1997 (9) TMI 12 - HC - Income Tax

Business Expenditure Company Surtax Capital Or Revenue Expenditure Ceiling On Expenditure

Summary

Issues:
1. Validity of reopening assessment under section 147(b) of the Income-tax Act, 1961.
2. Application of section 40(c) of the Income-tax Act to managing director's remuneration.

Analysis:

Validity of Reopening Assessment:
The case involved the reopening of assessment for the assessment year 1974-75 under section 147(b) of the Income-tax Act, 1961. The original assessment was reopened due to discrepancies identified during an audit by the Department related to the managing director's salary and depreciation. The key question was whether the audit report could provide a valid cause of action for the Income-tax Officer to reopen the assessment. The court referred to the judgment in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, where it was clarified that information provided by an audit party, even if related to legal provisions, could constitute valid information for reopening an assessment. Applying this principle, the court held that the audit party's information regarding the managing director's remuneration, not considered in the original assessment, justified the reopening under section 147(b) of the Act. Thus, the first question was answered in the affirmative against the assessee.

Application of Section 40(c) to Managing Director's Remuneration:
The second issue pertained to the application of section 40(c) of the Income-tax Act to the managing director's remuneration, including bonus payments from previous assessment years. The Income-tax Officer disallowed the excess amount based on the bonus accrued during the relevant accounting year. The Tribunal supported this decision, highlighting that the bonus payments were approved by the Central Government and the board of directors after the relevant accounting year. Additionally, the Supreme Court's decision in Nonsuch Tea Estate Ltd. v. CIT [1975] 98 ITR 189 was cited to emphasize that the liability to pay the managing director arises only after government approval. Considering these factors, the court upheld the application of section 40(c) to the managing director's remuneration, inclusive of bonus payments from earlier years. Consequently, the third question was answered in the affirmative against the assessee.

In conclusion, all questions of law raised in Tax Case No. 709 of 1982 were decided against the assessee, affirming the validity of the assessment reopening and the application of section 40(c) to the managing director's remuneration. No costs were awarded in this judgment.