Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Y.K Sabharwal
  • D.K Jain, JJ.
Acts
  • section 256(2) of the Income-tax Act, 1961 (for short, the Act),
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Y.K Sabharwal
  • D.K Jain, JJ.
Acts
  • section 256(2) of the Income-tax Act, 1961 (for short, the Act),
See more information ...
Smart Summary

Court Opinion Summary — D.K. Jain, J. (Section 256(2), Income-tax Act)

Factual and Procedural Background

The Revenue filed a petition under section 256(2) of the Income-tax Act, 1961 asking the High Court to direct the Income-tax Appellate Tribunal (Tribunal) to state a case and refer eight framed questions of law arising out of Income-tax Appeal No. 3272/(Dei) of 1985 (assessment year 1977–78). The questions related to (a) the characterisation of certain residential accommodations (Sterling Apartment flat in Bombay, a cottage at Marve Malad, Bombay, and Jindal House at Calcutta) as guest houses and the consequent disallowance under section 37(4); (b) the extent to which a hired accommodation at A-1, Maharani Bagh, New Delhi was a guest house; (c) whether premium for personal accident insurance for the managing director is a perquisite under section 40(c); (d) computation under rule 6D for travel disallowance; (e) investment allowance under section 32A; (f) charging of interest under section 216; and (g–h) whether 25% of certain composite expenses (public relations, business promotion, boarding) should be attributed to employees and allowed.

At assessment, the Assessing Officer disallowed certain maintenance expenses treating the residences as guest houses under section 37(4). The Commissioner of Income-tax (Appeals) and the Tribunal reached various conclusions: the Tribunal followed earlier orders (notably for assessment year 1972–73) and accepted the assessee's viewpoint in certain respects, while in others it made factual findings (for example, that one-third of Maharani Bagh was used as a guest house). The Revenue sought directions to have several of these questions referred to the High Court under section 256(2).

Legal Issues Presented

  1. Whether the Tribunal was correct in law in holding that Sterling Apartment flat, Cottage at Marve Malad and Jindal House could not be treated as guest houses and, as such, the expenses incurred thereupon were allowable; and whether only one‑third of Maharani Bagh house was a guest house and the remainder used for business purposes.
  2. Whether the Tribunal was correct in law in holding that the premium of personal accident insurance policy in respect of the managing director could not be considered to be a perquisite within the meaning of section 40(c) of the Income-tax Act.
  3. Whether the Tribunal was correct in law in directing the Income-tax Officer to calculate the disallowance under rule 6D with reference to the total journeys undertaken in a year and not with reference to each journey undertaken by an employee or director on day‑to‑day basis.
  4. Whether the Tribunal was right in holding that the investment allowance of Rs. 3,72,700 was wrongly disallowed by the Income-tax Officer under section 32A of the Act.
  5. Whether the Tribunal was right in holding that the interest under section 216 was wrongly charged.
  6. Whether the Tribunal was right in holding that 25 per cent of expenses under 'Public relations expenses' should be considered towards employees and allowed accordingly.
  7. Whether the Tribunal was right in holding that 25 per cent of the expenses under 'Business, promotion expenses' should be considered towards employees and allowed accordingly.
  8. Whether the Tribunal was right in holding that 25 per cent of expenses under 'Boarding expenses' should be considered towards employees and allowed accordingly.

Arguments of the Parties

Revenue's Arguments

  • The Revenue sought directions that the Tribunal state a case and refer the stated questions of law to the High Court under section 256(2).
  • Regarding the cottage at Marve Malad and Jindal House, the Revenue submitted that each assessment year is independent and therefore the rule of res judicata does not apply to taxation proceedings; accordingly, there was no legal bar to calling for a reference on these issues for the present year.
  • The Revenue attempted to reargue the characterisation of the assessee's production (whether it was producing "organic heavy chemicals") despite having accepted the Commissioner of Income-tax (Appeals) finding at an earlier stage.
  • For some issues (implied by the petition), the Revenue contended the Tribunal erred in law in its conclusions and thus the questions should be referred.

