V.V. Kamat, J.
1. The assessee, in pursuance of the previous order of this court dated April 12, 1991, in O. P. No. 8856 of 1983, has brought the following three questions expecting our answer :
'(1) Was the Appellate Tribunal justified in law in holding that it is not open to them to consider in proceedings under Section 260(1) of the Act that (alternatively) the remuneration paid to the two managing directors is governed by Section 40(c) of the Income-tax Act ?
(2) Was the Appellate Tribunal justified in its interpretation of the High Court judgment rendered in Income-tax Reference Nos. 85 and 86, dated December 18, 1980, CIT v. Travancore Chemical Mfg. Co. [1980] 133 ITR 818, and in holding that only Section 40A(5) should be applied for controlling the allowance of remuneration to the managing directors and not Section 40(c) of the Act ?
(3) Was the Appellate Tribunal justified in holding that in the instant case the validity of the jurisdiction assumed by the Income-tax Officer under Section 147(b) cannot be entertained in the proceedings under Section 260(1) of the Act ?'
2. For the assessment year 1974-75, before the Income-tax Officer, the question as regards the assessee's claim for deduction of remuneration of two managing directors of the assessee-company came up for consideration and at that time, the claim was founded on the statutory provisions of Section 40A(5) of the Income-tax Act, 1961. This was on the ground that the two managing directors were employees and, therefore, deduction could be claimed as regards remuneration paid to them. The Income-tax Officer disallowed their claim holding that the provisions of Section 40A(5) of the Act governed the situation.
3. The Appellate Assistant Commissioner of Income-tax was the first appellate authority. By the order dated February 23, 1977, two questions came up for consideration. Firstly, it was urged that resort to the provisions of Section 147(b) was unjustified as no new information had come to the possession of the Income-tax Officer, after the original assessment was completed. Secondly, it was urged that it was an error to treat the managing directors as employees of the company. It was urged that they are the directors under a resolution approved by the Central Government, under which they came to be appointed for a period of five years on condition that they are to be paid 2.5 per cent. of the net profit subject to a maximum of Rs. 72,000. This was in anticipation of the finalisation of accounts, that they were permitted to draw at the rate of Rs. 2,000 per month. This payment of Rs. 2,000 per month was not as remuneration, but payment in anticipation of the approval and finalisation of the accounts. It was also argued before the first appellate authority in this connection that, in fact, Section 40A(5) of the Act would not govern the situation, but it would be the provisions of Section 40(c) of the Act which would really answer the situation.
4. With regard to the first aspect of reopening under Section 147(b) of the Income-tax Act, 1961, the first appellate authority held that the Income-tax Officer was out of his jurisdiction to reopen the assessment, in view of the audit note forming the required information. The first appellate authority considered this to be academic in view of its answer to the second aspect, as regards the question of applicability of Section 40(c) of the Act and not Section 40A(5) of the Act.
5. The first appellate authority accepted the contention that the managing directors could not be understood as employees of the company, especially when the remuneration has reference to the percentage of profit which is not normally in the case of an employee. The first appellate authority also took into consideration the silence with reference to the contract about the question of remuneration. It was observed that it is purely a contractual relationship for a fixed period on a consideration of percentage of the profits. The reasoning led the first appellate authority to the conclusion, firstly, that the managing directors could not be understood as employees and, therefore, the provisions of Section 40A(5) of the Act could not apply. The first appellate authority has observed that it was contended by the assessee himself that the provisions of Section 40(c) could not be invoked as they were not invoked in the original assessment. It is on the basis of the above reasoning, the additions came to be deleted.
6. At the instance of the Revenue, the proceedings travelled before the Income-tax Appellate Tribunal. By order dated February 23, 1979, the Appellate Tribunal dismissed the departmental appeal holding that the managing directors are not employees, thereby ruling out the application of the provisions of Section 40A(5) of the Act. It must be stated that going through its judgment in the department's appeal, where the assessee was represented as respondent, this was the only question that was taken up for consideration.
