21 December 1950
Supreme Court


Case number: Appeal (civil) 59 of 1950






DATE OF JUDGMENT: 21/12/1950


CITATION:  1951 AIR  108            1950 SCR 1008  CITATOR INFO :  D          1965 SC1905  (6)  R          1976 SC 772  (6)

ACT: lndian  Income-tax  Act  (XI  of 1922),  ss.  10  (2)  (xv), 66--Reference--Jurisdiction  of High Court--Duty  to  decide case  on  facts stated by Tribunal--Accepting  arguments  of counsel  as poved facts and basing decision on them,  impro- priety of--Buisness expenditure-Payments to avoid disclosure of misfeasance of directors--Burden of proof

HEADNOTE:    The  jurisdiction  of the High Court in  the  matter  of mooroetax  references is an advisory jurisdiction and  under the Incometax Act the decision of the Appellate Tribunal  on facts is final unless it can be successfully assailed on the ground that thoro was 1009 no  evidence  for the conclusions on facts recorded  by  the Tribunal.     It is therefore the duty of the High Court  to start  by looking at the facts found by the    Tribunal  and answer  the  questions of law on that footing.  It  is   not proper  to depart from this rule of law as it  will  convert the   High Court into a fact finding authority, which it  is not, under the advisory jurisdiction.     As the statement of tile Case prepared by the  Appellate Tribunal  in accodance with the rules framed under  the  In- come-tax  Act is prepared with the knowledge of the  parties concerned  and they have full opportunity to apply  for  any addition  or  deletion  from that statement,  if  they  have approved  of the statement made by the Tribunal, it is   the agreed  statement of facts by the parties on which the  High Court  has to pronounce its judgment.’ The High Court  would be acting improperly if it takes the arguments     one     of the counsel for the assessee as if they  were facts and bases its conclusion on those arguments.    One of the directors of the assessee company, acting in the capaci- ty  of  managing agents of certain ,Mills,  had  drawn  some hundis in the name of the Mills, and as the Mills repudiated liability, suits were filed on the hundis against the  Mills and the assessees.  The assessees thereupon agreed to  reim-



burse the Mills by permitting the latter. to deduct a moiety of  the  commission payable to them under the  agreement  of managing  agency, against payments which the Mills may  have to make under the decrees. In their assessment to income-tax the assessees claimed that the amounts so deducted should be excluded  from their assessable income as business  expendi- ture under s. 10 (2,) (xv) of the incometax Act.  The Appel- late Tribunal found that the assessees had agreed to pay off the  decree amount from the remuneration due to  them,  that the  decree was passed against them evidently for some  mis- feasance  committed  by their directors, that the  books  of both  companies  showed that the assesssea were  paid  their remuneration  in  full,  and that the  expenditure  was  not therefore laid out for the purpose of carrying on the  busi- ness, and also that, as the payment was made for the  liqui- dation of a debt, it was not a revenue expenditure.  In  the High  Court  the assessees’ counsel argued, relying  on  the case  of Mitchell v. B. W. Noble Ltd.(1), that the  payments were  matie  by the assessees to avoid the publicity  of  an action against them and the consequent exposure and less  of reputation  as  a managing agency company, and as  such  the payments were deductible as business expenditure.  The  High Court  accepted this argument and reversed the  decision  of the Tribunel.     Held, that the High Court acted wrongly in accepting the arguments  of the assessees’ counsel as if they were  proved facts  and  basing its decision on them; and, as  the  facts necessary to support the claim for exemption under s. 10 (2) (xv) had not been established at any stage of the case,  the assessees were not entitlecl to the deduction claimed. (1) [1927J 1 K.B. 719. 129 1010 Judgment of the Calcutta High Court reversed.

