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Birla Jute Manufacturing Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 2 of 1977
Judge
Reported in[1981]128ITR235(Cal)
ActsIncome Tax Act, 1961 - Sections 37 and 147
AppellantBirla Jute Manufacturing Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateDebi Prosad Pal, ;R. Murarka and ;A.K. Dey, Advs.
Respondent AdvocateB.L. Pal and ;Suhash Ch. Sen, Advs.
Excerpt:
- .....ito on the ground that such payment was not for commercial considerations.5. as to the claim for salary paid to sri s. p. chhaochharia, the ito, observed that his father, sri r. k. chhaochharia, was admittedly a senior executive with the longest period of service in the assessee-company. he then referred to the assessee's explanation submitted in its letter dated 11th february, 1969, wherein it was claimed that sri chhaochharia hadbeen taken as a management trainee, since it was seen that he was talented and, therefore, marked out for training abroad and for appointment as a senior executive in due course. sri chhaochharia, who passed the higher secondary examination was at the relevant time a student of the birla institute of technology at ranchi. according to the ito, no services.....
Judgment:

Sudhindra Mohan Guha, J.

1. The assessee is M/s. Birla Jute . and the relevant assessment years were 1961-62 to 1968-69. Accounts had been maintained on mercantile basis and the assessee followed financial year as its previous year.

2. In the course of the assessment proceeding for the assessment year 1967-68, which was completed under Section 143(3) of the I.T. Act, 1961, the ITO noticed the payment of salary of Rs. 30,000 to Smt. Kamala Devi Saboo and Rs. 36,200 to Sri S. P. Chhaochharia. Mrs. Kamala Devi Saboo was the wife of Sri T. C. Saboo, a top executive of the assessee-company, and, according to the ITO, he was a man of eminence in the Birla organisation. Mr. Saboo had been in the employment of the assessee-company since 16th September, 1960. As regards Sri S. P. Chhaochharia, he was the son of Sri R. K. Chhaochharia, President of the assessee-company, and had been in its employment since 31st March, 1963. It was represented before the ITO that Mrs. Saboo was appointed in the company to look after labour welfare and also to attend to matters relating to labour relations. As to the services rendered by the lady, copies of two letters written respectively by Sri Haralal Halder and Sri Indramani Jana were produced.

3. It was found by the ITO that these two letters dated 21st February, 1968, were written on a date when enquiries regarding the payment of salary to the lady were already afoot. As such, he refused to attach any evidentiary value to these two letters and specially so when there was absolutely no proof as to the actual services rendered by her.

4. The ITO issued summons to Mrs. Kamala Devi Saboo and Sri S. P. Chhaochharia but there was no compliance. The assessee, according to the ITO, was required to ensure the attendance of the two persons and to produce evidence regarding the services rendered by them. It was also observed by the ITO that the lady had neither the requisite qualifications nor any experience to discharge duties alleged to have been entrusted to her. In these circumstances, the claim of the assessee remained unsubstantiated and the payment made was disallowed by the ITO on the ground that such payment was not for commercial considerations.

5. As to the claim for salary paid to Sri S. P. Chhaochharia, the ITO, observed that his father, Sri R. K. Chhaochharia, was admittedly a senior executive with the longest period of service in the assessee-company. He then referred to the assessee's explanation submitted in its letter dated 11th February, 1969, wherein it was claimed that Sri Chhaochharia hadbeen taken as a management trainee, since it was seen that he was talented and, therefore, marked out for training abroad and for appointment as a senior executive in due course. Sri Chhaochharia, who passed the higher secondary examination was at the relevant time a student of the Birla Institute of Technology at Ranchi. According to the ITO, no services could have been rendered by him to the assessee-company. The ITO held that the expenditure incurred by the payment of salary to Sri Chhaochharia was not laid out for the purpose of business and in this matter the assessee-company failed to discharge its burden of proof. Accordingly, the salaries paid to Sri S. P. Chhaochharia also were disallowed for the assessment year 1967-68.

6. Assessment for the year 1968-69 was similarly completed Section 143(3) of the I.T. Act, 1961, and the salaries paid to Mrs. Kamala Devi Saboo of Rs. 13,800 and to Sri S. P. Chhaochharia of Rs. 51,655 were disallowed.

7. In respect of the assessment years 1961-62 to 1966-67 the ITO passed his reassessment orders after reopening the respective assessment proceedings by issuing notices under Section 148 disallowing the salaries paid to Mrs. Saboo and Sri S. P. Chhaochharia.

