Commissioner of Income Tax vs Seraikella Glass Works (P.) Ltd.

In this reference u/s 256(1) of the Income Tax Act, 1961, the questions referred to us for our opinion are two in number. They read as follows:

"(i) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal were justified in law in holding that the expenditure of Rs. 4,94,303 shown to have been incurred in the repairs and renovation of the furnace was of a revenue nature and was deductible ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the disallowance made by the Income Tax Officer under the head ''Commission paid by the assessee-company'' to its directors and in not considering the applicability of Section 40(c) of the Income Tax Act, 1961 ?"

These two tax cases relate to the assessment year 1970-71. While assessing, the Income Tax Officer rejected the claim of the assessee of Rs. 4,94,303 claimed to have been incurred in the repairs and renovation of the furnace. The assessee claimed it to be a revenue expenditure whereas the Department asserted that it was capital in nature. The next matter which fell for consideration before the Income Tax Officer was whether the commission paid by the assessee-company to the directors was allowable in terms of Section 40(a)(v) of the Act,

The Appellate Assistant Commissioner, on appeal, allowed the claim of the assessee in regard to deduction of Rs, 4,94,308 said to have been incurred on the repairs and renovation of the furnace. He, however, rejected the claim in regard to the commission paid by the company to the directors. That led to filing of the two appeals--one by the assessee against the disallowance of commission to the directors and the other by the Revenue against the allowance of the sum spent over repairs and renovation of the furnace. The Tribunal disposed of both the appeals in favour of the assessee and against the Revenue.

The Revenue, being aggrieved by the order of the Tribunal, has got these references made to us u/s 256(1) of the Act.

The first question quoted above is concluded by a decision of our court by this very Bench in Taxation Case Nos. 54 to 56 of 1976 ( Commissioner of Income Tax Vs. Seraikella Glass Works (P.) Ltd., ). They related to assessment years 1964-65, 1966-67 and 1968-69. In that case, after an elaborate discussion of the matter, we held that the expenditure on renovation of the furnace was revenue in nature. We see no reason to differ from the view taken by us in the earlier case. In that view of the matter, the first question referred to us must be decided in terms of the earlier decision in favour of the assessee and against the Revenue.

That leaves us with the second question referred to us.

The question is whether commission paid to the directors could have been allowed or not.

The Income Tax Officer has rejected the claim and so has the Appellate Assistant Commissioner. The Appellate Assistant Commissioner in agreement with the Income Tax Officer had held that the perquisites, i.e., commission paid to the directors, were not salaries but benefit. The Appellate Assistant Commissioner also held in agreement with the Income Tax Officer that the company was more or less a family concern and the directors had substantial, if not decisive, voice in fixing their own remuneration. The Tribunal did not go into the questions of fact. It only applied itself to the question whether the case fell within the mischief of Section 40(a)(v) of the Act. The Tribunal did not disturb the finding of the Appellate Assistant Commissioner that the company was more or less a family affair of the directors. This observation of ours should not be read as implying that the Tribunal affirmed it; all that is meant to convey is that the matter was not considered by the Tribunal at all. The Tribunal was of the view that application of Section 40(a)(v) of the Act was not correct. It did not apply itself as to the reasonableness of the allowance.

Learned senior standing counsel for the Income Tax department contended that the case would fall within the ambit of Section 40(c) only, and Mr. Jain did not dispute that the case could fall u/s 40(c) of the Act. The Tribunal, however, did not apply itself as to the reasonableness of the extent of the allowance. The submission on behalf of the assessee is that the Tribunal was right in refusing to apply itself to the applicability of Section 40(c) of the Act as the matter has not been considered from that angle by the Income Tax Officer,

In our view, the submission urged on behalf of the assessee is ill-founded. The source of the power was certainly there. It is not denied that the Income Tax Officer had the power to go into the question as to whether the allowance claimed was reasonable or not reasonable. What the Income Tax Officer could do, the Tribunal also could do. We must concede that where remand involves investigation into new aspects or other sources of allowance, remand should not be resorted to. But where new sources do not fall for consideration, the Tribunal must be held to be fully empowered either to remand it or to go into the question itself. In our view, therefore, the Tribunal was not justified in refusing to adjudicate the claim of the assessee. It should have either considered the question itself or should have remanded the matter to the Income Tax Officer. In that view of the matter, we are definitely of the view that the Tribunal was not justified in deleting the disallowance made by the Income Tax Officer without considering the applicability of Section 40(c) of the Act. The matter must, therefore, be remanded to the Tribunal which will either decide the question of reasonableness of the allowance in terms of Section 40(c) itself or remand it to the Income Tax Officer for investigation into facts.

The second question, therefore, must be answered in favour of the Revenue and against the assessee. For the reasons stated above, question No. (i) is answered against the Revenue and in favour of the assessee and question No. (ii) is answered against the assessee and in favour of the Revenue. There shall be no order as to costs in the special circumstances of the case. Let this order be communicated to the Income Tax Appellate Tribunal in terms of Section 260 of the Income Tax Act.