Assessee's Arguments

  • The assessee pointed out that for the assessment year 1972–73 the Allahabad High Court had called for a reference on the issue of the Sterling Apartments flat, and that for subsequent years (1973–74 to 1976–77) no reference was sought by the Revenue on that issue; the assessee argued that a reference should not be directed for the present year for that reason.
  • The assessee highlighted that for the cottage at Marve Malad and Jindal House the Tribunal had consistently accepted the assessee's viewpoint for the assessment years 1972–73 to 1976–77 and that the Revenue either did not seek references earlier or such references were declined by the High Court.
  • The assessee drew attention to tribunal findings (e.g., that one‑third of Maharani Bagh was a guest house) being factual findings not challenged as perverse, and to later practical acceptance by Revenue (for assessment years 1981–82 and 1982–83) of Tribunal's orders on similar issues.
  • The assessee noted that from assessment year 1981–82 onwards, the Assessing Officer had allowed similar expenses on an approximate basis (25% attributed to employees).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Bharat Ram Charat Ram P. Ltd., [1986] 157 ITR 199; SLP dismissed [1990] 186 ITR (St.) 28 Held that insurance premium paid by a company in respect of accident insurance of its directors is not a "perquisite" within the meaning of section 17(1) and therefore cannot be taken into account for the purposes of section 40(c) of the Act. The court relied on this authority to conclude that the proposed question regarding personal accident insurance premium (Question No. 2) is not a statable question of law and therefore no reference should be called for on that point.
CIT v. Modipon Ltd. (No. 1), [1991] 189 ITR 344 (All) A reference on a similar question (in the assessee's own case for assessment year 1976–77) was called for under section 256(2). Because a similar question had been called for previously in the assessee's case, the court held that the present Question No. 3 requires a reference to this court.
Commissioner Of Income-Tax v. J.K. Synthetics Ltd. (No. 1), [1990] 181 ITR 505 An interpretation of section 216 of the Act to a given set of facts can give rise to a question of law. Relying on this decision, the court concluded that Question No. 5 (relating to charging of interest under section 216) should be referred to the court.
Commissioner Of Income-Tax v. Expo Machinery Ltd., [1991] 190 ITR 576 Where composite expenditure is incurred in hotels for entertaining customers, it may be necessary to resort to an estimate for ascertaining the portion attributable to employees; such estimation by the Tribunal is a question of fact. The court applied this principle to Questions Nos. 6–8 (composite expenses with a suggested 25% attribution to employees) and held those questions do not give rise to statable questions of law.

Court's Reasoning and Analysis

The court examined each framed question in sequence and applied legal principles and prior decisions as articulated in the opinion. The reasoning, as contained in the opinion, may be summarized as follows:

  1. Question No. 1(a) (Sterling Apartments flat): The Tribunal accepted the assessee's viewpoint by relying on its earlier order for assessment year 1972–73, which was the main order. Because a reference on a similar question in 1972–73 had already been called for by the Allahabad High Court, the court concluded that the same controversy in the present assessment year is fit for reference to the High Court under section 256(2).
  2. Question No. 1(a) (Marve Malad cottage and Jindal House): The Tribunal had, consistently from assessment years 1972–73 to 1976–77, accepted the assessee's viewpoint, and for those years the Revenue either did not seek a reference or the High Court declined it. The Revenue argued that taxation proceedings are independent year to year and res judicata does not apply. The court observed that while res judicata generally does not apply to ordinary assessment or appellate proceedings under the Act, the position differs in proceedings under section 256 because the High Court is a court of record and its decisions are binding on parties and authorities. Accordingly, the court held that the Revenue cannot be permitted to revisit this controversy and rejected the Revenue's request for a reference on these issues.
  3. Question No. 1(b) (Maharani Bagh): The Tribunal had found, on the evidence before it (including affidavits and other material), that one‑third of the building was used as a guest house and the remainder for business purposes. The court characterized this conclusion as a pure finding of fact which was not challenged as perverse in the proposed question; therefore it concluded that the proposed question is not a statable question of law.
  4. Question No. 2 (personal accident insurance premium): The court noted that this issue had been considered in CIT v. Bharat Ram Charat Ram P. Ltd. where it was held that such premiums are not "perquisites" within section 17(1) and hence not relevant for section 40(c). Having regard to that binding decision (and the dismissal of SLP), the court held that Question No. 2 is not a statable question of law.
  5. Question No. 3 (rule 6D disallowance calculation): Because a reference on a similar question had already been called for in the assessee's own case for assessment year 1976–77 (Modipon Ltd.), the court held that the proposed question should be referred to this court.
  6. Question No. 4 (investment allowance under section 32A): The Tribunal's order accepted that the assessee produced "organic heavy chemicals" (an issue which Revenue had earlier accepted at the Commissioner (Appeals) level), and the Tribunal also found that installation and use of the machinery had been established (depreciation had been allowed). However, the Tribunal failed to address whether the machinery claimed for investment allowance was new — an essential condition for such allowance. Because this specific legal condition was not considered by the Tribunal, the court found that the proposed question is a question of law requiring consideration and should be referred.
  7. Question No. 5 (interest under section 216): The court noted that an identical factual controversy had been considered in Commissioner Of Income-Tax v. J.K. Synthetics Ltd. and that that decision treated the issue as one giving rise to a question of law. On that basis the court held that a reference of this question must be called for.
  8. Questions Nos. 6–8 (25% attribution to employees of composite expenses): The court relied on Commissioner Of Income-Tax v. Expo Machinery Ltd., where the need to resort to estimation in ascertaining the employees' portion of composite hotel expenses was held to be a question of fact and an estimation by the Tribunal is a question of fact. The court also noted that Revenue had not sought references in earlier years on these expenses and that Assessing Officers from 1981–82 had been allowing such expenses on a 25% approximation. In view of the precedent and factual posture, the court concluded these questions do not give rise to statable questions of law.

