backed by any specific assets. In fact, the same is the position as regards the guarantees extended by him to other bankers with whom the credit facilities have been enjoyed by the Company under his management namely, M/s. Mc Dowell & Company Ltd., and M/s. Kissan Products Ltd. The total of such guarantees given to the bankers of all the Companies under his management works out to Rs. 115.32 Crores. On the above guarantees he has earned a Commission of Rs. 1,15,32,059/- at the rate of 1%. It is seen that the net wealth declared by Sri Vijaya Mallya, on the valuation dated 31-3-1990 is Rs. 70,47,200/- only, the guarantee commission receivable is excluded from the net wealth. Therefore, the assessing authority was of the view that there was no scientific basis for these bank guarantees, but only an innovative method of diverting the incomes from the Companies under his management. The material collected by the assessing authority also discloses that while sanctioning the amounts and credit facilities the banks have primarily secured the loans by various methods such as obtaining promissory notes, hypothecation of machineries, equitable mortgage on the loans and buildings, counter indemnities, security in the form of book debts etc. Some of these guarantees have been executed long back in 1984-85 etc. Some or the limits sanctioned have undergone changes necessitating the renewal of these guarantees. However, there does not appear to be any renewal of these guarantees. Perhaps the credit worthiness of the assessee is not in doubt and the securities offered in the form of assets of the Company are sufficient to cover the risk element involved. The assessee Company has not ascertained the requirements of these guarantees, but has been paying repeated commissions year after year to its Chairman. The assessee Company contended that there is an element of risk undertaken by Sri Vijaya Mallya, the Chairman by extending these bank guarantees to the bankers. The assessing authority found, that the security offered in the form of assets of the Company adequately covered the risk element and there is no evidence to suggest that the bankers insisted on the personal guarantees of its Chairman. He was also of the view that there was no genuine business necessity of continuing with these guarantees. That they have not been renewed periodically in the light of the actual utilisation of the credit facilities. Therefore, the personal guarantee is a mere signature given long back. Therefore, he concluded by holding that there is no genuine service rendered to the Company. It is commensurate with the payment of commission made. It is an unwarranted benefit bestowed upon the Chairman of the assessee Company which is wholly excessive and unreasonable. Keeping in view the legitimate business needs of the assessee the entire guarantee commission amounting to Rs. 13,96,580/- was disallowed. He also took note of the fact that the necessary permission from the RBI as required under FERA was not obtained and Commission to any person residing outside India cannot be made. The amount in question has not accrued or crystallised into income but they are in the process of accrual. The amount in question has not become due and payable. Therefore, the payment of guarantee commission cannot be called as accrued liability and at best can be termed as a contingent liability which would become payable only on granting permission by RBI and therefore it does not require any provisions in the Accounts. However, the assessee has debited guarantee commission even much before the liability has accrued. Therefore he disallowed the said expenditure. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income-Tax(Appeals-II) Bangalore. The Appellate Commissioner discussed all these questions in his order as under:-

(2.) The learned counsel appearing for the Revenue assailing the impugned order contends that the undisputed material on record discloses that Mr. Mallya is a Non-Resident Indian. His net wealth is Rs. 70,47,200/-. The Group of Companies which he represents have borrowed a sum of Rs. 115.32 Crores from various financial institutions. Mr. Vijaya Mallya has been paid Rs. 1.15 Crores as guarantee commission, as against the net wealth as on 31-3-1990 of a sum of Rs. 70,47,200/-. Therefore it is a ploy to divert the income under his management and it is a colourable devise. Admittedly, it is not a remuneration paid to the Managing Director. Therefore, the payment made is not lawful and would not fall within the mischief of Section 37 of the Act. The appellate Commissioner as well as the Tribunal in order to appreciate these undisputed facts have erroneously held that the assessee is entitled to the said expenditure. Therefore, he submits that a case for interference is made out.

(3.) Per contra, the learned counsel appearing for the assessee supported the impugned order. The appeal is admitted to consider the following substantial question of law.