Lachminarayan v. C.I.T., West Bengal II (Hegde, J.)

###, ## • J **selling_** **agency commission and claimed deduction** **of· the same under** section· 37 of the Act· a. an item of expenditure laid out or expanded. **The selling agency** **firm** **was principally a partnership firm** **of -the wives** D **and** **minor sons** **of** **the partners' assessee** **firm.** **The selling** **agency_** **agree-** ment woo entered into on March 26, 1962, while the partnership of the selling age:ncy firm came into existenc'.e on· April ·.13; 1962. The 1>usm.ss address of the selling agency firm was the same ·as that of the arsessea firm. The selling agency firm had no godown of its own nor any trans• port vehicles. . The Tril>unal held that the selling agency firm had no genuine i;ndependent existence and that the selling agency firm was only - a m.ake·relieve arrangement and a device to minimise the tax liability of E ··the assessee firm. · The .Tril>unal further he'd that the selling agency agree - **ment' was not a genuine business . arrangement, and refused refen:pce** A B c . The assessee is a registered firm of three partners who are l>rothers, ·each having I/3rd share and is engaged in the manufacture and sale of aluminium utensils. In. the assessment year 1963·64, the assessee c)aimed to have paid Rs. 31,684/- to l\I/s. Eastem Sales Corporation a. LACHMINARAYAN MADAN LAL _V;_ COMMISSIONER OF . ! INCOME-TAX, WEST BENGAL ' . _Septenlber_ 13, 1972 [K .. s. HEGDE, P. JAGANl\IOHAN REDDY AN~ H. R. KHAN:-0.~, JJ.J _Income Tax_ _Act,_ 1961, _s._ _31-Item. of expenditure laid out or_ _expand-_ _e,/_ _who//.v_ _and exclusively. for_ _tire_ _purpose_ _of tire_ _business-ccPaymena of._ _**selling agency**_ commirsio~Power _**oj ·the Income**_ _**Tax**_ _**Officer. to decide**_ _**whether Selling Agency agreement**_ _**is**_ _**a genuine business arrangentent-**_ _Section 25&--Tribunal not stating_ _a_ _case for the opinion_ _of the High_ _**Court and High Court not calling for a state1nent**_ _**of**_ _**case-Whether**_ _justified._ D to High Court. The High Court declined to call upon the Tribunal to state a case. as desired . by the assessee firm. . - · . On appeal to this Court on the grounds (i) that the Tribunal _mis-_ construed or misunderstood the selling agency agreement and the partnership deed and (ii) that the Tribunal ignored the oral evidence and F the s-ame had vitiated its conclusions and on the question whether any question· of law arises from the order of the Tril>unal which required the Tribunal. to state the case for the.opinion of the High Court, Dismissing the appeal, Held (i) ·The assessee by adopting a device h.ls made to appe.ir that the income which belonged to it had l>een earned by some other person. [213C] - . **G** _**Comnzissionef. of /nconze Tax, Gujarat**_ **v.** _**A. Ran1an**_ **&** _**Co. 61**_ **J.T.R.** II, followed: F ' . (ii) The mere existCiJl<:e·of an agreement l>etween th.; arsessee and its **selling agents or payment** **of certain amounts** **as** **commission, does not bind** -.,. the lna>me Tax Officer to hold that the payment~ was made exclusively and wholly· for the purpose of· the assessee.'s bu·iness. It is :still open to the Income Tax. Officer to consider the relevant factors and deterH · mi;ne. for himself whether the Commission said to have been paid to the selling agents is properly deductil>le under s.·37 of the Act. [214Al _Sw'1deshi Cotton Mills Co. Ltd._ v. Commissio~~ _of_ Inc~me _T,,;,, u.P.,_ 63 I.T.R., 57, I 208 SUPREME COURT REPORTS [1973) 2 S.C.R. ###,,. ,# . -(iii) Held, further, that as the TribUlla! had not relied upon any **irrelevant evidence** **and** **the** **inferences were rationally** **arrived** **at.** **[212H]** . _Dhiraj/a/ Girdharilal_ v. _Commissioner_ _of_ _income_ _TWc,_ _Bom/Ja.v,_ 26 .. l.T.R. 736, _Commissioner_ _of_ _Income Tax, West Beng/4-11_ v. _Rajastlran_ _Mines Lrd.,_ 78 ·l.T.R. 45 and _Commissioner_ _<>f_ _Income Tax, Punjab_ v. _Indian Woo/k/i Textile Mills,_ 51 I.T.R. 291, held inapplicable. (v) The Tribunal was justifi~d.in not stating a case for the opinion of B the High Court under section 256(1) and the High Court ·was justified in. not calling for statement of case under s. 256(2). [214C] _**Cominissioner**_ _**of**_ l~co,;,e _**Tax, West**_ Hen~] _**JI.**_ v~ _**-Durga**_ _**Prasad Atore,**_ 82 I.T.R. 540, referrel to. · - --- " ' ' CIVIL APPELLATE JURISDICTION : Civil' Appeal No. 20 of 1969. C Appeal by.special leave from the order dated July 1, 1968 of the Income Tax Appellate Tribunal,'A' Bench, Calcutta, in Income Tax Reference No. 26 of.1968. ·' _M._ C. _Setalvad, D._ _N._ _Mukherjee,_ C. _K._ _Ray_ and _G:_ S. _Chatterjee,_ for the appellant. - - · **D** S. C. _Manchanda, P. I. Juneja: B;_ _D. Sharma_ and _R._ _N._ _Sachthey,_ for the respondent. ' The Judgment of the Court was delivered by' . L HEGDE, J. Aggrieved by the order of tlie High Court, declin- . ing to call upon the Income-tax Appellate Tribunal 'A' Bench, Calcutta to state a case as desired by it, the assessee has brought this appeal by special leave. The q'uestion for decision is whether E any question of law arose from the order of ~he Tribunal which required the Tribunal to state the case for the opinion of the High Court.