JUDGMENT:       APPELLATE JURISDICTION: Civil Appeal No. 59 of 1950.       Appeal from a Judgment of the High Court of Judicature at  Calcutta  (Harries  C.J. and Chatterjea  J.)  dated  9th September,  1949, in a reference under section 66 (2) of the Indian Income-tax Act, 1922. (Reference No. 8 of 1949).       M.C.  Setalvad,  Attorney-General  for  India  (G.  N. Joshi, with him) for the appellant.       S. Mitra (B. Banerjee, with him) for the respondents.    1950. December 21. The Judgment of the Court   was deliv- ered by      KANIA  C.J.--This is an appeal from the  judgment    of the  High Court at Calcutta (Harries C.J. and     Chatterjea J.)  pronounced on a reference made to it    by the  Income- tax  Tribunal under section 66 (2) of    the Indian  Income- tax Act.   The relevant facts are    these.  The respondents are  a  private limited company    which  was  brought  into existence  to  float various    companies  including  cotton mills.  In November, 1932,    the Basanti Cotton Mills  Ltd. was incorporated and    the respondents were appointed their managing agents.    Their remuneration was fixed at a month- ly  allowance    of Rs. 500 and a commission of 3 per  cent. on  all  gross    sales of goods manufactured by  the  Mills Company.     The  fixed monthly allowance was liable  to  be increased     in  the event of the capital  of  the  company being     increased.  The  details are immaterial.   It  ap- pears    that certain hundis were drawn by one of the direc- tors    of the respondent company, acting in the capacity of



the  managing agents of the Mill Company, in the name     of the Mill Company and the same were negotiated to     others. The Nath Bank Ltd. claimed payment of    these hundis.   The Mill  Company  repudiated  its    liability as  it  appeared from the books of the Mill    Company that they had not  the use  of the sum of    Rs. 1 80,000 claimed by the Nath  Bank Ltd.  under     the hundis.  The Nath Bank  Ltd.  instituted four suits      1011 against  the  Mill Company, in two of which  the  respondent company were party-defendants.  The Mill Company was advised to settle the suits and the respondent company entered  into an agreement with the Mill Company, the material part of the terms of which runs as follows :--     "Memorandum  of  Agreement  made  between  the  Calcutta Agency Limited of the one part and Basanti Cotton Mills Ltd. of  the other part. WHEREAS the Nath Bank  Limited  demanded from  the Mills the payment of the sum of Rs.  1,80,000  and interest thereon AND WHEREAS the said Mills repudiated their liability  in respect thereof as it appeared from the  books of  the said Mills that the said Mills did not have the  use of  the  said  sum of Rs. 1,80000 or any  part  thereof  AND WHEREAS  the said Nath Bank Ltd. thereupon  instituted  four suits  in High Court  being suit Nos. 1683, 1720,  1735  and 1757 of 1939 for the said aggregate sum of Rs. 1,80,000  and the  interest thereon AND WHEREAS the said Mills  have  been advised  to settle the said suits amicably AND  WHEREAS  the Calcutta  Agency  Limited by its Directors, S.N.  Mitter  or S.C. Mitter, having been and being still the Managing Agents of  the  said Mills  have undertaken to reimburse  the  said Mills in respect of the decrees to be made in the said  four suits  in  the  manner  hereinafter  appearing  NOW    THESE PRESENTS  WITNESS AND IT IS HEREBY AGREED AND DECLARED     (i) That out of the commission of 3% payable by the said Mills  to the said Agency under Regulation 131 of the  Arti- cles  of Association of the Company, the Company shall  have paramount  lien on and deduct and set off a  moiety  thereof against any payment which the said Mills may make in respect of  the  decrees  or any of them and/or costs  of  the  said suits.     (ii) The said moiety shall be one  half of  the  commis- sion so payable less such sum as the Directors of the  Mills may from  time to time allow to be deducted."     Under  the said agreement, the respondent  company  paid to the Mill Company Rs. 22,500made up of 1012  Rs.  18,107 as principal and Rs. 4,393 as interest  in  the accounting  year.  The assessee company claimed this  before the  Income-tax Appellate Tribunal as a deduction  permitted under  section  10 (2) (xv) of the Indian   Income-tax  Act. The relevant part of that section  runs as follows :--     "10.  (1) "The tax shall be payable by an assessee under the  head  ’Profits  and gains of  business,  profession  or vocation’  in respect of the profits or gains of  any  busi- ness,  profession  or vocation carried on by   him’ (2)  Such profits or gains shall be computed  after   making the following allowances, namely :--     (xv) any expenditure (not being in the nature of capital expenditure  or personal expenses of the assessee) laid  out or  expended wholly and exclusively for the purpose of  such business, profession or vocation.     In  the statement of the case submitted by the  Tribunal after reciting the fact of the incorporation of the  company and  the terms of the compromise mentioned above, the  argu- ments  urged  on behalf of the assessee  company  have  been