8. The ITO reopened and completed the assessment for the aforesaid years on the ground that the fact of paying salaries to Mrs. Saboo and Sri S. P. Chhaochharia, as the case might be, was not disclosed at the time of the original assessment which necessitated action under Section 147 for which notices under Section 148 were issued. Relying upon his discussion made in the assessment order for the assessment year 1967-68 disallowances of salaries paid to the aforesaid two persons were made.

9. The assessee-company preferred an appeal to the AAC for all the assessment years. It was contended before him that the ITO was not justified in disallowing salaries paid to Mrs. Kamala Devi Saboo and that in any case he should not have disallowed the whole amount.' The two letters written by Sri Haralal Halder and Sri Indramani Jana were again placed before him in support of the contention what services had been rendered by Mrs. Kamala Devi Sahoo.

10. After apprising the evidence, the AAC held that the ITO was not justified in wholly disallowing the salary paid to the lady. Next, he considered the issue whether the salary paid to her was laid out wholly and exclusively for the purpose of the assessee's business. After taking into account the facts that Mrs. Saboo was the wife of Sri T. C. Saboo, a top executive of the assessee-company, a man of- eminence in the Birla organisation, that she did not attend before the ITO to answer regarding the duties performed by her and that the salary paid to him appeared to be disproportionately high and considering the nature of the services rendered by her and the salary paid to other employees, who were working fulltime, the AAC was of the view that it would be fair and reasonable to allow the salary as revenue expenditure.

11. Coming to the assessee's claim for deduction of salary paid to Sri S. P. Chhaochharia it was observed by the AAC that in the case of a businessman salary given to a student who did not render any service to the business should not be allowed as a deduction while computing the business income. Thus, he upheld the ITO's decision disallowing the claim on this score.

12. Being aggrieved by the AAC's decision in disallowing a portion of the remuneration paid to Mrs. Saboo for the assessment years 1961-62 to 1968-69 and in disallowing the entire remuneration paid to the other employee for the assessment years 1964-65 to 1968-69, the assesses came in further appeal to the Appellate Tribunal. The ITO on the other hand being dissatisfied with the AAC's decision in allowing a portion of the remuneration paid to the lady employees for the assessment years 1961-62 to 1968-69, also preferred appeals to the Tribunal.

13. After the filing of the appeals the assessee-company moved the Tribunal by separate petitions to admit the common ground for the assessment years 1961-62 to 1966-67. This was allowed by the Tribunal. It was stated in the petition that the initiation of the proceedings under Section 147 of the I.T. Act, 1961, was wholly without jurisdiction and/or in excess of jurisdiction and illegal and void. None of the conditions precedent for assumption of jurisdiction under Section 147 of the Act existed and/or were complied with. The purported order of reassessment and proceedings relating thereto were said to be illegal and void ab initio.

14. In regard to the issue regarding the deduction of salary paid to Mrs. Kamala Debi Saboo for the assessment years 1961-62 to 1968-69, and to Shri S. P. Chhaochharia for the assessment years 1964-65 to 1968-69, the Tribunal disposed of the matters by observing that the assessee's contention in the grounds of appeal relating to the disallowance of salary either partly or wholly were intimately related to the validity of the reassessments as the additional ground would get into the root of the reassessments and it would become merely a ramification of the contentions already raised on the basis of which the relief was sought for against the AAC's decision. Thus, in its opinion, the additional ground could not be held to be unconnected with the subject-matter of appeal and consequently it held that the additional grounds should be admitted subject to its decision on the second issue raised before the Tribunal. The second issue was as to whether the admission of the additional ground would invoke investigation into fresh facts or the decision thereon be restricted to the facts already available on records. The Tribunal decided to admit the additional ground and remand the same to the AAC for his decision after restricting hisinvestigation into the facts as already available on records. This would relate to the assessments for the assessment years 1961-62 to 1966-67.

15. As to the merits of the case the observations of the Tribunal were made in paras. 30 and 31 of its order (in pages 89 to 92 of the paper book) as follows:

