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TMI Blog1978 (9) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... f prohibition restraining the respondent from taking any steps pursuant to the said notices. Briefly stated the facts are these : The assessee is a private limited company incorporated under the Companies Act and is carrying on business of manufacture of pressure cookers and allied products at Bangalore. The sale of these products is being effected by the assessee through its selling agents, M/s. T. T. Krishnamachari and Company, which is a firm carrying on business at Madras, with whom the assessee has entered into an agreement. The assessee has been making payments to the said firm for the services rendered in connection with the sale of its products. The question whether the said payments could be treated as revenue expenditure and if so to what extent arose for consideration before the income-tax authorities in the earlier assessment years, i.e., 1968-69, 1969-70, 1970-71 and 1971-72, having regard to s. 40A(2)(a) of the Act and the relationship that existed between the directors of the assessee-company and the partners of the firm of M/s. T. T. Krishnamachari and Company. Ultimately, by a common order dated October 30, 1976, the said question was settled by the Income-tax Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal, following the said order,' dismissed the departmental appeal in respect of the assessment for the subsequent assessment year 1972-73 also. These orders of the Tribunal became final, the department having accepted the same. When the assessment of the income of the assessee arose during the assessment year 1973-74, the ITO disallowed by his order dated August 6, 1976, the claim made by the assessee regarding payments made to the selling agents as the decision of the Tribunal had not yet been rendered on the appeals referred to above. The assessee filed an appeal against the said order of assessment before the AAC. The appeal was allowed on March 5, 1977, and the allowance claimed by the assessee was granted in the light of the appellate orders of the Tribunal regarding earlier assessment years passed on October 30, 1976. The order passed by the AAC was allowed to become final. In the assessment order dated January 31, 1977, passed in respect of the assessment year 1974-75, the ITO himself granted the allowance claimed in respect of payments made to the selling agents as by then the appellate orders of the Tribunal in respect of the earlier years had been pronounced. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment year 1972-73 the order of the Tribunal is accepted by the department is not relevant for initiating action under sec. 148 for the subsequent assessment years ; (ii) the notices are not issued only on account of mere change of opinion on the part of the Income-tax Officer, but were issued as a consequence of audit objections raised by the internal audit party ; (iii) whether the provisions of sec. 40A or of sec. 40(c) are applicable to the facts of the case is a matter exclusively within the jurisdiction of the Income-tax Officer to adjudicate under the Act, and this is not a matter for interference by this hon'ble court under art. 226 ; (iv) the notices are issued under sec. 147(b) and the records of assessment contain the information in support of the action and the notices are validly issued." During the period under consideration, the relevant parts of s. 40 and s. 40A of the Act stood as follows: " 40. Amounts not deductible.--Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head' Profits and gains of business or profession'--........ (c) in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs of business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : Provided that the provisions of this sub-section shall not apply in the case of an assessee being a company in respect of any expenditure to which sub-clause (i) of clause (c) of section 40 applies ........" There is no dispute in this case that if s. 40(c)(i) is applicable to the case then the challenge to the impugned notices has to fail. There is also no dispute about the nature of services and facilities that were provided by the selling agents for which payments have been made. Both parties have depended upon the appellate order of the Tribunal. The questions raised in these appeals have, therefore, to be decided on the above basis. They are : (i) Whether it is open to this court under article 226 of the Constitution to quash the impugned notices and to issue an order restraining the Income-tax Officer from taking further steps ? (ii) Whether the observations made by the internal audit party amounts to ' information ' within the meaning of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is that both writs of prohibition and 'certiorari' have for their object the restraining of inferior courts from exceeding their jurisdiction, and they could be issued not merely to courts but to all authorities exercising judicial or quasi-judicial functions. But there is one fundamental distinction between the two writs, and that is what is material for the present purpose. They are issued at different stages of the proceedings. When an inferior court takes up for hearing a matter over