COMMISSIONER OF INCOME TAX vs SUDARSAN CHITS (INDIA) LTD.

NY. BALASUBRAMAAUAIV, J.

This is a reference at the instance of the Revenue and the Tribunal has stated a case and referred the following question of law arising out of the assessment of the income of the assessee for the asst. yr. 1979-80 under s. 256(1) of the IT Act, 1961 (hereinafter to be referred to as ''the Act''):

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of Rs. 2,04,000 made by the ITO out of the total claim of Rs. 2,50,000 in respect of managerial remuneration paid by the assessee to its holding company for services rendered holding that the claim is unreasonable?"

The assessee is a company. The assessment year involved is 1979-80. The ITO invoked the provisions of s. 40(c) of the Act and disallowed a sum of Rs. 2,04,000 out of a total sum of Rs. 2,50,000 paid towards managerial remuneration for the services rendered by the holding company. The disallowance was deleted by the CIT(A), following an earlier order of the Tribunal rendered in the assessee''s own case for an earlier assessment year.

The Tribunal, on appeal by the Revenue, followed its earlier order for the asst. yr. 1978-79 and held that the disallowance of remuneration by the ITO was not justified and dismissed the appeal preferred by the Revenue. It is this order which is the subject-matter of this tax case reference.

Learned counsel for the Revenue fairly submitted before us that the earlier order of the Tribunal rendered in the assessee''s own case was the subject matter of consideration by way of tax case reference before the Kerala High Court in Commissioner of Income Tax Vs. Sudarsan Chits (India) Ltd., and the Kerala High Court therein held that the provisions of s. 40(c) of the Act would be applicable only if the payment was made by way of remuneration to a director or to a person substantially interested in the company or a relative to the director or a relative to the person substantially interested in the company. The Court held that the payment was made to a holding company and, therefore, the provisions of s. 40(c) of the Act did not apply. We are in complete agreement with the view of the Kerala High Court and we hold that the ITO was not justified in invoking the provisions of s. 40(c) of the Act to a payment made to a holding company. It was found that the payments were made on contractual basis and the expenditure was incurred on account of business expediency and the arrangement with the holding company was a bona fide one and was made in the interest of the assessee''s business. In view of the finding of the Tribunal though rendered for the earlier assessment year, the payment in question in our view is allowable under s. 37 of the Act and it cannot be disallowed under s. 40(c) of the Act.

Accordingly, we answer the question of law referred to us in the affirmative, against the Revenue and in favour of the assessee. The assessee will be entitled to costs of a sum of Rs. 750.

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