R.S.Syal, Member (A) -
(1.) THIS appeal by the assessee emanates from the order passed by the CIT (A) on 20.11.2012 in relation to the assessment year 2009 -10.
(2.) THE only issue raised in this appeal through various grounds is against the confirmation of addition of Rs. 41,24,129/ -. Briefly stated, the facts of the case are that the assessee is engaged in the business of manufacture and export of surgical blades. Note no. 6 to the Annual accounts, attached with the return of income, read as under: -
On an observations by auditor, it was been noticed that the Central government approval of contract for sale, purchase of blades and scalpels and for getting job work done from M/s. Razormed INC. (a partnership concern in which directors of the company are interested as partners) had expired on 01.04.2007 and the company continued to make transactions their under without renewal approval from Central Government. Subsequent to the closure of financial year the company has got necessary approval from Central Government for the period 06.04.2009 to 31.03.2012 offence relating to the period 01.04.2007 to 05.04.2009 has been compounded by the Company Law Board on an application made by the Company in this respect.
On the perusal of the Note, the Assessing Officer noticed that the assessee entered into transactions of payment of job work charges to a related party, viz., M/s. Razormed Inc. during the financial year relevant to assessment year under consideration without obtaining prior approval of the Central Government in accordance with the provisions of section 297 of the Companies Act, 1956. On being called upon to explain as to why such job work charges be not disallowed in accordance with the provisions of Explanation to section 37(1) of the Income -tax Act, 1961 (hereinafter also called 'the Act'), the assessee submitted that the post facto approval for the transactions with the related parties undertaken during the year, was obtained from the Company Law Board on payment of compounding charges for the condonation of delay and hence there was no violation of law. Not convinced with the assessee's submissions, the AO opined that the facts of post facto approval and the condonation of delay by the Ministry of Corporate Affairs were not relevant because on the day of payment of such expenditure, there was no prior approval to the job charges paid to M/s. Razormed Inc., which triggered the Explanation to section 37(1) of the Act. This led to the addition of job work charges amounting to Rs. 41.24 lac and the further disallowance of compounding fee for condonation of delay amounting to Rs. 6,000/ -. The ld. CIT(A) echoed the assessment order on this issue. The assessee is in appeal before us only on the disallowance of job work charges and not on the disallowance of compounding fee for condonation of delay.
(3.) WE have heard the rival submissions and perused the relevant material on record. It is observed that the disallowance of Rs. 41.24 lac under consideration has been made in the light of the Explanation to section 37(1) of the Act, which came to be inserted by the Finance (No. 2) Act, 1998 with retrospective effect from 01.04.1962. The disallowance has been made on the premise that as on the date of making the payment to the related party, the assessee did not have the approval from the Company Law Board in accordance with the section 297 of the Companies Act. Before we embark upon considering the applicability of Explanation to section 37(1) of the Act, it would be apposite to consider the relevant parts of section 297 of the Companies Act, 1956, as under: -
297. Board's sanction to be required for certain contracts in which particular directors are interested
(1) Except with the consent of the Board of directors of a company, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company -
(a) for the sale, purchase or supply of any goods, material or services; or
(b) after the commencement of this Act, for underwriting the subscription of any shares in, or debentures of, the company:
Provided that in the case of a company having a paid -up share capital of not less than rupees one crore, no such contract shall be entered into except with the previous approval of the Central Government.
(2) Nothing contained in clause (a) of sub -section (1) shall affect -
(a) the purchase of goods and materials from the company, or the sale of goods and materials to the company, by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices; or
(b) any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for sale, purchase or -supply of any goods, materials and services in which either the company or the director, relative, firm, partner or private company, as the case may be, regularly trades or does business.
Provided that such contract or contracts do not relate to goods and materials the value of which, or services the cost of which, exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract or contracts; or
(c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company as aforesaid.
(3) Notwithstanding anything contained in sub -sections (1) and (2) a director, relative, firm, partner or private company as aforesaid may, in circumstances of urgent necessity, enter, without obtaining the consent of the Board, into any contract with the company for the sale, purchase or supply of any goods, materials or services even if the value of such goods or cost of such services exceeds five thousand rupees in the aggregate in any year comprised in the period of the contract; but in such a case, the consent of the Board shall be obtained at a meeting within three months of the date on which the contract was entered into.
(5) If consent is not accorded to any contract under this section, anything done in pursuance of the contract shall be voidable at the option of the Board.