COMMISSIONER OF INCOME TAX vs KHEMCHAND MOTILAL JAIN.

A. K. MATHUR, C. J. :

Both the references are connected therefore, they are disposed of by a common judgment.

For convenient disposal of both the References, the facts given in MCC No. 679 of 1972 (CIT vs. M/s. Khemchand Motilal Jain) are taken into consideration.

This is a reference under s. 256(1) of the IT Act at the instance of the Revenue and the following questions for law has been referred by the Tribunal for answer of this Court :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-company was entitled to the benefits conferred by the provisions of s. 80HH and 80I of the IT Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the commission resolved to be paid to the directors by the company cannot be considered for the purpose of invoking the provisions of s. 40(c) of the IT Act, 1961 ?"

The assessee is a new private limited company, commenced its business of bidi manufacturing w.e.f. 1st Jan., 1982. The company succeeded a firm M/s. Khemchand Motilal Jain which was dissolved on 31st Dec., 1981. All the assets and liabilities to the erstwhile firm was taken over by the succeeding company and it is also carrying on the business of manufacturing bidi having the same trade mark. The company so formed was also manufacturing bidi of Dholak brand. The assessee-company claimed deduction under ss. 80HH and 80I of the IT Act in the revised return for the assessment year under reference. The assessees claim was not allowed by the AO. According to him, the assessee had succeeded the firm M/s. Khemchand Motilal Jain, which was dissolved on 31st Dec., 1981 and that all the assets and liabilities of the erstwhile firm had been taken over by the succeeding company and the firm also carried on the same business of bidi manufacturing. The claim under s. 80HH of the IT Act was dismissed on the ground that the company did not manufacture bidis afresh and it had only inherited such a business from the predecessor firm which began to manufacture bidis long before 31st Dec., 1970 and the AO held that no new industrial undertaking had come into existence after 1970. He was of the opinion that it is only a reconstruction of the business already in existence. The AO further held that labourers, factories and manufacturing centres, plant and machinery remained the same as was used by the erstwhile firm and hence, he concluded that no new industrial unit has been set up as claimed. Similarly, he also denied the deductions under s. 80I as he found that the assessee had failed to satisfy all the conditions laid down in sub-s. (2) of s. 80I. The AO also made a disallowance of Rs. 1,93,790 under s. 40(c) of the IT Act, i.e. remuneration and commission paid to Shri Motilal Jain, chairman, Shri Jeewanlal Jain, managing director. Shri Prakash Chand Jain director, and Shri Azad Kumar Jain, director. Besides the remuneration and commission at certain rate on net profits had been paid to the above directors varying from 3% to 1.5% and this was also disallowed by the AO in excess of Rs. 72,000 in each case and added to the total income of the assessee-company.

Aggrieved by the order of the AO, the assessee approached the appellate authority in appeal and the appellate authority reversed the finding of the AO. Thereafter the matter was taken up by the Revenue in appeal before the Tribunal and the Tribunal affirmed the findings of the appellate authority. Hence, this reference was moved by the Revenue for making reference before this Court and accordingly, the aforesaid two questions of law have been referred by the Tribunal for answer of this Court.

We have heard the learned counsel for the parties and perused the records. The appellate authority after scrutinising the facts, has enumerated certain undisputed facts which were affirmed by the Tribunal also, and they are as under :

(i) that the business of the erstwhile firm came to an end with its dissolution w.e.f. 31st Dec., 1981;

(ii) that all the immovable properties were not taken over by the company, much less even the movable properties like trade marks were not handed over to the appellant-company;

(iii) that the appellant had taken new sales-tax No. as also new central excise No., besides new labour licence under Bidi Cigar Act; new branches have been opened after starting the business by the appellant-company;

(iv) the appellant took over and succeeded only stocks, raw material along with liabilities and not immovable properties and trade mark;

(v) partners of the erstwhile firm, who have entered into an agreement with the appellant company are charging licence fee from the company for the use and exploitation of trade mark; and

(vi) some property of the erstwhile partners of dissolved firm has also been taken on rent by the appellant-company.

On the basis of these admitted facts, the finding given by the AO was found to be not sustainable. These admitted facts which emerge from the order of the appellate authority, make it clear that it was not a purchase of the wholesale firm but only purchases of certain things and started functioning as a new company because sales tax number, central excise number and labour licence under B. C. Act were taken new. The movable like trade marks was not given by the company. All the movable properties were not taken over. Therefore, these facts which have been recorded by the appellate authority and affirmed by the Tribunal, speak eloquently that there was no complete succession. Therefore, in these circumstances, on the basis of the admitted facts, as they emerged, it transpires that it was not a re-construction of a business of the erstwhile firm but a new company emerged though it has taken certain movable and immovable property and stock, which was lying there out of that, a new company has emerged and it cannot be said to be a reconstruction of the same firm though some of the partners may be common. All these concurrent findings of facts make it clear that it was not a reconstruction of the old concern. Hence we answer the first question in favour of the assessee and against the Revenue.

Similarly, question of disallowance under s. 40(c) is concerned, the Tribunal has also affirmed the findings of the appellate authority. The appellate authority took the view that the salary defined in s. 17 does not include the commission. It is pointed out that the commission which was paid, was independent of the salary. It is alleged that the commission paid to Shri Motilal Jain, Sri Jeewanlal Jain, Shri Prakash Chand Jain and Shri Azad Kumar Jain was in pursuance of the resolution passed by the Board on 1st Jan., 1982 and it has nothing to do with the salary which was paid to some of the partners; this commission was paid to them for their financial involvement and they having given standing as guarantee for the loans taken by the company. It was contended that there was no proximity between these two. The appellate authority held that this was not in lieu of salary paid to them for their full time services rendered by them. Therefore, it was not considered to be a salary. It was also found that it was not an excess warranting any part for disallowance under s. 40(C). The appellate authority divided it in two parts i.e. salary and commission and treated this as a commission only and not part of a salary and not found to be excessive. Therefore, this disallowance was also negatived and this was affirmed by the Tribunal. We have considered the factual aspects and in view of the concurrent finding of fact given by both the authorities below, i.e. appellate authority and Tribunal, we are of the opinion that there is no reason to take a different view from the view taken by both the authorities below. Hence, we answer both the aforesaid questions in favour of the assessee and against the Revenue. Accordingly, we answer both the questions in favour of the assessee and against the Revenue.