Delhi High Court upholds deductibility of guarantee commission to directors

This Tax Alert summarizes a recent ruling of the Delhi High Court (HC) in the case of Controls & Switchgear Contactors Ltd. (Taxpayer) on the issue of allowability of guarantee commission to the Taxpayer’s directors who had given personal guarantees to lending bank for extending various credit facilities to the Taxpayer. Considering that the provision of personal guarantees and undertaking attendant risks were clearly beyond the scope of directors’services, the HC concluded that the transactions were real and genuine. Furthermore, considering that the Taxpayer was a listed company and the concerned directors were not the only shareholders, the HC concluded that the amount, if not paid as commission, would not have been payable to directors as dividend or profits. Hence, the commission payment was not hit by a specific provision of the Indian Tax Laws (ITL) which does not permit deduction for bonus or commission paid to an employee in lieu of profits or dividend.