'30. We have carefully gone through the letters of appointment and the evidence adduced by the assessee's counsel before us. After giving due consideration to his contentions and those of the department we do not find any merit in the assessee's submissions. In this connection, we entirely rely upon the decision of the Supreme Court in CIT v. Calcutta Agency Ltd. : [1951]19ITR191(SC) . Therein it was held that the burden of proving the necessary facts in order to entitle the assessee to claim exemption under Section. 10(2)(xv) of the Indian Income-tax Act, 1922, was on the assessee. From the orders of the authorities below and the contentions raised before us, the allowance or disallowance of the expenditure claimed by the asses-see-company in the computation of its total income would depend upon the provisions of section 37 of the Income-tax Act, 1961 (analogous to section 10(2Xxv) of the 1922 Act). In the instant case before us, the evidence adduced by the assessee lay in the letter of appointment and the letters of two outsiders as to the services rendered by Sm. Saboo to the assessee-com-pany for which the salaries as claimed from year to year were paid to her. We understand from the assessee's counsel that Sm. Saboo left the services. She was paid salaries amounting to Rs. 12,031 in the assessment year 1961-62, which were increased to Rs. 22,312 in the assessment year 1962-63, and for the assessment years 1963-64 to 1964-65, she had been drawing annually round about Rs, 32,000. For the assessment year 1967-68, she was allowed Rs. 30,000 and for the succeeding assessment year a remuneration of Rs. 10,800 was claimed as her salary. It looks strange that the assessee-company had no internal evidence to substantiate that the lady who was allowed that much of salary from year to year actually rendered adequate services commensurate with her high salaries. It had to depend upon external evidence and the learned counsel for the assessee contended before us that the income-tax authorities should have made necessary enquiries before discarding the external evidence so produced in support of the lady's services rendered to the assessee-company. Thus, in our opinion, the assessee had no case and the AAC was not justified in interfering with the ITO's decision simply by giving undue importance to the appointment letter. In the circumstances, we restore the disallowances in full for all the assessment years and uphold the ITO's decision in disallowing the salaries in full as not laid out or expended wholly and exclusively for the purpose of the assessee's business.'

'31. As regards the remuneration paid to Sri Chhaochharia, hereto there was no evidence even as to his having practical training in the asses-see's factories or even in the head office. The learned counsel for the assessee referred to us the decision of the Supreme Court reported in : [1961]41ITR414(SC) (CIT v. Royal Calcutta Turf Club). There the assessee, the Royal Calcutta Turf Club, started a school for the training of Indian boys as jockeys when there was a risk of jockies being unavailable. In the assessee's case, there was no scheme of taking students with the prospect of future employment. We are given to understand in the course of the hearing by the assessee's counsel that Sri Chhaochharia cleared the higher secondary examination in 2nd division and the assessee had no evidence to show his brilliance justifying his induction in future as an employee of the assessee-company and that too with annual remuneration varying between Rs. 13,806 and Rs. 51,355. Sri Chhaochharia's remuneration was initially Rs. 13,806 and this was increased to Rs, 16,728 in the following year, i.e., assessment year 1965-66. Thereafter, in three succeeding assessment years, his annual remuneration was found to be Rs. 17,028, Rs. 36,300 and Rs. 51,355. The assessee had a solitary case in the training, i.e., Sri Chhaochharia, and there was not an iota of evidence justifying such high remuneration. It was common ground that he had not rendered any service to the assessee-company and we fail to understand as to how in the circumstances of the case Sri Chhaochharia was paid that much of salary. Hereto, the authorities below justified in disallowing the remuneration paid to Sri Chhaochharia as the amount was not laid out or expended wholly and exclusively for the purpose of the assessee's business. Thus, we refuse to interfere with the AAC's decision in the matter.'

16. Thereafter, the assessee moved this court by an application under Section 256(2) of the I.T. Act, 1961, and in compliance with the direction given by this court, the Tribunal drew up a consolidated statement of case and sent for opinion the following questions, as directed by the court for the assessment years 1961-62 to 1963-64, 1964-65 to 1966-67, 1967-68 and 1968-69.

For the assessment years 1961-62 to 1963-64

'1. Whether, on the facts and in the circumstances of the case, the Tribunal having remanded the appeal to the Appellate Assistant Commissioner of Income-tax to decide the validity of the proceeding under Section 147 of the Income-tax Act, 1961, was competent to decide the question of allowability of the salary paid to Srimati Kamala Devi Saboo ?

2. Whether, on the facts and in the circumstances of the case, the disallowance of salaries paid to Srimati Kamala Devi Saboo was justified in law?

3. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that Srimati Kamala Devi Saboo did not render adequate services commensurate to her services and, therefore, the salary paid to her was not laid out or expended wholly and exclusively for the purpose of the assessee's business was perverse and in excess of and beyond the scope of enquiry under Sections 28 and 37 of the Income-tax Act, 1961?'

For the assessment years 1964-65 to 1966-67 :

'1 Whether, on the facts and in the circumstances of the case, the Tribunal having remanded the appeal to the Appellate Assistant Commissioner of Income-tax to decide the validity of the proceeding under Section 147 of the Income-tax Act, 1961, it was competent to decide the question of allowability of the salary paid to Sm. Kamala Devi Saboo and the amount paid to Shri S. C. Chhaochharia ?