· . .,, F The as~essee is a registered firm ·of three partners, Madanlal Bagaria, Bajranglal Bagaria .and Sohanlal Bagaria; each having a I /3rd share fn the partn~rship. The partners are brothers. Its business is that of manufacture and sale of aluminium· ·utensils. Up'° the assessment year 1962-63, the firm was making its sales direct to the customers.· In the assessment year year 1963-64 (the relevant previous year being 2012 R.N. 13-4-1963 to 1-4-1964) the asses.see claimed to have; paid Rs. 31,684/- to Messrs. . Eastern Sales Corpn. as selling agency commission and claimed deduction of the same under s. 37 of the Indian Incometax Act; 1961 (to pe hereinafter referred to as the Act) as an item of expenditure laid out or expanded wholly and exclusively tor the purpose of the business. The Income-tax. Officer rejected that claim. But the Appellate Assistant Commissioner in appeal G **H** A B ###### c D E F G H LACHMINARAYAN _v._ C.I.T. _(lfegde,_ _J.)_ 209 allowed the same. The A.A.C. after summari:;ing the conclusions reached by the I.T.O. and setting out the arguments advanced on either side, concluded 'by o1'>erving : "On a careful consideration of the facts and circumstances, l am inclined to take the view that the discount should be allowed as a deduction, as having been laid out wholly and exclusively for the purpose of the appellant's business. The facts narrated above, clearly indicate that there has been a phenomenal increase in the sales of the appellant, after the appointment of the selling agents. The mere fact of the partners of the selling agents being closely related to the partners of the appellant firm is of little consequence, in the absence vf proof of collusion between the two concern5. Instead of the payment being made to total strangers, the discount in the present case has been paid to a firm, constituted by the near relations of the partners of the appellant and what is more, the payment was against actual service rendered. The depositions, recorded by the I.T.O. referred to above, clearly bring out that the selling agency firm contacted the customers and thereby improved sales of the appellant." Aggrieved by the decisions of the A.A.C., the Department took up the matter in appeal to the Income-tax Appellate Tribunal. ·The Trit.unal rcvcrs~d the orJer ·Df the A.A.C. and restored that of the I.T.O. lt cime to the conclusion that the socalled selling agency agreement between. the asscssce firm and the selling agency firm was only a make-believe arrangement. It was merely a device to rniniJTiise the tax liability of the assessee firm and it was not a genuine busine5' arrangement. It arrived at that conclusion on the basis of the followieg facts : major son Kanti Prasad Bagaria was another partner in the 0 sell ing agency finn. He had l/9th share in the orofits of that firJTI. Nwdlal Bagaria. th.e minor son of Bajranglal "Bagaria was entitled to get l/9th share in the profits of the selling agency firm. In effect the wife and the children of Bajranglal were entitled to _1/3_ rd share in the profits of the selling agency firm. Another partner of the selling agency firm was $anarshi Devi Bagaria, !5-L348Sup.C.I./73 The selling agency firm had four major partners. Two minors - were also entitled to share in the benefits of that partnership. One of the major partner was Shiva Kumari Bagaria wife of Madan Lal Bagaria, one of the partners in the assessee finn. She had a I/3rd share in the profits of the selling agency firm. Another partner of that firm was Triveni Devi Bagaria wife of B2i-~nglal Bagaria, a partner in the assessee firm. She had major son Kanti Prasad Bagaria l/9th share in the pp1fits of the selling agency firm. was another partner Bajrannlal's in the 0 sell 2 10 SUPREME COURT REPORTS [1973] 2 S.C.R. wife of Sohan Lal Bagaria, one of the partners in the assessee firm. She had l/9th share in the profits of the selling agency firm. Shyamsunder Bagaria, minor son of Sohanlal was entitled to get I/6th share in the profits of the selling agency Jinn. This shows that the wife and son of Sohanlal were entitled to I/3rd share in the profits of the selling agency finn. From these facts, the Tirbunal inferred that the selling agency firm is nothing but another manifestation of the. assessee finn. The Tribunal further came to the conclusion that on the day the selling agency agreement was entered into viz. 011 March 26; 1962, the selling agency firm had not even come into existence. It came into existen£e for the first time on April 13, 1962. The partnership agreement clearly shows that the partn~rship came into existence only on April 13, 1962. This discrepancy between the two documents was emphasised by the Tribunal in support of its conclusion that the agreement in question was a mere make-believe do~ument. The Tribunal also took into consideration that out of the partners, two were minors who could not have rendered any assistance in the matter of