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PETITIONER: LACHMINARAYAN MADAN LAL

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, WEST BENGAL

DATE OF JUDGMENT13/09/1972

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ

CITATION:  1973 AIR 2330            1973 SCR  (2) 207  1973 SCC  (3)  76

ACT: Income Tax Act, 1961, s. 37-Item of expenditure laid out  or expanded  wholly  and  exclusively for the  purpose  of  the business-Payment of, selling agency commission-Power of  the Income   Tax  Officer  to  decide  whether  Selling   Agency agreement  is  a genuine business  arrangement-Section  256- Tribunal  not  stating a case for the opinion  of  the  High Court  and High Court not calling for a statement  of  case- Whether justified.

HEADNOTE: The assessee is a registered firm of three partners who  are brothers,  each  having 1/3rd share and is  engaged  in  the manufacture   and  sale  of  aluminum  utensils.    In   the assessment  year 1963-64, the see claimed to have  paid  Rs. 31,684/-  to  M/s.   Eastern Sales  Corporation  as  selling agency  commission and claimed deduction of the  same  under section 37 of the Act as an item of expenditure laid out  or expanded.   The  selling  agency  firm  was  principally   a partnership  firm  of  the  wives  and  minor  sons  of  the partners’  assessee firm.  The selling agency agreement  was entered into on March 26, 1962, while the partnership of the selling  agency firm came into existence on April 13,  1962. The business   address  of the selling agency firm  was  the same as that of the assesses  firm. The selling agency  firm had  no  godown of its own nor any transport  vehicles.  The Tribunal  held that the selling agency firm had  no  genuine independent  existence and that the selling agency firm  was only a make-believe arrangement and a device to minimise the tax liability of    the assessee firm. The Tribunal  further held  that  the selling agency agreement was not  a  genuine business arrangement, and refused reference  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  misconstrued or misunderstood the  selling  agency agreement  and  the  partnership  deed  and  (ii)  that  the Tribunal ignored the oral evidence and  the     same     had vitiated  its  conclusions and on the question  whether  any question of law arises from the order of the Tribunal  which required  the Tribunal to state the case for the opinion  of

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the High Court,      Dismissing the appeal, Held  (i)  The  assessee by adopting a device  has  made  to appear    the income which belonged to it had been earned by some other person.  [213C]      Commissioner  of Income Tax, Gujarat v. A. Raman &  Co. 67 J.T.R. 11, followed. (ii) The mere existence of an agreement between the assessee and its   selling  agents or payment of certain  amounts  as commission,  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. 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 is properly deductible under s. 37 of the Act. [214A] Swadeshi  Cotton  Mills Co. Ltd. v. Commissioner  of  Income Tax, U.P. 63 I.T.R., 57, 208 (iii)Held, further, that as the Tribunal had not relied upon  any  irrelevant  evidence  and  the  inferences   were rationally arrived at. [212H]  Dhirajlal  Girdharilal  v.  Commissioner  of  Income   Tax, Bombay,  26  I.T.R. 736, Commissioner of  Income  Tax,  West Bengal-ll  v.  Rajasthan  Mines  Ltd.,  78  I.T.R.  45   and Commissioner of Income Tax, Punjab v. Indian Woollen Textile Mills, 51 I.T.R. 291, held inapplicable. (v)The  Tribunal was justified in not stating a  case  for the opinion of 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] Commissioner  of Income Tax, West Bengal II v. Durga  Prasad More, 82  I.T.R. 540, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 20 of  1969. 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. S.C.  Manchanda,  P. I. Juneja, B. D. Sharma  and  R.  N. Sachthey, for the respondent. The Judgment of the Court was delivered by HEGDE, J, Aggrieved by the order of the 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 question  for decision is whether any question of law  arose from  the order of the Tribunal which required the  Tribunal to state the case for the opinion of the High Court. The  assessee  is  a  registered  firm  of  three  partners, Madanlal  Bagaria, Bajranglal Bagaria and Sohanlal  Bagaria, each having a 1/3rd share in the partnership.  The  partners are brothers.  Its business is that of manufacture and  sale of aluminum utensils.  Upto 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 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 Income-tax  Act,  1961  (to  be hereinafter   referred  to  as  the  Act)  as  an  item   of

