Banerjee, J. - (1.) The assessee, a public limited company, is a manufacturer and dealer, inter alia, in steel wire products. In the computation of the total income for the assessment year 1957-58 (corresponding to the accounting year ending with March 31, 1957), the assessee claimed the following amounts as deductions: (1) Contribution of Rs. 1,50,000, to the Indian National Congress. (2) Provision for payment of bonus amounting to Rs. 5,55,000, in addition to the actual payment of bonus during the accounting period, and (3) Anticipated wealth-tax liability amounting to Rs. 1,62,653.
(2.) The Income-tax Officer allowed the first and the second claim but disallowed the third and completed the assessment some time in March, 1958. The assessee preferred an appeal against the order of assessment, before the Appellate Assistant Commissioner, on or about April 8, 1958. During the pendency of the appeal before the Appellate Assistant Commissioner, the Income-tax Officer issued a notice, under Section 34(1 )(b) of the Indian Income-tax Act, on August 30, 1958, requiring the assessee to submit a revised return for the year 1957-58. The assessee filed a return on September 9, 1958, under protest and subject to objection as to the jurisdiction of the Income-tax Officer to issue such a notice. Thereafter, the Income-tax Officer wrote a letter, on September 12, 1958, to the assessee calling upon the assessee to explain how the contribution to the Indian National Congress could be claimed as an allowable deduction. The assessee replied to the letter, on September 19, 1958, taking up the position that the contribution was allowable as an expenditure under Section 10(2)(xv), on the following lines of reasoning: " The Congress is a political party and in power ever since India attained independence in 1947. The company's memorandum of association authorises contributions to such parties. You will kindly recall the two recent decisions, one of the hon'ble High Court of Calcutta and the other by the Bombay High Court that donations by public companies to political organisations were intra vires and competent and not unlawful under the company law. Cultivation of the patronage and good grace of the political party in power amounts to lubricating the machinery for carrying on of the business like our clients ; more so in the cases of assessees like our clients whose activities are controlled, namely, even about the supply of raw materials, fabrication, disposal and price by Iron & Steel Control Order and who have to dance attendance on and explain their view point before a hierarchy of executives. Admittedly, the contribution was made not merely ex-gratia or merely by way of charity but was made by a public company with the prospect of promoting their innumerable business or trade interests. You are aware of the instances where mutual good relations and understanding resolve many a dispute, beget confidence and responsibility, promote expeditious disposal of the business and solution of problems and difficulties. The party in power has to offer the patronage of priorities, licences under the various laws and at various levels and stages. The contributions to such a party evince first the knowledge and belief of the contributor that the contribution is worth its while and secondly, that the contributor finds it prospective and conducive to its interest to make the contribution. Whatever be the ethics of such conduct, even a smile of a Minister or a nod or a frown of an executive authority amenable to a Minister either of a State or of the Centre amounts to a very great help for businessmen or industrialists in getting priorities, in resolving labour disputes, in getting licences and so on. This contribution was inspired by nothing else than motives of commercial expediency and for promotion of the company's business interests. Nationalisation is already in the air. The Imperial Bank has been nationalised, the insurance companies have been nationalised, the talk about nationalising the production and distribution of essential commodities like steel and iron or coal or textiles or sugar is already, according to the layman within the realms of probability, particularly in the proclaimed socialistic Constitution of India itself but also by the Congress in power. This contribution was inspired no less by concern, anxiety and motive to indirectly create some influence against nationalisation of our clients' particular industry or line of industry..."
(3.) Before the Income-tax Officer could take further proceedings, the appeal before the Appellate Assistant Commissioner came up for hearing, on November 21, 1958. On the second date of the hearing, the Appellate Assistant Commissioner addressed a letter to the assessee pointing out that the Income-tax Officer should have disallowed the contribution by the assessee to the Indian National Congress and requiring the assessee to show cause why the assessment should not be enhanced by inclusion of the said amount of contribution in the income of the assessee. The assessee, thereupon, challenged the jurisdiction of the Appellate Assistant Commissioner on the following two grounds: (a) The Appellate Assistant Commissioner was not entitled to assume jurisdiction in the matter, when proceedings under Section 34(1), covering the same matter, were pending before the Income-tax Officer, and (b) The power of enhancement given to the Appellate Assistant Commissioners was confined to matters which were the subject-matter of appeal and not to other matters.;