Law:

Section:

Section 147, read with section 40A(2) and section 40(c)(i), of the Income-tax Act, 1961 - Reassessment - General - Whether in a case where provisions of section 40(c)(i) were applicable, reassessment made by applying section 40A(2) for disallowance of guarantee commission paid to relatives of director was bad in law - Held, yes Facts The assessee-company previously had a managing agent 'J' which was a private company and after the abolition of managing agency it entered into an agreement with five persons, including one R, who was previously chairman and managing director of 'J' and his relatives, for arrangement of finance to the assessee in consideration of certain guarantee commission. During the course of inspection of the records, the IAC pointed out that the amount of the said guarantee commission paid to the guarantors were excessive and unreasonable and that the provisions of section 40A were attracted. The ITO, accordingly, reopened the assessments for the assessment years 1960-70 and 1970-71 and disallowed the said guarantee commission by invoking the provisions of section 40A. On appeal, the Tribunal, held that by invoking section 40A, reassessment as well as the disallowance of the guarantee commission were bad in law and could not be sustained, as section 40(c)( i) and not section 40A(2) was applicable to the present case. On reference: Held Admittedly, the deduction, in the instant case, had resulted in the provision of remuneration to the relatives of the directors, and, thus, the provisions of section 40(c) applied to such payments. Section 40A(2)(b)(ii ) refers to an expenditure incurred by an assessee which is a company in respect of which payment has been or is to be made to any director or a relative of such director. This section, thus, would apparently be applicable to the payments of guarantee commission to the relatives of the directors. But, the proviso to section 40A(2) which controls it lays down that the provisions under the section shall not apply in the case of an assessee which is a company in respect of an expenditure to which section 40(c)( i) applies. It follows that if the expenditure fall under section 40(c)(i ), then that…

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