1988 (3) TMI 133 - AT - Income Tax

Company In Which Public Are Substantially Interested, Business Disallowance, Remuneration Paid To Directors, Registered Society

Issues Involved:

1. Classification of the assessee as a company in which the public are substantially interested under Section 2(18).
2. Validity of reopening the assessment under Section 147(a) for the assessment year 1975-76.
3. Entitlement to weighted deduction under Section 35B for the assessment years 1978-79 and 1979-80.
4. Treatment of medical reimbursement and conveyance allowance under Section 40A(5) for the assessment year 1980-81.
5. Disallowance under Rule 6D for the assessment year 1978-79.
6. Rate of depreciation for water works for the assessment years 1982-83 and 1983-84.
7. Payment to a director for the purpose of the ceiling of Rs. 72,000.

Issue-wise Detailed Analysis:

1. Classification of the Assessee:

The main point in all the appeals was whether the assessee is a company in which the public are substantially interested under Section 2(18). The assessee must satisfy three cumulative conditions:
- At least 40% of the voting power should be held unconditionally by the public or a company in which the public are substantially interested.
- The shares should be freely transferable.
- The affairs of the company or the shares carrying more than 60% of the total voting power should not be controlled or held by 5 or fewer persons.

The shares were held by various entities, including individuals, societies, and companies. The shares held by United India Insurance Corporation were considered as held by the public. However, Sundaram Industries Ltd. and Southern Roadways Ltd., although deemed public limited companies, were not companies in which the public are substantially interested. Sundaram Charities, holding 7,400 shares, was argued to be part of the public. However, based on the Supreme Court's decision in Raghuvanshi Mills Ltd. v. CIT, the shares must be held unconditionally and beneficially by the public. The department held that Sundaram Charities formed a block with other entities, and the shares were not freely transferable due to the pre-emption rights in the company's memorandum of association. Therefore, the assessee did not satisfy any of the conditions, and it was concluded that the assessee cannot be considered as a company in which the public are substantially interested.

2. Validity of Reopening the Assessment:

For the assessment year 1975-76, the Income-tax Officer had reopened the assessment under Section 147(a). The Commissioner (Appeals) upheld the validity of the reopening. However, it was found that the assessee had fully and truly disclosed all material facts, including the list of shareholders, during the original assessment proceedings. Therefore, the reopening of the assessment was not valid, and the reassessment proceedings for the year 1975-76 were annulled.

3. Entitlement to Weighted Deduction:

For the assessment years 1978-79 and 1979-80, the assessee claimed a weighted deduction under Section 35B at the rate of 1.5 times. However, this entitlement was contingent on the finding that the assessee was a company in which the public are substantially interested. Since the assessee was not considered as such a company, the claim for weighted deduction at 150% was rejected.

4. Treatment of Medical Reimbursement and Conveyance Allowance:

For the assessment year 1980-81, the issue was whether medical reimbursement and conveyance allowance should be treated as perquisites under Section 40A(5). The Commissioner (Appeals) held that Section 40(c) read with the first proviso to Section 40A(5) would apply, and the overall ceiling of Rs. 72,000 would be applied. It was concluded that cash payments like house rent allowance and other payments are not perquisites but are in the nature of remuneration. Therefore, these payments must be considered in deciding whether the payments have exceeded Rs. 72,000.

5. Disallowance under Rule 6D:

For the assessment year 1978-79, an excess travelling allowance of Rs. 1,466 was disallowed by the Income-tax Officer based on the details furnished by the assessee. The Commissioner (Appeals) directed the Income-tax Officer to verify the correctness of the disallowance. The assessee had no grievance with this direction.

6. Rate of Depreciation for Water Works:

For the assessment years 1982-83 and 1983-84, the issue was the rate of depreciation for water works. The department contended that the rate should be 5% as they come within the meaning of hydraulic works, pipelines, and reservoirs. The Commissioner allowed a rate of 10%, but it was concluded that the specific rate fixed in the schedule should be applied, and the assessee is entitled to only 5% depreciation.

7. Payment to a Director:

An additional ground was raised by the department regarding a payment of Rs. 6,050 to one of the directors, Sri Rambhupal Reddy, for the purpose of the ceiling of Rs. 72,000. This point was decided against the company, supported by the decision of the Andhra Pradesh High Court in the case of D. B. R. Mills.

Conclusion:

The assessee's appeal for the assessment year 1975-76 was allowed, and the reassessment proceedings were annulled. The other appeals by the assessee were dismissed. The departmental appeals were partly allowed, with specific points decided in favor of the department.

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