selling the products of the assessee finn; three of the partners of the finn were !aides who had no prior business experience and consequently they would have been of little assistance in carrying on the activities of the selling agency firm. The only male adult who was the partner in the selling agency finn was Kanta Prasad Bagaria who had only a I/9th share in the profit> of the finn. Further Kanta Prasad was a partner in another manufacturing concern situate at a place quite distant from the place where the selling agency business was said to have been carried on. The Tribunal further took note of the fact that the busi11ess address of the selling agency finn was the same as that of the assessee finn. The selling agency !inn had no godown of its own nor any transport vehicles. On the basis of these findings, it reached the conclusion that the selling agency firm had no genuine existence. _Prima facie_ all the'e are findings of fact. Mr. M. C. Setalvad, appearing for the assesse.e challenged the findings reached by the Tribunal on two grounds _viz._ ( 1) . that the Tribunal misconstrued or misunderstood the two documents _viz._ the selling agency agreement dated March 26, 1962 and the partnership deed dated April 13, 1962 and (2) the Tribunal ignored the oral evidence and the same has vitiated its conclusions. On the basis of those contentions he urged that the facts found and the· conclusions reached by the Tribunal are vitiated. Mr. Setalvad is not right in his contention that there is no discrepancy between the agreement dated March 26, 1962 and the partnership deed dated April 13, 1962. The selling ager.cy agreement proceeds on the basis that the partnership is already in A II ###### c D E F G H LACHMINARAYAN _v._ CI.T. _(Hegde,_ _J.)_ 211 i\ existence. The assessee could have entered into an agreement only with an existing firm. It is true as contended by Mr. Setalvad that a partnership arrangement may be oral but the question here is whether the selling agency finn was in existence on March 26, 1962. For finding out when that firm came into existence, we have to refer to the partnership deed dated April B 13, · 1962. That document in clear tenns says that it has come into e~dstence on that day. It is true as· is contended by Mr. Setalvad that the selling agency agreement says that the same will come into force on April 13, 1962. But that is not the question before us. We are here concerned with the question whether the selling agency firm existed on March 26, 1962. On th3{ quesC . tion the Tril)unal's conclusion is not open to challenge. There is discrepancy between the two documents. It was next urged by Mr. Setalvad that the Tribunal has i~­ nored the oral evidence and as such its findings cannot be accepted. We are unable to accept this contention as well. It is true that the Tribunal has not elaborately discussed the oral eviD, dence. But it is not correct to say that the oral evidence bas been ignored. In paragraph 6 of the Tribunal's order, it notices the reliance placed by the as!!Cssee on the oral evidence. But it declined to place any reliance on the same. In paragraph 9 of its order, the Tribunal observed : "If the matter had to be decided only on the basis E of the agreement, the partnership deed of the selling agency firm and the statements of the customers and of the partners of the selling agency finn and we have to take them at their face value, we would not have been inclined to interfere with the decision of the Appellate Assistant Commissioner that the selling agency comF mission was incurred wholly and exclusively for the purpose of the business; but we are obliged to hold that the so-called selling agency arrangement was only a make believe arrangement, as a device for minimising the tax liability of the assessee firm and that it is not a genuine business arrangement." G After saying so it proceeded to give reasons in support of that conclusion. In other words the Tribunal thought that it is unable to accept the oral evidence as its face value in view of the surrounding circumstances of the case. It was open to the Tribunal to t!o so. We may also notice at this stage the reference in the Tribunal's order to the fact that the selling agency firm had H no transport vehicles of its own is based on the oral evidence in the case. The Tribunal also did not believe the oral evidence led on behalf of the assessee that the darwan of the selling agency firm went in the lorry for delivering the goods sold. 212 SUPREME COURT REPORTS [1973] 2 SJ:;.R. Mr. Setalvad took us through the oral evidence recorded by the l.T.O. with a view to satisfy us that the Tribunal has ignored important pieces of evidence. After going through the same we are unable to disagree with the conclusion reached by the Tribunal that not much value can be attached to that evidence. It was open to the Tribunal to· reject the oral evidence in the light of the surrounding circumstances of the case. It is true that the A.A.C. did observe that : "The depositions recorded by the ITO, referred to above clearly bring out that the sillling agency firm contacted