Madhya Pradesh High Court
Commissioner Of Income-Tax vs Khemchand Motilal Jain Co. on 25 June, 1996
Equivalent citations: [1997]228ITR338(MP)
Author: A.K. Mathur
Bench: A.K. Mathur, Chief Justice
JUDGMENT A.K. Mathur, C.J.
1. Both the references are connected, therefore, they are disposed of by a common judgment.
2. For convenient disposal of both the references, the facts given in (CIT v. Kemchand Motilal Jain - M. C. C. No. 679 of 1992), are taken into consideration.
3. This is a reference under Section 256(1) of the Income-tax Act at the instance of the Revenue and the following two questions of law have been referred by the Tribunal for answer of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-company was entitled to the benefits conferred by the provisions of sections 80HH and 80I of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the commission resolved to be paid to the directors by the company cannot be considered for the purpose of invoking the provisions of Section 40(c) of the Income-tax Act, 1961 ?"
4. The assessee is a new private limited company and commenced its business of bidi manufacturing with effect from January 1, 1982. The company succeeded a firm, Khemchand Motilal Jain, which was dissolved on December 31, 1981. All the assets and liabilities of the erstwhile firm was taken over by the succeeding company and it is also carrying on the business of manufacturing bidi having the same trade mark. The company so formed also manufactured bidis of Dholak brand. The assessee-company claimed deduction under sections 80HH and 80I of the Income-tax Act in the revised return for the assessment year under reference. The assessee's claim was not allowed by the Assessing Officer. According to him, the assessee had succeeded the firm, Khemchand Motilal Jain, which was dissolved on December 31, 1981, and all the assets and liabilities of the erstwhile firm had been taken over by the succeeding company and the firm also carried on the same business of bidi manufacturing. The claim under section 80HH of the Income-tax Act was dismissed on the ground that the company did not manufacture bidis afresh and it had only inherited such a business from the predecessor firm which began to manufacture bidis long before December 31, 1970, and the Assessing Officer held that no new industrial undertaking had come into existence after 1970. He was of the opinion that it is only a reconstruction of the business already in existence. The Assessing Officer further held that the labourers, factories and manufacturing centres and plant and machinery remained the same as was used by the erstwhile firm and, hence, he concluded that no new industrial unit has been set up as claimed. Similarly, he also denied the deductions under section 80I as he found that the assessee had failed to satisfy all the conditions laid down in Sub-section (2) of section 80I. The Assessing Officer also made a disallowance of Rs. 1,93,790 under Section 40(c) of the Income-tax Act, i.e., remuneration and commission paid to Shri Motilal Jain, chairman, Shri Jeewanlal Jain, managing director, Shri Prakash Chand Jain, director, and Shri Azad Kumar Jain, director. Besides the remuneration, commission at certain rates on the net profits had been paid to the above directors varying from 3 per cent. to 1.5 per cent. and this was also disallowed by the Assessing Officer in excess of Rs. 72,000 in each case and added to the total income of the assessee-company.
5. Aggrieved by the order of the Assessing Officer, the assessee approached the appellate authority in appeal and the appellate authority reversed the finding of the Assessing Officer. Thereafter, the matter was taken up by the Revenue in appeal before the Tribunal and the Tribunal affirmed the findings of the appellate authority. Hence, this reference was moved by the Revenue for making a reference before this court and, accordingly, the aforesaid two questions of law have been referred by the Tribunal for answer of this court.
6. We have heard learned counsel for the parties and perused the records. The appellate authority after scrutinising the facts, has enumerated certain undisputed facts which were affirmed by the Tribunal also, and they are as under :
(i) that the business of the erstwhile firm came t,o an end with its dissolution with effect from December 31, 1981 ;
(ii) that all the immovable properties were not taken over by the company, much less even the movable properties like trade marks were not handed over to the appellant-company ;
(iii) that the appellant had taken new sales tax number as also new central excise number besides new labour licence under the Bidi Cigar Act ; new branches have been opened after starting the business by the appellant-company ;
(iv) the appellant took over and succeeded only to stocks, raw materials along with liabilities and not immovable properties and the trade mark ;
(v) partners of the erstwhile firm, who have entered into an agreement with the appellant-company are charging licence fee from the company for the use and exploitation of trade mark ; and
(vi) some property of the erstwhile partners of the dissolved firm has also been taken on rent by the appellant-company.
7. On the basis of these admitted facts, the finding given by the Assessing Officer was found to be not sustainable. These admitted facts which emerge from the order of the appellate authority, make it clear that it was not a purchase of the wholesale firm but only purchase of certain things and started functioning as a new company because sales tax number, central excise number and labour licence under the Bidi and Cigar Act were taken anew. The movables like trade marks were not given to the company. All the immovable properties were not taken over. Therefore, these facts, which have been recorded by the appellate authority and affirmed by the Tribunal, speak eloquently that there was no complete succession. Therefore, in these circumstances, on the basis of the admitted facts, as they emerged, it transpires that it was not a reconstruction of a business of the erstwhile firm but a new company emerged though it has taken over certain movable and immovable property and stocks, which were lying there and out of that a new company has emerged and it cannot be said to be a reconstruction of the same firm though some of the partners may be common.
All these concurrent findings of fact make it clear that it was not a reconstruction of the old concern. Hence, we answer the first question in favour of the assessee and against the Revenue.
8. Similarly, the question of disallowance under Section 40(c) is concerned, the Tribunal has also affirmed the findings of the appellate authority. The appellate authority took the view that salary as defined in Section 17 does not include commission. It is pointed out that the commission which was paid was independent of the salary. It is alleged that the commission paid to Shri Motilal Jain, Shri Jeewanlal Jain, Shri Prakash Chand Jain and Shri Azad Kumar Jain was in pursuance of the resolution passed by the board on January 1, 1982, and it has nothing to do with the salary which was paid to some of the partners. This commission was paid to them for their financial involvement and they having given guarantee for the loans taken by the company. It was contended that there was no proximity between these two. The appellate authority held that this was not in lieu of salary paid to them for the full time services rendered by them. Therefore, it was not considered to be salary. It was also found that it was not in excess warranting any part for disallowance under Section 40(c). The appellate authority divided it in two parts, i.e., salary and commission, and treated this as commission only and not part of salary and not found to be excessive. Therefore, this disallowance was also negatived and this was affirmed by the Tribunal. We have considered the factual aspects and in view of the concurrent finding of fact given by both the authorities below, i.e., the appellate authority and the Tribunal, we are of the opinion that there is no reason to take a different view from the view taken by both the authorities below. Hence, we answer both the aforesaid questions in favour of the assessee and against the Revenue. Accordingly, we answer both the questions in favour of the assessee and against the Revenue.