which it has no jurisdiction, the person against whom the proceedings are taken can move the superior court for a writ of prohibition, and on that, an order will issue forbidding the inferior court from continuing the proceedings. On the other hand, if the court hears that cause or matter and gives a decision, the party aggrieved would have to move the superior court for a writ of ' certiorari ', and on that, an order will be made quashing the decision on the ground of want of jurisdiction. It might happen that in a proceeding before the inferior court a decision might have been passed, which does not completely dispose of the matter, in which case it might be necessary to apply both for cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s jurisdiction (See Regina v. Comptroller-General of Patents and Designs [1953] 2 WLR 760 at p. 765 (QB) and Parisienne Basket Shoes Proprietary Ltd. v. Whyte, 59 CLR 369. A clear distinction must, therefore, be maintained between want of jurisdiction and the manner in which it is exercised. If there is want of jurisdiction then the matter is coram non judice and a writ of prohibition will lie to the court or inferior tribunal forbidding it to continue proceedings therein in excess of its jurisdiction. " The reason for interfering at this stage in cases of this nature are to be found in Bengal Immunity Co. Ltd. v. State of Bihar [1955] 6 STC 446 (SC). In that case, the petitioner was asked by a sales tax authority to apply for registration and to submit returns under the provisions of the Bihar Sales Tax Act, 1947. The petitioner who questioned the jurisdiction of the authority to issue such a notice applied under art. 226 of the Constitution. The High Court of Patna took the view that the Bihar Sales Tax Act undoubtedly conferred jurisdiction on the STO to investigate the question of liability of a dealer to sales tax and accordingly he was well within his jurisdiction in issuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and simple. The remedy under the Act cannot be said to be adequate and is, indeed, nugatory or useless if the Act which provides for such remedy is itself ultra vires and void and the principle relied upon can, therefore, have no application where a party comes to court with an allegation that his right has been or is being threatened to be infringed by a law which is ultra vires the powers of the legislature which enacted it and as such void and prays for appropriate relief under article 226. As said by this court in Himmatlal Harilal Mehta v. State of Madhya Pradesh [1954] 5 STC 115 (SC) this plea of the State stands negatived by the decision of this court in State of Bombay v. United Motors (India) Ltd. [1953] 4 STC 133 (SC). We are, therefore, of the opinion, for reasons stated above" that the High Court was not right in holding that the petition under article 226 was misconceived or was not maintainable. It will, therefore, have to be examined and decided on merits. " In Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), where a notice issued under s. 34 of the Indian I.T. Act, 1922, corresponding to s. 148 of the Act was questioned, the Supreme Court observed (p. 207 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that art. 226(3) of the Constitution precluded in assessee from challenging a notice issued under s. 148 of the Act relying upon the observations made by the Supreme Court in the case of Calcutta Discount Co. Ltd. [1961] 41 ITR 191 and holding that the Supreme Court had recognised the existence of an alternative remedy. We are of the view that the case has to be examined in the light of the amended art. 226 which imposes a restriction on the power of the High Court and the nature of the alternative remedy available. In that case, the Supreme Court qualified the words " alternative remedy " with the word " such " as referring to the remedy by way of an appeal and reference under s. 66 to the High Court which were referred to by the counsel for the department. But it cannot be assumed that the Supreme Court held in that case that the appeal and reference referred to therein did really amount to remedies " alternative " to a writ or direction that could be issued under art. 226 restraining the continuance of a proceeding which had been commenced without jurisdiction. We respectfully disagree with the above decision of the Full Bench of the High Court of Punjab and Haryana. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been issued within a period of 4 years or not is only a question of limitation which could and should properly be raised in the assessment proceedings. It is wholly incorrect however to suppose that this is a question of limitation only not touching the question of jurisdiction. The scheme of the law clearly is that where the Income-tax Officer has reason to believe that an under-assessment has resulted from non-disclosure he shall have jurisdiction to start proceedings for reassessment within a period of 8 years : and where he has reason to believe that an under-assessment has resulted from other causes he shall have jurisdiction to start proceedings for reassessment within 4 years. Both the conditions, (i) the Income-tax Officer having reason to believe that there has been under-assessment, and (ii) his having