1996 (9) TMI 68 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 40(c) vs. section 40A(5) for remuneration paid to managing directors.
2. Validity of jurisdiction assumed by the Income-tax Officer u/s 147(b).
3. Scope of the Appellate Tribunal's powers u/s 260(1).

Summary:

Issue 1: Applicability of section 40(c) vs. section 40A(5) for remuneration paid to managing directors
The assessee contended that the remuneration paid to the two managing directors should be governed by section 40(c) of the Income-tax Act, 1961, rather than section 40A(5). Initially, the Income-tax Officer disallowed the claim under section 40A(5). The Appellate Assistant Commissioner (AAC) held that the managing directors were not employees, thus section 40A(5) did not apply, and deleted the additions. The Tribunal upheld this view. However, the High Court in CIT v. Travancore Chemical Mfg. Co. [1982] 133 ITR 818 concluded that the managing directors were employees, making section 40A(5) applicable. The Tribunal, bound by this judgment, ruled it could not consider section 40(c) under its powers u/s 260(1).

Issue 2: Validity of jurisdiction assumed by the Income-tax Officer u/s 147(b)
The AAC initially held that the Income-tax Officer lacked jurisdiction to reopen the assessment u/s 147(b) due to the absence of new information. However, this was considered academic as the AAC ruled in favor of the assessee on the applicability of section 40(c). The Tribunal noted that the assessee did not challenge the jurisdiction issue at the earlier stage and thus could not raise it now under section 260(1). The Tribunal cited the Supreme Court's decision in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589, emphasizing that only questions raised before the Tribunal can be referred to the High Court.

Issue 3: Scope of the Appellate Tribunal's powers u/s 260(1)
The Tribunal's powers u/s 260(1) are limited to acting conformably with the High Court's judgment. The Tribunal cannot entertain new questions or issues not raised earlier. The High Court emphasized the principle of finality and constructive res judicata, stating that allowing new issues at this stage would undermine the legal process and lead to harassment. The Tribunal must dispose of the case in accordance with the High Court's directions, ensuring the finality of decisions.

Conclusion:
The High Court answered all questions in the affirmative, favoring the Revenue and against the assessee. The Tribunal must act within the statutory limits and cannot reconsider issues not previously raised. The judgment underscores the importance of procedural finality and the limited scope of appellate review under section 260(1).