TMI Blog1956 (4) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... The questions as framed and referred to this Court mixed up to some extent the three different heads of disputed liabilities, and we would prefer to discuss first the questions at issue between the assessee company and the Department, independent of the frame of the question. The Madura Knitting Company consisted of seven partners, drawn from three family groups and each group had a third share. The N.M.R. family group consisted of three brothers, Venkatakrishna Iyer, Subbaraman and Krishnamurthi. They were divided inter se, and each had a ninth share. The V.S.M. family group consisted of Gopalakrishna Iyer, Rajarama Iyer and Mohanram. They were also divided inter se, and each of them had a ninth share. The sole member of the other family unit was M.K. Ramaswami Iyer, who had a third share. Venkatakrishna Iyer, Subbaraman, Krishnamurthi and Ramaswami Iyer has each married a sister of the V.S.M. brothers. The three N.M.R. brothers had other business actvities besides those of the Madura Knitting Company. They were partners of the Colours Trading Company, a concern wholly independent of the Madura Knitting Company. These three along with others were also partners of the Royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns who held quota permits. The constituents of the partnership were comparatively few in number, not more than nine as is apparent from an affidavit dated 10th March, 1952. Of these U.P. Agencies, Benares, was one. These nine constituents were not old customers of the Madura Knitting Company. The Madura Knitting Company charged the Ambal Stores for the goods sold to that firm the same prices it charged the other wholesale buyers, and no special concession was shown to have been extended to the partnership by the Madura Knitting Company itself. It was, however, not disputed that the partners of Ambal Stores had not engaged themselves in any trading activity prior to January 1947. The partnership claimed to have carried on its business at 120, South Masi Street, Madura. That house belonged to the father of the partners, N.M.R. Venkatakrishna Iyer, and they did not pay any rent. The partnership had no godown, but then it needed none, as the goods it obtained of the Madura Knitting Company were cleared almost immediately after, by the constituents of the partnership, to whom it sold the goods. Baluswami Iyer, an employee of the Colours Trading Company, attended to the clerical work of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s apparently never the case of the Department, that the transactions were conducted by the partnership, Ambal Stores, for the benefit of the assessee, the Madura Knitting Company. Benami would imply that the partnership was a real concern, as real as the assessee company; only the assessee company alone was entitled to the profits earned. A plea of benami would really raise the problem, who was the beneficial owner. Was it Venkatakrishna Iyer, the father of the four partners of Ambal Stores, who gave them the business premises free of rent; or was the beneficial owner the Colours Trading Company which had the use of all the monies of the partnership, though with a liability to pay interest and which lent the services of one of its employees Baluswami Iyer to the partnership? Or was the beneficial owner the Madura Knitting Company, which treated the partnership of Ambal Stores just like any of its other constituents ? If either Venkatakrishna Iyer or the Colours Trading Company was the beneficial owner of the trade to which the Ambal Stores merely lent its name, that would certainly be enough to negative any possible claim of the Madura Knitting Company that the profits earned by Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther supporting evidence, would not prove the genuineness of the firm . We have first to observe, whether the plea was one of benami or of sham, that the burden lay not upon the assessee company but upon the Department to prove that what was apparent was not real. The assessee pointed out two facts: (i) that the partnership, Ambal Stores, was treated as a real one by the Income-tax Authorities when they accorded registration to that firm under section 26A of the Act; and (ii) the Income-tax Authorities treated the Ambal Stores as a real entity when they taxed its profits. With reference to the second factor the Tribunal observed that it was a case of precautionary assessment. The first factor they ignored. It is difficult to envisage a precautionary registration under section 26A of the Act. Thus, the contention of the assessee was well founded, that for the purpose of taxing the Ambal Stores the Departmental Authorities accepted the partnership as a real concern; the registration still stood. When dealing with the Madura Knitting Company, however, the Income-tax authorities elected to treat the registered concern, Ambal Stores, as a bogus concern, a sham concern, a concern whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ambal Stores, was certainly not an employee of the Madura Knitting Company. The Income-tax Officer further observed : No orders are seen to have been booked straight but only through P.D. Ranga Iyer, who is a commission agent of Madura Knitting Company . The finding was not that he was an employee of the Madura Knitting Company, or that anything that Ranga Iyer did was to the detriment of the Madura Knitting Company. Surely a commission agent can work for more than one principal; that the same commission agent was employed by more than one concern would not prove that all the concerns should be treated as one for the purposes of income-tax. The Departmental Authorities and the Tribunal commented on the fact, that the partnership, Ambal Stores, deposited its funds with the Colours Trading Company. They overlooked the fact, that the books of the Colours Trading Company showed that the partnership was credited with interest at six per cent. per annum. It was never the case of any one, that the Colours