7. The proceedings thereafter travelled to this court in CIT v. Travancore Chemical Mfg. Co. : [1982]133ITR818(Ker) , only with regard to the question of applicability of Section 40A(5) of the Income-tax Act, 1961. This court held that the assumption of the Tribunal that in every contract of service there should be a provision for power to take disciplinary action was erroneous. This court also held that the managing directors were not members of the provident fund and that they were not entitled to any bonus or leave privileges or even to a minimum remuneration, observing in the context that these considerations were totally irrelevant for determining the nature of the relationship that existed between the company and the managing directors. In the process of reasoning, this court reached the conclusion that the two managing directors were employees of the company and, therefore, entitled to claim deduction in respect of the remuneration paid to them, subject only to the provisions of Section 40A(5) and the question referred was answered accordingly.
8. It was thereafter that the proceedings reached before the Income-tax Appellate Tribunal, Cochin Bench, in pursuance of the decision of this court (supra) under Section 260(1) of the Income-tax Act, 1961. It is at this stage, the assessee took up the contention that the proceedings had the origin in the nature of reassessment made by the Income-tax Officer under Section 147(b) of the Act. It was submitted that the Appellate Assistant Commissioner, as stated in the above narration, had not given a clear finding in regard to the validity of the reopening under Section 147(b) of the Act. The assessee submitted that this aspect was not argued before the Tribunal at the earlier stage, in view of the fact, it is submitted, that the assessee took it that the addition made by the Income-tax Officer was properly deleted by the Appellate Assistant Commissioner. The assessee further contended that he had a right to support the order of the Appellate Assistant Commissioner also on the ground of lack of jurisdiction on the part of the Income-tax Officer to resort to Section 147(b) of the Act. The assessee contended that even under Section 260(1) of the Act, he had a legal right to urge these aspects, in regard to the resort to Section 147(b) of the Act.
9. The assessee also contended, secondly, that on the merits the provisions of Section 40(c) are required to be considered even on the assumption that the two managing directors are employees of the company, a contention that not Section 40A(5), but Section 40(c) of the Act would govern the situation.
10. It was at that stage when the Appellate Tribunal was considering the proceedings on receipt of the answer of this court to the question referred and it was in such a situation, the Tribunal considered that the question before this court in a proceeding under Section 256(1) of the Act was clear enough. There was a specific reference to the applicability or otherwise of Section 40A(5) and this court had succinctly answered the said question to the effect that the question of deduction of the amount of salary paid to the two managing directors should be controlled by Section 40A(5) of the Act. The Appellate Tribunal further observed that it is not open to it to consider the question under its powers under Section 260(1) of the Act as to whether Section 40(c) would govern the situation. The Appellate Tribunal placed reliance on the decision of the Madras High Court in East India Corporation Ltd. v. CIT : [1975]99ITR287(Mad) , to the effect that the question that could be considered by the Appellate Tribunal in its power under Section 260(1) of the Act could only be one which was in dispute before the High Court in the reference proceedings, leaving only to the Appellate Tribunal to proceed in accordance with the decision of the High Court. The Tribunal has expressed that it must be held that the High Court had decided in the case of the assessee for the assessment year that only Section 40A(5) of the Act could be considered for application and not Section 40(c) of the Act on the basis of the decision of the High Court.
11. With regard to the aspect of jurisdiction under Section 147(b) of the Act, the Appellate Tribunal also considered the difficulty of the limits under Section 260(1) of the Act. In this context, the Tribunal has answered the contention of the assessee that in fact, the Appellate Assistant Commissioner had not given a clear finding in regard thereto. In paragraph 4 of its order (annexure 'C'), in fact, the observations of the Appellate Assistant Commissioner have been reproduced and it is on the strength of the observations, the contention was rejected by the Appellate Tribunal that the question of validity of jurisdiction is not clearly decided by the first appellate authority.