recapitulated.  The first argument was that under the  first proviso  to  section 7 of the Indian  Income-tax  Act,  this payment  was liable to be exempted.  The  Tribunal  rejected that argument. On the reference, the High Court also reject- ed  the same and it was not presented before us.   The  next argument  of  the  respondents was that in  respect  of  Rs. 22,500 it was entitled to exemption under section 10(2) (xv) of the Income-tax Act on the ground that the payment was  an expenditure which was not in the nature of a capital expend- iture or personal expenses of the applicant company but  was an  expenditure  laid  out wholly and  exclusively  for  the purpose  of its business.  They urged that if the  applicant company  did  not agree to pay this amount,  Basanti  Cotton Mills Ltd. could have brought a suit against the company  to realise this amount due on the hundis which would      1013 have  exposed  the applicant company to the  public  and  in order  to save themselves from the scandal and maintain  the managing agency they agreed to ’the deduction of of  certain amounts  from the managing agency commission due to  it  and thereby brought it within the principles of the decision  of Mitchell v.B.W. Noble Ltd.(1)  The Tribunal found as  facts: (1)  ’I?hat  the  applicant company agreed to  pay  off  the decretal  amount from the remuneration which they are  enti- tled  to get from the Basanti Cotton Mills.  (2) The  decree was  passed  against  the applicant  company  evidently  for certain  misfeasance  committed  by its  directors  and  the applicant  company agreed to pay it off from  its  remunera- tion.  (3) The books of account of Basanti Cotton Mills Ltd. would  show that they were paying the applicant  company  in full its remuneration and the books of the applicant company also show that it was entitled to its remuneration in  full. (4) In the circumstances the Tribunal held that the expendi- ture was not laid out wholly and exclusively for the purpose of carrying on the business.  (5) Besides, the Tribunal  was of  the opinion that in this case it was not a  revenue  ex- penditure  at  all.  As the payment had to be  made  towards liquidation of the decretal amount the Tribunal held, in the circumstances  of this case, that it was a capital  payment. On  behalf  of the respondent it was argued in  the  further alternative that the  Privy  Council  decision in Raja Bijoy Singh Dudhuria’s case(2) would cover the present case.  That contention was rejected by the Tribunal.     This  statement  of the case prepared by  the  Incometax Tribunal and submitted to the High Court for its opinion was perused  by the parties and they had no suggestions to  make in respect of the same.  The statement of the case was  thus settled  with  the knowledge and approval  of  the  parties. When  the matter came before the High Court, Mr. Mitra,  who argued the case for the present respondents, as shown by the judgment  of  the High Court, urged as  follows:--"  If  the applicant company had not agreed to pay the amount mentioned [1927] 1 K.B. 719. 1014 in  the aforesaid agreement, then the Basanti  Cotton  Mills Ltd. would have sued the company for the realisation of  the amounts due on the hundis and it seems that there would have been no defence to the action. This would have subjected the applicant  company to the danger of public exposure  and  in order to save itself from the scandal and in order to  main- tain  the managing agency, the applicant company  agreed  to deduct  certain amounts from the managing agency  commission and therefore such expenditure came within section 10(2)(xv) of  the  Act."  The High Court  thereafter  noticed  several cases including Mitchell’s case(1) and towards the close  of



