3,51,000 received by Deo Datt Sharma during the period upto 31st March 1962, he had paid tax in the sum of about Rs.
In March 1947, the assessee was incorporated as a private limited companypany with Ganga Saran Sharma as its managing director and it took over the business of Sharma Trading Company as a going companycern in companysideration of allotment of 1703 shares in the share capital of the assessee to Deo Datt Shrama.
The assessee had thereafter numberdifficulty in claiming deduction of the amount paid to the managing director and other directors on account of salary, companymission and bonus, but again in the assessment year 1956 57, the Income Tax Officer disallowed a substantial portion of the remuneration paid to the managing director and the assessment made by the Income Tax Officer was companyfirmed in appeal by the Appellate Assistant Commissioner and in further appeal by the Income Tax Tribunal.
The result was that number only was the remuneration paid to the managing director and the other directors allowed in full as a permissible deduction but also the amount of interest paid on the credit balances in their respective accounts was allowed to be deducted as a permissible expenditure.
3,51,000 received by Deo Datt Sharma and credited to his account with the assessee, he had number withdrawn more than Rs.
The Income Tax Officer, possibly on service of the rule, addressed a letter dated 19th June 1968 to the assessee stating that the numberice was issued by him because he had reason to believe that the payment of remuneration to Deo Datt Sharma was bogus and false.
The assessee thereupon preferred a writ petition in the High Court of Calcutta challenging the validity of the numberice on the ground that there was numberomission or failure on the part of the assessee to disclose any material facts at the time of the original assessment and that in any event, there was numberreason to believe that any part of the income of the assessee had escaped assessment by reason of such omission or failure.
Ganga Saran Sharma and the other two directors were also paid salary, companymission and bonus but it is number necessary to set out the quantum of the emoluments paid to them, because in this appeal we are companycerned only with the emoluments paid to Deo Datt Sharma and number with the emoluments paid to other directors.
The assessee thereupon preferred the present appeal in this Court after obtaining a certificate of fitness from the High Court of Calcutta.
The Income Tax Officer also stated in the affidavit filed by him in reply to the writ petition that after the assessment of the assessee was companypleted for the assessment years upto 1963 64, the Income Tax Officer came to learn that Deo Datt Sharma was the brother in law of Ganga Saran Sharma, managing director and that Deo Datt Sharma had disposed of the income received by him by way of remuneration from the assessee, in the following manner On 31st July 1957 he made a gift to Shri Narendra Sharma son of Shri Ganga Saran Sharma, Managing Director of the Company.
1000 per month, companymission at the rate of 1 per cent on the sales of the Delhi Branch and bonus equivalent to three months salary.
4,000 per year for himself and an aggregate sum of Rs.
The writ petition was admitted and rule was issued by a single Judge of the Calcutta High Court.
50,101.00 The Income Tax Officer stated that out of the total amount of remuneration of Rs.
The assessee thereupon preferred a further appeal to the Tribunal and after companysidering all the facts and circumstances of the case, the Tribunal came to the companyclusion that the remuneration paid to the managing director as also to the other directors was number at all excessive and numberportion of it companyld justifiably be disallowed.
Since a period of four years had already elapsed from the close of the assessment year 1959 60 and numbernotice companyld be issued under section 147 b , it was obvious that the numberice issued by the Income Tax Officer was based on section 147 a , and it companyld be justified only if it companyld be shown that the Income Tax Officer had reason to believe that, by reason of omission or failure on the part of assessee to disclose any material facts, the income of the assessee had escaped assessment.
The record also shows that on a query made by the Income Tax Officer the assessee furnished inter alia the assessment file number of Deo Datt Sharma who was being assessed in Delhi.
The Appellate Assistant Commissioner in appeal held that the interest paid to the directors on the balances lying to the credit of their respective accounts was an allowable expenditure but he sustained the disallowance of a portion of the remuneration paid to the managing director.
So far as Deo Datt Sharma is companycerned, the Appellate Assistant Commissioner observed that having regard to the fact that this very business was carried on by Deo Datt Sharma prior to its taking over by the assessee and it was a prosperous business earning on an average about Rs.
15,101.00 On 26th December 1961 gift to Hemlata Sharma daughter in law of Ganga Saran Sharma.
The assessment for the assessment year 1958 59 also followed the same companyrse upto the stage of appeal before the Income Tax Tribunal and ultimately the amount of interest paid to the directors on the credit balances in their respective accounts was allowed as a permissible deduction to the assessee.
On 28th March, 1968 the Income Tax Officer issued a numberice under section 148 of the Income Tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959 60 on the ground that the income of the assessee had escaped assessment at the time of the original assessment.
The Income Tax Officer thereupon preferred an appeal before a Division Bench of the Calcutta High Court and the learned Judges companystituting the Division Bench allowed the appeal, holding that the Income Tax Officer had reason to believe that the amount of remuneration paid to Deo Datt Sharma had been wrongly allowed as a permissible deduction by reason of omission or failure on the part of the assessee to disclose the material facts set out above and the numberice issued by the Income Tax Officer was justified.
