1998 (8) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of managing agent's remuneration u/s 37 of the Income-tax Act, 1961.
2. Reopening of assessment u/s 154 of the Income-tax Act for the assessment year 1967-68.

Summary:

1. Deduction of Managing Agent's Remuneration u/s 37 of the Income-tax Act, 1961:
The primary issue was whether the assessee-company's failure to deduct interest on borrowings while computing net profits, which determined the managing agent's remuneration, should be ignored, and the full amount of remuneration paid be allowed as an expenditure u/s 37 of the Income-tax Act, 1961. The court noted that the assessee had not deducted interest on borrowings as required by section 349 of the Companies Act, 1956, resulting in excess remuneration to the managing agent. The Tribunal had allowed this excess payment as a deduction, relying on previous court decisions. However, the Supreme Court's decision in Maddi Venkataraman and Co. (P.) Ltd. vs Commissioner of Income-tax [1998] 229 ITR 534, which emphasized that expenses incurred in violation of another statute cannot be allowed as deductions, overruled these precedents. The court held that the remuneration exceeding the limits set by section 348 of the Companies Act, 1956, was not allowable as a deduction u/s 37 of the Income-tax Act, 1961. The Tribunal's decision to allow the excess payment was thus erroneous.

2. Reopening of Assessment u/s 154 of the Income-tax Act for the Assessment Year 1967-68:
For the assessment year 1967-68, the Assessing Officer had initially allowed the entire remuneration claimed. Later, without any new facts, the officer initiated proceedings u/s 154 of the Income-tax Act to rectify the assessment, citing excess remuneration. The court observed that at the time of the rectification order, the prevailing legal position, as per Commissioner of Income-tax vs Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49, did not support such rectification. Therefore, the Tribunal was correct in setting aside the rectification proceedings, as there was no apparent mistake on the record justifying such action.

Conclusion:
For all assessment years except 1967-68, the court held that the excess remuneration paid in violation of section 348 read with section 349 of the Companies Act, 1956, should be disallowed. The answers to the first three questions were in favor of the Revenue, disallowing the excess remuneration. For the fourth question, concerning the assessment year 1967-68, the court ruled in favor of the assessee, stating that the rectification u/s 154 was not justified. The Revenue was awarded costs of Rs. 1,000.