1. The original assessment under Section 143(3) of the Income-tax Act, 1961 (the Act') was completed in this case on 20-1-1976. This assessment was audited by the internal audit party and they observed that while completing the original assessment, the ITO had not considered the provisions of Section 40A(5) of the Act though the salary and commission paid to the two employees were exceeding the maximum amount allowable under Section 40A(5). The ITO, therefore, reopened the assessment under Section 147(6) of the Act as he had reason to believe that the income chargeable to tax had escaped assessment. He completed this assessment under Section 144 of the Act read with Section 147(6) on 18-1-1979 holding that an amount of Rs. 85,594 was further disallowable under Section 40A(5) in respect of the salary of the aforesaid two employees, viz., Shri P.V. Mehta and Shri E.R. Patel. On an application being made by the assessee under Section 146 of the Act, the ITO reopened this ex parte assessment by his order under Section 146, dated 29-3-1979. The assessment presently under consideration is the one dated 10-2-1980 made in consequence of the order dated 29-3-1979 under Section 146. In the course of these assessment proceedings, the ITO observed that these two employees, viz., Shri E.R. Patel and Shri P.V. Mehta were paid salary and commission as under: Shri E.R. Patel Shri P.V. Mehta Rs. Rs.Salary 12.000 9,000Commission 77,297 57,297 _______Total 89,297 66,297 ------- According to the ITO, since the payment of the salary and commission exceeded the amount admissible under Section 40A(5), the excess had to be disallowed. He, accordingly, disallowed the payments to these persons in excess of Rs. 60,000 each, i.e., a total disallowance of Rs. 35,594 was made.
2. The assessee objected against this order before the Commissioner (Appeals) on various grounds. Firstly, the assessee objected to the reopening of the assessment under Section 147(6) and secondly, on the ground that no disallowance could be made under Section 40A(5) in the facts and circumstances of the case inasmuch as the entire commission payable to these persons was not in effect paid, but the amounts of Rs. 30,000 and Rs. 40,000 were utilised by the assessee for the purchase of a policy on deferred annuity from the LIC by paying the single premium of Rs. 30,000 and Rs. 40,000, respectively, to provide for the payment of annuity to the two parties for their life and upon their death to their dependents at such times fixed from the date of the retirement of the parties or on the death, whichever event takes place first. The agreements with these two employees had the following important provision : Provided always that no benefit shall accrue to the party of the first part or his dependents, as the case may be, nor shall party of the first part or his dependents be entitled to have any benefit or to have any right, lien or interest under the aforesaid policies until the date of the first payment of the annuity.
The Commissioner (Appeals), however, rejected the assessee's appeal on both the grounds for the detailed reasons mentioned by him in the appellate order.
3. The assessee is, therefore, in further appeal before the Tribunal on the very same aforesaid two grounds. In the first place, it is brought to our notice that the assessee had furnished all the relevant information pertaining to the payment of the salary and the commission to these two employees to the ITO by the assessee's letter dated 8-1-1977. All that the ITO was doing was reapprising the same facts for which purpose he had reopened the assessment under Section 147(6). This was not permissible under the law. Secondly, it is submitted that the audit report conveyed the opinion of the audit party on the state of law and such information of the audit party would not form the basis for the reopening of an assessment under Section 147(6) as explained by the learned Judges of the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT  119 ITR 996. Finally, it is submitted that the payments of Rs. 66,297 and Rs. 89,297 paid to Shri P.V. Mehta and Shri E.R. Patel included the value of the deferred annuity which the employer had purchased for these two employees. This amount did not partake of the nature of salary for the purpose of Section 40A(5). On behalf of the revenue, the appeal is resisted on the ground that on a perusal of the audit objection, it would be clear that the audit party has not tried to express any opinion on any of the issues involved. It had merely invited the attention of the ITO to the provisions of Section 40A(5). On the merits of the disallowance, the learned departmental representative has invited our attention to the IT AT Special Bench decision dated 30-9-1981 in the case of Mettur Chemical & Industrial Corporation Ltd. v. ITO in IT Appeal No. 3032 (Mad.) of 1977-78 reported in 3 ITD 612 where the Special Bench has answered in the affirmative the question whether the word 'remuneration' in Section 40(c)(i) of the Act included commission paid by an assessee to its managing director.
4. We have carefully considered the facts and circumstances of the case and the arguments on either side. The original assessment was completed in this case on 20-1-1976. Thereafter, the ITO proposed sometime in 1977 to rectify the assessment under Section 154 of the Act in respect of the excess allowance made on account of the remuneration to the two employees, Shri E.R. Patel and Shri P.V. Mehta. The assessee furnished the entire details by his letter dated 8-1-1977. We are not aware whether this rectification was actually made or not. But at about the same time, an audit objection was received, which we shall reproduce in extenso, as much will depend on the substance of the objection. It reads as under : On going through the records it is seen that two employees of the assessee-firm have been paid salary and commission during the previous year relevant to the assessment year 1973-74 as under : Shri P.V. Mehta Rs. 66,297 (7 months) Shri E.R. Patel Rs. 89,297 (7 months) In both the cases of employees as the salary paid is more than Rs. 5,000 per month. Section 40A(5) of the Income-tax Act, 1961, should have been applied. As the above employees were in employment for only seven months, maximum salary payable should have been restricted to Rs. 35,000 in each of the cases of the employees.
Therefore, balance of Rs. 85,594 should have been disallowed.
The ITO, therefore, reopened the assessment under Section 147(b). In the light of these facts, in our opinion, the plea on behalf of the assessee that the assessee had already placed all the materials before the ITO by its letter dated 8-1-1977 will not carry it far. The assessee's letter dated 8-1-1977 is subsequent to the original assessment dated 20-1-1976. Therefore, it cannot be said that the ITO had reopened the assessment for arriving at a fresh decision on the same facts. As regards the assessee's objection to the nature of the audit objection, we have reproduced it earlier in extenso. In our opinion, all that the audit party has advised the ITO was that Section 40A(5) should have been applied, which apparently had not been applied in the original assessment. All that the audit party has done is to invite the attention of the ITO to a provision of law. In our opinion, the reopening of the assessment under Section 147(6) does not in any manner violate against the principle of law as explained by the learned Judges of the Supreme Court in the case of Indian & Eastern Newspaper Society (supra).
5. This brings us to the merit of the addition. The fact is that the employer had paid these two persons Rs. 66,297 and Rs. 89,297 partly in cash and partly by way of deferred annuity. To our mind there is some substance in the assessee's grievance on this issue. Deferred annuity was not payable to the assessee or to its members immediately. Apart from that, the proviso in the agreement with these two parties reproduced earlier in this order, makes it abundantly clear that the assessee could not claim any benefit under this policy until the date of the first payment of the annuity. In the circumstances, it cannot be said that the commission to the extent of Rs. 30,000 and Rs. 40,000 payable to these two persons was actually remuneration 'paid' to these two persons, for the purposes of Section 40A(5). In the circumstances, in our opinion, the Tribunal Madras Special Bench decision in the case of Mettur Chemical & Industrial Corpn. Ltd. (supra) relied upon by the revenue, has no relevance to the facts of the present case.
6. Finally, therefore, in our opinion, though the assessment was validly reopened by the ITO under Section 147 (b), no amount of remuneration paid to these employees could be disallowed under Section 40A(5).