TRAVANCORE CHEMICAL and MANUFACTURING COMPANY LIMITED vs COMMISSIONER OF INCOME TAX.

V. V. KAMAT, J. :

The assessee, in pursuance of the previous order of this Court dt. 12th April, 1991 in O. P. No. 8856 of 1983, has brought the following three questions expecting our answer :

"1. Was the Tribunal justified in law in holding that it is not open to them to consider in proceedings under s. 260(1) of the Act that (alternatively) the remuneration paid to the two managing directors is governed by s. 40(c) of the IT Act ?

Was the Tribunal justified in its interpretation of the High Court judgment rendered in IT Ref. Nos. 85 and 86 dt. 18th Dec., 1980 and in holding that only s. 40A(5) should be applied for controlling the allowance of remuneration to the managing directors and not s. 40(c) of the Act ?

Was the Tribunal justified in holding that in the instant case the validity of the jurisdiction assumed by the ITO under s. 147(b) cannot be entertained in the proceedings under s. 260(1) of the Act ?"

For the asst. yr. 1974-75, before the ITO, the question as regards assessee claimed for deduction of remuneration of two managing directors of the assessee-company came up for consideration and at that time, the claim was founded on the statutory provisions of s. 40A(5) of the IT Act, 1961. This was on the ground that the two managing directors were employees and, therefore, deduction could be claimed as regards remuneration paid to them. The ITO disallowed their claim holding that the provisions of s. 40A(5) of the Act governed the situation.

The AAC was the first appellate authority. By the order dt. 23rd Feb., 1977, two questions came up for consideration. Firstly, it was urged that resort to the provisions of s. 147(b) was unjustified as no new information had come to the possession of the ITO, after the original assessment was completed. Secondly, it was urged that it was an error to treat the managing directors as employees of the company. It was urged that they are the directors under a resolution approved by the Central Government, under which they came to be appointed for a period of five years on condition that they are to be paid 2.5% of the net profit subject to a maximum of Rs. 72,000. This was in anticipation of the finalisation of accounts, that they were permitted to draw at the rate of Rs. 2,000 per month. This payment of Rs. 2,000 per month was not as remuneration, but payment in anticipation of the approval and finalisation of the accounts. It was also argued before the first appellate authority in this connection that in fact, s. 40A(5) of the Act would not govern the situation, but it would be the provisions of s. 40(c) of the Act which would really answer the situation.

With regard to the first aspect of reopening under s. 147(b) of the IT Act, 1961, the first appellate authority held that the ITO was out of his jurisdiction to reopen the assessment, in view of the audit note forming the required information. The first appellate authority considered this to be academic in view of its answer to the second aspect, as regards the question of applicability of s. 40(c) of the Act and not s. 40A(5) of the Act.

The first appellate authority accepted the contention that the managing directors could not be understood as employees of the company, especially when remuneration has reference to the percentage of profit which is not normally in the case of an employee. The first appellate authority also took into consideration the silence with reference to the contract about the question of remuneration. It was observed that it is purely a contractual relationship for a fixed period on a consideration of percentage of the profits. The reasoning led the first appellate authority to the conclusion, firstly, that the managing directors could not be understood as employees and, therefore, the provisions of s. 40A(5) of the Act could not apply. The first appellate authority has observed that it was contended by the assessee himself that the provisions of s. 40(c) could not be invoked as they were not invoked in the original assessment. It is on the basis of the above reasoning, the additions came to be deleted.

At the instance of the Revenue, the proceedings travelled before the Tribunal. By order dt. 23rd Feb., 1979, the Tribunal dismissed the Departmental appeal holding that the managing directors are not employees, thereby ruling out the application of the provisions of s. 40A(5) of the Act. It must be stated that going through its judgment in the Departments appeal, where the assessee was represented as respondent, this was the only question that was taken up for consideration.

The proceedings thereafter travelled to this Court [ Commissioner of Income Tax Vs. Travancore Chemical Mfg. Co., ], only with regard to the question of applicability of s. 40A(5) of the IT Act, 1961. This Court held that the assumption of the Tribunal that in every contract of service there should be a provision for power to take disciplinary action was erroneous. This Court also held that the managing directors were not members of the provident fund and that they were not entitled to any bonus or leave privileges or even to a minimum remuneration, observing in the context that these considerations were totally irrelevant for determining the nature of relationship that existed between the company and the managing directors. In the process of reasoning, this Court reached the conclusion that the two managing directors were employees of the company and, therefore, entitled to claim deduction in respect of the remuneration paid to them, subject only to the provisions of s. 40A(5) and the question referred for answered accordingly.

