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Commissioner of Income-tax Vs. Income-tax Appellate Tribunal, d Bench and anr. (Stadmed Pvt. Ltd.) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberMatter No. 386 of 1973
Judge
Reported in[1977]109ITR267(Cal)
ActsIncome Tax Act, 1922 - Sections 10(2), 10(4), 10(4A) and 66; ;Constitution of India - Article 226
AppellantCommissioner of Income-tax
Respondentincome-tax Appellate Tribunal, "d" Bench and anr. (Stadmed Pvt. Ltd.)
Appellant AdvocateBalai Pal and ;Ajit Sengupta, Advs.
Respondent AdvocateKalyan Roy and ;R.N. Dutta, Advs.
Cases ReferredK. M. Shanmugam v. S.R.V.S.
Excerpt:
- .....of the opinion that such allowance was excessive or unreasonable having regard to the legitimate business income and the benefit derived by the company from incurring the said expenditure. therefore, even in a case where the expenditure has been incurred wholly and exclusively for the purpose of the business, if such expenditure was in the nature of allowance mentioned in sub-section (4a) of section 10 in respect of persons mentioned therein, such allowance, to be allowable, must not be excessive or unreasonable having regard to the legitimate business income and the benefit derived by the company from incurring of the said expenditure. from the order of the income-tax officer referred to hereinbefore, it is manifest that he proceeded on the basis of section 10(4a) in disallowing the.....
Judgment:

Sabyasachi Mukharji, J.

1. The subject-matter of challenge in this application is the order dated 27th October, 1971, passed by the Income-tax Appellate Tribunal, 'D' Bench, Calcutta. In order to appreciate the questions involved in this application it would be relevant to refer to the facts in little detail. It appears that for the assessment year 1961-62 the assessee which is a limited company made a claim for allowance of certain remuneration and commission paid to two joint managing directors, Shri A. K. Das and Shrimati Sujata Saha. The Income-tax Officer in his assessment order observed that the joint managing directors were paid monthly salary of Rs. 1,500 per month and commission on sales in the case of A. K. Das at the rate of 10 per cent. and in the case of Shrimati Sujata Saha 1 1/2 per cent. on the sale. Dealing with the same the Income-tax Officer observed, inter alia, as follows :

'The joint managing directors were paid the remuneration at the same rate in the immediately preceding year. The payment of such remuneration was found excessive and disallowances were made from the remuneration of both the directors. The assessee-company had contended that the payments are justified in view of the duties performed by the directors and also in view of the increase in the business of the company. In the assessment year 1960-61, the directors had performed similar services. The increase in business is in no way abnormal in this year but rather it is following the normal trend of a going concern. Besides, there is nothing on record to indicate that the increase in business can be attributed to some special effort put in by the two directors. On the contrary the same set of facts obtained in the cases of the two directors, Srimati Saha did not, as before, have any special qualification in this line of business and Sri A. K. Das continued to be the director of another company. Hence, the remuneration paid to the directors is considered to be excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by it from the payment of such remuneration. Accordingly, I would allow only Rs. 750 p.m. as salary in the case of Sujata Saha as per remuneration and a sum of Rs. 750 p.m. as salary and commission on sales at 1% in the case of Sri A. K. Das. Thus the disallowance in the case of Srimati Sujata Saha would work out to Rs. 9,000 from salary and Rs. 38,887 on account of commission. The disallowance in the case of Sri A. K. Das's remuneration comes to Rs. 9,000. Hence the total disallowance under this head will come to Rs. 56,887.'

