Commission paid against Guarantee by Directors in violation of RBI guidelines is not allowable

1. The brief facts, relevant to issue No. (iv) above, are that during the assessment proceedings, the assessee had debited a sum of Rs. 10,19,203/- under the head “Commission paid against guarantee by directors”. On being asked, the assessee explained that the assessee company had obtained working capital limits from bank which were secured by way of hypothecation of plant & machinery, fixed assets, stocks, bicycles and auto parts in process, finished goods, book debts, export bills & other receivables and goods in transit. It was further explained that the loans were also secured by equitable mortgage of lease hold rights of Plot No. C- 87 & C-88, Phase V, Focal Point, Ludhiana and also by personal guarantee given by two directors of the company. In lieu of this personal guarantee, the assessee company had paid commission @ 0.6% of the amount of guarantee amounting to Rs. 10,19,293/-. The details of these expenses are as under :