It was thereafter, the proceedings reached before the Tribunal, Cochin Bench in pursuance of the decision of this Court (supra) under s. 261 of the IT Act, 1961. It is at this stage, the assessee took up the contention that the proceedings had the origin in the nature of reassessment made by the ITO under s. 147(b) of the Act. It was submitted that the AAC, as stated in the above narration, had not given a clear finding in regard to the validity of the reopening under s. 147(b) of the Act. The assessee submitted that this aspect was not argued before the Tribunal at the earlier stage, in view of the fact, it is submitted, that the assessee took it that the addition made by the ITO was properly deleted by the AAC. The assessee further contended that he had a right to support the order of the AAC also on the ground of lack of jurisdiction on the part of the ITO to resort to s. 147(b) of the Act. The assessee contended that even under s. 260(1) of the Act, he had a legal right to urge these aspects, in regard to the resort to s. 147(b) of the Act.

The assessee also contended, secondly, that on merits the provisions of s. 40(c) are required to be considered even on the assumption that the two managing directors are employees of the company, a contention that not s. 40A(5), but s. 40(c) of the Act would govern the situation.

It was at that stage when the Tribunal was considering the proceedings on receipt of the answer of this Court to the question referred and it was in such a situation, the Tribunal considered that the question before this Court in a proceeding under s. 256(1) of the Act was clear enough. There was a specific reference to the applicability or otherwise of s. 40A(5) and this Court had succinctly answered the said question to the effect that the question of deduction of the amount of salary paid to the two managing directors should be controlled by s. 40A(5) of the Act. The Tribunal further observed that it is not open to it to consider the question under its powers under s. 260(1) of the Act as to whether s. 40(c) would govern the situation. The Tribunal placed reliance on the decision of the Madras High Court in East India Corporation Ltd. Vs. Commissioner of Income Tax, to the effect that the question that could be considered by the Tribunal in its power under s. 260(1) of the Act could only be one which was in dispute before the High Court in the reference proceedings leaving only to the Tribunal to proceed in accordance with the decision of the High Court. The Tribunal has expressed that it must be held that the High Court had decided in the case of the assessee for the assessment year that only s. 40A(5) of the Act could be considered for application and not s. 40(c) of the Act on the basis of the decision of the High Court.

With regard to the aspect of jurisdiction under s. 147(b) of the Act, the Tribunal also considered the difficulty of the limits under s. 260(1) of the Act. In this context, the Tribunal has answered the contention of the assessee that in fact, the AAC had not given a clear finding in regard thereto. In paragraph 4 of its order (Annexure C), in fact the observations of the AAC have been reproduced and it is on the strength of the observations, the contention was rejected by the Tribunal that the question of validity of jurisdiction is not clearly decided by the first appellate authority.

In addition to this aspect, the earlier order of the Tribunal has also been examined to record that the assessee did not make any submission regarding the validity of the jurisdiction under s. 147 of the Act, seeking support of the order of the AAC on grounds other than the grounds which are disputed by the Revenue in its appeal. It is specifically recorded that even though the first part of the order relating to the applicability of s. 40A(5) of the Act was in favour of the assessee, the assessee could have sought support to the order in his favour even by making submission with regard to the aspect, under s. 147(b) of the Act, decided against him by the first appellate authority. In this process, the Tribunal sought guidance of the decision of the apex Court in Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., with regard to the declaration of law to the effect that only questions that can be referred under s. 256(1) to the High Court are questions which are being raised before the Tribunal and either dealt with or not dealt with by it and not questions which are not being raised at all. In consequence, the Tribunal held that these aspects were not raised by the assessee before the Tribunal prior to the proceedings reaching this Court by way of reference.

The Tribunal also observed that the situation of finality and the binding nature of the judgment of this Court would be totally lost if the questions are allowed to be raised in a piecemeal manner as if at the sweet will of the assessee. It is in this process, by the order (Annexure C), the Tribunal with regard to the applicability of s. 40(c) of the Act referring to the proviso to s. 40A(5) and the decision of this Court dt. 28th July, 1978 in IT Ref. No. 67 of 1976 (para 2 of the judgment thereof) held that in the case of a managing director being an employee there is no scope for higher ceiling.

It was thereafter that the assessee approached this Court in O. P. No. 8856 of 1983, obviously after the rejection of the reference application. At the second appellate stage, the proceedings are before the Tribunal in accordance with the statutory provisions of ss. 253 and 254 of the IT Act, 1961. In this context, it would be more than appropriate to refer to the said provisions and in regard thereto, it would be necessary to reproduce the provisions of ss. 253(4) as well as s. 254(4). They are as hereunder :

"253(4). The ITO or the assessee, as the case may be, on receipt of notice that an appeal against the order of the AAC has been preferred under sub-s. (1) or sub-s. (2) by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof, within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the AAC, and such memorandum shall be disposed of by the Tribunal as if it were an appeal presented within the time specified in sub-s. (3).

