1. The Income-tax Appellate Tribunal, Gauhati Bench, has referred under Section 256(2) of the I. T. Act, 1961, hereinafter referred to as 'the Act', the following two questions of law to this court for decision :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in limiting the guarantee commission to the extent of Rs. 1,750 only instead of Rs. 13,750 for the assessment year 1966-67 ?
(2) Whether the Tribunal had any materials before it to limit the guarantee commission to a period of 1 1/2 months ?'
2. The assessee is a private limited company. For the assessment year 1966-67, it had claimed a deduction of guarantee commission of Rs. 13,750 paid to the managing director. The business of M/s. Pheros and Company (P.) Ltd. was the proprietary concern of one F, C. Agarwal. The business was taken over by a private limited company, that is, the assessee.
took over the proprietary business on July 1, 1964, there was an existing arrangement that the State Bank of India would give overdraft facilities against the security of stock-in-trade. In addition, a personal guarantee was to be given by F.C. Agarwal, in order to continue the overdraft when the proprietary concern was taken over by the company. The arrangement entered into when the business was the proprietary concern continued up to May 21, 1965, and for that period no guarantee had been given by F. C. Agarwal. After May 21, 1965, the overdraft was transferred to the account of the company and at this stage it was stipulated that the managing director had to give a personal guarantee in respect of the overdraft. The limit of the overdraft was Rs. 5 1/2 lakhs and the company agreed to pay guarantee commission of 2 1/2 per cent. on this limit. The total claim of guarantee commission for the assessment year in question came to Rs. 13,750. The company passed a resolution on June 4, 1965, sanctioning the above commission. The ITO considered the claim to be unbelievable in the light of various other benefits granted to F. C. Agarwal and, therefore, he disallowed the claim of the assessee.
3. On appeal, the AAC sustained the order of the ITO. Thereafter, the assessee filed are appeal before the Tribunal. The Tribunal held that the payment of guarantee commission was business expenditure in the hands of the company and it was payment for business consideration of the company and, therefore, it was an allowable deduction under Section 37 of the Act. The Tribunal further held that in consideration of the other remuneration paid to F. C. Agarwal this payment of guarantee commission could not be considered to be excessive within the meaning of Section 40(c) of the Act. After holding so, the Tribunal, however, observed that since the bank sanctioned the cash credit limit in May, 1969, and before that the company was utilising facilities of overdraft without any guarantee, the Tribunal limited the commission for 1 1/2 months only taking the entire amount claimed to be that for one year and in that view the Tribunal allowed only Rs. 1,750 out of the total claim of Rs. 13,750 under Section 37 of the Act.
4. On the above facts the above-mentioned two questions of law have been referred.
5. From the order of the Tribunal, it is quite clear that the guarantee commission allowed to the managing director in the instant case was business expenditure of the company and that this expenditure was incurred for business consideration and, therefore, it could not be disallowed under Section 37 of the Act. The Tribunal also has categorically found that the amount paid by way of guarantee commission could not be considered to be excessive under Section 40(c) of the Act. So, from the findings of the Tribunal, it is found
that the entire sum of Rs. 13,750 was expended by way of business expenditure by the assessee and that was allowable deduction under Section 37 of the Act. The Tribunal, however, thought that this guarantee commission at the rate of 2 1/2 per cent. on the limit of overdraft was per annum and on that basis perhaps it limited the guarantee commission to Rs. 1,750 only. In this connection we may notice the resolution of the company regarding the guarantee commission payable to the managing director, which is found in the assessment order passed by the ITO. The said resolution runs as follows:
'Resolved that the managing director, Mr. F.C. Agarwal, be paid a guarantee commission @ 2 1/2% on Rs. 5,50,000 being the amount on which personal guarantee is given by him to the State Bank of India for cash credit facilities obtained by the company.'
6. In pursuance of this resolution, the guarantee commission of Rs. 13,750 was paid by the assessee to the managing director and the Tribunal has found that this payment was business expenditure. Though the guarantee was given on May 21, 1965, there is nothing in the resolution or anywhere in the record to show that this 2 1/2 per cent. on the overdraft limit payable to the managing director was for 12 months. Since there is no such stipulation limiting the guarantee commission at the rate of 2 1/2 per cent. on the overdraft limit, we hold that the finding of the Tribunal taking the guarantee commission claimed as for 12 months and limiting the deductible amount to Rs. 1,750 is without any material on record. That being the position, on the own finding of the Tribunal which has held that the entire sum of Rs. 13,750 was business expenditure, the Tribunal is not justified in limiting the guarantee commission to the extent of Rs. 1,750 only instead of Rs. 13,750 for the assessment year 1966-67.
7. We also find, as observed hereinabove, that the Tribunal had no material before it to limit the guarantee commission to a period of 1 1/2 months.
8. In the result, we answer both the questions in the negative and against the department.
9. The reference is answered accordingly. There will be no order as to costs.
B.N. Sarma, J.
10. I agree.