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expenditure laid out or expanded wholly and exclusively  for the  purpose  of  the  business.’  The  Income-tax   Officer rejected   that   claim.   ’But  the   Appellate   Assistant Commissioner in appeal 209 allowed   the  same.   The  A.A.C.  after  summarising   the conclusions  reached  by  the I.T.O.  and  setting  out  the arguments advanced on either side, concluded by observing :               "On  a careful consideration of the facts  and               circumstances, I 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  of  proof   of               collusion  between the two concerns.   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 Tribunal reversed the order of the A.A.C. and restored  that of the I.T.O. It came to the conclusion  that the so called selling agency agreement between the  assessee firm  and  the selling agency firm was only  a  make-believe arrangement.   It  was merely a device to minimise  the  tax liability  of  the assessee firm and it was  not  a  genuine business arrangement.  It arrived at that conclusion on  the basis of the following facts : 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 firm.  She had a 1/3rd share in the profits  of the  selling agency firm.  Another partner of that firm  was Triveni  Devi Bagaria wife of Bajranglal Bagaria, a  partner in the assessee firm.  She had 1/9th share in the profits of the  selling  agency  firm.  Bajianglal’s  major  son  Kanti Prasad  Bagaria  was another partner in the  selling  agency firm.   He  had  1/9th share in the profits  of  that  firm. Nandlal Bagaria, the minor son of Bajranglal Bagaria was en- titled  to  get 1/9th share in the profits  of  the  selling agency  firm.   In  effect  the wife  and  the  children  of Bajranglal  were entitled to 1/3rd share in the  profits  of the  selling  agency firm.  Another partner of  the  selling agency firm was Banarshi Devi Bagaria, 15-L348Sup.C.I./73 210 wife  of  Sohan  Lai Bagaria, one of  the  partners  in  the assessee firm. She  had 1/9th share in the, profits  of the selling agency firm. Shyamsunder Bagaria, minor son of Sohanlal was entitled to get1/6th   share   in    the

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profits  of  the selling agency firm.  This shows  that  the wife and son of Sohanlal were entitled to 1/3rd share in the profits  of the selling agency firm.  From these facts,  the Tirbunal  inferred that the selling agency firm  is  nothing but  another  manifestation  of  the,  assessee  firm.   The Tribunal further came to the conclusion that on the day  the selling agency agreement was entered into viz. on March  26, 1962,  the  selling  agency  firm had  not  even  come  into existence.   It  came into existence for the first  time  on April  13,  1962.  The partnership agreement  clearly  shows that  the partnership 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 document. 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 firm; three of the partners of the firm were laides 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 firm  was  Kanta Prasad Bagaria who had only a 1/9th share in the profits  of the  firm.   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 business address of the selling agency firm was the same as that of the assessee firm.  The selling agency  firm 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 these are findings of fact. Mr.  M. C. Setalvad, appearing for the  assessee  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 agency agreement proceeds on the basis that the  partnership is already in 211 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 firm  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 13, 1962.  That  document  in clear  terms  says that it has come into existence  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  that question the Tribunal’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  ig- nored  the oral evidence and as such its findings cannot  be

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accepted.  We are unable to accept this contention as  well. It  is true that the Tribunal has not elaborately  discussed the  oral evidence.  But it is not correct to say  that  the oral  evidence  has  been ignored.  In paragraph  6  of  the Tribunal’s  order,  it notices the reliance  placed  by  the assessee 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  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 firm 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 commission 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." 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 do so.  We may also  notice  at this stage the reference in the Tribunal’s order to the fact that  the selling agency firm had 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 Mr.  Setalvad took us through the oral evidence recorded  by the  I.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  selling               agency   firm  contacted  the  customers   and               thereby improved sales of the appellant." This was merely a ipse dixit.  No reasons were given in sup- port  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 stated 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 prima  facie  perverse order.  We shall now  consider  those decisions. In Dhirajlal Girdharilal v. Commissioner of Income-tax, Bom- bay(1)  this Court ruled that when a court of fact  acts  on material,  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

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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  inadmissible. Hence this decision has no bearing on the point in issue  in this case. In  Commissioner of Income-tax, West Bengal-II v.  Rajasthan Mines  Ltd.,(2)  this  Court held that it  is  open  to  the parties  to  challenge  a conclusion of fact  drawn  by  the Tribunal on the ground that it is not supported by any legal evidence  or  that the impugned conclusion  drawn  from  the relevant  facts is not rationally possible.  If 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. (1) 26, ITR 736.   (2) 78, ITR, 45. 213 In Commissioner of Income-tax, Gujarat v. A. Raman &  Co.(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 accrues to a trader is taxable 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 accrues or arises  to him.    Effectiveness  of  the  device  depends   not   upon considerations  of  morality  but on the  operation  of  the Income-tax  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 may 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, Punjab v.  Indian Woollen Textile Mills(2) . 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 the 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  can  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 finding of the Tribunal  as  to  the unreality of the trust put forward was not based on evidence or was otherwise vitiated. In  our opinion the facts of this case come within the  rule laid down by this Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax, U.P. (4) The question whether an

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amount  claimed as an expenditure was laid out  or  expanded wholly  and exclusively for the purpose of the business  has to be decided on (1)  67, I.T.R. 11, (3)  82 I.T.R. 540. (2)  51, I.T.R. 291. (4)  63, I.T.R. 57. 214   the  facts and in the light of the circumstances  in  each case.   The  mere  existence of  an  agreement  between  the assessee  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 payments  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 under 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-s. (2) of s. 2 5 6. In  the result this appeal fails and the same  is  dismissed with costs. S.B.W.                                  Appeal dismissed. 215