1988 (7) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Whether the conditions of Section 10(6)(vii)(a) were fulfilled by the assessee.
2. Whether the payment of bonus exceeded the approved limit and thus violated the provisions of Section 10(6)(vii)(a).
3. Whether the approval of the service contract was obtained in time.

Issue-wise Detailed Analysis:

1. Fulfillment of Conditions under Section 10(6)(vii)(a):

The Department contested that the CIT(A) erred in holding that the conditions of Section 10(6)(vii)(a) were fulfilled by the assessee, thus excluding the amount of tax paid by the employer from being treated as a perquisite. The reassessment proceedings were initiated following the CIT's order under Section 263, which claimed that the original assessment was erroneous and prejudicial to the interest of revenue. The CIT believed that there was a violation of Section 10(6)(vii)(a) because the remuneration paid exceeded the approved limit and the service contract was not approved in time.

2. Payment of Bonus and Violation of Provisions:

The first charge against the assessee was that the remuneration paid, including the bonus, exceeded the government-approved limit. The Department argued that the salary of Rs. 8,000 per month with an annual increment of Rs. 500 was approved, whereas the assessee received a bonus over and above these figures. The CIT(A) observed that the original assessments were canceled due to an audit objection, which was later dropped by the Accountant General after confirming that the conditions for availing exemption under Section 10(6)(vii)(a) were met.

The CIT(A) noted that the payment of bonus was part of the service contract, and the exact quantum was not required to be stated in the application to the government. The government clarified that it was unnecessary to specify the details of allowances and perquisites in the approval order. The CIT(A) found no violation regarding the extent of salary and allowances, as they were within the meaning of the sanction accorded by the Government of India.

3. Approval of Service Contract in Time:

The second charge was that the service contract was not approved in time, specifically before 1st October of the relevant assessment year. The CIT(A) observed that for the assessment year 1981-82, there was no delay in obtaining the approval, which was granted on 4th December 1980, well before the due date of 1st October 1981. The ITO's interpretation that the approval should have been obtained by 1st October 1980 was incorrect.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, stating that the assessee fulfilled the required conditions for availing exemption under Section 10(6)(vii)(a). The Tribunal found no restriction by the Government of India on the payment of bonus, and the approval of the service contract was obtained in time. The reassessment orders for both years were quashed, and the original assessment orders were restored. The Department's appeal was dismissed.

The Tribunal also noted the inconsistency in the Department's actions, as it did not file an appeal for the assessment year 1980-81, despite identical facts for both years. The Tribunal emphasized that the reassessment was unnecessary, given the dropping of the audit objections and the fulfillment of conditions by the assessee.