1999 Supreme(Mad) 2775

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE N.K. JAIN & THE HONOURABLE MR. JUSTICE N.V. BALASUBRAMANIAN
T. V. Sundaram Iyengar and Sons Limited - Appellant
Versus
Commissioner of Income Tax - Respondents
Cases Nos. 164 to 168 of 1999
Decided On : 13 December 1999

The reopening of a case under section 147(b) of the Income-tax Act, 1961, is permissible if the assessing authority has reason to believe that there are sufficient materials to justify the reopening. The disallowance of expenditure under section 37(4) of the Act is permissible if the expenditure is not incurred for the purpose of the business.

Headnote:

INCOME TAX - Reassessment - Salary and maintenance expenses - Depreciation - Whether the Tribunal was right in holding that the reassessments under section 147(b) of the Act are in order - Whether the Tribunal misdirected itself in law and acted without evidence or in disregard of material evidence filed by the assessee in holding that the salary and maintenance expenses paid to Mr. Nicholas Sundaram was not allowable expenditure - Whether the Tribunal's conclusion about the disallowance of salary and maintenance expenses paid to Mr. Nicholas Sundaram is vitiated in law by referring only to some of the documents in paper book I and II and in omitting to take into account several other important documents filed by the assessee - Whether having regard to several documents filed by the assessee, the Tribunal could have come to the conclusion that Mr. Nicholas Sundaram did not render any service and there was no employer-employee relationship and the salary and maintenance expenses were not allowable business expenditure - Whether the conclusion of the Tribunal about Mr. Nicholas Sundaram's appointment is based on several wrong assumptions wrong appreciation of the evidence and by ignoring material evidence - Whether, on the facts and in the circumstances of the case, there was any material for the Tribunal to hold that Mr. Nicholas Sundaram is a relative of the director when the finding of the Commissioner of Income-tax (Appeals) is that he is not a relative of the director within the meaning of section 2(41) read with section 2(32) of the Act and which finding has been accepted by the Department - Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that depreciation is not allowable under section 37(4) on the building called the guest house but used by the assessee for the purpose of its business ?

Fact of the Case:

The assessee, a company, appointed Nicholas Sundaram, the nephew of one of the company's founders, on a salary of Rs. 1,000 per month plus dearness allowance and other benefits. Sundaram was then deputed to Austria for post-graduate studies in automobile and machine building for seven years with leave and pay. The assessee claimed the salary and maintenance expenses paid to Sundaram as business expenditure. The assessing officer disallowed the expenses, holding that Sundaram had not rendered any service to the company and that there was no employer-employee relationship. The Commissioner of Income-tax (Appeals) upheld the assessing officer's order. The Tribunal also upheld the disallowance of the expenses. The assessee filed tax case petitions, contending that the Tribunal had erred in law in holding that the reassessments under section 147(b) of the Income-tax Act, 1961, were in order and that the salary and maintenance expenses paid to Sundaram were not allowable expenditure.

Finding of the Court:

The court held that no question of law arose from the facts of the case. It agreed with the Tribunal's finding that there was material evidence on record to support the reopening of the case under section 147(b) of the Act. The court also upheld the Tribunal's finding that the salary and maintenance expenses paid to Sundaram were not allowable expenditure, as there was no evidence that Sundaram had rendered any service to the company or that there was an employer-employee relationship between them. The court further held that the Tribunal was justified in disallowing depreciation under section 37(4) of the Act on the building called the guest house, as the amendment to section 37(4) with retrospective effect from February 28, 1970, barred such depreciation.

Issues: 1. Whether the Tribunal was right in holding that the reassessments under section 147(b) of the Act are in order? 2. Whether the Tribunal misdirected itself in law and acted without evidence or in disregard of material evidence filed by the assessee in holding that the salary and maintenance expenses paid to Mr. Nicholas Sundaram was not allowable expenditure? 3. Whether the Tribunal's conclusion about the disallowance of salary and maintenance expenses paid to Mr. Nicholas Sundaram is vitiated in law by referring only to some of the documents in paper book I and II and in omitting to take into account several other important documents filed by the assessee? 4. Whether having regard to several documents filed by the assessee, the Tribunal could have come to the conclusion that Mr. Nicholas Sundaram did not render any service and there was no employer-employee relationship and the salary and maintenance expenses were not allowable business expenditure? 5. Whether the conclusion of the Tribunal about Mr. Nicholas Sundaram's appointment is based on several wrong assumptions wrong appreciation of the evidence and by ignoring material evidence? 6. Whether, on the facts and in the circumstances of the case, there was any material for the Tribunal to hold that Mr. Nicholas Sundaram is a relative of the director when the finding of the Commissioner of Income-tax (Appeals) is that he is not a relative of the director within the meaning of section 2(41) read with section 2(32) of the Act and which finding has been accepted by the Department? 7. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that depreciation is not allowable under section 37(4) on the building called the guest house but used by the assessee for the purpose of its business?

Ratio Decidendi: The court applied the following legal principles in reaching its decision: * The reopening of a case under section 147(b) of the Income-tax Act, 1961, is permissible if the assessing authority has reason to believe that there are sufficient materials to justify the reopening. * The disallowance of expenditure under section 37(4) of the Act is permissible if the expenditure is not incurred for the purpose of the business. * The amendment to section 37(4) of the Act with retrospective effect from February 28, 1970, bars depreciation on buildings used as guest houses.

Final Decision: The court dismissed the tax case petitions, holding that no question of law arose from the facts of the case.