1983 (11) TMI 100 - AT - Income Tax

Summary

Issues:
1. Reopening of assessment under section 147(b) based on audit observation.
2. Disallowance under section 40A(5) for excess salary and commission payments.
3. Nature of deferred annuity payments in relation to section 40A(5) disallowance.

Detailed Analysis:

1. The case involved the reopening of the assessment under section 147(b) of the Income-tax Act, 1961 based on an audit observation that the Income Tax Officer (ITO) had not considered section 40A(5) while completing the original assessment. The ITO reopened the assessment as he believed that income chargeable to tax had escaped assessment. The assessment was subsequently reopened under section 146 upon the assessee's application. The Commissioner (Appeals) rejected the assessee's objection to the reopening, leading to the appeal before the Tribunal.

2. The primary issue for consideration was the disallowance under section 40A(5) for excess salary and commission payments made to two employees. The ITO disallowed the payments exceeding the allowable amount under section 40A(5), resulting in a total disallowance of Rs. 35,594. The assessee contended that the excess amount was utilized to purchase deferred annuity policies for the employees, and thus, should not be considered as part of the salary for disallowance purposes. The Commissioner (Appeals) upheld the disallowance, leading to the appeal before the Tribunal.

3. The Tribunal analyzed the nature of the deferred annuity payments made to the employees in relation to the disallowance under section 40A(5). It was observed that the deferred annuity payments did not immediately benefit the assessee or the employees, as per the terms of the annuity policy. The Tribunal concluded that the deferred annuity payments did not qualify as remuneration under section 40A(5) and, therefore, could not be subject to disallowance. The Tribunal distinguished a previous decision cited by the revenue, emphasizing the unique circumstances of the case at hand.

In conclusion, the Tribunal partly allowed the appeal, ruling that while the assessment was validly reopened, no disallowance could be made under section 40A(5) for the remuneration paid to the employees, including the deferred annuity component.