254(4). Save as provided in s. 256, orders passed by the Tribunal on appeal shall be final"

It would be seen that the above statutory provisions deal with what is to be done by the respondent to such proceedings and that is to be done within a period of thirty days from the date of receipt of notice from the Tribunal. The phrase "notwithstanding that he may not have appealed against such order or any part thereof" is important in this connection. Similarly, the phrase "orders passed by the Tribunal on appeal shall be final" has also an equal bearing.

The above provision shows that such a respondent who may not have appealed either against such order or any part thereof has to file a memorandum of cross objections against any part of the order of the AAC, which has to be disposed of by the Tribunal as if it were an appeal presented within the time specified under sub-s. (3). The statutory provision is also abundantly clear that save as provided in s. 256 of the IT Act, 1961, the orders of the Tribunal receive finality in regard thereto.

The Income Tax (Appellate Tribunal) Rules, 1963, especially r. 22 thereof, require registration of such cross-objections and apply all the rules to such registration. The said statutory provision of the said rules are reproduced hereunder :

"22. Cross-objections - A memorandum of cross-objections filed under sub-s. (4) of s. 253 shall be registered and numbered as an appeal and all the rules, so far as may be, shall apply to such appeal".

16A. In addition to this, it would be necessary to reproduce r. 27 of the Income Tax (Appellate Tribunal) Rules, 1963, dealing directly with the respondent who may support the order in his favour on grounds decided against him. The said rule is reproduced hereinafter :

"27. Respondent may support order on grounds decided against him - The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him".

Thus, the combined effect of rr. 22 and 27 reinforces statutory contents of ss. 253(4) and 254(4) more emphatically and the said rules clearly spell out that it is the respondent who has to exercise his right in support of the order that may be in his favour on other grounds making it unnecessary for him to be the appellant himself in regard thereto. Combined effect of the above two rules keeps open two methods for such a respondent, one is to file a memorandum of cross-objection and the other is specifically to urge to support the order on grounds decided against him, although he may not have appealed. This is his second remedy in the proceedings taken up before the Tribunal, not by him but by the appellant.

Therefore, it will have to be considered that the basic principle that the respondent has to take up steps, although he may not have appealed independently from any part of the order, such a respondent has a right not only to support the order, but he has also to state that the finding against him by the authority below in respect of any issue ought to have been in his favour. This principle of finality is based on the general assumption that any matter or question which might and ought to have been made a ground is required to be deemed to have been a matter arising under the concerned situations. The principle of finality presents constructive situation, by necessary implication as a consequence in appreciating and understanding the principle of finality. The principle of finality is based and accepted in the context of the required situation in the interest of justice. Just as the Courts on authority appreciate the rights of the contending parties to raise important questions and consider in the context as far as possible any provision in regard thereto at any stage, yet the Courts on authority have always considered a situation in regard to certain questions in regard to which certain stages are contemplated in accordance with the principle of finality. The principle of finality not only is in the interest of the health of the legal system, but it is also, in the context, a feature in consonance with justifiable anxiety to see the end of the situation in regard to the context. Allowing anyone to raise anything at any time is also a factor in the nature of harassment in the situation. Although the interest of justice is paramount, the statutory safeguards in the context of the principle of finality have their own contribution in the process to see the end of the litigation. It is in this context, even the ordinary law recognises this principle in the well known doctrine of res judicata, which has, in its turn, considered the principle of constructive res judicata. It is in the context of the principles of constructive res judicata that situations which might and ought to have been made ground have been statutorily recognised in consonance with the principle of finality. Even the legal and statutory provisions requiring respondent to take necessary legal steps provided by the law of procedure in the context, though in the same direction what is expected to be taken up by the respondent at an appropriate stage to get well provided in the statutory provision.

This principle stares at our face when we see the statutory provisions of ss. 253 and 254 of the IT Act, 1961 as well as its particulars specified in the Income Tax (Appellate Tribunal) Rules, 1963. It is necessary to mention that in its order, as present under our consideration (Annexure C), in paragraph 5, there is a reference to IT Ref. No. 67 of 1976 decided on 28th July, 1978 by this Court in the matter of M/s. Premier Cotton Spinning Mills Ltd. vs. CIT. We have gone through the contents of the said judgment. In the said judgment, even the aspect of applicability of s. 40(c) of the Act is taken up for consideration, to be read with s. 40A(5) of the Act. Referring to the contents of s. 40A(5) of the Act, this Court has considered that the situation would be applicable only to the lower ceiling of Rs. 60,000. Be that as it may, the question before us is clearly whether the assessee could be allowed to take up the above contentions under the above situation in regard to which it can be safely and surely stated that these contentions are sought to be taken up certainly not at the appropriate and proper occasions when they ought to have been taken up when the matter was before the Tribunal prior to its reaching this Court by reference at the instance of the Revenue. We have already stated that at that stage although the assessee was a respondent, the proceedings were allowed to be taken up in a situation where the respondent-assessee who could have supported the order under the above statutory provisions had chosen to be conspicuous by silence.