reason to believe that such under-assessment has resulted from non-disclosure of material facts, must co-exist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of 4 years. The argument that the court ought not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that under-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any information; the court may also determine whether from that information the Income-tax Officer may have reason to believe that income chargeable to tax had escaped assessment. But the jurisdiction of the court extends no further. " It is thus clear that it is open to this court to examine whether the information was such that prima facie it may be said that the ITO had reason to believe that income chargeable to tax had escaped assessment. This leads us on to the facts of these cases. As mentioned earlier the Tribunal had after an elaborate investigation came to the conclusion that the payments made by the assessee to its selling agents were not either excessive or unreasonable having regard to the services and facilities provided by the selling agents by applying s. 40A(2) of the Act. Even though the non-obstante clause in s. 40A(1) gives the provisions of that section an overriding effect over the other provisions of the Act, the proviso to that section excludes the application of that section to any expenditure to which sub-cl. (i) of cl. (c) of s. 40 of the Act applies. Since the facts are not in dispute, we shall examine whether sub-cl. (i) of cl. (c) of s. 40 applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The proper rule of construction of a proviso is explained by the Supreme Court in Tahsildar Singh v. State of U. P., AIR 1959 SC 1012 at p. 1022 as follows: " The cardinal rule of construction of the provisions of a section with a proviso is succinctly stated in Maxwell's Interpretation of Statutes, 10th edn., at p. 162 thus : " The proper course is to apply the broad general rule of construction, which is that a section or enactment must be construed as a whole, each portion throwing light if need be on the rest. The true principle undoubtedly is, that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause, and proviso, taken and construed together is to prevail. Unless the words are clear, the court should not so construe the proviso as to attribute an intention to the legislature to give with one hand and take away with another. To put it in other words, a sincere attempt should be made to reconcile the enacting clause and the proviso and to avoid repugnancy between the two." The crucial words in s. 40A(2)(a) are ' fair market value of the goods, services or facilities '. If the remuneration, benefit or amenity referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, is expanding most rapidly. Services, nonetheless, are the favoured domain of the small firm. As mentioned in the last chapter, the growth of the firm is arrested where the task is geographically dispersed and where, accordingly, the activity at any one point is limited and where the task involved is unstandardized. This means that one or a few people work in isolation, i.e., without supervision. Under such circumstances they adopt their preferred pace, which is normally slow. They enhance their input of mental and physical energy only if, in their earning, they reap the rewards and suffer the penalties of the individual entrepreneur. Geographical dispersion, it may be observed, is not an absolute barrier to organization. If the task is relatively standardized, performance norms can be established for dispersed workers to which they can then be required to conform. Or payment can be according to product or revenue produced. On such dispersed functions can be associated with the capital and technical support of a larger organization as in the case of a local unit of a retail or restaurant chain. In recent times there has also been a great exfoliation of hybrid arrangements, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities under the agreement as independent entrepreneurs and it has been held that the commission paid to them was not excessive. At this stage, it is appropriate to set out a part of the order of the Tribunal dated October 30, 1976, in respect of the assessment years 1968-69 to 1971-72. It reads : " On a careful consideration of the facts of the case on record, we are of the opinion that the commission paid to the selling agents in this case is neither excessive nor unreasonable having regard to the tests set forth in section 40A(2)(a). The assessee-company did not have any establishment in the form of premises, staff, telephone and other facilities in any of the major cities of India, Bombay, Calcutta, Delhi and Madras, which are the principal distribution centres. If the assessee-company had these facilities, it Would have incurred costs, which the assessee had estimated at about Rs. 7,39 lakhs per year. As regards the legitimate business reeds, we have already set out the background in which the tripartite agreement was entered into between the assessee-company, the foreign company and M/s. T. T. Krishnamachari and Company. We have also referred to in great detail the vari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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