2. Under section 10(2)(xv) of the Indian Income-tax Act, 1922, expenditure incurred wholly and exclusively for the purpose of carrying on the business is allowable as deduction. Therefore, in order to be entitled to deduction under Section 10(2)(xv) of the said Act, the expenditure must be shown to have been incurred wholly and exclusively for the purpose of the business. Under section 10(4A) of the said Act, however, in the case of a director or person who is substantially interested in the company within the meaning of Sub-clause (iii) of Clause (6C) of Section 2 of the Act such expenditure or allowance was not allowable if the Income-tax Officer was of the opinion that such allowance was excessive or unreasonable having regard to the legitimate business income and the benefit derived by the company from incurring the said expenditure. Therefore, even in a case where the expenditure has been incurred wholly and exclusively for the purpose of the business, if such expenditure was in the nature of allowance mentioned in Sub-section (4A) of Section 10 in respect of persons mentioned therein, such allowance, to be allowable, must not be excessive or unreasonable having regard to the legitimate business income and the benefit derived by the company from incurring of the said expenditure. From the order of the Income-tax Officer referred to hereinbefore, it is manifest that he proceeded on the basis of Section 10(4A) in disallowing the entirety of the expenditure claimed though he did not say that he was disallowing under Section 10(4A) of the Act. The assessee preferred an appeal from the said order of the Income-tax Officer. The Appellate Assistant Commissioner in considering this question referred to the decision in Income-tax Appeal No. 936 of 1964-65 and referred to the principles laid down in the case of Bengal Enamel Works Ltd. v. Commissioner of Income-tax : [1966]59ITR472(Cal) and found that in the previous year it was directed that the remuneration of Rs. 1,250 per month should be allowed to the managing director, Srimati Saha. Thereafter, he observed, inter alia as follows :

'It was stated that she was not even a matriculate. Nothing could be brought on record even at the appellate stage about her previous business experience although it was stated that she had acted as a director previously for some time during her husband's lifetime. It was argued that the sales position improved from year to year after her appointment as a joint managing director but the Tribunal has remarked in its decision referred to above that this was a normal increase in this type of business and may have been in part contributed by the efforts of the managing director. In the Calcutta High Court's decision referred to above it was held that in deciding the issue one should take an overall picture of all the facts and circumstances of the case and the cumulative effect of the surrounding circumstances should be given effect to. At page 475 of the same case it was also stated by the High Court that it is now settled law that the question whether an item of expenditure is wholly and exclusively laid out for the purpose of the assessee's business must be decided on the facts of each case. Smt. Saha was holding large number of shares in the company and she had also controlling interest in the company. The company was previously run by her husband. The extent of services rendered by these two managing directors has not been brought out in the- records. A/R, however, stated that the lady regularly attended office whole-time. Of course, there is no doubt that Sri Das was connected with the company since its inception and he is a qualified man. Under the circumstances, the remuneration of Rs. 750 p.m. allowed to him and a commission of 1% on sales are not adequate when a similar remuneration of Rs. 750 per month has been allowed to the lady. The fact that Sri Das was also working in another company during the year should not be a reason for curtailing his remuneration by half. He is a capable and qualified man and in accordance with the remuneration paid to the managing director in this company, in my opinion, he is entitled to a remuneration @ Rs. 1,000 p.m. against Rs. 750 allowed by the Income-tax Officer.

Regarding Smt. Saha the remuneration of Rs. 750 p.m. allowed by the Income-tax Officer seems to be fair and reasonable. About the commission of 1 1/2% allowed to her it was argued that a commission of 2 1/2% on total sales had been allowed in past to the previous managing director.'

3. The Appellate Assistant Commissioner also did not refer to either the provisions of Section 10(2)(xv) or Section 10(4A) of the Indian Income-tax Act, 1922. The cases referred to in the said portion of the order, however, were cases dealing with question under Section 10(2)(xv) of the Act. But it must be pointed out that the Appellate Assistant Commissioner took into consideration whether the sales were made as a result of the participation of the managing directors and whether they had business experience. It is not clear from the order of the Appellate Assistant Commissioner whether he proceeded solely on the consideration of Section 10(2)(xv) or Section 10(4A). It seems to me that he considered both the aspects and modified to a certain extent the order of the Income-tax Officer as indicated above having regard to the business income and the benefit derived by the company from the participation of the said two managing directors, after having come to the conclusion that the said expenditure had been incurred wholly and exclusively for the purposes of the business. From the aforesaid order of the Appellate Assistant Commissioner the assessee preferred an appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal, after discussing the rival contentions, observed as follows :

