Karnataka HC says no tax waiver on Vijay Mallya’s cut in UB loan deal

The Karnataka High Court has pulled up UB Group chairman Vijay Mallya for ‘diverting’ company money.

In a case pertaining to fiscal 1989-90, United Breweries had sought an income tax deduction on payment of Rs1.15 crore to Mallya, then managing director, towards ‘guarantee commission.’
This was paid in lieu of personal guarantees given by Mallya to banks for loans availed of by United Breweries.

The income tax assessing officer (AO) noted that Mallya had also given similar guarantees to other companies under his management.

He had earned Rs1.15 crore for guarantees of Rs115 crore, while Mallya’s net wealth in 1990 was only Rs70 lakh, it was pointed out.

There was no scientific basis for these bank guarantees and it was only an innovative method to divert income from companies under his management, the taxman alleged.

It was also noted that the loans given by bank were primarily secured against respective company’s assets. The officer said the guarantees were given way back in 1984-85, but some of the loan limits had undergone changes since, necessitating a renewal of personal guarantee. However, no such renewal had taken place, he pointed out.

Hence the AO observed that United Breweries had been paying guarantee commission without ascertaining requirement for these guarantees, there was no legitimate business need for paying it.

The AO further noted that under foreign exchange regulation, it was necessary to obtain permission from RBI, before making payment of guarantee commission to a non-resident individual.

No such approval was obtained by the assessee, even though Mallya was  non-resident Indian for relevant year. Accordingly, AO held that no deduction could be allowed for guarantee commission under section 37 of the Income-tax Act.

While upholding the AO’s stand, the high court held that, “It is a clear case, as rightly pointed out by the Assessing Authority, a ploy to divert income of the companies under his management…”

The court held that the banks had lent money on the basis of security of the assets of the company, and not on the basis of personal guarantee given by Mallya. It observed: “This personal guarantee is adopted as a means to pay remuneration to the managing director for which he was otherwise not entitled to. It is to overcome the directions issued by the Reserve Bank of India. It is to overcome the statutory provisions contained in Section 309 of the Companies Act.”

The section deals with the conditions relating to payment of managerial remuneration.

Accordingly, HC set aside the order of the Income Tax Appellate Tribunal and restored the order of the AO disallowing the deduction of guarantee commission.

The court concluded that “...the order passed by the tribunal is contrary to the material on record. There is no application of mind. The order is vitiated because of not appreciating the facts of this case in a proper perspective and thus, it is not sustainable.”

— The writers are with taxsutra.com