the   judgment  delivered  by  Chatterjea  J.  observed   as follows:--"In  this case it is clear that the agreement  was entered into with a view to avoid the publicity of an action against  the  managing agents and  consequent  exposure  and scandal andin order to maintain the managing agency so  that the  company  could carry on its business  as  before.   The payment  in  question did not bring in any new  assets  into existence nor in my opinion can it properly be said that  it brought into existence an advantage for the enduring benefit of the company’s trade. The Appellate Tribunal observed that the decree was evidently passed against the appellant compa- ny forcertain misfeasance by its directors and the appellant company  agreed to pay it off from its remuneration   ...... The  object  of the agreement was to enable the  company  to remove  a defect in carrying on the business of the  company and to earn profits in its business.  Therefore this case is covered by the judgment of the Court of Appeal in  Mitchell’ scase(1)  ......  "Applying this line of reasoning the  High Court  differed  from  the conclusion of  the  Tribunal  and allowed  the deduction to the respondent company under  sec- tion  10(2)  (xv) of the Income-tax Act, as claimed  by  the respondents.   The Commissioner of Income-tax, West  Bengal, has come in appeal to us.      Now  it is clear that this being a claim for  exemption of  an amount, contended to be an expenditure falling  under section 10(2)(xv), the burden of proving the (1) [1927] 1 K.B. 719. 1015 necessary  facts in that connection was on the assessee,  it being  common  ground that the commission was  due  and  had become payable and was therefore the business income of  the assessee company liable to be taxed in the assessment  year. The jurisdiction of the High Court in the matter of  income- tax references is an advisory jurisdiction and under the Act the  decision of the Tribunal on facts is final,  unless  it can be successfully assailed on the ground that there was no evidence for the conclusions on facts recorded by the Tribu- nal. It is therefore the duty of the High Court to start  by looking  at the facts found by the Tribunal and  answer  the questions  of law on that footing.  Any departure from  this rule of law will convert the High Court into a  fact-finding authority, which it is not under the advisory  jurisdiction. The  statement of the case under the rules framed under  the Income-tax Act is prepared with the knowledge of the parties concerned and they have a full opportunity to apply for  any addition  or deletion from that statement of the  case.   If they approved of that statement that is the agreed statement of  facts  by  the parties on which the High  Court  has  to pronounce  its  judgment.  In the present case  the  parties perused  the statement of case and as disclosed by the  note made at the end of it had no suggestions to make in  respect thereof.  It is therefore clear that it was the duty of  the High  Court to start with that statement of the case as  the final  statement of facts.  Surprisingly, we find  that  the High  Court, in its judgment, has taken the argument of  Mr. Mitra as if they were facts and have based their  conclusion solely  on that argument.  Nowhere in the statement  of  the case  prepared by the Tribunal and filed in the High  Court, the Tribunal had come to the conclusion that the payment was made  by the assessee company to avoid any danger of  public exposure  or  to  save itself from scandal or  in  order  to maintain the managing agency of the appellant company.   The whole  conclusion of the High Court is based on this  unwar- ranted  assumption  of facts which are taken only  from  the argument of counsel for the present respondents before



