COMMISSIONER OF INCOME TAX Vs. GEO SEA FOODS

JUDGEMENT

(1.) PURSUANT to a direction given by this court in O. P. No. 11602 of 1993 under Section 256(2) of the Income-tax Act, 1961 (in short, "the Act"), the following question has been referred by the Income-tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal"), for the opinion of this court :

(2.) THE background facts are as follows : THE assessee, a partnership firm, is engaged in the business of processing and export of sea foods. For the assessment year 1977-78, it had filed a return declaring total income of Rs 3,36,750. In computing the income, the assessee had claimed deduction of Rs. 2,99,996 out of the compensation received by it amounting to Rs. 5,09,872. THE said sum of Rs. 2,99,996 was credited to the current account of four partners of the assessee in equal shares. THE claim was that the partners of the firm happened to be the shareholders of a company by name "Hotel Winrace (P.) Ltd.", and the amount in question was due to the said company under an agreement dated March 31, 1976. THE Assessing Officer noticed that the corresponding entry crediting commission in the account of the company was made on March 31, 1977, dividing the amount and crediting it to the accounts of four shareholders equally. He further noted from a letter dated March 3, 1978, of Greaves International Ltd., Bombay, from which the assessee had received commission to Hotel Winrace (P.) Ltd., that it had not appointed the latter as its agent prior to March, 1978, and there was no reason why commission should have been paid by it to the assessee had Hotel Winrace (P.) Ltd. been the agent. THE agreement executed by two of the partners of the assessee-firm, one on behalf of the assessee itself and the other on behalf of the company, and the apportionment and crediting of amount in the books of the assessee itself to the credit of the partners indicated that it was a clear device to reduce the income of the assessee. Accordingly, the sum of Rs. 2,99,996 was added to disclosed income. On appeal, the Commissioner of Income-tax (Appeals) (in short, "the CIT(A)") held that even though commission was paid to a limited company, it had ultimately been divided among four partners of the assessee, and hence it should be considered as payment to partners and disallowed the same by applying Section 40(b) of the Act. That decision was affirmed by the Tribunal by order dated April 5, 1983, in I.T.A. Nos. 471 and 515/ Coch. of 1981. THE Tribunal observed that :

(3.) IN support of the application, learned counsel for the Revenue submitted that the approach of the Third Member, who held that penalty could not be imposed under Section 271(1)(c) of the Act, proceeded with reference to the position as existing prior to the amendment of Section 271(1)(c) of the Act. Great emphasis is laid on certain conclusions of the Third Member, more particularly the following in para. 10 of the judgment rendered by the Vice-President-Third Member :