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L.H. Sugar Factories and Oil Mills (P.) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 657 of 1974
Judge
Reported in(1979)10CTR(All)268; [1979]118ITR985(All)
ActsIncome Tax Act, 1961 - Sections 28, 37(1) and 40; Income Tax Rules, 1962 - Rule 5(1)
AppellantL.H. Sugar Factories and Oil Mills (P.) Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateAshok Gupta, Adv.
Respondent AdvocateR.S. Dhawan, Adv.
Excerpt:
- - on facts, the tests laid down under clause (c) of section 40 are satisfied. in view of the divided success, the parties may bear their own costs......whether, on the facts and in the circumstances of the case, the sum of rs. 1,13,543 payable by the assessee-company as interest under section 3(3) of the u. p. sugarcane (purchase tax) act, 1961, is an allowable deduction under section 37(1) or under section 28 of the income-tax act, 1961 ? 4. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the payment of rs. 40,000 as contribution to the congress party and rs. 5,000 as contribution towards election expenses of the company's employee were not admissible as deductions under section 37(1) or section 28 of the income-tax act, 1961 ? 5. whether, on the facts and in the circumstances of the case and having regard to the second proviso to rule 5(1) of the income-tax rules, 1962, the.....
Judgment:

Satish Chandra, C.J.

1. For the assessment year 1963-64, the Tribunal has referred the following five questions of law for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the payment of Rs. 1,49,884 on account of guarantee commission passed all the tests laid down in Section 40(c) of the Income-tax Act, 1961, and that entire claim of payment was allowable ?

2. Whether, on the facts and in the circumstances of the case, there was material for the Tribunal to hold that the payment of commission on sale of sugar to the agents amounting to Rs. 1,81,104 was an admissible deduction ?

3. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,13,543 payable by the assessee-company as interest under Section 3(3) of the U. P. Sugarcane (Purchase Tax) Act, 1961, is an allowable deduction under Section 37(1) or under Section 28 of the Income-tax Act, 1961 ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 40,000 as contribution to the Congress party and Rs. 5,000 as contribution towards election expenses of the company's employee were not admissible as deductions under Section 37(1) or Section 28 of the Income-tax Act, 1961 ?

5. Whether, on the facts and in the circumstances of the case and having regard to the second proviso to Rule 5(1) of the Income-tax Rules, 1962, the Tribunal was right in holding that the extra shift depreciation allowance for double and triple shift working in the case of the assessee-company was to be calculated with reference to the actual number of days on which the factory worked such extra shifts and not at 100% of the normal depreciation allowance for the relevant previous year ?'

2. In relation to the first question, the material facts are that the assessee had paid guarantee commission amounting to Rs. 1,49,884 to its directors and substantial shareholders as compensation for giving personal security against the cash credit agreements with the company's bankers. The commission paid to these persons was at the rate of 10% of the interest payable to the bankers. The ITO disallowed the entire claim under Clause (c) of Section 40 of the I.T. Act on the finding that this expenditure was remuneration, benefit or amenity paid to a director or shareholder and was an unreasonable figure unrelated to the legitimate business needs of the company and the benefit derived by it therefrom. This view was upheld partly by the AAC, who allowed the claim to the extent of 50 per cent. Both sides went up to the Tribunal. The Tribunal held :

'In our view there was no justification for disallowing any part of the guarantee commission paid by the company to its directors or substantial shareholders. The commercial justification for giving guarantee by the directors to the banks cannot be gainsaid. The banks insisted on it and the directors and the substantial shareholders had to make allowance for it. There is no basis for the assumption of the Income-tax Officer that the guarantee was demanded by the banks as a kind of hostage from the directors. On the other hand, the guarantee demanded was as an additional security in case the assets of the private limited company or public limited company are lost due to vicissitudes of business. The personal guarantee by the directors in effect pledges their personal assets against such contingency. It is a part of banking wisdom to insist on this kind of security. When the private limited company gets this assistance from its directors, it is but commercially proper that the directors should be compensated for the risk that they are running. It is clear from the report of Synthetics and Chemicals that although in that case the directors were not paid the guarantee commission, the bank clarified that if such a guarantee was not given the rate of interest would be increased and there would be restrictive covenants in the loan agreement. In other words, what the company loses by way of guarantee commission, it would gain by saving of interest and avoidance of restrictive covenants. The payment of guarantee commission was, therefore, commercially justified. In regard to the rate there has been no change in the rate. On the other hand, the volume of the company's business has increased and there is a preponderance of loans in its structure of liabilities. The payment, therefore, could not be called in question as being influenced by any extra-commercial considerations and it must be taken that it passed all the tests laid down in Section 40(c). We, therefore, direct that the whole of the guarantee commission should be allowed.'

3. It is thus apparent that the directors and shareholders stood personal security having regard to the legitimate business needs of the company. The compensation paid was at the rate of 10% of the interest payable to bankers. It was not excessive. On facts, the tests laid down under Clause (c) of Section 40 are satisfied. We are in agreement with the Tribunal that the assessee was entitled to this deduction. The first question is hence liable to be answered in favour of the assessee.

4. In relation to the second question, the matter stands concluded by a decision of this court in Jaswant Sugar Mills Ltd. v. CIT : [1970]78ITR154(All) . In similar circumstances, a Bench of this court in that case held that the payment of commission on sale of sugar was an admissible deduction. We are bound by that decision. The second question is hence liable to be answered in favour of the assessee.

5. The third question has recently been adjudicated upon by a Full bench of this court in Saraya Sugar Mills (P.) Ltd. v. CIT : [1979]116ITR387(All) . It was held that interest paid on arrears of sugarcane purchase tax is not an allowable deduction. The third question is hence liable to be answered in favour of the department.

6. The fourth question is about payment of contribution to the Congress party and towards the election expenses of the company's employee. In J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. CIT : [1966]62ITR813(All) , it was held that, in the absence of any direct nexus between the business of the company and the contribution, the amount paid to a political party was not an allowable business expenditure. In the present case, on facts, it has not been established that the payment had any justification qua the business interest of the assessee company. It was hence rightly disallowed. The fourth question is hence liable to be answered in favour of the department.

7. In relation to the fifth question, the position is that in J.K. Synthetics Ltd. v. CIT : [1979]118ITR629(All) , this court has held that the normal allowance referred to in Expln. 1 under 'Machinery and plant' in Appendix I, relating to Rule 5 of the I.T. Rules, 1962, refers to the figure of normal depreciation had the machinery and plant worked for a period of 180 days or more and not the hypothetical figure of normal depreciation. For double and triple shift working, 100% of such normal depreciation allowance is admissible. The actual number of days on which the factory worked such extra shifts is immaterial. In view of this decision, the fifth question is liable to be answered in favour of the assessee.

8. In the result, we answer questions Nos. 1, 2 and 5 in favour of the assessee and against the department and questions Nos. 3 and 4 in favour of the department and against the assessee. In view of the divided success, the parties may bear their own costs.


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