12. In addition to this aspect, the earlier order of the Appellate Tribunal has also been examined to record that the assessee did not make any submission regarding the validity of the jurisdiction under Section 147 of the Act, seeking support of the order of the Appellate Assistant Commissioner on grounds other than the grounds which are disputed by the Revenue in its appeal. It is specifically recorded that even though the first part of the order relating to the applicability of Section 40A(5) of the Act was in favour of the assessee, the assessee could have sought support to the order in his favour even by making submissions with regard to the aspect, under Section 147(b) of the Act, decided against him by the first appellate authority. In this process, the Appellate Tribunal sought guidance of the decision of the apex court in CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) , with regard to the declaration of law to the effect that only questions that can be referred under Section 256(1) to the High Court are questions which are being raised before the Tribunal and either dealt with or not dealt with by it and not questions which are not being raised at all. In consequence, the Tribunal held that these aspects were not raised by the assessee before the Tribunal prior to the proceedings reaching this court by way of reference.
13. The Appellate Tribunal also observed that the situation of finality and the binding nature of the judgment of this court would be totally lost, if the questions are allowed to be raised in a piecemeal manner as if at the sweet will of the assessee. It is in this process, by the order (annexure 'C'), the Tribunal with regard to the applicability of Section 40(c) of the Act referring to the proviso to Section 40A(5) and the decision, of this court dated July 28, 1978, in Income-tax Reference No. 67 of 1976 (para. 2 of the judgment thereof) held that in the case of a managing director being an employee there is no scope for a higher ceiling.
14. It was thereafter that the assessee approached this court in O. P. No. 8856 of 1983, obviously after the rejection of the reference application, At the second appellate stage, the proceedings are before the Income-tax Appellate Tribunal in accordance with the statutory provisions of Sections 253 and 254 of the Income-tax Act, 1961. In this context, it would be more than appropriate to refer to the said provisions and in regard thereto, it would be necessary to reproduce the provisions of Sections 253(4) as well as Section 254(4). They are as hereunder :
' 253. (4) The Income-tax Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of the Appellate Assistant Commissioner has been preferred under Sub-section (1) or Sub-section (2) by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof, within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the Appellate Assistant Commissioner, and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in Sub-section (3).
254. (4) Save as provided in Section 256, orders passed by the Appellate Tribunal on appeal shall be final.'
15. It would be seen that the above statutory provisions deal with what is to be done by the respondent to such proceedings and that is to be done within a period of thirty days from the date of receipt of notice from the Appellate Tribunal. The phrase 'notwithstanding that he may not have appealed against such order or any part thereof' is important in this connection. Similarly, the phrase 'orders passed by the Appellate Tribunal on appeal shall be final' has also an equal bearing.
16. The above provision shows that such a respondent who may not have appealed either against such order or any part thereof has to file a memorandum of cross-objections against any part of the order of the Appellate Assistant Commissioner, which has to be disposed of by the Appellate Tribunal, as if it were an appeal presented within the time specified under Sub-section (3). The statutory provision is also abundantly clear that save as provided in Section 256 of the Income-tax Act, 1961, the orders of the Appellate Tribunal receive finality in regard thereto.
17. The Income-tax (Appellate Tribunal) Rules, 1963, especially Rule 22 thereof, require registration of such cross-objections and apply all the rules to such registration. The said statutory provision of the said rules is reproduced hereunder :
'22. Cross-objections.--A memorandum of cross-objections filed under Sub-section (4) of Section 253 shall be registered and numbered as an appeal and all the rules, so far as may be, shall apply to such appeal.'
18. In addition to this, it would be necessary to reproduce Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963, dealing directly with the respondent who may support the order in his favour on grounds decided against him. The said rule is reproduced hereinafter :
'27. Respondent may support order on grounds decided against him.--The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.'
19. Thus, the combined effect of Rules 22 and 27 reinforces the statutory contents of Sections 253(4) and 254(4) more emphatically and the said rules clearly spell out that it is the respondent who has to exercise his right in support of the order, that may be in his favour on other grounds making it unnecessary for him to be the appellant himself in regard thereto. The combined effect of the above two rules keeps open two methods for such a respondent, one is to file a memorandum of cross-objections and the other is specifically to urge to support the order on grounds decided against him, although he may not have appealed. This is his second remedy in the proceedings taken up before the Appellate Tribunal, not by him but by the appellant.
