2001 PLP 371 (PTD)

M. S. JANARTHANAM, J.‑‑‑The assessee, the Mofussil Warehouse and Trading Co. Ltd., Madras, is a wholly owned subsidiary company of Parry & Co. The assessee owned warehouses and godowns and derived income from letting out the same. In connection with its business of letting out its warehouses and godowhs on hire, it had utilised the services of the employees of the holding company Parry & Co., and for the services of such employees being utilised, it reimbursed the holding company of the expenses incurred therefore, by way of payment of salaries to such employees. The assessment years involved are 1979‑80 and 1980‑81, for which the respective calendar years are the accounting years. The assessee claimed rembursement as deductible expenses, while computing the total income, for those assessment years, which amounted to Rs.1,48,587 and Rs.1,44,471 respectively. The Income‑tax Officer allowed the claims of the assessee. The Commissioner of Income‑tax, Madras, in exercise of the powers of revision under section 263 of the Income Tax Act, 1961 (Act No.43 of 1961‑‑‑(for short "the I.T. Act") examined the record and found that the reimbursements allowed to the holding company were excessive compared to the services charges paid in the earlier assessment year 1978‑

79. He further found that there was no separate agreement of the assessee with the holding company in this regard and payments made were also not totally based on the business needs of the company. He vas further of the view that the Income‑tax Officer had not at all applied his mind to the provisions of section 40A(2)(b) of the Income‑tax Act. In this view of the matter, he came to the conclusion that the orders passed by the Income‑tax Officer were erroneous and prejudicial to the interests of the Revenue. Accordingly, he set aside the assessment with a direction to the Income‑tax Officer to consider the applicability of the provisions of section 40A(2)(b) of the Income‑tax Act and redo the assessments, according to law. On appeal by the assessee, the Tribunal upheld the validity of the jurisdiction, inasmuch as the Income‑tax Officer had not considered at all the applicability of section 40A(2)(b) regarding reimbursements made to the holding company. Accordingly, the Tribunal upheld the order of the Commissioner and dismissed the appeals filed by the assessee. The Tribunal under section 256(2) of the Income‑tax Act referred the common question of law, as below for the opinion of this Court: "Whether, the Tribunal was right in confirming the order of the Commissioner of Income‑tax in disallowing the assessee's claim for deduction of reimbursement charges paid to the holding company for the assessment years 1979‑80 and 1980‑81?" The question under reference, we are of the view, had been wrongly framed, in the sense of not bringing about the real controversy between the parties. The question so posed makes it appear that the Commissioner of Income‑tax (for short "the CIT") disallowed the assessee's claim for deduction of reimbursement charges paid to the holding company for the assessment years 1979‑80 and 1980‑81 and disallowance so made was lately confirmed by the Tribunal, on appeal. That is not the reality of the situation. What the Commissioner of Income‑tax did was that he, in exercise of the powers under section 263 of the Income‑tax Act, found that the order passed by the Income‑tax Officer was erroneous, in so far as it is prejudicial to the interest of the Revenue. According to him, the reimbursement allowed to the holding company was excessive, compared to the service charges paid to it during the earlier assessment year 1978‑