'We have given our careful consideration to the arguments which have been addressed to us. The decisions on which the learned counsel has relied are not, in our opinion, applicable to the facts and circumstances of the present case. In both those decisions the question before their Lordships was whether the remuneration/commission paid to employees/agents qualified for deduction under Section 10(2)(xv). The disallowance in the present case has been made under Section 10(4A). Under section 10(2)(xv), the requirement is that the payments should have been incurred wholly and exclusively for the purposes of the business. The stipulation in Section 10(4A) is that the allowances should not be excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. Therefore, the decisions which are rendered under Section 10(2)(xv) would not be applicable to cases falling under Section 10(4A).

5. As stated earlier, the Tribunal had occasion to consider the matter from the standpoint of Section 10(4A) in the assessment year 1959-60, when the late Shri Gour Gopal Saha was the sole managing director of the asscssee-company, The Tribunal held that it would be reasonable to allow a remuneration of Rs. 1,250 per month, plus commission at 2 1/2% on sales. Though there are now two managing directors, it is clear from what has been stated in the orders of the authorities below that the brunt of the responsibility would have fallen on the shoulders of Shri A. K. Das. The Appellate Assistant Commissioner has in para. 1 of his order, inter alia, observed that 'there is no doubt that Shri Das was connected with the company since its inception and he is a qualified man'. In regard to Smt. Sujatha Saha, he has, inter alia, observed that ' she was not even a matriculate and that nothing has been brought on record regarding her previous business experience, if any', It is no doubt true that the Tribunal fixed the reasonable remuneration for the late Shri Gour Gopal Saha at only Rs. 1,250 per month but then, it was coupled with commission of 2 1/2% on sales. The commission payable to Shri Das has been considerably curtailed whereas the late Shri Gour Gopal Saha was in receipt of 2 1/2% commission on sales, Shri A. K. Das's entitlement is only 1%. It, therefore, appears to us that the remuneration of Rs. 1,500 per month which has been claimed in respect of Shri A.K. Das is quite just and fair and cannot be considered to be either excessive or unreasonable, within the meaning of that expression in Section 10(4A). We would, therefore, direct that the remuneration paid to him be allowed in full.

In so far as Smt. Sujatha Saha is concerned, the remuneration of Rs. 750 per month plus commission at 1 1/2% on sales, which has been allowed by the Appellate Assistant Commissioner is sufficiently liberal and no enhancement of the allowance is accordingly necessary. The ground relating to the remuneration paid to the joint managing directors is disposed of accordingly.'

4. Thereafter, the assessee made an application for reference of certain questions of law to the High Court and suggested four questions to be referred. The Tribunal reframed the questions suggested and formulated one question. Thereupon the draft statement was circulated. But before it could be finalised the assessee made an application for rectification of the order of the Tribunal and the impugned order which is the subject-matter of challenge in this application was thereafter passed by the Income-tax Appellate Tribunal whereby the Income-tax Appellate Tribunal observed as follows :

'5. Before us the learned counsel for the assessee-company submitted that the Appellate Assistant Commissioner applied the provisions of Section 10(2)(xv) and not those of Section 10(4A) to the facts and circumstances of the case. According to him, the issue relating to the application of Section 10(4A) was brought in by the Income-tax Officer not by expressly mentioning the section but using the phraseology of the section. It was also claimed that from a reading of the relevant portion of the order it would appear that the Income-tax Officer relied upon the provisions of both the Sections, that is, Sections 10(2)(xv) and 10(4A). But the Appellate Assistant Commissioner in his order did not make any discussion on the provisions of Section 10{4A) and, on the other hand, relied upon the order of the Tribunal in respect of the assessment year 1959-60 wherein the identical issue was decided in accordance with the provisions of Section 10(2)(xv). The learned counsel further contended that in view of the decision of the Supreme Court in Commissioner of Income-tax v. Amritlal Bhogilal & Co. : [1958]34ITR130(SC) the relevant assessment order got merged with the Appellate Assistant Commissioner's order and consequently the issue relating to the application of Section 10(4A) went out of the picture. It was further submitted that the Tribunal was wrong in going beyond the Appellate Assistant Commissioner's order by applying the provisions of Section 10(4A) to the facts of the instant case and, according to him, the appeal before the Tribunal should have been pressed with reference to the provisions of Section 10(2)(xv).

