T T PRIVATE LIMITED Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THESE two appeals are filed against the common order passed in Writ Petitions Nos. 7496 and 7497 of 1978 by Puttaswamy J. dismissing the petitions. The appellant (hereinafter referred to as "the assessee") was the petitioner in the said petitions and the ITO, Company Circle III, Bangalore, was the respondent. In the writ petitions the assessee prayed for the issue of an appropriate writ, order or direction quashing the two notices dated March 25, 1978, issued by the respondent under s. 148 of the I.T. Act, 1961 (hereinafter referred to as "the Act"), proposing to reassess the income of the assessee for the assessment years 1973-74 and 1974-75 on the ground that he had reason to believe that certain income of the assessee had escaped assessment in each of the above assessment years and for a writ in the nature of prohibition restraining the respondent from taking any steps pursuant to the said notices.

(2.) BRIEFLY stated the facts are these : The assessee is a private limited company incorporated under the Companies Act and is carrying on business of manufacture of pressure cookers and allied products at Bangalore. The sale of these products is being effected by the assessee through its selling agents, M/s. T. T. Krishnamachari and Company, which is a firm carrying on business at Madras, with whom the assessee has entered into an agreement. The assessee has been making payments to the said firm for the services rendered in connection with the sale of its products. The question whether the said payments could be treated as revenue expenditure and if so to what extent arose for consideration before the income-tax authorities in the earlier assessment years, i.e., 1968-69, 1969-70, 1970-71 and 1971-72, having regard to s. 40A(2)(a) of the Act and the relationship that existed between the directors of the assessee-company and the partners of the firm of M/s. T. T. Krishnamachari and Company. Ultimately, by a common order dated October 30, 1976, the said question was settled by the Income-tax Appellate Tribunal, Madras Bench 'C', Madras, in I.T.A. Nos. 366 to 369 (Bang)/1975-76. After perusing the tripartite agreement dated December 20, 1956, entered into between the assessee, the selling agents and the Prestige Group of London and on the basis of the material available on record, the Tribunal concluded that the selling agents, M/s. T. T. Krishnamachari and Company, had been rendering various services and providing various facilities to the assessee such as, (i) giving guidelines to the assessee in the matter of manufacture of various models and range of pressure cookers in the light of their own market research; (ii) giving advice to the assessee in the matter of selection and appointment of distributors for the sale of cookers and fixing the terms and conditions thereof and also advising termination of services of distributors as and when required; (iii) making reports to the assessee on the activities of the competitors; (iv) participation in the finalisation of advertisement and sales promotional campaigns; (v) supervising the activities of the distributors; (vi) attending to complaints of consumers; (vii) helping the assessee in the matter of collection from distributors; (viii) helping the assessee in liaison work with Government authorities; (ix) helping the assessee in procuring raw materials; and (x) helping the assessee in the matter of excise duty, etc. The Tribunal also perused the resolution dated October 17, 1960, passed by the assessee-company in its extraordinary general meeting appointing M/s. T. T. Krishnamachari and Company as sole selling agents on a commission of 7 1/3% on cookers and 15% on spare parts and considered that with the passage of time, as and when the assessee came to undertake the after-sale service, the quantum of commission had to be reduced gradually to 5% and 2 1/2%, respectively. The departmental stand that there was no specific agreement entered into by the assessee with M/s. T. T. Krishnamachari and Company was rejected by the Tribunal which held that the various resolutions passed by the assessee-company and the tripartite agreement earlier referred to constituted the agreement. Thus, the Tribunal in its elaborate order dated October 30, 1976, held that the payment in question was reasonable in the light of various factors and thus the same was not liable to be disallowed under s. 40A(2)(a) of the Act. The Tribunal, following the said order, dismissed the departmental appeal in respect of the assessment for the subsequent assessment year 1972-73 also. These orders of the Tribunal became final, the department having accepted the same.

(3.) IT would appear that the internal audit party raised an objection regarding allowance having been made in respect of payments made to the selling agents under s. 40A(2)(a) of the Act as according to them the case had to be dealt with under s. 40(c)(i) of the Act. In view of the observations made by the audit party the ITO decided to issue the impugned notices under s. 148 of the Act proposing to reopen the assessments for the assessment years 1973-74 and 1974-75 and to make a reassessment. Aggrieved by the said notices the assessee filed the two writ petitions. The petitions were dismissed at the stage of preliminary hearing by the learned single judge observing that since it was open to the assessee to appear before the ITO and to urge that there was no case for reopening the assessment proceedings already completed, they were not fit cases for interference at this stage. These appeals are filed against the orders of the learned single judge.