Cheran Engineering Corporation Ltd. vs Commissioner of Income Tax

N. V. Balasubramanian, J.—In this reference, at the instance of the assessee, the following four questions of law have been referred for our

consideration :

(i) Whether the Appellate Tribunal is right in law in holding that the assessee-company cannot raise before the Appellate Tribunal, the inherent

lack of jurisdiction of the Commissioner of Income Tax in passing the impugned order u/s 263 as the jurisdiction was not challenged before the

Commissioner of Income Tax ?

(ii) Whether the Appellate Tribunal is right in law in holding that the Commissioner of Income Tax is within his powers u/s 263 to revise decision of

the Inspecting Assistant Commissioner while giving direction to the Income Tax Officer u/s 144B and particularly in view of the decision in the case

of East Coast Marine Products (P.) Ltd. (S.B.) I. T. A. T.. Hyderabad [1983] 4 ITD 73 ?

(iii) Whether the Appellate Tribunal is right in law in holding that the order of the Commissioner of Income Tax u/s 263 is not barred by limitation

u/s 263(2)(b) of the Income Tax Act ?

(iv) Whether the Appellate Tribunal in the facts and circumstances of the case, is right in law in holding that the sum of Rs. 50,000 and Rs.

1,01,485 are not allowable expenditure u/s 37 of the Income Tax Act ?

The assessee is a company, in which the public are substantially interested. The assessee filed return for the assessment year 1978-79, admitting

the income of Rs. 14,58,332. The Income Tax Officer, on scrutiny of the accounts, found that the additions and disallowances exceeded Rs.

1,00,000 and, hence, the draft assessment order was issued to the assessee u/s 144B of the Income Tax Act, 1961. The assessee filed its

objections and the case was referred to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after hearing the

objections of the assessee, held that the assessee was entitled to deduction of a sum of Rs. 50,000 being the contribution made to the Labour

Welfare Fund and a sum of Rs. 1,01,485 paid by the assessee to its employees as gift for strike-free services. He held that a sum of Rs. 50,000

cannot be taken as an advance and, similarly, the sum of Rs. 1,01,485 cannot also be taken as a gift and both these sums should be regarded as a

business expenditure incurred by the assessee for the welfare of its employees and, therefore, the assessee was entitled to the deduction of the

same. On the basis of the directions given by the Inspecting Assistant Commissioner of Income Tax, the Income Tax Officer completed the

assessment on July 3, 1981.

The Commissioner of Income Tax exercising his power u/s 263 of the Act, was of the opinion that the allowance of Rs. 50,000 being the

transfer of the amount to a welfare fund and the payment of Rs. 1,01,485 made as gift to the employees for strike-free services were not allowable

expenditure, and, therefore, he issued a show-cause notice to the assessee and, after hearing the objections preferred by the assessee, held that

both the amounts should be regarded as bonus and the amount admissible as bonus exceeded the limit prescribed u/s 36(1)(ii) of the Act, and the

Income Tax Officer erred in allowing both the sums as a deduction. He directed the Income Tax Officer to disallow both the amounts and

complete the assessment.

The assessee challenging the order of the Commissioner of Income Tax has preferred an appeal before the Income Tax Appellate Tribunal. The

Income Tax Appellate Tribunal upheld the jurisdiction of the Commissioner of Income Tax on the ground that the order passed by the Income Tax

Officer on the basis of the direction of the Inspecting Assistant Commissioner was an order passed by the Income Tax Officer.

The Tribunal also rejected the plea raised on behalf of the assessee that the initiation by the Commissioner was time barred and he has no

jurisdiction to initiate the revision proceedings. On merits of the case, the Tribunal held that the sum of Rs. 50,000 was made as donation by the

assessee to the trust and the assessee would be entitled to the deduction u/s 80G of the Act, if it is a recognised trust and, therefore, it was not

open to the assessee to claim the same as business expenditure u/s 37 of the Act. Regarding the sum of Rs. 1,01,485 is concerned, the Tribunal

held that the amount paid exceeded the maximum ceiling limit prescribed in the Payment of Bonus Act, and, therefore, the assessee was not

entitled to the deduction of the same.

The assessee challenged the order of the Appellate Tribunal and the four questions of law set out earlier have been referred to us. So far as the

first question of law is concerned, we are of the opinion, that the question is not propertly framed and it cannot be said that there is inherent lack of

jurisdiction on the Commissioner to revise the order of the Income Tax Officer passed u/s 143(3) read with Section 144B of the Act. The

Commissioner was of the opinion, that the order of the Income Tax Officer was erroneous and prejudicial to the interests of the Revenue and if he

comes to such a conclusion on the basis of materials on record, he could properly exercise the revisional jurisdiction conferred upon him u/s 263 of

the Act and, therefore, we are of the opinion that it cannot be said that the Commissioner had lacked the inherent jurisdiction to revise the order of

assessment. It is not the case of the assessee that there were no materials or that the materials available were irrelevant before the Commissioner

assumed the jurisdiction u/s 263 of the Act to revise the order of assessment.