20. Therefore, it will have to be considered that the basic principle thatthe respondent has to take up steps, although he may not have appealedindependently from any part of the order, such a respondent has a right not only to support the order, but he has also to state that the findingagainst him by the authority below in respect of any issue ought to havebeen in his favour. This principle of finality is based on the generalassumption that any matter or question which might and ought to havebeen made a ground, is required to be deemed to have been, a matterarising under the concerned situations. The principle of finality presentsa constructive situation, by necessary implication as a consequence inappreciating and understanding the principle of finality. The principle offinality is based and accepted in the context of the required situation inthe interest of justice. Just as the courts on authority appreciate the rightsof the contending parties to raise important questions and consider in thecontext as far as possible any provision in regard thereto at any stage, yetthe courts on authority have always considered a situation in regard tocertain questions in regard to which certain stages are contemplated inaccordance with the principle of finality. The principle of finality not onlyis in the interest of the health of the legal system, but it is also, in thecontext, a feature in consonance with justifiable anxiety to see the endof the situation in regard to the context. Allowing anyone to raise anythingat any time is also a factor in the nature of harassment in the situation.Although the interest of justice is paramount, the statutory safeguards inthe context of the principle of finality have their own contribution in theprocess to see the end of the litigation. It is in this context, even theordinary law recognises this principle in the well known doctrine of resjudicata, which has, in its turn, considered the principle of constructiveres judicata. It is in the context of the principles of constructive res judicatathat situations which might and ought to have been made ground, havebeen statutorily recognised in consonance with the principle of finality.Even the legal and statutory provisions requiring the respondent to takenecessary legal steps provided by the law of procedure in the context,though in the same direction what is expected to be taken up by therespondent at an appropriate stage to get well provided in the statutoryprovision.
21. This principle stares at our face when we see the statutory provisions of Sections 253 and 254 of the Income-tax Act, 1961, as well as its particulars specified in the Income-tax (Appellate Tribunal) Rules, 1963. It is necessary to mention that in its order, at present under our consideration (annexure 'C'), in paragraph 5, there is a reference to Income-tax Reference No, 67 of 1976 decided on July 28, 1978, by this court in the matter of Premier Cotton Spinning Mills Ltd. v. CIT, We have gone through the contents of the said judgment. In the said judgment, even the aspect of applicability of Section 40(c) of the Act is taken up for consideration, to be read with Section 40A(5) of the Act. Referring to the contents of Section 40A(5) of the Act, this court has considered that the situation would be applicable only to the lower ceiling of Rs. 60,000. Be that as it may, the question before us is clearly whether the assessee could be allowed to take up the above contentions under the above situation in regard to which it can be safely and surely stated that these contentions are sought to be taken up certainly not at the appropriate and proper occasions when they ought to have been taken up when the matter was before the Income-tax Appellate Tribunal prior to its reaching this court by reference at the instance of the Revenue. We have already stated that at that stage although the assessee was a respondent, the proceedings were allowed to be taken up in a situation where the respondent-assessee who could have supported the order under the above statutory provisions had chosen to be conspicuous by silence.
22. In the context of the situation, we -have to consider the statutory limits when the Income-tax Appellate Tribunal was dealing with the proceedings received from this court in pursuance of its judgment dated February 23, 1982, in Income-tax Reference No. 53 of 1979. This was on the basis of an earlier decision of this court dated December 18, 1980 (see : [1982]133ITR818(Ker) ).
23. The statutory provisions of Section 260 of the Income-tax Act, 1961, require this court to decide the question of law raised in the case and thereafter further require despatch of its judgment to the Appellate Tribunal. The statutory provisions further require the Appellate Tribunal to act thereupon and to pass such orders as are necessary 'to dispose of the case conformably to such judgment'. This phrase sets out the statutory limits of the Appellate Tribunal. The Tribunal gets limited powers to proceed with the situation 'conformably in accordance with the judgment of this court'.
