1982 (8) TMI 39 - HC - Income Tax

Business Expenditure Contribution To Recognised Provident Fund Failure To Disclose Fully And Truly Reassessment

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the Income-tax Officer (ITO) could not reasonably believe that any income of the assessee had escaped assessment due to the assessee's failure to disclose all material facts.
2. Whether the amounts paid by the assessee as contributions to the provident fund were allowable as deductions during the relevant assessment years.

Issue-wise Detailed Analysis:

Issue 1: Reasonable Belief of Income Escaping Assessment
The Tribunal examined the reasons recorded by the ITO for reopening the assessments and noted that the ITO did not specify which primary facts were omitted by the assessee. The Tribunal observed that the articles of association were available to the ITO during the original assessments, and it was not obligatory for the assessee to file them annually. The Tribunal concluded that the ITO could not reasonably believe that any income had escaped assessment due to the assessee's failure to disclose material facts fully and truly. The High Court agreed with this view, citing the principles laid down in Calcutta Discount Company Ltd. v. ITO [1961] 41 ITR 191 (SC), and held that the necessary condition for reopening the assessment under Section 147(a) did not exist. Thus, the first question was answered in the affirmative and in favor of the assessee.

Issue 2: Allowability of Provident Fund Contributions as Deductions
The High Court examined whether the contributions made by the assessee to the provident fund were allowable as deductions under Section 36(1)(iv) of the Income-tax Act, 1961. The Court noted that the provident fund was recognized by the Commissioner of Income-tax, and the primary facts required for claiming the deduction were fully disclosed. The Court further observed that the articles of association regulate the company's internal affairs and do not affect the legality of transactions with third parties. Therefore, contributions made in derogation of the articles of association could still be allowable as deductions.

The Court referred to the decisions in CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49 (Mad) and CIT v. Rajendra Mills Ltd. [1974] 93 ITR 122 (Mad), which held that payments made in contravention of the Companies Act could still be allowed as deductions under the Income-tax Act. The Court distinguished the present case from Haji Aziz and Abdul Shakoor Bros v. CIT [1961] 41 ITR 350 (SC), where the issue was the deductibility of penalties paid for breaches of law. The Court concluded that contributions to a recognized provident fund, even if made in derogation of the articles of association, qualify for deduction under Section 36(1)(iv) of the Income-tax Act, 1961. Thus, the second question was also answered in the affirmative and in favor of the assessee.

Conclusion:
Both questions referred to the High Court were answered in the affirmative and in favor of the assessee. The assessee was entitled to costs assessed at Rs. 250.