CHERAN ENGINEERING CORPORATION LTD. VS COMMISSIONER OF INCOME-TAX
2001 P T D 222
[Madras High Court (India)]
[ 238 I T R 892]
Before R. Jayasimha Babu and N. V. Balasubramanian, JJ
CHERAN ENGINEERING CORPORATION LTD.
versus
COMMISSIONER OF INCOME‑TAX
T. C. No. 773 of 1985 (Reference No.412 of 1985), decided on 24/02/1998.
(a) Income‑tax‑‑‑
‑‑‑‑Revision‑‑‑Powers of CIT‑‑‑Order passed under S.143(3) read with S.144B‑‑‑Order passed pursuant to direction of IAC‑‑‑Order can be revised‑‑ Income Tax Act, 1961, Ss. 143, 144B & 263.
There is no inherent lack of jurisdiction in the Commissioner of Income‑Tax to revise the order of the Income‑tax Officer passed under section 143(3) read with section 144B of the. Income Tax Act, 1961. The order passed by the Income‑tax Officer pursuant to the direction of the Inspecting Assistant Commissioner is still an order of assessment and the Commissioner of Income‑tax has the jurisdiction under section 263 of the Act to interfere with the order passed by the Income‑tax Officer as per the direction given by the Inspecting Assistant Commissioner.
CIT v. V.V.A. Shanmugham (1999) 236 ITR 878 (Mad.) fol.
The assessee‑company filed its return for the assessment year 1978‑79. The Income‑Tax Officer, .on scrutiny‑of the accounts, found that the additions and disallowances exceeded Rs.1,00,000 and hence, a draft assessment order was issued to the assessee under section 144B of the Act. The assessee filed its objections and the case was referred to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after hearing the objections of the assessee held that the assessee was entitled to deduction of a sum of Rs.50,000 being the contribution made to the Labour Welfare Fund and a sum of Rs.1,01,485 paid by the assessee to its employees as gift for strike‑free services. On the basis of the directions given by the Inspecting Assistant Commissioner, the Income‑Tax Officer completed the assessment on July 3, 1981. The Commissioner of Income‑tax exercising his power under section 263 of the Act, was of the opinion that the allowance of Rs.50,000 being the amount transferred to a welfare fund and the payment of Rs.1,01,485 made as gift to the employees for strike‑free services were not allowable expenditure. He, therefore, issued a show‑cause notice to the assessee and after hearing the objections preferred by the assessee, held that both the amounts should be regarded as bonus and the amounts in question exceeded the limit prescribed under section 36(1)(ii) of the Act and the Income‑tax Officer erred in allowing both the sums as a deduction. He directed the Income‑tax Officer to disallow both the amounts and complete the assessment. The Tribunal upheld the order of the Commissioner of Income‑tax and also held that the order was not barred by limitation. On a reference:
Held, (i) that under section 263(2)(b) of the Act, the Commissioner of Income‑tax has the power to revise an order of assessment before the expiry of two years from the date of the order sought to be revised. The Income‑tax Officer had passed the order of assessment on July 3, 1981, under section 143(3) read with section 144B of the Act. The time‑limit for the Commissioner of Income‑tax to pass an order had to be computed from July 3, 1981 and not from the date of the expiry of the previous year, viz., March 31, 1981. If the time‑limit were computed from July 4, the order passed by the Commissioner of Income‑tax on June 29, 1983 was not barred by limitation.
(ii) That the contribution of Rs.50,000 made by the assessee was claimed as "labour welfare expenditure" and once it is a labour welfare expenditure, it is allowable under section 37 of the Act. In so far as the sum of Rs.1,01,485 was concerned, the amount was paid by the assessee directly to its employees for agreeing to render strike‑free service during the relevant period. The amount was paid at the rate prescribed on the basis of the agreement and, therefore, the amount paid by way of contribution for strike‑free service was also labour welfare expenditure and for the promotion of the assessee's business and the amount was allowable as business expenditure.
Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101 (SC) applied.