Holding and Implications

Final Disposition: The High Court directed the Tribunal to refer the following questions, along with an appropriate statement of the case, for the opinion of the High Court:

  • Question No. 1(a) — limited to the expenses incurred on the maintenance of the flat in Sterling Apartments, Bombay;
  • Question No. 3 — calculation of disallowance under rule 6D with reference to total journeys undertaken in a year;
  • Question No. 4 — whether the investment allowance claim under section 32A was wrongly disallowed (specifically whether the machinery was new); and
  • Question No. 5 — whether interest under section 216 was wrongly charged.

Implications:

  • The court refused to direct references on several of the other questions, concluding they did not raise statable questions of law (notably Question No. 2 and Questions Nos. 6–8, and Question No. 1(b) as framed), either because applicable precedent disposed of the legal point or because the matter involved factual findings for the Tribunal that were not challenged as perverse.
  • The court explained that High Court decisions under section 256(2) operate with the binding quality of a court of record and, in that limited context, the rule of res judicata or constructive res judicata may preclude Revenue from re‑litigating the same controversy repeatedly in later assessment years when earlier references have been called for and decided by the High Court.
  • There will be no order as to costs.
Show full summary ...

    Commissioner Of Income-Tax v. Modipon Ltd. (No. 2).

    D.K Jain, J.:— By this petition under section 256(2) of the Income-tax Act, 1961 (for short, “the Act”), the Revenue, seeks a direction to the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) to state a case and refer the following questions stated to be questions of law and arising out of Income-tax Appeal No. 3272/(Dei) of 1985 pertaining to the assessment year 1977–78:

    “1. (a) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that Sterling Apartment Flat, Cottage at Marve Malad and jindal House could not be treated as guest houses and, as such, the expenses incurred there upon were allowable?

    (b) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that only ⅓rd portion of Maharani Bagh house was a guest house and remaining portion was for business purposes?

    2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the premium of personal accident insurance policy in respect of the managing director could not be considered to be a perquisite within the meaning of section 40(c) of the Income-tax Act?

    3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in directing the Income-tax Officer to calculate the disallowance under rule 6D with reference to the total journeys undertaken in a year and not with reference to each journey undertaken by an employee or director on day-to-day basis?

    4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the investment allowance of Rs. 3,72,700 was wrongly disallowed by the Income-tax Officer under section 32A of the Income-tax Act?

    5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest under section 216 was wrongly charged?

    6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 25 per cent. of expenses incurred under the head ‘Public relations expenses’ should be considered towards employees and should be allowed accordingly?

    7. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 25 per cent. of the expenses incurred under the head ‘Business, promotion expenses’ should be considered towards employees and should be allowed accordingly?

    8. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that 25 per cent. of expenses incurred under the head ‘Boarding expenses’ should be considered towards employees and should be allowed accordingly?”

