1984 (10) TMI 24 - HC - Income Tax

Assessment, Commission Paid By Firm To Partner, Deduction, Disallowance, Firm, Firm Assessment, Reassessment

Summary

Issues Involved:
1. Validity of adding back the sum of Rs. 70,990 to the income of the assessee-firm under section 40(b) of the Income-tax Act, 1961.
2. Validity of reopening the assessments under section 147(a) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of Adding Back Rs. 70,990 Under Section 40(b):

The primary issue was whether the commission paid to Tribhuvandas by the assessee-firm should be added back under section 40(b) of the Income-tax Act, 1961. The court examined the agreements and partnership deeds, which explicitly stated that Tribhuvandas, through his proprietary concern Bitco Sales Service, was entitled to a 10% commission on sales. The court noted that the prohibition under section 40(b) is absolute and applies to payments made to a partner, regardless of the capacity in which the partner receives the payment. The court referenced the case of N. M. Anniah & Co. v. CIT, which held that section 40(b) applies irrespective of the character in which a person has become a partner. The court concluded that the commission paid to Tribhuvandas fell within the scope of section 40(b) and should be added back to the income of the firm.

2. Validity of Reopening the Assessments Under Section 147(a):

The second issue was whether the reopening of assessments under section 147(a) was valid. The court observed that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The trading accounts and profit and loss accounts did not disclose the commission paid to Bitco Sales Service, and there was no indication in the statements filed before the Income-tax Officer that any commission had been paid. The court referenced the Supreme Court's decision in Malegaon Electricity Co. P. Ltd. v. CIT, which held that an assessee must disclose all primary facts necessary for the assessment. The court concluded that the assessee's failure to disclose the commission payments led to the escapement of income, justifying the reopening of assessments under section 147(a).

Assessment Year 1962-63 Specific Analysis:

For the assessment year 1962-63, the court noted a specific instance where the Income-tax Officer had asked the assessee to explain the low rate of profit. The assessee had responded, indicating that a 10% discount was given to Bitco Sales Service, which affected the gross profit. The court found that the Income-tax Officer had been provided with enough information to ascertain the commission payments if he had been diligent. Therefore, the court held that for the assessment year 1962-63, the assessee had disclosed all material facts, making the reopening of the assessment invalid.

Judgment Summary:

1. The court affirmed the addition of the commission under section 40(b) for all assessment years in question.
2. The court upheld the reopening of assessments under section 147(a) for all years except the assessment year 1962-63.
3. For the assessment year 1962-63, the court held that the reopening of the assessment was invalid due to the sufficient disclosure of material facts by the assessee.

Conclusion:

The court answered the first question in the affirmative and against the assessee. The second question was answered in the affirmative and against the assessee for all references except for the assessment year 1962-63, where it was answered in the negative and in favor of the assessee. No order as to costs was made.