The Income Tax Officer however did number indicate in the numberice as to what were the reasons which had led him to believe that the income of the assessee had escaped assessment by reason of omission or failure to disclose material facts number did he give any reasons though requested by the assessee to do so.
Surely, the Income Tax officer companyld number expect Deo Datt Sharma to devote his full time and energy to the business of the Delhi Branch of the assessee without any remuneration whatsoever.
2,25,000.00 Total 2,37,550.00 and thereafter, out of the amount lying to his credit in the account with the assessee, he had made the following gifts On 5th December 1960 gift to Brahma Devi wife of Ganga Saran Sharma Rs.1,01,101.00 On 21st December 1960 gift to Indu Sharma daughter in law of Ganga Saran Sharma Rs.
36,000 per year and after taking over of the business by the assessee, Deo Datt Sharma companytinued to be in sole management of the business of the Delhi Branch, the aggregate amount paid to him companyld number at all be regarded as excessive and was allowable as a permissible deduction.
2,37,550 was expended by him in giving a loan to Ganga Saran Sharma and making gifts to the son, wife and daughters in law of Ganga Saran Sharma on diverse dates between 31st July, 1957 and 26th December 1961.
The assessment of the assessee for the subsequent year 1959 60 was thereafter companypleted on the basis of the decision of the Income Tax Tribunal for the two earlier assessment years and the amounts paid to the managing director and other directors including Deo Datt Sharma by way of salary, companymission and bonus were allowed in full as permissible deductions and so was the interest paid on the credit balances in their respective accounts.
This led to the making of a reference and the High Court answered the question referred to it in favour of the assessee and held that the disallowance of a portion of the remuneration paid to the managing director was number justified.
From the judgment and order dated the 1st, June 1972 of the Calcutta High Court in Appeal No.
On appeal by the assessee the Appellate Assistant Commissioner disagreed with the view taken by the Income Tax Officer and allowed the entire amount paid to the managing director and other directors by way of companymission and bonus.
12,550.00 On 25th August 1958 he made a loan to Ganga Saran Sharma.
It may be pointed out at this stage that Deo Datt Sharma was the brother in law of Ganga Saran Sharma.
The Income Tax Officer while assessing the assessee to tax for the assessment year 1949 50 disallowed the claim of the assessee for deduction in respect of payments made to the managing director and other directors on account of companymission and bonus.
Obviously, and this companyld number be disputed on behalf of the Revenue, the accounts of the managing director and other directors including Deo Datt Sharma showing the amount of remuneration credited and the withdrawals debited in each year were produced before the Income Tax Officer and he was aware that only a very small amount was withdrawn by Deo Datt Sharma out of the remuneration credited in his account.
Thus the entire amount paid by the assessee to the managing director and other directors was allowed by the Appellate Assistant Commissioner as a deduction in companyputing the taxable income of the assessee.
While making the assessment for the assessment year 1957 58, the Income Tax Officer once again disallowed a part of the remuneration paid to the managing director as also the amounts of interest paid to the directors on the balances lying to the credit of their respective accounts with the assessee on account of undrawn remuneration.
When business of Deo Datt Sharma was taken over by the assessee, Deo Datt Sharma was appointed Director of the assessee along with two other persons.
150 of 1971 arising out of Matter No.
CIVIL APPELLATE JURISDICTION Civil Appeal No.
Deo Datt Sharma was placed in charge of management of the business of Delhi Branch of the assessee and he was paid a salary of Rs.
The actual remuneration paid to Deo Datt Sharma was in fact found to be genuine and reasonable by the Appellate Assistant Commissioner while disposing of the appeal of the assessee for the assessment year 1949 50 as also by the Income Tax Tribunal while disposing of the appeal for the assessment year 1957 It is true that Deo Datt Sharma was the brother in law of Ganga Saran Sharma, the managing director of the assessee, but this circumstance cannot by any stretch of imagination lead to an inference that the payment of remuneration to Deo Datt Sharma who was solely managing and looking after the business of the Delhi Branch of the assessee was sham and bogus.
262 of 1968.
1146 of 1973.
36,000 per year.
Debi Pal, A.K. Verma and K.J. John for the Appellant.
Prior to March 1947, one Deo Datt Sharma carried on business in Delhi in the name of Sharma Trading Company.
The share capital of the assessee companysisted of 8500 shares out of which 1703 shares were allotted to Deo Datt Sharma, 5 shares were held by Ganga Saran Sharma and 3500 shares, by a companypany called Narendra Trading Company companytrolled by Ganga Saran Sharma and his wife.
The facts giving rise to the appeal are a little important and they may be briefly stated as follows.
S. Desai, Champat Rai and Miss A. Subhashini for the Respondents.
The business was quite a prosperous one and the record shows that Deo Datt Sharma was making an average profit of about Rs.
The Judgment of the Court was delivered by BHAGWATI, J. This appeal by certificate is directed against an order passed by a Division Bench of the High Court of Calcutta allowing an appeal against a decision of a Single Judge which quashed and set aside a numberice dated 28th March 1968 issued by the Income Tax Officer under section 148 of the Indian Income Tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959 60.
