Decided on May 14,1982



S.S. Mehra, Judicial Member - (1.) THE appellant-revenue by their instant appeal challenge the first appellate order dated 13-11-1980, of Shri K.C. Chand, the learned Commissioner (Appeals), Calcutta, for the assessment year 1974-75, on the following grounds : 1.That the learned Commissioner of Income-tax (Appeals) has erred in law in holding that Section 40(c) applies only to a natural person and not to a juridical person and in that view was not justified in quashing the assessment.
(2.) That on the facts and in the circumstances of the case the learned Commissioner of Income-tax (Appeals) erred in holding that the Income-tax Officer had erroneously applied the provisions of Section 147 without giving his finding on the jurisdiction of the Income-tax Officer and in quashing the assessment. 2. The respondent-assessee is a resident limited company and the method of accounting is mercantile. The relevant accounting period is the year ending 30-9-1973. The assessment originally framed was reopened by initiating reassessment proceedings under Section 147(6) of the Income-tax Act, 1961 ('the Act'). The learned TTO, Shri T.V. Verghese, considered that in computing the disallowable expenditure under Section 40(c) of the Act, the payments of Rs. 5,38,155, made to Imperial Chemical Industries Ltd., UK-the holding company-who has got substantial interest in the assessee-company, was not considered. He felt that the expression 'person' appearing in Section 40(c) shall have the meaning assigned to it in Section 2(31) of the Act. The reopening proceedings and the withdrawal of the relief were resisted by the assessee. The learned ITO, while hearing the objection of the assessee notwithstanding, considered that the payment in excess of Rs. 72,000 made to Imperial Chemical Industries Ltd. was not allowable. Consequently, an addition of Rs. 4,66,155 was made out of the sum of Rs. 5,38,155 after allowing deduction under Section 40(c) to the tune of Rs. 72,000. The assessment order under Section 143(3)/147(b)/144B of the Act, is dated 30-8-1980. The said assessment order of the learned ITO was thereafter challenged by the assessee and it appears to have been contended before the learned Commissioner (Appeals) that the assessee had objected to the reopening of the assessment under Section 147(6), since according to the assessee all primary facts were placed before the learned ITO during the original assessment proceedings. It was mentioned that the necessary details including payment of technical fees to the UK company were disclosed and that no income chargeable to tax had escaped assessment in consequence of any failure on the part of the assessee to disprove any material facts necessary for assessment. It was also contended before the learned Commissioner (Appeals) that the learned ITO erroneously treated the technical fees paid to the UK company as payment under Section 40(c), because payments made to corporate bodies were not covered by the provisions of the aforesaid section and that 'person' appearing in Section 40(c)(j) referred to 'individual' only and not to corporate bodies. Objections also appear to have been taken that information from audit party did not constitute any information within the meaning of Section 147(6) and furthermore, the original assessment order had already merged with the earlier order of the learned Commissioner (Appeals) dated 22-11-1978.
(3.) THE learned Commissioner (Appeals) vacated the assessment order under reference with the following observations : I find that the aforesaid objection of the learned representative had considerable force. THE provisions of Section 40(c) were applicable to a director of the company or a relative of the director and person having substantial interest in the company or a relative of such person. A person having substantial interest in the company could only be a natural person who could have a relative. A company or a firm could not have a relative obviously. So Section 40(c) only applied to a natural person. Only the meaningful rule of construction has to prevail as held by the Supreme Court in the cases reported in Bengal & Assam Investors Ltd. v. CIT [1966] 59 ITR 547 and CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377. Moreover, the decision of the Karnataka High Court in the case of T.T. (P.) Ltd. v. ITO [1980] 121 ITR 551 was directly on the issue. Deriving support from the above decision I would hold that the ITO had erroneously applied the provisions of Section 147 of the Income-tax Act, 1961. THE assessment is, therefore quashed.;

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