1. K. A. THANIKKACHALAM, J.----In pursuance of the direction given by this Court in T. C. P. No. 518 of 1982, dated April 5, 1983, the Tribunal referred the following question for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961, hereinafter referred to as the "Act": "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the reassessm ent made under section. 147(b) of the Income-tax Act for the assessment year 1974-75 is valid in law?"
2. The assessee is a company carrying on business at Madras. The assessment for the assessment year 1974-75, for which the previous year ended on December 31, 1973, was completed under section 143(3) of the Act. Subsequently, the Income-tax Officer noticed. That the expenditure allowed by way of remuneration to directors under section 40(c) of the Act was in excess of the ceiling prescribed and that the weighted deduction under section 35B was improperly allowed on an amount of Rs.1,34,411 which represented commission paid to U. K. And Nepal parties. He, therefore, reopened the assessm ent under section 147(b) of the Income-tax Act, and in the reassessm ent, added Rs.44,827 under section 40(c) and Rs.1,34,411 under section 35B of the Act.
3. Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), questioning the jurisdiction with regard to the reopening of the assessment as well as the additions made on the merits. The Commissioner of Income-tax (Appeals) upheld the Income- tax Officer's order in so far as the question of jurisdiction is concerned. In so far as the appeal filed on the merits is concerned the Commissioner of Income-tax (Appeals) upheld the addition made by the Income-tax Officer under section 40(c) of Rs.44,827 but deleted the other addition of Rs.1,34,411 made under section 35B of the Act. Aggrieved, the assessee filed an appeal before the Appellate Tribunal questioning the jurisdiction of the Income-tax Officer to reopen the assessment under section 147(b) of the Act. On merits, objection was taken to the disallowance sustained under section 40(c) of the Act. The Tribunal, taking note of the fact that the reopening of the assessment under section 147(b) was based upon the earlier year's records, which in turn, is based upon the audit note, came to the conclusion that reopening under section 147(b) is bad. On the merits, with regard to the addition made under section 40(c), the Tribunal has not expressed any opinion.
4. Before us, learned junior standing counsel appearing for the Department, submitted that the Tribunal was not correct in holding that the Income-tax Officer has got no jurisdiction to reopen the assessm ent under section 147(b) of the Act. It was submitted that the earlier year's assessment was reopened on the basis of the audit note, but in so far as the present assessment year is concerned, reopening was done not on the basis of the audit note, but on the basis of the previous year's records. Therefore, it was submitted that the conclusion arrived at by the Tribunal that the Income-tax Officer was influenced by the audit note relating to the earlier assessment year is not sustainable.
5. On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that even though the audit report pointing out the question with regard to the application of section 40(c), related to the earlier assessment year, the said audit report could have influenced the Income-tax Officer while perusing the earlier year's records for reopening the assessm ent in the present assessment year.
6. We have heard both learned junior standing counsel appearing for the Department as well as learned counsel appearing for the assessee. In the assessment year 1974-75, original assessment was made without applying section 40(c) of the Act and weighted deduction was allowed under section 35B of the Act with regard to the commission paid to foreign agencies. On going through the earlier year's records, the Income-tax Officer came to the conclusion that section 40(c) was not applied in the assessm ent year under consideration and weighted deduction under section 35B of the Act was granted in excess. The assessment for the present assessment year was reopened on March 30, 1979, while the assessm ent for the previous assessment year was reopened on July 20, 1977. The assessm ent in the earlier year was reopened in pursuance of the audit objection stating that section 40(c) was not made applicable and the weighted deduction was granted in excess of the allowable limit. In the present assessment year, the Income-tax Officer was influenced by the earlier year's records. The earlier year's records would go to show that assessment in the earlier year was reopened on the basis of the audit note, pointing out the non-application of section 40(c) and an excessive allowance of weighted deduction under section 35B of the Act. Therefore, according to the Tribunal, when the Income-tax Officer was influenced by the earlier year's records, he would have been also influenced by the audit note on the basis of which the earlier year's assessm ent was reopened. Therefore, the Tribunal came to the conclusion that ultimately the Income-tax Officer would have been influenced by the earlier year's audit note. It is no doubt true that there is no audit objection for the present assessment year under consideration. But the facts on record would go to show that only on going through the earlier year's records, the Income-tax Officer came to the conclusion that section 40(c) was not applied and weighted deduction was granted in excess under section 35B of the Act. The earlier year's assessment was reopened on the basis of the audit: objection and the Income-tax Officer would have seen the same, while perusing the earlier year's assessm ent. Therefore, there is possibility of saying that the Income-tax Officer in the present assessm ent year under consideration, would have been influenced by the earlier reopening of the assessm ent, which was based upon the audit objection. <p.m></p.m>