6. Thereafter, the learned counsel appearing for the assessee contended before us that the Tribunal should recall and quash its order. In this regard it was urged that the Tribunal had the authority to do so as the order dated February 24, 1971, was passed by the Tribunal on wrong analysis of fact and law which mistake was palpable as the aforesaid order of the Tribunal was passed on wrong materials and misapplication of law. It was submitted that the Tribunal should pass a fresh order in accordance with law, after cancelling its own order dated February 24, 1971. In this regard the learned counsel for the assessee relied upon the decision in the case of Mangat Ram Kuthiala v. Commissioner of Income-tax : [1960]38ITR1(Mad) .

7. On the other hand, the learned departmental representative strongly contended before us that the impugned order of the Tribunal was correctly made and there was no mistake apparent from the records which would warrant its cancellation as requested for on behalf of the assessee-company. He led us through para. 4 of the Tribunal's order and had also drawn our attention to the order of the Tribunal in R.A. No. 154 of 1967-68 relating to the order of the Tribunal in I.T.A. No. 936 of 1964-65 for the assessment year 1959-60. With reference to para. 4 of the order of the Tribunal in the aforesaid reference application the learned departmental representative pointed out to us that the relevant order against which the reference application was filed, was passed after considering the provisions of Section 10(4A). Thus, according to him, all through the question rested on the applicability of Section 10(4A) though cases referred to were related to Section 10(2)(xv).

8. In reply the learned counsel for the assessee led us through paras. 2 and 3 of the order of the Tribunal in respect of the assessment year 1959-60 in order to lay stress upon his view-point that the said decision rested on the application of Section 10(2)(xv).

9. We have given due consideration to the rival contentions after going through the relevant orders referred to before us and the decisions relied upon on behalf of the assessee. We are of the opinion that the contentions raised on behalf of the assessee have a reasonable bearing in the sense that there was a mistake apparent from the record which calls for a rectification of the impugned order. The Tribunal in para. 4 of the aforesaid order discussed the applicability of the provisions of Section 10(4A) to the facts of the case to the exclusion of Section 10(2)(xv). This is against the trend of the discussions made by the Appellate Assistant Commissioner in his order. It is an admitted fact that the cases referred to in all the relevant orders were relating to the applicability of the provisions of Section 10(2)(xv). The two sections, namely, Section 10(2)(xv) and Section 10(4A) being completely of different import specially when the Appellate Assistant Commissioner did not specifically mention Section 10(4A), the observations of the Income-tax Officer in the assessment order lost all its relevance. Hence, we are of the opinion that the assessee's miscellaneous application should be entertained for proper rectification of the order of the Tribunal. As the rectification would involve substantially the point in issue and in view of the decision in the case of Mangat Ram Kuthiala : [1960]38ITR1(Mad) we decide to quash the impugned order for the original appeal to be disposed of by the Tribunal, in accordance with law. In the circumstances stated above the assessee's miscellaneous application is allowed.'

5. After making the aforesaid observations the Tribunal allowed the said application and has set aside the decision of the Appellate Tribunal and has directed re-hearing of the matter. It is the legality of the aforesaid decision of the Tribunal which is the subject-matter of challenge in this application under Article 226 of the Constitution.