(b) Income‑tax--
‑‑‑‑Revision‑‑‑Assessment‑‑‑Limitation‑‑‑Extension of period of limitation for assessment‑‑‑Order of assessment passed under direction of IAC ‑‑‑ Time limit for, completing assessment is extended by 180 days‑‑‑Limitation for revision is two years from date of such an order of assessment ‑‑‑CIT's order of revision not barred by limitation‑‑‑Indian Income Tax Act, 1961, Ss. 144B, 153 & 263.
(c) Income‑tax‑‑‑
‑‑‑Business expenditure‑‑‑Amounts transferred to Labour Welfare Fund‑‑ Amount paid to workers for rendering strike‑free services‑‑‑Expenses were labour welfare expenditure‑‑‑Expenses incurred for purposes of business‑‑ Deductible as business expenditure‑‑‑Indian Income Tax Act, 1961, S.37(1).
R. Meenakshisundaram for T. K. Jayaraman, Philip George and D.C. Jully for the Assessee.
C.V. Rajan for the Commissioner.
JUDGMENT
N. V. BALASUBRAMANIAN, J.‑‑‑In this reference, at the instance of the assessee, the following four questions of law have been referred for our consideration:
"(i) Whether the Appellate Tribunal is right in law in holding that the assessee‑company cannot raise before the Appellate Tribunal, the inherent lack of jurisdiction of the Commissioner of Income‑Tax in passing the impugned order under section 263 as the jurisdiction was not challenged before the Commissioner of Income‑tax?
(ii) Whether the Appellate Tribunal is right in law in holding that the Commissioner of 'Income‑Tax is within his powers under section 263 to revise decision of the Inspecting Assistant Commissioner while giving direction to the Income‑Tax Officer under section 144B and particularly in view of the decision in the case of East Coast Marine Products (P.) Ltd. (S.B.) I.T. A.T. Hyderabad (1983) 4 ITD 73?
(iii) Whether the Appellate Tribunal is right in law in holding that the order of the Commissioner of Income‑Tax under section 263 is not barred by limitation under section 263(2)(b) of the Income‑tax Act?
(iv) Whether the Appellate Tribunal in the facts and circumstances of the case, is right in law in holding‑ that the sum of Rs.50,000 and Rs.1,01,485 are not allowable expenditure under section 37 of the Income‑tax Act?"
The ‑assessee is a company, in which the public are substantially interested. The assessee filed return for the assessment year 1978‑79, admitting the income of Rs.14,58,332. The, Income‑tax Officer, on scrutiny of the accounts, found that the additions and disallowances .exceeded Rs.1,00;000 and, hence, the draft assessment order was issued to the assessee under section 144B of the Income Tax Act, 1961. The assessee filed its objections and the case was referred to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after hearing the objections of the assessee, held that the assessee was entitled to deduction of ‑a sum of Rs.50,000 being the contribution made to the Labour Welfare Fund and a sum of Rs.1,01,485 paid by the assessee to, its, employees as gift for strike‑free services. He held that a sum of Rs.50,00 cannot be taken as an advance and, similarly, the sum of Rs.1,01,485 cannot also be taken as a gift, and both these sums should be regarded as a business expenditure incurred by the assessee for the welfare of its employees and, therefore, the assessee was entitled to the deduction of the same. On the basis of the directions given by the Inspecting Assistant Commissioner of Income‑Tax, the Income -tax Officer completed the assessment on July 3, 1981.
The Commissioner of Income‑Tax exercising his power under section 263 of the Act, was of the opinion that the allowance of Rs.50,000 being the transfer of the amount to a welfare fund and the payment of Rs:1,01,485 made as gift to the employees for strike‑free services were not allowable expenditure, and, therefore, he issued a show‑cause notice to the assessee and, after hearing the objections preferred by the assessee, held that both the amounts should be regarded as bonus and the amount admissible as bonus exceeded the limit prescribed under section 36(1)(ii) of the Act, and the Income‑tax Officer erred in allowing both the sums as a deduction. He directed the Income‑tax Officer to disallow both the amounts and complete the assessment.
