1984 (5) TMI 94 - AT - Income Tax

Tribunal upholds Income Tax Act sections, dismisses appeals on royalty & purchase price payments.

Sahney Steel And Press Works Limited. Versus Income-Tax Officer.

Sahney Steel And Press Works Limited. Versus Income-Tax Officer. - ITD 010, 659, Issues Involved:1. Validity of proceedings under Section 147(a) of the Income-tax Act, 1961.2. Cessation of liability and applicability of Section 41(1) of the Income-tax Act, 1961.3. Disallowance of royalty payments.4. Disallowance of purchase price under Section 40A(3) of the Income-tax Act, 1961.Detailed Analysis:1. Validity of Proceedings under Section 147(a):The assessee contested the validity of the initiation of proceedings under Section 147(a) by the Income Tax Officer (ITO). The ITO initiated proceedings based on the belief that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The ITO relied on correspondence between the assessee and Wood Auto Suppliers Ltd. (English Company), particularly a letter dated 6-8-1968, which confirmed the termination of the agreement and cessation of royalty payments. The Tribunal upheld the ITO's initiation of proceedings, stating that the belief formed by the ITO had a rational basis and was not merely a pretence. The Tribunal emphasized that the adequacy of the reasons for such belief is not for the Tribunal to adjudicate upon.2. Cessation of Liability and Applicability of Section 41(1):The Tribunal examined whether the cessation of liability occurred in 1968, as claimed by the ITO. The ITO argued that the liability for royalty ceased in 1968 based on the letter from the English Company and the confirmation by the assessee's director, Trilochan Singh. The Tribunal referred to its earlier decision for the assessment year 1972-73, where it was held that the cessation of liability took place in 1968. The Tribunal reiterated that the mutual consent to terminate the agreement in 1968 released the assessee from the obligation to pay royalty, and thus, the provisions of Section 41(1) were applicable.3. Disallowance of Royalty Payments:For the assessment years 1969-70, 1970-71, and 1971-72, the ITO disallowed royalty payments claimed by the assessee, arguing that the agreement for royalty payments had been terminated in 1968. The Tribunal upheld the disallowance of royalty payments for all three assessment years. It was noted that the termination of the agreement in 1968 meant that no royalty was payable for the subsequent years, and the amounts claimed as deductions were not justified.4. Disallowance of Purchase Price under Section 40A(3):For the assessment years 1970-71 and 1971-72, the assessee contested the disallowance of purchase price payments made to Manmohan Dass & Co. The ITO disallowed these payments, citing that the identity of the supplier was not fully established and that payments were not made by crossed cheques, thereby attracting the provisions of Section 40A(3). The Tribunal upheld the disallowance, agreeing with the ITO's findings that the payments did not comply with the provisions of Section 40A(3) and were therefore inadmissible.Conclusion:The Tribunal dismissed all the appeals, upholding the validity of the proceedings under Section 147(a), the applicability of Section 41(1) concerning the cessation of liability, the disallowance of royalty payments for the relevant assessment years, and the disallowance of purchase price payments under Section 40A(3). The Tribunal emphasized that the ITO's actions were justified based on the material facts and correspondence available, and the assessee's failure to disclose these facts fully and truly warranted the reassessment proceedings.