In the context of the situation, we have to consider the statutory limits when the Tribunal was dealing with the proceedings received from this Court in pursuance of its judgment dt. 23rd Feb., 1982 in IT Ref. No. 53 of 1979. This was on the basis of an earlier decision of this Court in CIT vs. Travancore Chemical Mfg. Co. (supra).

The statutory provisions of s. 260 of the IT Act, 1961 require this Court to decide the question of law raised in the case and thereafter further require despatch of its judgment to Tribunal. The statutory provisions further require the Tribunal to act thereupon and to pass such orders as are necessary to dispose of the case conformably to such judgment. This, phrase sets out the statutory limits of the Tribunal. The Tribunal gets limited powers to proceed with the situation conformably in accordance with the judgment of this Court.

Obviously, in such a situation, the questions which ought to have been considered after agitation in regard thereto in accordance with the statutory provisions, in our judgment, cannot be contemplated in the context.

The learned counsel for the assessee placed reliance on the decision of the Bombay High Court in ITAT & Ors. vs. S. C. Cambatta & Co. Ltd. AIR 1956 Bom. 509 for a proposition that the Tribunal even acting within the limits of s. 260(1) of the IT Act, 1961 could be contemplated to get jurisdiction to consider the question of law. The learned counsel took us carefully through the entire judgment. The Court was dealing with an appeal from the decision of the learned single judge of that Court directing the Tribunal to hear the application under s. 66(1) of the IT Act, 1922, which was rejected by the Tribunal on the ground of being outside the limits of the Tribunal acting on an order in pursuance of the reference passed by the High Court earlier. On behalf of the Revenue, it was argued before the said Court and the said argument was found to be perfectly right. The Revenue contended that the power of reference is a limited power conferred upon the High Court under s. 66 of the 1922 Act and it is not possible to extend the ambit of the said power. Consequent submission on behalf of the Revenue was also equally held to be right that reference only lies under s. 66 of the said Act, provided a question of law arises out of an order passed by the Tribunal under s. 33(4) of the Act.

Accepting these submissions on behalf of the Revenue, emphasising also the situation of finality to be found in s. 33 of the 1922 Act, it was observed that the situation is clear that except in cases which may go up to the High Court on a reference, the decision of the Tribunal under s. 33 is final. We have already emphasised the statutory provisions under the Act now in force - IT Act, 1961. This is to the effect that no finality attaches to the decision of the Tribunal because by reason of the decision of the High Court on a reference, the decision given by the Tribunal is liable to be reopened and it will be the duty of the Tribunal to give effect to whatever decision the High Court gives. We have also sufficiently emphasised the statutory provisions of ss. 254(4) and 260(1) of the IT Act, 1961 to emphasise that the Tribunal is expected to dispose of the proceedings received from the High Court conformably to such judgment of the High Court.

Further discussion of the judgment shows that on receipt of the proceedings from the High Court as a result of the decision on the reference, the Tribunal has the function of ascertaining the valuation of the goodwill in regard to which the question of law which was submitted to be referred arose before the learned single judge.

In this context, it was held that the final decision in appeal has only to be given by the Tribunal after the reference has been made and that decision can only be given under s. 33(4) of the Act. It was observed that the Tribunal has to pass an order out of which a question of law arises, which question never arose out of the first order, then there is no reason why the assessee or the CIT should not have the right of coming to the High Court.

In other words, if the question of law could be said to have arisen for the first in point of time, when the proceedings were before the Tribunal in pursuance of the order of reference, the Tribunal can certainly consider such a question but it would be only on a factual situation that the question arises first in point of time and definitely not at any time in the past during the travel of the proceedings. After carefully considering the judgment cited by the learned counsel, we find that in fact, the terse observations go more rigorously in fortifying our approach taken on the factual situation before us. The statutory provisions do provide that on receipt of the proceedings on a reference from the High Court, the Tribunal has to act conformably in the light of the directions in the answer to the question referred. If the question that is sought to be raised and contended at this stage of the proceedings has not been urged or could not have been urged, the Tribunal may proceed to consider such question, but only on satisfaction that the question arises afresh for the first time and is of such a nature that it could not have been raised at any time in the earlier travel of the proceedings.

For all the above reasons, we answer all the questions in the affirmative - in favour of the Revenue and against the assessee.