Judgment:
Leila Seth, J.
1. By these five applications under section 256(2) of the Income-tax Act, 1961, the Commissioner of Income-tax prays that the Tribunal be directed to draw up a statement of case and refer the following common question of law (though the amounts differ for each year and the question is also slightly differently worded) for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the payment of amounts as guarantee commission to the directors is an allowable deduction in computing the assessed's profits from business ?'
Income-tax Case No. 225 of 1984 relates to the assessment year 1972-73 and the amount is Rs. 2,60,416
Income-tax Case No. 64 of 1985 relates to the assessment year 1973-74 and the amount is Rs. 2,55,822,
Income-tax Case No. 65 of 1985 relates to the assessment year 1971-72 and the amount is Rs. 2.55,822,
Income-tax Case No. 240 of 1982 relates to the assessment year 1970-71 and the amount is Rs. 3,20,889
and Income-tax Case No. 241 of 1982 relates to the assessment year 1969-70 and the amount is Rs. 3,30,000.
2. We are indicating herein the figure pertaining to Income-tax case No. 225 of 1984. Guarantee commission amounting to Rs. 2,60,416 was paid to two directors, Mrs. R. B. Patel was paid a sum of Rs. 2,27,406 and Mr. P.B. Kotak was paid a sum of Rs. 33,010. The amount was paid for giving personal guarantees to various banks such as the Central Bank. Canara Bank, Dena Bank, Syndicate Bank and Bank of Tokyo, the Income-tax Officer disallowed the amount paid as guarantee commission and the disallowance was affirmed by the Appellate Assistant Commissioner.
3. The assessed appealed to the Income-tax Appellate Tribunal, the Tribunal allowed the expenditure on payment of guarantee commission as a legitimate business expense. It based its decision on various facts : (a) during the assessment years 1965-66 to 1968-69, substantial amounts of guarantee commission had been allowed, (b) in the case of CIT v. Punj Sons P. Ltd. (Income-tax Reference No. 48 of 1966 decided on March 1, 1977) this court had allowed guarantee commission as a revenue expenditure, (c) banks and other institutions had insisted on personal guarantees of the directors, and, if they had not been given, the loans would have been reduced thus affecting the business of the assessed. The Tribunal considered the circular of the Reserve Bank of India dated July 29, 1970, and came to the conclusion that despite the circular the assessed had no choice but to give personal guarantees of the directors as the banks concerned insisted on them. The Tribunal noticed that long after the circular, that is, even as late as August 27, 1975, the Canara Bank insisted on personal guarantees. Further. The Dena Bank, by its letter of August 22, 1972, had required personal guarantees; the Bank of Tokyo, by its letter dated August 26, 1976, had also required personal guarantees of the directors. Consequently, the Tribunal found as a fact that the assessed could not refuse to furnish personal guarantees because refusal would have amounted to non-availability of certain loans and would have affected the business of the company. It came to the conclusion that the payment of guarantee commission was actually made and was neither excessive not unreasonable having regard to the legitimate needs of the business and commercial expediency.
4. The Commissioner of Income-tax then moved an application under section 256(1) of the Income-tax Act, this application was rejected because of the abovementioned findings of fact.
5. Learned counsel for the respondents contends that the circular dated July 29, 1970, of the Reserve Bank of India made it clear that personal guarantees were not normally to be taken and, consequently, the guarantee commission paid to the directors was not a legitimate business expenditure, He also submits that the position for the assessment years prior to 1970 is different form the position for the subsequent years in view of the abovementioned circular of the Reserve Bank of India and no guarantee commission was payable to the directors even if the banks insisted on personal guarantees of the directors and, consequently, the payment was for extra-commercial considerations.
6. The Tribunal noted that the Reserve Bank of India circular only gave a direction to the banks that if they were satisfied about the financial capacity of the borrowers and the loan proposals, personal guarantees need not be insisted upon, but the Tribunal found, after taking the Reserve Bank of India circular dated July 29, 1970, into consideration and the insistence of the banks, as above noticed, to get personal guarantees of the directors, that the assessed had no choice but to get the guarantees or else it would affect its business. This is a finding of fact. In this view of the matter and the further fact recorded by the Tribunal that the guarantee commission was neither irregular nor unauthorized nor excessive nor unreasonable having regard to commercial expediency and legitimate business needs, we are of the opinion that no question of law arises.
7. Consequently, these applications are rejected. However, we make no order as to costs.