    2. Briefly stated, the material facts relevant to the controversy involved in question No. 1(a) are that the assessee incurred certain expenses for the maintenance of: (i) Flat in Sterling Apartments in Bombay, (ii) Cottage at Marve Malad, Bombay, and (iii) Jindal House at Calcutta. During the course of assessment proceedings, the Income-tax Officer took the view that these residential accommodations were in the nature of guest houses and, therefore, the expenses incurred on their maintenance were disallowable under section 37(4) of the Act, which prohibits allowance of any expenditure incurred by the assessee after February 28, 1970, on the maintenance of any residential accommodation in the nature of a guest house. The disallowance was upheld by the Commissioner of Income-tax (Appeals) primarily on the ground that no visitors' register had been maintained at these places. On appeal by the assessee, the Tribunal, following its earlier orders in respect of the assessment years 1972–73 and 1976–77, came to the conclusion that all the three accommodations were not in the nature of guest houses and, therefore, the provisions of section 37(4) of the Act were not attracted. It is contended before us by learned counsel for the assessee that although for the assessment year 1972.-73, on the Revenue's application under section 256(2) of the Act, reference was called for by the Allahabad High Court on the question pertaining to the expenses incurred on the maintenance of the flat in Sterling Apartments, Bombay, for the subsequent years, viz., assessment years 1973–74 to 1976–77, no reference was sought by the Revenue on this issue and, therefore, reference on the question may not be directed for the present assessment year as well.

    3. From a bare reading of the Tribunal's order, it is clear that while accepting the assessee's view point, the Tribunal has merely relied on its earlier order for the assessment year 1972–73, which, we are told, is the main order. Reference on a similar question in respect of the assessment year 1972–73 having been called for, we are of the view that the question involving the same controversy in the present assessment year also is fit for reference.

    4. As regards the expenses incurred on the maintenance of cottage at Marve Malad, Bombay, and Jindal House, Calcutta, it is the admitted position that right from the assessment years 1972–73 to 1976–77, the Tribunal has consistently been accepting the assessee's view point and in respect of all these years the Revenue has either not sought a reference on this issue or the same has been declined by the High Court. Faced with the situation, learned counsel for the Revenue submits that each assessment year being independent, the rule of res judicata does not apply to taxation proceedings and, therefore, there is no legal bar to calling for a reference on this issue as well. The proposition adumbrated by learned counsel for the Revenue is too broad and general. It is true that generally speaking, the rule of res judicata does not apply to proceedings under the Act, like assessment or appellate proceedings under the Act because findings therein do not fulfil the two essential elements of res judicata, viz., (i) the judex (a decision on question of law or fact by a judge or judicial Tribunal), and (ii) a lis. However, the position is different in proceeding's under section 256 of the Act. Unlike various authorities under the Act, the High Court is a court of record. Before it, there is a lis between two parties: the assespee on the one hand and the Revenue on the other. The court dealing with a question of law or fact is a court having power and authority of law to decide the issues. A decision by it is binding on the parties and the authorities under the Act. The rule of res judicata, or for that matter the rule of constructive res judicata in any case, would apply to the decision rendered by the High Court. In that view of the matter, we are of the opinion that the Revenue cannot be permitted to rake up the present controversy over again. We, therefore, reject the Revenue's request for reference on this issue.

    5. In so far as question No. 1(b) is concerned, while framing the assessment, the Income-tax Officer disallowed the expenses incurred by the asses-see on the maintenance of a hired accommodation at A-1, Maharani Bagh, New Delhi, on the ground that the said accommodation was also in the nature of a guest house. Dealing with the issue, the Tribunal has observed that even though the affidavits were filed by the assessee in support of its claim that the building was used for holding business meetings and as a transit house, its user as a guest house could not altogether be ruled out. The Tribunal has accordingly estimated that one-third portion of the said building was used as a guest house and the remaining portion for the purposes of the business of the assessee. This conclusion of the Tribunal is a pure finding of fact which has not been challenged in the proposed question as being perverse, which finding of fact cannot otherwise be disturbed even on the ground that there is no evidence to support it. We cannot also accept the suggestion of counsel for the Revenue that the question may be reframed because, it is beyond the jurisdiction of this court in these proceedings to alter the basic frame of the question. We may also take note of the statement made at the Bar by learned counsel for the assessee that in respect of the assessment years 1981–82 and 1982–83, the Tribunal's orders on the issue have been accepted by the Revenue. In our opinion, the question proposed is not a statable question of law.

    6. As regards question No. 2, it is not disputed by Mr. Gupta, learned counsel for the Revenue, that a similar controversy has been considered by this court in CIT v. Bharat Ram Charat Ram. P. Ltd., [1986] 157 ITR 199, wherein it has been held that the insurance premium paid by a company in respect of accident insurance of its directors is not a “perquisite” within the meaning of section 17(1) and this cannot be taken into account for the purpose of section 40(c) of the Act. It appears that against the said decision, the Revenue preferred a special leave petition but the same was dismissed (see [1990] 186 ITR (St.) 28). Having regard to this decision, in our opinion, the proposed question is not a statable question of law.

