1982 (3) TMI 87 - AT - Income Tax

Issues Involved:
1. Reopening of assessment under Section 147(b) of the Income Tax Act.
2. Deduction of interest on loans for underwriting preference shares.
3. Taxability of dividend foregone by the State Government.
4. Allowability of guarantee fees paid to the Credit Guarantee Corporation of India.
5. Ex gratia payment to staff.
6. Addition in legal and service charge account.
7. Payment to staff welfare fund.
8. Relief under Section 36(1)(viii) of the Income Tax Act.
9. Gratuity paid to LIC.

Detailed Analysis:

1. Reopening of Assessment under Section 147(b) of the Income Tax Act:
The first contention raised was regarding the reopening of assessment under Section 147(b) of the Act. The original assessment was completed on 1st August 1977, determining the total income of the assessee at Rs. 51,50,909. The assessments for the years 1973-74 and 1974-75 were reopened based on information from the audit department. The CIT(A) held that the ITO had no jurisdiction to reopen the proceedings under Section 147(b). The revenue appealed, arguing that the reopening was valid at the time based on the Supreme Court decision in Kasturbhai Lalbhai vs. R. K. Malhotra. However, the Supreme Court's later decision in Indian & Eastern Newspapers Society vs. CIT determined that a note from the audit department is not "information" for the purpose of reassessment proceedings. Hence, the initiation of reassessment proceedings was void ab initio, and the CIT(A)'s decision was upheld.

2. Deduction of Interest on Loans for Underwriting Preference Shares:
The CIT(A) allowed the deduction of interest of Rs. 4,21,647 for 1973-74 and Rs. 4,39,547 for 1974-75. The ITO had disallowed these amounts, viewing the liability as contingent. The CIT(A) found the liability to be accrued and part of the loan agreement with the Government of Gujarat. The Tribunal upheld this decision, noting that the liability to pay interest on loans for underwriting preference shares was specified and should be allowed on an accrual basis.

3. Taxability of Dividend Foregone by the State Government:
The ITO treated the dividend foregone by the State Government as a taxable subsidy. The CIT(A) held that it was not taxable as income but rather a capital receipt. The Tribunal agreed, stating that the dividend foregone was a remission and not taxable as income.

4. Allowability of Guarantee Fees Paid to the Credit Guarantee Corporation of India:
The ITO disallowed the guarantee fees paid, arguing that the assessee wrongly undertook the liability. The CIT(A) allowed the deduction, stating the expenditure was incurred for business purposes. The Tribunal upheld this decision, noting that the liability to pay the fee was on the assessee, and the non-recovery from borrowers did not affect the allowability of the claim.

5. Ex Gratia Payment to Staff:
The ITO disallowed the ex gratia payment of Rs. 4,872, viewing it as a contravention of the Bonus Act. The CIT(A) allowed the payment, considering it necessary to maintain good staff relations. The Tribunal upheld this decision, referencing the Supreme Court decision in Sassoon J. David & Co. (P) Ltd. vs. CIT.

6. Addition in Legal and Service Charge Account:
The ITO added Rs. 18,000 due to a discrepancy. The CIT(A) deleted the addition, finding it represented refunds made during the year. The Tribunal upheld the CIT(A)'s decision as no material was presented to counter this finding.

7. Payment to Staff Welfare Fund:
For the year 1973-74, the ITO disallowed Rs. 10,000 paid to the staff welfare fund. The CIT(A)'s decision to allow the payment was upheld by the Tribunal, referencing their earlier order.

8. Relief under Section 36(1)(viii) of the Income Tax Act:
The CIT(A)'s decision to grant relief under Section 36(1)(viii) was upheld by the Tribunal for both years under appeal.

9. Gratuity Paid to LIC:
For the year 1974-75, the CIT(A) allowed the gratuity payment of Rs. 28,928 to LIC. The Tribunal upheld this decision, referencing their earlier order.

Conclusion:
The appeals were dismissed, and the CIT(A)'s decisions were largely upheld, confirming the invalidity of the reassessment proceedings and allowing various deductions and claims made by the assessee.

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