Commissioner of Income Tax vs Godrej and Boyce Mfg. Co. Ltd.

Kania, J.

1., This is an application u/s 256(2) of the income tax Act, 1961 (''the Act''), for directing the Tribunal to refer to this Court for determination the question set out hereinafter and to make a statement of a case for that purpose. The question sought to be referred is as follows :

Whether, on the facts and in the circumstances of the case; and in law, the Tribunal was right in cancelling the order of the income tax Officer u/s 154 for the assessment year 1973-74 and is not sustaining it even to the extent of the excess of the allowance received by the two directors above the undisputed limit u/s 40(c), namely, the excess over Rs. 72,000 in each case, of Rs. 16,987 and Rs. 16,987 equal to Rs. 33,974 ?

The relevant facts are that the assessment of the assessee was completed u/s 143(3) of the Act for the assessment year 1973-74. In respect of the three directors, the ITO disallowed a sum of Rs. 97,381 on the ground that it was exceeding the limit specified u/s 40(c) / 40A(5) of the Act. However, this disallowance did not include the guarantee commission paid to the directors. This commission was paid in respect of the personal guarantees given by the said directors to guarantee the repayment of loans taken by the assessee. Thereafter, the ITO issued a notice- u/s 154 of the Act and purported to rectify a mistake apparent on the record by adding the amount of the aforesaid commission to the disallowance made by him earlier. The assessee appealed against the said rectification to the Commissioner (Appeals) and succeeded in the appeal. An appeal was preferred by the department against this order to the Tribunal, but the Tribunal dismissed the said appeal, inter alia, on the ground that there was no mistake apparent on the face of the record in not including the aforesaid amounts of the commission in the disallowances. Hence, no rectification could be made u/s 154. It is from this decision that the aforesaid question is sought to be referred to this Court.

It is beyond dispute that the power to rectify conferred by section 154 cannot be used where an addition is sought to be made by way of rectification to the liability of the assessee, based on a point which is debatable. Section 40(c) (i), on the basis of which the rectification appears to have been made, runs as follows :

(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has substantial interest in the company or to a relative of the director or of such person, as the case may be,

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if in the opinion of the income tax Officer, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed,

(A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees;

The rest of the provisions of clause (c) are not material for our purposes. Sub-section (5) of section 40A, admittedly, does not carry the matter any further.

We find that in T.T. Pvt. Ltd. Vs. Income Tax Officer, Company Circle-III, Bangalore, , a Division Bench of the Karnataka High Court has taken the view that the payment made to a selling agent who comes on marketing operations cannot be treated as an ''expenditure'' which is referred to in section 40(c). If the payments represent fair market value for the services rendered, then there is no limitation on the total amount payable during any period. This decision of the Karnataka High Court has been approved and relied on by a Division Bench of the Punjab & Haryana High Court in Commissioner of Income Tax Vs. Avon Cycles (P.) Ltd., .

In view of these decisions, the Tribunal was right in its view that the question as to whether the amount of guarantee commission fell within the provisions of section 40(c) or 40A(5) and the computation of the disallowance was a highly debatable question. Such disallowance could not be made by way of rectification u/s 154. As, in our view, the Tribunal was obviously right in its conclusion, no purpose will be served in directing the Tribunal to refer the question as sought by the petitioner.

Rule is discharged with costs.