2005 (1) TMI 106 - HC - Income Tax

Application made by assessee u/s 256(1) for making reference to HC on the question proposed was dismissed by tribunal hence the impugned application u/s 256(2) - question whether a particular charge paid as service charge to a holding company can be deducted or not is essentially a question of fact - issue was good for debate up to the Tribunal but not thereafter for the High Court in reference jurisdiction under section 256(1) - application is found to be devoid of merit

Summary

Issues:
Application under section 256(2) of the Income-tax Act, 1961 for dismissal of application under section 256(1) by the Tribunal regarding assessment years 1988-89 and 1989-90. Questions proposed for reference to the court under section 256(1) regarding service charges paid by the applicant-company to its holding company and the applicability of section 40A(2) in disallowing expenses.

Analysis:
The judgment delivered by A. M. Sapre J. and Ashok Kumar Tiwari J. pertains to an application made by the assessee under section 256(2) of the Income-tax Act, 1961 following the dismissal of their application under section 256(1) by the Tribunal. The Tribunal's decision arose from orders related to assessment years 1988-89 and 1989-90. The assessee contended that the Tribunal erred in dismissing their application under section 256(1) and hence approached the court under section 256(2) for review.

During the hearing, the court considered the arguments presented by the counsel for both the assessee and the Revenue. After examining the case records, the court concluded that the application did not raise any referable question of law under section 256(1) for the court to address on its merits. The court found that the questions proposed by the applicant were primarily factual in nature and did not involve any legal issues that warranted reference to the court under section 256(1).

The applicant had put forth four questions for reference to the court, primarily related to the payment of service charges by the applicant-company to its holding company and the applicability of section 40A(2) in disallowing such expenses. The court determined that these questions were essentially factual and intertwined, based on the appreciation of facts rather than any legal interpretation. The court emphasized that for a question to be referable, it must involve an issue of law, not just factual analysis.

The court further explained that the determination of whether a particular charge paid as a service charge is deductible or not, especially when paid to the same company, is a question of fact based on agreements and documents presented by the assessee. While acknowledging the debate surrounding this issue up to the Tribunal level, the court clarified that such factual matters were not suitable for consideration by the High Court in its reference jurisdiction under section 256(1) of the Act.

Ultimately, the court concurred with the Tribunal's decision that the questions proposed by the applicant did not constitute legal questions but were rooted in factual analysis. Consequently, the court found the application devoid of merit and dismissed it, ruling that no costs were to be awarded in this matter.