1016 the High Court.  The danger of failing to recognise that the jurisdiction  of  the High Court in these  matters  is  only advisory  and the conclusions of the Tribunal on  facts  are the conclusions on which the High Court is to exercise  such advisory jurisdiction is illustrated by this case.  It seems that  unfortunately counsel for the respondents caught  hold of Mitchell’s case(1) and basing his argument on the circum- stances under which a payment could be described as a  busi- ness expenditure falling within the terms of section 10  (2) (xv),  argued  that the facts in the present case  were  the same.  Instead  of first ascertaining what  were  the  facts found  by the Tribunal in the present case, the process  was reversed  and the procedure adopted was to  take  Mitchell’s case(1)  as the law and argue that the facts in the  present case  covered  the  situation.  1n our opinion  this  is  an entirely  wrong approach and should not have been  permitted by the High Court. The High Court fell into a grave error in omitting first to ascertain what were the facts found in the case stated by the Tribunal. The High Court overlooked  that in  Mitchell’s case(1) the whole discussion started  with  a quotation  from the case stated by the Commissioners as  the facts of the case.     A scrutiny of the record in the present case shows  that before the  Income-tax Officer the  assessees claimed only a deduction  of  the interest of Rs. 5,582  as  a  permissible deduction under section 10 (2) (iii) of the Income-tax  Act. That claim was rejected by the Income-tax Officer.  When the matter went to the Assistant Income-tax Commissioner it  was argued  that  the  Income-tax Officer was in  error  in  not allowing the deduction of interest and was also wrong in not allowing the entire sum of Rs. 22,500 as a deduction on  the ground that portion of the income (viz., Rs. 22,500)  should be  treated  as  not earned or deemed to be  earned  by  the assessees at all, having regard to the decision of the Privy Council  in  Raja Bijoy Singh Dudhuria’s case(2)  The  first paragraph of the order of the Appellate Assistant    Commis- sioner   contains  the  following     1017 statement  :--"  In disallowing this  (interest)  c]aim  the Income-tax  Officer was following the decision of my  prede- cessor in his order dated the 18th March 1942 in Appeal  No. 1-C-11  of 1941-42. My predecessor observed: "Nothing is  in evidence  to show that the managing agency company had  sur- plus money and such money was invested or that there was any need  to borrow.Thus the need to borrow is not  established. There is no doubt that money was borrowed but unless it  can to  proved  that  the borrowing is for the  purpose  of  the business and the loan was used in the business, the interest cannot be allowed under section 10(2)(iii)."     The second objection raised before the Appellate Assist- ant Commissioner was in these terms :--" That the Income-tax Officer  should have allowed the said sum of Rs.  22,500  as allowable  expenditure being allocation of a sum out of  the revenue receipt before it became income in the hands of  the assessee."  The  wording of the objection and  the  argument noticed in the order of the Appellate Assistant Commissioner show that the contention was that this sum should be treated as  not  having  become the income of the  assessee  at  all because  it was deducted at the source by the Mill  company. Reliance was placed for this contention on Raja Bijoy  Singh Dudhuria’s  case(1).   The contention was rejected.  At  the third stage, when the assessee urged his contentions  before the  Income Tax Appellate Tribunal,-he thought of urging  as an  argument  that this was a  permissible  deduction  under



section  10 (2)(xv) because of the  principles laid down  in Mitchell’s case(2).  No evidence, it appears, was led before the  Income Tax Tribunal, nor has the Tribunal recorded  any findings of fact on which the principles laid down in Mitch- ell’s case(2) could be applied.  The Tribunal’s  conclusions of facts were only as summarized in the earlier part of  the judgment.   It is therefore clear that the  necessary  facts required  to be established before the principles laid  down in MiZchell’s case(’2) could be applied, have not been found as facts in the present case at any stage of the proceedings and the High Court was in error (1) 6 I.T.C. 449.                  (2) [1927] 1 K.B. 719. 130 1018     in applying the principles of Mitchell’s case(1) on  the assumption of facts which were not proved. The High    Court was carried away, it seems, by the argument of    the  coun- sel  and  through error accepted the argument     as  facts. Indeed,  if it had noticed the contention urged  before  the Income-tax  Officer  it  would have seen at  once  that  the argument  was in a measure conflicting with that  contention which was based on the footing of Rs. 1,80,000 being a  loan to  the assessee on which it had to pay interest, which  was sought  to  be deducted under section 10 (2)  (iii)  of  the Income-tax  Act.   In our opinion,  therefore,  this  appeal should be allowed on the simple ground that the facts neces- sary  to be established by the respondents to support  their claim  for  exemption under section 10(2)(xv)of  the  Indian Income-tax Act have not been established at any stage of the proceedings  and  therefore  they are not  entitled  to  the deduction  claimed.   The appeal is therefore  allowed  with costs here and before the High Court.                             Appeal allowed, Agent for the appellant: P.A. Mehta. Agent for the respondents: Ganpat Rai. (1) [1927] 1 K.p,. 719