Commission to CMD for personal guarantee may be treated as ploy to divert funds
 
The assessee claimed a deduction for the guarantee commission of Rs. 1.15 crores that it paid to its Chairman Shri. Vijay Mallya. The AO & CIT (A) disallowed the claim on the ground that the so-called guarantee was a mere signature on a document, not backed by specific assets and that as the commission payment exceeded Mr. Mallyas net wealth of Rs. 70 lakhs, it was an innovative method of diverting income from the company and an unwarranted benefit to Vijay Mallya. However, the Tribunal allowed the claim. On appeal by the department, HELD reversing the Tribunal:
 
None of the bankers had obtained details of the assets & liabilities of Vijay Mallya in India or abroad. He stood guarantor in respect of total borrowings of Rs. 115 crores and received commission of Rs. 1.15 crores even though his net worth was hardly Rs. 70.47 lakhs. Also, as he was a NRI, the permission of the RBI ought to have been taken which was not done. 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. The payment was characterized as commission to overcome the RBIs directions, the provisions of s. 309 of the Companies Act and was not a lawful payment and could not be allowed as a deduction u/s 37(1).