1984 (4) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under section 263.
2. Erroneous assessment order prejudicial to the interests of the revenue.
3. Waiver of interest receivable from a subsidiary company.
4. Treatment of director's sitting fees under section 40A(5).

Detailed Analysis:

1. Jurisdiction under Section 263:
The primary issue was whether the Commissioner erred in assuming jurisdiction under section 263 of the Income-tax Act, 1961, given that the assessment order had already merged with the appellate order of the Commissioner (Appeals). The assessee-company relied on the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. and the Special Bench of the Tribunal in the case of Dwarkadas & Co. (P.) Ltd. However, the Commissioner rejected this preliminary objection, citing the Bombay High Court's judgment in CIT v. Sakseria Cotton Mills Ltd., which held that the doctrine of merger depends on the nature and scope of the appellate or revisional order. Since the points raised under section 263 were not covered in the appellate order, the question of merger did not arise. The Tribunal upheld the validity of the proceedings under section 263, following the Bombay High Court's decision and the Full Bench of the Madhya Pradesh High Court in CIT v. R.S. Banwarilal.

2. Erroneous Assessment Order Prejudicial to the Interests of the Revenue:
The Commissioner found that certain claims allowed by the ITO were not admissible, causing prejudice to the revenue. This provided a prima facie reason for initiating proceedings under section 263. The Tribunal agreed with the Commissioner, rejecting the second preliminary ground raised by the assessee-company.

3. Waiver of Interest Receivable from a Subsidiary Company:
The assessee-company waived the interest of Rs. 1,05,515 receivable from its subsidiary, Kirloskar Kisan Equipment Co. Ltd., due to the subsidiary's poor financial condition. The Commissioner disallowed the waiver, considering it a gratuitous sacrifice. The assessee-company argued that the waiver was a commercially expedient decision to keep the subsidiary viable, citing Supreme Court decisions in CIT v. Chandulal Keshavlal & Co. and CIT v. Shoorji Vallabhdas & Co. The Tribunal, upon reviewing the financial condition of the subsidiary and relevant case law, found the waiver justified and reversed the Commissioner's decision, holding that the interest did not actually accrue to the assessee due to the subsidiary's financial distress.

4. Treatment of Director's Sitting Fees under Section 40A(5):
The Commissioner treated the sitting fees paid to directors as part of their salary under section 40A(5). The assessee-company argued that these fees were reimbursements for expenses. The Tribunal disagreed with the assessee, stating that sitting fees are for services rendered and form part of remuneration. However, the Tribunal held that section 40A(5) was erroneously invoked and that the remuneration should be examined under section 40(c), following the Special Bench decision in Geoffrey Manners & Co. Ltd. v. ITO.

Conclusion:
The Tribunal partly allowed the appeal, upholding the validity of the proceedings under section 263 and the Commissioner's decision on the director's sitting fees but reversing the decision on the waiver of interest receivable from the subsidiary.