the customers and· thereby improved sales of the appellant." This was merely a _ipse dixit._ No reasons were given in support of that conclusion. The A.A.C. has not examined the evidence before him. He has not considered whether that evidence was believable or not. On the other hand the Tribunal for the reasons it has st1ted was not able to place reliance on it. Mr. Setalvad invited our attention to number of decisions in support of this contention that the Tribunal's order is a _pl'ima_ _facie_ perverse order. We shall now consider those decisions. In _Dhirajlal Gi,.d/Jal'ila/_ v. _Commissioner of Income-tax, Bom-_ _bay(')_ this Court ruled that when a court of fact acts on matedal, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. In this case, we have not been able to accept Mr. Setalvad's contention that any part of the evidence relied on by the Tribunal was either irrelevant or inadinissible. Hence this decision has no bearing on the point in issue in this case. In _Commissioner_ _of_ _Income-tax, West Bengal-ll_ v. _Rajas-_ _than Mines J,td.,_ (') this Court held that it is open to the parties to challenge a conclusion of fact drawn by the Tribunal on the j!round that it is not supported by any legal evidence or that the impugned conclusion drawn from the relevant facts is not rationally possible. Tf such a plea is established, the court has to consider whether the conclusion in question is not perverse and should not. therefore, be set aside. It is not possible to say on the facts and in the circumstances of this case that the conclusions of fact drawn by the Tribunal is not supported by any legal evidence or that the same could not be rationally arrived at. (I) 26, !TR 736. (2) 71, !Tit, _45._ A B ##### c E F G H A B ###### c D E F LACHMINARAYAN _v._ C.I.T. _(Hegdc,_ _!.)_ 213 In _Commissioner of lncome-ta.x, Guiarat_ _v._ _A._ _Raman_ & _Cr._ ( [1] ) this Court restated the well accepted proposition that the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrue.s to a trader is taxble in his hands but income which he could have, but has not earned, is not made taxable as income accrued to him. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A tax payer may resort to a device to divert the income before it accures or arises to him. Effectiveness of the device depends not upon considerations of morality but on the operation of the Incometax Act. But this Court in the same case further observed that by adopting a device, if it is made to appear that the income which belonged to the assessee had been earned by some other person, that income t)lay be brought to tax in the hands of the assessee. According to the findings given by the Tribunal this case belongs to the latter category namely that the assessee by adopting a device has made to appear that the income which belonged to it had been earned by some other person. Mr. Setalvad ·placed considerable reliance on the decision of this Court in _Commissioner of Income-tax,_ _Pzmjab_ v. _Indian_ _Woollen Textile Mills(')._ Therein this Court observed that in that case the Tribunal assumed the only fact on which its conclusion was founded and had ignored other relevant matters on which A.A.C. had relied in support of its conclusion. Consequently the Tribunal must be held to have misdirected itself in law in arriving at its finding. We have earlier considered th• contention of Mr. Setalvad that the Tribunal had misdirected itself but we have not been able to accept the same. Hence the ratio of this decision is of no assistance to the appellant. ' Reference was also made to the decision of this Court in _Commissioner of Income-tax West Bengal II_ v. _Durga Prasad_ _More(_ _[3]_ _)._ We fail to see how this decision c.an lend any assistance to the appellant's case. In that case this Court reversing the decision of the High Court held that it could not be said that the G finding of the Tribunal as to the unreality of the trust put forward was not based on evidence or was otherwise vitiated. H In our opinion the facts of this case come within the rule laid down by this Court in _Swadeshi Cotton Mills Co. Ltd._ v. _Com-_ _mis.sioner of lncome-ta.x, U.P:f,')_ The question whether an amount claimed as an expenditure was faid out or expanded wholly and exclusively for the purpo!:e of the business has to be decided on II) 67, I.T.R. ll, 13) 82 l.T.R. 540. l2l 51, l.T.R. 291. 14) 63, l.T.R. _51._ 214 SUPREME OOURT REPORTS [1973] 2s.C.R. the facts and in the light of the circ11mstancei in each case. The mere existence of an agreement between the asiessee and its. selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payment~ might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible unjer s. 37 of the Act. For the reasons mentioned above, we are of opinion that the Tribunal was justified in not stating a case for the opinion of the High Court under s. 256( 1) of the Act and the High Court was justified in not calling for a statement of case under sub-<. (2) of s. 256. In the result this appeal fails and the same is dismissed with costs. S.B.W. _Appeal dismissed._ A B c _I_