In so far as the second question referred to us is concerned, the question deals with the power of the Commissioner to revise the order of

assessment made by the Income Tax Officer on the basis of a direction given by the Inspecting Assistant Commissioner u/s 144B of the Act. This

court in an unreported judgment in the case of Commissioner of Income Tax Vs. V.V.A. Shanmugam, ) in T. C. No. 1090 of 1980, dated January

7, 1997, has taken the view that the order passed by the Income Tax Officer pursuant to the direction of the Inspecting Assistant Commissioner is

still an order of assessment and the Commissioner has the jurisdiction u/s 263 of the Act to interfere with the order passed by the Income Tax

Officer as per the direction given by the Inspecting Assistant Commissioner. We are in agreement with the view expressed by the earlier Bench of

this court in ( Commissioner of Income Tax Vs. V.V.A. Shanmugam, T. C. No. 1090 of 1980, dated January 7, 1997), and, therefore, we hold

that the Appellate Tribunal was correct in holding that the order of the Income Tax Officer though passed on the basis of a direction by the

Inspecting Assistant Commissioner, can still be the subject-matter of revision by the Commissioner of Income Tax.

Regarding the third question that has been referred to us, we are of the opinion that the order passed by the Income Tax Officer cannot be said

to be barred by limitation. We have set out the facts earlier. The Income Tax Officer initially passed a draft assessment order and on the basis of

the direction given by the Inspecting Assistant Commissioner u/s 144B of the Act, the Income Tax Officer completed the assessment on the basis

of his direction. u/s 153, Explanation l(iv) of the Act, if the Income Tax Officer on July 3, 1981, is within the time limit prescribed u/s 153 of the

Act (sic). u/s 263(2)(b) of the Act, the Commissioner has the power to revise an order of assessment before the expiry of two years from the date

of the order sought to be revised. The Income Tax Officer has passed the order of assessment on July 3, 1981, u/s 143(3) read with section 144B

of the Act. The time limit for the Commissioner to pass an order has to be computed from July 3, 1981, and not from the date of the expiry of the

previous year, viz., March 31, 1981. If the time limit is computed from July 4, 1981, we are of the opinion that the order passed by the

Commissioner on June 29, 1983, is within the time limit provided u/s 263 of the Act. We, therefore, find no error in the order of the Tribunal in

holding that the Commissioner has exercised the power of revision within the time limit u/s 263 of the Act.

In so far as the fourth question of law is concerned, that relates to the merits of the case. The question refers to the deductibility of two sums,

viz., Rs. 50,000 and a sum of Rs. 1,01,485. As regards the sum of Rs. 50,000 is concerned, the Tribunal disallowed the claim of the assessee on

the ground that the amount has been transferred to welfare fund and the welfare fund was not recognised by the Commissioner of Income Tax,

and, therefore, the assessee was not entitled to deduction. The Tribunal also rejected the claim of the assessee holding that even if the transfer of

Rs. 50,000 is taken as donation by the assessee to the trust, the assessee would be entitled to deduction u/s 80G of the Act and, there- fore, the

assessee was not entitled to the deduction of the sum of Rs. 50,000 as business expenditure. The trust to which the amounts were transferred is

styled as Chennai Engineering Labour Welfare Fund. Though the Tribunal has not enclosed a copy of the trust deed along with the statement of the

case, it is not disputed that the trust was formed for the benefit of employees of the assessee. The Commissioner also has not disputed that the trust

was formed for the benefit of employees of the assessee. The Commissioner also has not disputed the position that the trust was created for the

welfare of the employees of the assessee. If the trust has been created for the welfare of the employees and any contribution was made by the

assessee to the trust, in our opinion, it would in effect mean a contribution made by the assessee, for the welfare of the employees and, in our

opinion, the contribution for the welfare of the employees is an allowable deduction under the provisions of Section 37 of the Act. We are of the

opinion that the contribution made by the assessee is claimed as ""labour welfare expenditure"" and once it is a labour welfare expenditure, it is

allowable u/s 37 of the Act. In so far as the sum of Rs. 1,01,485 is concerned, the amount was paid by the assessee directly to its employees for

agreeing to do the work strike-free and the amount was paid to the employees to render strike-free service, during the relevant period. The

amount was also paid at the rate prescribed on the basis of the agreement, and, therefore, we are of the opinion that the amount paid by way of

contribution for strike-free service is also a labour welfare expenditure and for the promotion of the assessee''s business and the amount is

allowable as a business expenditure.

Mr. C. V. Rajan, learned counsel for the Revenue, fairly brought to our notice the decision of the Supreme Court in the case of M/s. Sri

Venkata Satyanarayana Rice Mill Contractors Co. Vs. Commissioner of Income Tax, Andhra Pradesh, II, , wherein the apex court held that any

contribution made by the assessee to a public welfare fund which is directly connected or related to the carrying on of the assessee''s business is

allowable as a deduction u/s 37(1) of the Income Tax Act, 1961. In our opinion, the decision of the Supreme Court would a fortiori apply to the

facts of the case. Though the donation made by the assessee was not in favour of a public welfare fund, but the donation in the instant case, was

made for its own employees'' welfare fund and the money was paid to the fund to secure to the assessee the benefit in carrying on the business of

the assessee and, therefore, the amount paid can be regarded as a labour welfare expenditure and allowable as deduction u/s 37 of the Act as the

payments were made on the ground of the assessee''s business exigencies. We are, therefore, of the opinion that the Tribunal was not correct in

holding that the sum of Rs. 50,000 as well as Rs. 1,01,485 paid by the assessee cannot be regarded as a business expenditure.

Accordingly, we answer the questions of law referred to us as under :

The first question of law __ In the affirmative and against the assessee.

The second question of law __ In the affirmative and against the assessee.

The thirdquestion of law __ In the affirmative and against the assessee ; and

The fourth quesiton of law __ In the negative, in favour of the assessee and against the Revenue,

The assessee would be entitled to costs of Rs. 750.

The assessee would be entitled to costs of Rs. 750.