6. Rectifications or corrections of erroneous decisions and orders of the courts, tribunals and quasi-judicial authorities are parts of the processes for administration of justice. The occasions and scope of such rectification, however, depend upon the error sought to be rectified and the procedure enjoined for such rectification in the statute under which the courts, tribunals or the quasi-judicial authorities function. In this connection, it is important to bear in mind that where jurisdiction is given to an authority, it is appropriate that that authority should be credited with ancillary and incidental powers to make that jurisdiction effective. It is, however, important to emphasise that existence of express power eliminates the scope of exercise of implied or ancillary power. It is also necessary to emphasise that courts or tribunals created by statutes have no inherent plenary powers like civil courts, though, sometimes, as part of the incidental or ancillary powers these have certain inherent powers, inherent in the sense that these are parts of the ancillary or implied powers. The aforesaid principles are well-settled. Reliance in this connection may be placed on the observations of the Supreme Court in the case of Income-tax Officer v. M. K. Mohammed Kunhi [1969] 71 ITR 815 , Province of Bihar v. Jokhi Ram Ram Prasad [1948] 1 STC 202 (Pat), J. K. Iron & Steel Co. Ltd. v. Iron & Steel Mazdoor Union : (1956)ILLJ227SC . In the case of Mangat Ram Kuthiala v. Commissioner of Income-tax : [1960]38ITR1(Mad) , the Division Bench of the Punjab High Court observed that it was a settled rule that a judicial tribunal could recall and quash its own order in exceptional cases when it was shown that it was obtained by fraud or by palpable mistake or was made in utter ignorance of a statutory provision and the like, and for the application of that rule the class of the tribunal was not a material matter but what was of substance and material was the nature of proceedings before it. If the proceedings were in the nature of judicial proceedings, then irrespective of the class of the tribunal the rule applied. It was held that the Appellate Tribunal had inherent jurisdiction to entertain the application made before it in that case. As I have noticed before, the tribunal, like the Income-tax Appellate Tribunal, cannot be said to have inherent jurisdiction as such like a civil court; such tribunals certainly do have ancillary and implied powers to exercise the jurisdiction vested in them and as part of that ancillary and incidental powers to discharge the jurisdiction vested in them certain amount of authority may be considered to be inherent in the implied or ancillary powers. Beyond that, in my opinion, it cannot be said that such tribunals exercise inherent powers. In the case of Income-tax Officer v. S. B. Singar Singh & Sons : [1970]75ITR646(All) the Division Bench of the Allahabad High Court observed that even when express power to review its orders was not conferred by a statute, a court or a tribunal had inherent jurisdiction to rectify a wrong committed by itself when that wrong caused prejudice to a party for which that party was not responsible. In those circumstances it was held that though Section 35 of the Indian Income-tax Act, 1922, had not been made applicable to the proceedings under the Excess Profits Tax Act, 1940, and would not apply to applications for review, the Tribunal had inherent power to review its orders in order to correct a wrong done to a party. The existence of express power, however, eliminates the scope of exercise of implied power. In the instant case Sec-tion 35 of the Indian Income-tax Act, 1922, would be applicable. Section 35 authorises rectification of a mistake in case the mistake is apparent from the record by the Income-tax Appellate Tribunal in view of Sub-section (2) of Section 35 of the Act. The scope and effect of what is an error apparent on the face of the record have been examined in several decisions of the Supreme Court as well as of this court. It is not necessary to refer to them in detail. Many of these decisions were reviewed by me in a Bench decision of this court in the case of Income-tax Officer v. Raleigh Investment Co. Ltd. : [1976]102ITR616(Cal) , where it was held that in order to come within the ambit of Section 154 it was necessary that the mistake must be obvious, patent and self-evident. A mistake on which conceivably there could be two opinions cannot come within the ambit of the section. If, however, two views are not possible by misreading the section or by misreading an order a mistake was committed and such a mistake would come within the purview of Section 154. Even then this principle is not always easy of application as was emphasized by the Supreme Court in the case of K. M. Shanmugam v. S.R.V.S. (P.) Ltd. : [1964]1SCR809 of the report the Supreme Court observed that the concept comprised many imponderables and it was not capable of precise definition because no objective criterion could be laid down, the apparent nature of an error, to a large extent, being dependent upon the subjective element. It depended, however, on the facts and circumstances of each case.