24. Obviously, in such a situation, the questions which ought to have been considered after agitation in regard thereto in accordance with the statutory provisions, in our judgment, cannot be contemplated in the context.
25. Learned counsel for the assessee placed reliance on the decision of the Bombay High Court in ITAT v. S.C. Cambatta and Co. Ltd. : [1956]29ITR118(Bom) , for a proposition that the Appellate Tribunal even acting within the limits of Section 260(1) of the Income-tax Act, 1961, could be contemplated to get jurisdiction to consider the question of law. Learned counsel took us carefully through the entire judgment. The court was dealing with an appeal from the decision of a learned single judge of that court directing the Appellate Tribunal to hear the application under Section 66(1) of the Indian Income-tax Act, 1922, which was rejected by the Appellate Tribunal on the ground of being outside the limits of the Appellate Tribunal acting on an order in pursuance of the reference passed by the High Court earlier. On behalf of the Revenue, it was argued before the said court and the said argument was found to be perfectly right. The Revenue contended that the power of reference is a limited power conferred upon the High Court under Section 66 of the 1922 Act and it is not possible to extend the ambit of the said power. The consequent submission on behalf of the Revenue was also equally held to be right that reference only lies under Section 66 of the said Act, provided a question of law arises out of an order passed by the Tribunal under Section 33(4) of the Act.
26. Accepting these submissions on behalf of the Revenue, emphasising also the situation of finality to be found in Section 33 of the 1922 Act, it was observed that the situation is clear that except in cases which may go up to the High Court on a reference, the decision of the Appellate Tribunal under Section 33 is final. We have already emphasised the statutory provisions under the Act now in force--Income-tax Act, 1961. This is to the effect that no finality attaches to the decision of the Appellate Tribunal because by reason of the decision of the High Court on a reference, the decision given by the Appellate Tribunal is liable to be reopened and it will be the duty of the Appellate Tribunal to give effect to whatever decision the High Court gives. We have also sufficiently emphasised the statutory provision of Sections 254(4) and 260(1) of the Income-tax Act, 1961, to emphasise that the Appellate Tribunal is expected to dispose of the proceedings received from the High Court conformably to such judgment of the High Court.
27. Further, discussion of the judgment shows that on receipt of the proceedings from the High Court as a result of the decision on the reference, the Tribunal has the function of ascertaining the valuation of the goodwill in regard to which the question of law which was submitted to be referred arose before the learned single judge.
28. In this context, it was held that the final decision in appeal has only to be given by the Appellate Tribunal after the reference has been made and that decision can only be given under Section 33(4) of the Act. It was observed that the Tribunal has to pass an order out of which a question of law arises, which question never arose out of the first order, then there is no reason why the assessee or the Commissioner should not have the right of coming to the High Court.
29. In other words, if the question of law could be said to have arisen at the first point of time, when the proceedings were before the Appellate Tribunal in pursuance of the order of reference, the Appellate Tribunal can certainly consider such a question but it would be only on a factual situation that the question arises first in point of time and definitely not at any time in the past during the travel of the proceedings. After carefully considering the judgment cited by learned counsel, we find that, in fact, the terse observations go more rigorously in fortifying our approach taken on the factual situation before us. The statutory provisions do provide that on receipt of the proceedings on a reference from the High Court, the Appellate Tribunal has to act conformably in the light of the directions in the answer to the question referred. If the question that is sought to be raised and contested at this stage of the proceedings has not been urged or could not have been urged, the Appellate Tribunal may proceed to consider such question, but only on satisfaction that the question arises afresh for the first time and is of such a nature that it could not have been raised at any time in the earlier travel of the proceedings.
30. For all the above reasons, we answer all the questions in the affirmative, in favour of the Revenue and against the assessee.
31. A copy of this judgment, under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.