The assessee challenging the order of the Commissioner of Income -Tax has preferred an appeal before the Income‑Tax Appellate Tribunal: The Income‑tax Appellate Tribunal upheld the jurisdiction of the Commissioner of Income‑tax on the ground that the order passed by the Income‑tax Officer on the basis of the direction of the Inspecting Assistant Commissioner was an order passed by the Income‑tax Officer.
The Tribunal also rejected the plea raised on behalf of the assessee that the initiation by the Commissioner was time barred and he 'has no jurisdiction to initiate the revision proceedings. On merits of the case, the Tribunal held that the sum of Rs.50,000 was made as donation by the assessee to the trust and the assessee would be entitled to the deduction under section 80G of the Art, if it is a recognised trust and, therefore, it was not open to the assessee to claim the same as business expenditure under section 37 of the Act. Regarding the sum of Rs.1,01,485 is concerned, the Tribunal held that the amount paid exceeded the maximum ceiling limit prescribed in the Payment of Bonus Act, and, therefore, the assessee was not entitled to the deduction of the same.
The assessee challenged the order of the Appellate Tribunal and the four questions of law set out earlier have been referred to us. So far as the first question of law is concerned, we are of the opinion, that the question is not: properly framed and it cannot be said that there is inherent lack of jurisdiction on the Commissioner to revise the order of the Income‑tax, Officer passed under section 143(3) read with section 144B of the Act. The Commissioner was of the opinion, that the order of the Income‑tax Officer was erroneous and prejudicial to the interests of the Revenue and if he comes to such a conclusion on the basis of materials on record, he could properly exercise the revisional jurisdiction conferred upon him under section 263 of the Act, and therefore, we are of the opinion that it cannot be said that the Commissioner had lacked the inherent jurisdiction to revise the order of assessment. It is not the case of the assessee that there were no materials or that the materials available were irrelevant before the Commissioner assumed the jurisdiction under section 263 of the Act to revise the order of assessment.
In so far as the second question referred to us is concerned, the question deals with the power of the Commissioner to revise the order of assessment made by the Income‑tax Officer on the basis of a direction given by the Inspecting Assistant Commissioner under section 144B of the Act. This Court in an unreported judgment in the case of CIT. v. V.V.A. Shannmugam (since reported in (1999) 236 ITR 878) in T.C. No.1090 of 1980, dated January 7, 1997, has taken the view that the order passed by the Income‑Tax Officer pursuant to the direction of the Inspecting Assistant Commissioner is still an order of assessment and the Commissioner has the jurisdiction under section 263 of the Act to interfere with the order passed by the Income‑Tax Officer as per the direction given by the Inspecting Assistant Commissioner. We are in agreement with the view expressed by the earlier Bench of this Court in (CIT v. V.V.A. Shannmugam (1999) 236 I.T.R. 878 T.C. No. 1090, of 1980, dated January 7, 1997), and, therefore, we hold that the Appellate Tribunal was correct is holding that the order of the Income‑Tax Officer though passed on the basis of a direction by the Inspecting Assistant Commissioner, can still be the subject‑matter of revision by the Commissioner‑of Income‑tax.
Regarding the third question that has been referred to us, we are of the opinion that the order passed by the Income‑tax Officer cannot be said to be barred by limitation. We have set out the facts earlier. The Income‑tax Officer initially passed a ‑ draft assessment order and on the basis of the direction given by the‑Inspecting Assistant Commissioner under section 144E of the Act, the Income‑tax Officer completed the assessment on the basis of his direction. Under section 153, Explanation 1{iv) of the Act, if the Income- tax Officer on July 3, 1981, is within the time limit prescribed under section 153 of the Act (sic). Under section 263(2)(b) of the Act, the Commissioner has the power to revise an order of assessment before the expiry of two years from the date of the order sought to be revised. The Income‑tax Officer has passed the order of the assessment on July 3, 1981, under section 143(3) read with section 144B of the Act. The time limit for the Commissioner to pass an order has to be computed from July 3, 1981, and not from the date of the expiry of the previous year, viz., March 31, 1981. If the time limit is computed from July 4, 1981, we are of the opinion that the order passed by the Commissioner on June 29, 1983, is within the time limit provided under section 263 of the Act. We, therefore, find no error in the order of the Tribunal in holding that the Commissioner has exercised the power of revision within‑ the time limit under section 263 of the Act.