2. Whether, on the facts and in the circumstances of the case, the disallowance of salaries paid to Smt. Kamala Devi Saboo and the amount paid to Sri S. P. Chhaochharia was justified in law ?

3. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that Smt. Kamala Devi Saboo did not render adequate services commensurate to her services and, therefore, the salary paid to her was not laid out or expended wholly and exclusively for purposes of the assessee's business was perverse and in excess of and beyond the scope of enquiry under Sections 28 and 37 of the Income-tax Act, 1961?'

For the assessment years 1967-68 and 1968-69:

'1. Whether, on the facts and in the circumstances of the case, the disallowance of salaries to Smt. Kamala Devi Saboo and the amount paid to Sri S. P. Chhaochharia was justified in law ?

2. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that Smt. Kamala Devi Saboo did not render adequate services commensurate to her services and, therefore, the salary paid to her was not laid out or expended wholly and exclusively for the purpose of the assessee's business was perverse and in excess of and beyond the scope of enquiry under Sections 28 and 37 of the Income-tax Act, 1961?'

17. As to question No. 2 for the assessment years 1961-62 to 1963-64 and 1964-65 to 1966-67, and question No. 1 for the assessment years 1967-68 and 1968-69, Dr. Debi Prosad Pal, learned counsel appearing for the assessee, argues that the Tribunal fell into an error in disallowing the entire salaries paid to Mrs. Kamala Devi Saboo and to Sri S. P. Chhaochharia. It is the finding by the Tribunal that apart from two letters, both dated 21st February, 1968, written by Sri Haralal Halder and Sri IndramaniJana, there was absolutely no other evidence to establish the fact whether Mrs. Saboo had rendered any service. These two letters appeared to have been written on identical language on the self-same date. These were, to some extent, in the nature of certificates. It was incumbent on the assessee to produce evidence to establish what services had actually been rendered by Mrs. Saboo and what payments had actually been paid to her. In the absence of any evidence the Tribunal had no other alternative but to reverse the findings of the AAC and restore the order passed by the ITO. The Tribunal appeared to have duly considered the facts and circumstances and the evidence on record. The findings of the Tribunal which appear to be exhaustive find place in paras. 30 and 31. In the absence of any evidence on the material point, it cannot be said that the disallowance of salaries to Mrs. Kamala Devi Saboo was not justified in law. As to the disallowance of the amount alleged to have been paid to Mr. S. P. Chhao-chharia, Dr. Pal, learned counsel for the assessee, was candid enough not to press that point.

18. Dr. Pal mainly argues that on the findings for the years 1967-68 and 1968-69, on merits, the Tribunal was not justified in referring the matter to the AAC for the years 1961-62 to 1963-64 and 1964-65 to 1966-67. It is argued by him that the question of payment of salary to both the employees would come afresh for consideration while disposing of the matter by the AAC. His grievance is that the Tribunal remanded the case to the AAC for these years for his decision but restricted his investigation to the facts already available on records. By such restriction, according to Dr. Pal, the assessee would be debarred from adducing evidence, if any, as to the actual payment of salary to both the employees. Mr. Balai Pal, learned counsel for the revenue, draws our attention to para. 24 of the order passed by the Tribunal at p. 86 of the paper book. We have already pointed out that this was not a case of open remand, but a restricted one in some sense. If the assessee be debarred from adducing a fresh evidence and to proceed on the findings of the Tribunal as to the merits of the case for the subsequent years, the order of remand becomes redundant to some extent. In this view of the matter, we would hold, in agreement with Dr. Pal, that both parties would be at liberty to adduce fresh evidence of course subject to the admissibility of such evidence by the appropriate authority in accordance with the law.

19. In view of the findings of the Tribunal and also in view of the reasons mentioned hereinbefore, we would answer the questions in the manner indicated below :

20. Question No. 1 for the assessment years 1961-62 to 1963-64 and 1964-65 to 1966-67 is answered in the affirmative and in favour of the revenue, subject to the condition that the parties would be entitled toadduce fresh evidence depending on admissibility of such evidence before the appropriate authority in accordance with law.

21. For the assessment years 1967-68 and 1968-69, question No. 1 is answered in the affirmative and in favour of the revenue.

22. Question No. 2, for the assessment years 1961-62 to 1963-64 and 1964-65 to 1966-67, is answered in the affirmative and in favour of the revenue.

23. For the assessment years 1967-68 and 1968-69, question No. 2 is answered in the negative and in favour of the revenue.

24. Question No. 3, for those assessment years, is answered in the negative and in favour of the revenue.

25. Each party will pay and bear its own costs.

Sabyasachi Mukharji, J.

26. I agree.


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