79. After entertaining such a view, he, in fact, gave an opportunity to the assessee of his being heard and thereafter only deriving the necessary satisfaction that the order of the Income‑tax Officer was erroneous and, consequently, it was prejudicial to the interests of the Revenue, he cancelled the assessment by ordering fresh assessments, in accordance with law by the Income‑tax Officer. Section 40A(2)(a) of the Income‑tax Act prescribes, "Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this subsection, and the Income‑tax Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." On the face of such a salient provision, the direction by the Commissioner of Income‑tax to the Income‑tax Officer to pass fresh assessments according to law cannot mean any way other than the expenditure incurred for the services rendered by the holding company, as is considered by him to be excessive and unreasonable, not having been allowed as a deduction in the computation of the income of the assessee. From what has been stated above, it is thus, crystal clear that the question under reference is not at all bringing out the real controversy in existence between the parties and so, the question requires to be refrained, in the light of the factual matrix of the case bringing out the controversy between the parties. The question to be refrained to read as under: "Whether the Tribunal was right in confirming the order of the Commissioner of Income‑tax cancelling the order of assessment by the Income‑tax Officer, in exercise of the powers inhering in him under section 263 of the Income‑tax Act, in holding that the order of the Income‑tax Officer was rather erroneous, in so far as it is prejudicial to the interests of the Revenue, in the sense of reimbursements made by the assessee‑company to the holding company in respect of the service rendered by its employees being excessive or unreasonable, on the facts and in the circumstances of the case?" To put it shortly, the real issue arising for consideration under the reframed question is as to whether there are foundational or jurisdictional facts in existence for the Commissioner of Income‑tax to have invoked his jurisdiction under section 263 of the Income‑tax Act. Mr. K. Vaitheeswaran, learned counsel representing Subbaraya Aiyar, Padmanabhan and Ramamani, learned counsel appearing for the assessee, would, with all force and vehemence, on placing implicit reliance on the decision of a Division Bench of this Court in the case of Venkatakrishna Rice Company v. CIT (1987) 163 ITR 129, contend that section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate's order in exercise of the supervisory power, but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue, which is a unique conception which has to be understood in the context of and in the interest of Revenue administration and such a power cannot in any manner be equated to or regarded as approaching in any way, the appellate jurisdiction or even the ordinary revisional jurisdiction conferred on the Commissioner under section 264 of the Income‑tax Act. Mrs. Chitra Venkataraman, learned junior standing counsel representing the Revenue would strike a discordant note to the hues of views, as projected by learned counsel appearing for the assessee and submit that the inaction on the part of the Income‑tax Officer by non‑application of his mind to the factual matrix of the case, in the light of the salient provisions adumbrated under section 40A(2), culminated in distortions and prejudices to the Revenue and to set right such distortions and prejudices to the Revenue, the power under section 263 of the Income‑tax Act can very well be resorted to by the Commissioner and that is what exactly had been done in the case on hand by cancelling the assessment and directing the Income‑tax Officer to pass assessment orders, according to law. We may now proceed to consider the tenability or otherwise of the rival submission of either counsel. It is discernible from the factual matrix of the case that there was no agreement of the assessee with the holding company in respect of payments to be effected for the utilisation of the services of its employees in the conduct of the business of the assessee a subsidiary company. Besides, the payments made were also not totally based on the business needs of the assessee‑company. Further, nothing is traceable to the assessment order, as relatable to the application of mind for the part of the Income‑tax Officer to the salient provisions adumbrated under section 4OA(2)(b) of the Income‑tax Act. If he really applied his mind in this regard, there would have been some sort of a discussion in the order and the absence of any discussion therefor is a clear indication of his non‑application of mind. According to section 40A(2)(a), if the Income‑tax Officer is of opinion that any expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities availed of, for which payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, then so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. In the instant case, the amounts paid by the assessee‑company to the holding company by way of reimbursement in relation to the utilisation of the services of the employees of the holding company run to the tune of Rs.1,48,587 and Rs.1,44,471 for the assessment years in question respectively. The excessive nature of the claim or its unreasonableness or otherwise had not at all been taken into account by the Income‑tax Officer, who was allowing such deduction in the computation of the income of the assessee and such a duty is expected to be performed by him by the salient provisions adumbrated under section 40A(2)(a) of the Income‑tax Act. The non‑performance of such a duty on the part of the Income‑tax Officer culminated in distortions and prejudices to the Revenue. Such distortions and prejudices to the Revenue for being set right, the Commissioner of Income‑tax invoked his power under section 263 and in exercise of such power, he cancelled the assessment passed by the Income‑tax Officer with a direction to him to make a fresh assessment, according to law. Such a power can, by no stretch of imagination, be stated to be a power exercised in appellate or revisional jurisdiction conferred on the Commissioner under section 264 of the Income-tax Act. The interdiction contemplated by the decision in the case of Venkatakrishna Rice Company (1987) 163 ITR 129 (Mad.), on which implicit reliance is made by learned counsel appearing for the assessee is relatable to exercise of appellate or revisional jurisdiction. We have ahead expressed the view that the Commissioner had properly exercised his power under section 263 of the Income‑tax Act in order to set right distortions and prejudices caused to the Revenue and that such an exercise of power will clearly fall within the jurisdictional limits of the power inhering in him under the said section. The power so exercised by the Commissioner held to be within the jurisdiction limits of section 263 by the Appellate Tribunal, therefore, cannot at all be stated to be not sustainable, on the facts and in the circumstances of the cases. This question is therefore, answered against the assessee and in favour of the Revenue. In fine, these tax cases (reference) are thus, disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of these cases. M.B.A./162/FC Order accordingly.