Commission to CMD for personal guarantee may be treated as ploy to divert funds

CIT vs. United Breweries Ltd (Karnataka High Court )

ITA No. 404 of 2009

Date of Decision 15th October 2011

Honorable high Court in this case on the issue of payment of Commission by United Breweries Ltd. To its Chairman Shri. Vijay Mallya held that though the chairman has stood as guarantor in his personal capacity, the bank has lent money not on personal Guaranty of the Chairman but on the Assets of the Company which are offered as a security to the bank. This personal Guarantee is adopted as a mean to pay remuneration to managing Director for which he was otherwise not entitled too.

It is to overcome the directions issued by the RBI. It is overcome the directions contained in section 309 of the Companies Act, 1956. The assessee paid the MD commission “on the pretext” of paying guarantee commission and it is a “clear case” of “a ploy to divert the income of the companies under his management” and was not a lawful payment and could not be allowed as a deduction u/s 37(1).