M.S.SHAH,J. - (1.) IN this reference at the instance of the Revenue, the following question has been referred for the opinion of this Court in respect of asst. yr. 1982 -83 : 'Whether, on the facts and circumstances of the case, the provisions of Section 40A(2) were applicable ?'
(2.) THE facts giving rise to this reference, briefly stated, are as under : 2.1. The assessee is a private limited company engaged in the business of re -rolling steel into CTD bars as also the conversion work of PWD on job basis. Its directors R.R. Malhotra, A.R. Malhotra and Ravinder Malhotra, were carrying on business in partnership in the name and style of M/s Malhotra Steel Corporation. On 16th Oct. 1978, the assessee -company became a partner in that firm. Thereafter the firm was dissolved w.e.f. 30th June, 1980 and the business was taken over by the assessee -company. A dissolution deed was drawn on 1st Aug., 1980. Clause 6 of the deed of dissolution stated that the company was not in a position to make full payment of the balance standing to the credit of the above -mentioned three persons in their capital account and hence they agreed to retain amounts of Rs. 2 lacs each in each of their respective sarafi account for ten years (aggregate amount of retained capital Rs. 6 lacs). In consideration thereof, the company agreed to pay to each of them for a period of 10 years 5 per cent of the net profit of the company (aggregate 15 per cent net profit) or 15 per cent per annum on the amounts credited to the sarafi account of each of them, whichever is higher. 2.2. The accounting year in question ended on 30th June, 1981 relevant to asst. yr. 1982 -83, The assessment was framed on 14th March, 1993, determining the total income of the assessee at Rs. 43,01,922. The assessee company's claim for deduction of Rs. 7.93 lacs paid to the former partners as return on their retained capital of Rs. 6 lacs was allowed on the basis of Clause 6 in the dissolution deed for payment of 5 per cent of the gross profits payable to each of the three former partners. 2.3. On 31st Jan., 1985, the Commissioner of Income -tax (CIT) issued a show -cause notice under Section 263 of the Act. The assessee -company submitted its reply dt. 22nd Feb., 1985. After considering the same, the CIT passed order dt. 12th March, 1985, holding that the order dt. 14th March, 1983, passed by the ITO was erroneous and prejudicial to the interest of the Revenue, inasmuch as the payment of Rs. 2,57,729 each to the three directors of the company had been wrongly allowed by the ITO while computing the total income. The CIT directed the ITO to revise the assessed income by adding the amount in question as the same was not allowable as a deduction. Alternatively, the CIT was of the view that the provisions of Section 40A(2) as also Section 40A(8) were applicable to the aforesaid payment, as the payment was excessive and unreasonable. 2.4. The assessee -company carried the matter in appeal before the Tribunal against the aforesaid order of the CIT under Section 263. The Tribunal dismissed the appeal holding that the CIT had rightly invoked his powers and assumed jurisdiction under Section 263. The Tribunal was of the view that provisions of Section 40A(2) would be squarely applicable in view of the close connection between the payer and the payee, as the outgoing partners were also the present directors of the assessee -company, a closely -held private limited company. While observing that it was for the assessee -company to decide whether to retain the amount of Rs. 6 lacs being the capital of the three partners (who are now directors of the company) with the assessee -company as a deposit, the Tribunal held that the payment of Rs. 7.93 lacs made by the assessee -company to the three former partners of the firm (who are now the directors of the assessee -company) as profit/interest for retaining the refundable deposit of Rs. 6 lacs for the year under consideration and also a recurring liability to share 15 per cent profits/pay 15 per cent interest (whichever is higher) for another period of nine years was excessive and unreasonable and 50 per cent of such payment was disallowed by the Tribunal for the assessment year in question i.e., 1982 -83. Hence, this reference at the instance of the assessee. At the hearing of this reference, Mr. R.K. Patel learned counsel for the assessee urged the following contentions : 3.1. No addition/disallowance is sustainable (1) Once Tribunal disapproved the method of revision on alternatives by the CIT under Section 263, no addition/disallowance can be sustained on any other estimate basis. (2) Tribunal has concluded that amounts payable to ex -partners were in the interest of business and tax authority cannot interfere with the decision of businessmen. (3) There is a factual finding of Tribunal that transaction is not doubted and there is no attempt to evade tax. (4) There is finding that there are huge liabilities and liabilities of outsiders are being given preference so far as discharging of business liability is concerned. (5) Sharing of profits on the facts and circumstances of the case is not prohibited by law. 3.2. Non -applicability of Section 40A(2) (1) Department has not proved prerequisite conditions required for the existence of excessive/unreasonableness of payments as compared to fair market value of services to outsiders. (2) Ex -partners are taxed in higher slabs of rates of tax and the only basis for retaining 50 per cent disallowance by Tribunal is that they may not be taxed in future in higher bracket of tax rate. (3) Reliance is placed on Circular No. 6P of 1968 dt. 6th July, 1968 (Chaturvedi and Pithisaria Vol. II p. 2431 at para 74 on p. 2432), for the purpose of contending that the powers under Section 40A(2) cannot be invoked when there is no tax evasion. 3.3. The learned counsel for the assessee has placed strong reliance on the decisions of this Court in Marghabhai Kishabhai Patel and Co. v. CIT : [1977]108ITR54(Guj) and in Voltemp Transformer (P) Ltd. v. CIT (1981) 129 ITR 105.
(3.) ON the other hand Mr. Akil Kureshi, learned counsel for the Revenue has made the following submissions : 4.1. The power under Section 40A(2) can be invoked whenever the tax authority is of the opinion that the expenditure or payment is excessive or unreasonable having regard to the relevant considerations mentioned in the provision, so much of the payment as is considered by the Tax authority to be excessive or unreasonable shall not be allowed as a deduction. The facts are glaring. For retaining an amount of Rs. 6 lacs of the former partners (the present directors of the assessee -company), the assessee -company pays return of Rs. 7.93 lacs for one year with similar liability to pay profits at the rate of 15 per cent of the gross profits for the next five years or interest at the rate of 15 per cent per annum whichever is higher for the next nine years. This fact is too glaring to be ignored. 4.2. Malhotra Steel Corporation (i.e. a dissolved firm) was doing lucrative business and earning good profits. Hence, at the time of dissolution, the parties knew that the firm was making substantial profits and that 15 per cent of the amount of gross profit of the firm is going to be a sizeable amount. 4.3. The three outgoing partners of the dissolved firm are directors in the assessee -company (which is a closely held private limited company which, took over the business of the dissolved firm). Hence, this was a case of the payer and payee being the same persons for all practical purposes. Whatever assets in the partnership firm which they gave up in dissolution, they got them as shareholders and directors of the closely -held private limited company. 4.4. The fact that the outgoing partners (present director of the assessee -company) paid individual tax on the amounts of Rs. 7.93 lacs received from the assessee -company as return on their capital cannot wipe out the fact that even if the said outgoing partners had been paid by the assessee -company interest at 30 per cent p.a., only that part of the amount (i.e., Rs. 1,80,000) would have been deductible from the income of the assessee -company and on the balance amount of Rs. 6,13,000 the assessee -company would have had to pay income -tax at corporate rate plus the outgoing partners (who are present directors of the assessee -company) would also have to pay income -tax on dividend from the assessee -company at the individual rates (they were in the high bracket). Hence, by the arrangement in question, the directors of the company decided to pay this huge amount as return on their own capital i.e., their capital in their capacity as the outgoing partners of the dissolved firm. 4.5. In any view of the matter, the finding that the payment made by the assessee -company to the outgoing partners (the present directors of the assessee -company) was excessive and unreasonable to the extent of 50 per cent, is a finding of fact which has been given by the Tribunal after taking into consideration all the relevant facts and circumstances and that the finding of the Tribunal is not outside the bracket nor is it such that no reasonable person could have arrived at. In short, the finding of the Tribunal can never be said to be perverse. Hence, this Court may not go behind the finding of fact given by the Tribunal. ;