In so far as the fourth question of law is concerned, that relates to the merits of the case. The question refers to the deductibility of two sums, viz. Rs.50,000 and a sum of Rs.1,01,485. As regards the sum of Rs.50,000 is concerned, the Tribunal disallowed the claim of the assessee on the ground that the amount has been transferred to welfare fund, and the welfare fund was not recognised by the Commissioner of Income‑tax, and, therefore, the assessee was not entitled to deduction. The Tribunal also rejected the claim of the assessee holding that even if the transfer of Rs.50,000 is taken as donation by the assessee to the trust, the assessee would be entitled to deduction under section 80G of the Act and, therefore, the assessee was not entitled to the deduction of the sum of Rs.50',000 as business expenditure. The trust ‑ to which ‑ the amounts were transferred is styled as Chennai Engineering Labour Welfare Fund. Though the Tribunal has not enclosed a copy of the trust, deed alongwith the statement of the case, it is not disputed that the trust was formed for the benefit of employees of the assessee. The Commissioner also has not disputed that the trust was formed for the benefit of employees of the assessee. The Commissioner also has not disputed the position that the trust was created for the welfare of the employees of the assessee. If the trust has been created fox the welfare of the employees and any contribution was made by the assessee to the trust, in our opinion, it would in effect mean a contribution made by the assessee, for the welfare of the employees and, in our opinion, the contribution for the welfare of the employees is an allowable deduction under the provisions of section 37 of the Act. We are of the opinion that the contribution made by the assessee is claimed as "labour welfare expenditure" and once it is a labour welfare expenditure, it is allowable under section 37 of the Act. In so far as the sum of Rs.1,01,485 is concerned, the amount was paid by the assessee directly to its employees for agreeing to do the work strike‑free and the amount was paid to the employees to render strike‑free service, during the relevant period. The amount was also paid at the rate prescribed on the basis of the agreement, and, therefore, we are of the opinion that the amount paid by way of contribution for strike‑free service is also a labour welfare expenditure and for the promotion of the assessee's business and the amount is allowable as a business expenditure.
Mr. C. V. Rajan, learned counsel for the Revenue; fairly brought to our notice the decision of the Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT (1997) 223 ITR 101, wherein the apex Court held that any contribution made by the assessee to a public welfare fund which is directly connected or related to the carrying on of the assessee's business is allowable as a deduction under section 37(1) of the Income Tax Act, 1961. In our opinion, the decision of the Supreme Court would a fortiori apply to the facts of the case. Though the donation made by the assessee was not in favour of a public welfare fund, but the donation in the instant case, was made for its own employees' welfare fund and the money was paid to the fund to secure to the assessee the benefit in carrying on the business of the assessee and, therefore, the amount paid can be regarded as a labour welfare expenditure and allowable as deduction under section 37 of the Act as the payments were made on the ground of the asses see's business exigencies. We are, therefore, of the opinion that the Tribunal was not correct in' holding that the sum of Rs.50,000 as well as Rs.1,01,485 paid by the assessee cannot be regarded as a business expenditure.
Accordingly, we answer the question of law referred to us as under:
The first question of law‑‑‑In the affirmative and against the assessee.
The second question of law‑‑- In the affirmative and against the assessee;
The third question of law‑‑‑In the affirmative and against the assessee; and
The fourth question of law‑‑‑In the negative, in favour of the assessee and against
the Revenue.
The assessee would be entitled to costs of Rs.750.
M.B.A./165/FC
Order accordingly.