Patna High Court
A. Hasan Sasamusa vs Commissioner Of Income-Tax on 27 March, 1957
Equivalent citations: AIR1958PAT179, [1957]32ITR338(PATNA), AIR 1958 PATNA 179
Author: Chief Justice
Bench: Chief Justice
ORDER
1. In this case the assesses was the Managing Director of Sasamusa Sugar Works Limited for the assessment years 1944-45, 1945-46 and 1947-48. The relevant accounting years were the corresponding financial years, namely, 1943-44, 1944-45 and 1946-47. The assessee was paid in each accounting year a sum of Rs. 48,000/- as remuneration by the Company. But in the Company's assessment the Income-tax Authorities allowed only a deduction of Rs. 7,200/- instead of Rs. 48,000/- for each accounting year as remuneration of the Managing Director.
The order of the Income-tax Officer on this point was confirmed by the Appellate Assistant Commissioner, and for each of the three years only a sum of Rs. 7,200/- was allowed as the Managing Director's remuneration and the balance of the amount, namely, Rs. 40,800/-, was disallowed as the proper deduction from the gross profits of the Company. The original assessment was made upon the assessee in the year 1947 by the Income-tax Officer for all the three assessment years. The assessee was taxed only on the amount of Rs. 7,200/-, though the entire amount of Rs. 48,000/- was taken into account for the purpose of determining the rate of tax.
The Income-tax Officer followed this course in view of the Finance Department Notification No. 878-F, dated 21st March, 1922, as amended by Notification No. 8 of the Finance Department, dated 24th March, 1928. Later on, the Income-tax Officer issued a notice against the assessee under Section 34 on the basis of the contents of a circular issued by the Commissioner of Income-tax, United Province, stating that the notification of the Finance Department was not applicable to a case like that of the assessee. By this time Section 34 of the Income-tax Act had been amended by Central Act No. 48 of 1948.
Under the provisions of the amended section the Income-tax Officer obtained the sanction of the Commissioner of Income-tax for reopening the assessment of the assessee for the three assessment years. After obtaining the sanction the Income-tax Officer drew up proceedings under Section 34. In due course the assessments were completed for all the three years and a sum of Rs. 40,800/- was assessed to tax. The assessee preferred an appeal to the Appellate Assistant Commissioner against all these assessments, but the appeals were dismissed. The assessee then took an appeal to the Tribunal against the order of the Appellate Assistant Commissioner.
The Tribunal held that Section 34 as amended by Act 48 of 1948 was properly applied to the case of the assessee and further that the assessee was not entitled to the benefit of the Finance Department Notification No. 878-F, dated 21st March, 1922, as amended by another notification of the same department D/- 24-3-1928. It was held by the Appellate Tribunal that the conditions prescribed by the notification were not satisfied and, therefore, the assessee was not entitled to the benefit of the notification.
2. At the request of the assessee the Income-tax Appellate Tribunal submitted the following questions of law for the opinion of the High Court under Section 66 (1) of the Indian Income-tax Act :
"1. Whether Section 34 of the Act, as amended by Act 48 of 1948, was applicable to the proceedings under Section 34, initiated for the assessment years 1944-45, 1945-46 and 1947-48 on 23-3-49, 23-3-49 and 25-8-49, respectively?
2. Whether the sum of Rs. 40,800/- is exempt from tax under the Finance Department Notification No. 878-F, dated 21st March, 1922, as amended by Notification No. 8, dated 24th March, 1928?"
3. With regard to the first question, Mr. S.N. Dutta on behalf of the assessee conceded that In view of the decision of this Court in Commr. of Income-tax, B. & O. v. Pratap Singh Bahadur, 1956-30 ITR 484: ,(AIR 1957 Pat 61) (A), it must be held that Section 34 of the Income-tax Act, as amended by Act 48 of 1948, was applicable to proceedings under Section 34 initiated against the assessee for the three assessment years in question. In view of this decision we consider that the first question of law referred to the High Court must be answered against the assessee and in favour of the Income-tax Department.
4. As regards the second question, it was submitted by learned Counsel on behalf of the assessee that all the three conditions required by the Finance Department Notification had been satisfied in this case and the assessee was entitled to ask that the amount of Rs. 40,800/- should be excluded for the purpose of taxation and the benefit mentioned in the Finance Department Notification should be given to the assessee. The argument is based upon the notification of the Finance Department, dated 21st of March, 1922, as amended by another notification of the same department dated 24th March, 1928, which is to the following effect :
''The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act :
1. Sums received by an assessee on account of salary, bonus, commission or other remuneration for services' rendered, or in lieu of interest on money advanced, to a person for the purposes of his business, where such sums have been paid out of, or determined with reference to, the profits of such business, and by reason of such mode of payment or determination, have not been allowed as a deduction taut have been included in the profits of the business on which income-tax has been assessed and charged under the head 'business' :
Provided that such sums shall not be exempt from the payment of super-tax unless they are paid to the assessee by a person other than a company and have already been assessed to super-tax. (Finance Department Notification No. 878-F, dated 21st March, 1922, as amended by Notification No. 8, dated 24th March, 1928).
X X X X "
It is evident that three conditions must be satisfied before the assessee is entitled to the benefit of this notification. In the first place, it must be proved that the sum was received by the assessee as salary, bonus, commission or other remuneration for services rendered. Secondly, it must also be established that the sum was paid to the assessee "out of, or determined with reference to, the profits of such business". Thirdly, it must be shown that the amount has not been deducted from the company's assessment.
We agree with the learned Counsel for the assessee that the first and the third conditions have been satisfied; but we do not agree that the second condition has been satisfied by the assessee in this case. On this point the learned Counsel referred to the order of the Appellate Assistant Commissioner at page 8 of the paper-book, where the Appellate Assistant Commissioner states that "the increase was sanctioned after three months of the close of the accounting period when the trading results were known, and the effect was given to this increase from the beginning of the year and there is reasonable ground for the presumption that the increased payment was a device for avoidance of tax and was not a bona fide expenditure." But this portion of the order of the Appellate Assistant Commissioner is not of much assistance to the argument of the assessee because there is nowhere a finding that the sum was paid to the assessee out of the profits of the business or that the amount was determined with reference to the profits of the business. Merely because the amount was sanctioned after the accounting period, it cannot be legitimately inferred that the amount was paid out of the profits of the business or the amount was determined with reference to the profits of the business.
There is hence no material to support the argument addressed on behalf of the assessee that the second condition mentioned in the Finance Department Circular had been satisfied in this case. On the other hand, we agree with the finding of the Accountant Member, Mr. Narayana Row, in his order that the second condition has not been satisfied and that the assessee is not entitled to exemption of the tax with respect to the amount of Rs. 40,800/- for all the three assessment years.
5. For these reasons we answer the second question also against the assessee and in favour of the Income-tax Department and hold that the amount of Rs. 40,800/- is not exempt from income-tax under the Finance Department Notification dated 21st March, 1922, as amended by another notification of the same department dated 24th March, 1928.
6. The assessee must pay the costs of this reference. Hearing fee Rs. 250/-.