    7. In so far as question No. 3 is concerned, a reference of a similar question having been called for in the case of the assessee itself in respect of the assessment year 1976–77 (CIT v. Modipon Ltd, (No. 1), [1991] 189 ITR 344 (All)), in our opinion, a reference on the question posed has to be called for.

    Coming to question No. 4, the claim of the assessee for investment allowance under section 32A of the Act was disallowed by the Assessing Officer on three grounds, viz., (i) the plant and machinery on which the investment allowance had been claimed was not covered by item No. 27 of the Ninth Schedule, (ii) no evidence was adduced to show that the machinery in question was new, and (iii) no evidence was adduced to prove that the machinery was actually installed or first put to use during the relevant previous year. The Commissioner of Income-tax (Appeals) though he held that the assessee was producing “organic heavy chemicals” falling in entry 27 of the Ninth Schedule he concurred with the Assessing Officer that the claim was to be otherwise disallowed on grounds (ii) and (iii) above. Although, the Revenue was not in appeal before the Tribunal against the finding of the Commissioner of Income-tax (Appeals) that the assessee was producing “organic heavy chemicals”, yet the Tribunal went on to re-examine the issue and did endorse the view taken by the Commissioner of Income-tax (Appeals). We feel that the Revenue having accepted the order of the Commissioner of Income-tax (Appeals), it is too late in the day for it to reagitate the issue as to whether the assessee is producing “organic heavy chemicals” or not, as has been attempted before us by learned counsel for the Revenue. As regards the remaining two grounds on which the claim of the assessee was rejected, the Tribunal held as follows:

    “One of the grounds was that no evidence was produced by the assessee regarding the installation and user of the machinery in question. This has been found to be not correct. At the time of original assessment, the Income-tax Officer himself allowed depreciation on these machineries on tentative basis and subsequently modified his order under section 154 to allow depreciation. Depreciation on plant and machinery under section 32 is allowable with reference to ownership, installation and user of the machinery. When depreciation has been allowed by the Assessing Officer, the fact that the machinery was owned and installed and used by the assessee during the assessment year 1976–77 is established.”

    8. It is evident from the above extracted portion of the Tribunal's order that it has failed to address itself to the question as to whether the machinery on which investment allowance had been claimed by the assessee was new machinery, which is one of the essential conditions for allowance of such a relief. In this view of the matter, we are of the opinion that the proposed question is a question of law requiring consideration by this court.

    9. With regard to question No. 5, it could not be disputed by learned counsel for the assessee that identical facts involving the controversy contained in the question came up for consideration of this court in Commissioner Of Income-Tax v. J.K Synthetics Ltd. (No. 1). (No. 1), [1990] 181 ITR 505, wherein it was held that a question similar to the one raised in the present petition involved the interpretation of section 216 of the Act to a given set of facts and thus giving rise to a question of law. In view of this decision, in our opinion, a reference of the question has to be called for.

    10. In so far as questions Nos. 6 to 8 are concerned, the controversy involved therein was the subject-matter of consideration before this court in Commissioner Of Income-Tax v. Expo Machinery Ltd., [1991] 190 ITR 576. In that case, the issue involved was regarding the estimation out of the composite expenditure incurred in hotels in entertaining the company's customers by the employees of the company and it was held that under these circumstances, it was necessary to resort to an estimate in ascertaining that part of the expense incurred on food and beverages of the employees which is to be excluded from the purview of section 37(2A) of the Act and such an estimation by the Tribunal would be a question of fact.

    11. Besides, it is pointed out by learned counsel for the assessee that no question in respect of any of the expenses involved in these questions was sought to be referred by the Revenue from the orders of the Tribunal for the earlier years, which orders have been relied upon by the Tribunal while granting relief to the assessee in the present assessment year. It is also stated that from the assessment year 1981–82 onwards, the Assessing Officer has been himself allowing similar expenses on approximate basis at 25 per cent as pertaining to the employees. Having regard to the aforesaid decision and the stated factual positipn, in our opinion, these questions do not give rise to statable questions of law.

    12. Consequently, we direct the Tribunal to refer questions Nos. 1(a) (limited to the expenses incurred on the maintenance of the flat in Sterling Apartments, Bombay) 3, 4 and 5 along with an appropriate statement of the case for the opinion of this court. There will, however, be no order as to costs.

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    Commissioner Of Income-Tax v. Modipon Ltd. (No. 2).
    (Sep 22, 1994)