7. Bearing the aforesaid principles in mind it has to be considered whether the Income-tax Appellate Tribunal was right in holding that there was an error apparent on the face of the record. In the impugned order the Income-tax Appellate Tribunal has observed that there was discussion about the applicability of the provisions of Section 10(4A) of the Indian Income-tax Act, 1922, to the facts of the case to the exclusion of Section 10(2)(xv). This was against the trend of the discussion made by the Appellate Assistant Commissioner. The two sections operated in different fields. The Appellate Assistant Commissioner not having discussed, according to the Tribunal, the provisions of Section 10(4A), the observations of the Income-tax Officer lost all its relevance. The premises upon which the Tribunal seems to have proceeded is that if the Income-tax Officer had disallowed the expenditure on the ground of Section 10(4A), then in a case where the Appellate Assistant Commissioner had disallowed it under Section 10(2)(xv), the question of disallowance on the ground of Section 10(4A) was no longer open for examination by the Tribunal because the order of the Income-tax Officer had merged into the order of the Appellate Assistant Commissioner. This raises an important controversy. It depends on what was the subject-matter of the appeal. The subject-matter of the agpeal was not whether Section 10(4A) should be applied or Section 10(2)(xv) of the Act should be applied. Broadly speaking, the subject-matter of the appeal was the right of the assessee to claim allowance under the provisions of law. As I have noticed before, it is even not manifest that the Appellate Assistant Commissioner had proceeded solely on Section 10(2)(xv). Even if he had, then it would be doubtful controversy whether in such a case under Section 10(4A) the Tribunal was competent to examine this question where the Appellate Assistant Commissioner had not examined the question from that point of view. On this aspect it is conceivable that there can be conflicting views. The conclusion, that the Tribunal was in error on the assumption that the Income-tax Appellate Tribunal was not competent to go into the question of Section 10(4A) where the Appellate Assistant Commissioner had not considered that from that point of view is, in my opinion, not justified in the facts and circumstances of this case. The Supreme Court had observed that even in a case where Section 10(2)(xv) applied, it was necessary for the assessee to cross the hurdle of Section 10(4A). As the Supreme Court observed in the case of Commissioner of Income-tax v. Indian Molasses Co, (P.) Ltd. : [1970]78ITR474(SC) before Section 10(2}(xv) could be called in aid to support the claim the company had to establish that it represented expenditure laid out wholly and exclusively for the purpose of the business and that it was authorised under Section 10(4A) of the Act. I need not in this case detain myself to consider whether in the case of disallowance of this nature Section 10(4A) had any application because the said Section spoke of allowance in respect of expenditure which resulted directly or indirectly in remuneration and was not applicable to the case of remuneration which was paid directly to the director. Such contention was not raised before the Tribunal in the instant case. Having regard to this nature of mistake, on which it appears to me, there can reasonably and conceivably be two views, the Tribunal was not justified in setting aside its previous orders on the ground that the mistake was apparent from the record. The Tribunal in its previous order had categorically proceeded under Section 10(4A). The law justifies the consideration of expenditure under Section 10(4A). In my opinion from reading the order as such it cannot be said that such assumption of jurisdiction by the Tribunal in its appellate order was on erroneous basis or on a basis which was palpably and manifestly erroneous. In the aforesaid view of the matter I am of the opinion that the Tribunal had no jurisdiction to pass the impugned order.

8. On behalf of the revenue it was contended that the draft statement hadbeen circulated and as such the Tribunal was not competent to recall itsprevious order. I am unable to accept this contention. Until a referenceis actually made the earlier steps are tentative. In this connection reliancemay be placed on the observations of a Division Bench of the Gujarat HighCourt in the case of Commissioner of Wealth-tax v. Sayaji Mill Ltd. : [1971]82ITR662(Guj) .

9. Another contention was urged before me on behalf of the petitioner that the Commissioner of Income-tax, West. Bengal III, was the competent Commissioner who was dealing with the matter but this petition had been filed by the Commissioner of Income-tax IV. Relevant notification dated the 15th June, 1972, was produced before me--copy whereof I direct to be kept on the record. I am satisfied that the present applicant had competency to make the present application. In the premises, the impugned order dated the 27th October, 1971, is hereby quashed and set aside and the Tribunal is directed to proceed in accordance with law.

10. The rule is made absolute to the extent indicated above. There will be no order as to costs. Stay of operation of this order asked for is refused.


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