Trading Company and the Madura Knitting Company constituted one business concern. What benefit the Colours Trading Company derived by retaining the deposits of Ambal Stor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om any of the concerns to which the Madura Knitting Company sold its products. As we see it, neither the Departmental Authorities nor the Tribunal examined the evidence on record, freed of the obsession, that whatever-Venkatakrishna Iyer was interested in or whatever even the Colours Trading Company was shown to have been interested in really accrued to the benefit of the Madura Knitting Company. We have no hesitation in coming to the conclusion, that there was no evidence on record on which the Tribunal could come to the conclusion, that the partnership, Ambal Stores, was not a real concern, and that the profits made by Ambal Stores accrued either as a fact or in law to the Madura Knitting Company. During the arguments before us learned counsel for the assessee company produced the accounts of the Ambal Stores, which showed that one of the partners Jayammal had withdrawn on three occasions monies for her own use, once in 1951 and twice in 1952. Similarly, another partner, Kamala, was shown to have withdrawn monies for her own use on two occasions in 1953. These were transactions subsequent to the relevant assessment years we have had to consider. We do not propose to let thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was calculated not on the net profits of the company as a whole but only on the net profits of the branch. The details of the salary, dearness allowance, bonus and commission paid to each of these seven employees in the three relevant assessment years were set out in the statement of the case submitted by the Tribunal. The genuineness of the payments in the three relevant accounting years was not disputed. The employees were assessed to tax on the basis of those payments. The Income-tax Officer was of the view, that the agreements between each of these employees and the Madura Knitting Company were not genuine. The Assistant Commissioner recorded : 'I agree with the Income-tax Officer that the manner in which the agreements have been obtained from the employees is suspicious and in any case the agreements do not conclude the matter . The Tribunal did not record any specific finding on the issue, whether the agreements themselves were genuine or not, in the sense whether they were entered into on 13th April, 1945. But as the Assistant Commissioner pointed out, whether the agreements were executed on 13th April, 1945, may not be material, when the genuineness of the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees were remunerated by way of commission at rates varying from 1 to 2 % of net profits of the company. It might be noted that it is on the net profits of the company and is not based either on production or the services rendered. It was mentioned that this commission was given as a sort of incentive to the employees to produce more goods so that the company's profits might increase. These were already remunerated by way of salary, dearness allowance, Deepavali allowance and annual bonus etc. The commission on net profits is a new feature introduced into the accounts for the first time in these assessment years . That was a correct summary of facts. The Tribunal went on to observe: This is an odd contract. We fail to see the connection between the efforts put in by these particular employees and the net profits. As is well known the net profit does not depend upon production alone and depends upon several circumstances, notably market conditions, political conditions, use of machinery, presence or absence of competition, availability of raw materials and machinery parts, and facilities of distribution, sagacity in buying, selling and, not the least of all, the manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in the volume of business as compared to the previous year . That was not quite correct. The production did show a marked increase. That was decided by the Tribunal itself in connection with a different claim made by the assessee. In the tabular statement at page 53 of the typed papers in R. C. No. 93 of 1955 that is, the judgment on appeal by the Appellate Tribunal, the Tribunal referred to the increase in production, the unit being a dozen. In the assessment year 1942-43 it was 88,000 ; in 1943-44, 86,000. Then there was a progressive increase 1,34,000 in 1944-45 ; 1,74,000 in 1945-46 ; 2,32,000 in 1946-47 ; 2,24,000 in 1947-48 and 2,52,000 in 1948-49. This again, apparently referred only to banians. But even there, the increase in production was substantial. Earlier in its judgment the Tribunal allowed another claim of the assessee, though only in part, towards the cost of erecting temporary structures, sheds, both in the premises of the Madura Knitting Company and in Mohanrams, for coping with the increase in production. 75% of that cost was allowed in relation to Madura Knitting Company and 50% for Mohanrams. That certainly substantiated the claim of the assessee, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questions Nos. 1 and 2 in R.C. No. 93 of 1955, which dealt with all the four assessment years, with which we are now concerned. The assessee's case was that it had large stocks on hand and sales were low up to 1944. Subsequently, even in the boom period, they had to face keen competition from other manufacturers of hosiery goods. The assessee company decided to appoint agents for canvassing orders for the goods produced by it. On 7th April, 1944, they appointed Kamadhenu and Company as its agents for promoting sales of its goods within the City of Madras. Kamadhenu and Company was offered a commission of 6 %. Raja-gopala Iyer and Narasimha Iyer were the partners of Kamadhenu and Company. They were also partners of the Rayal Talkie Distributors, a concern with which the Madura Knitting Company had no real connection. But the three N.M.R. brothers were partners both in the Madura Knitting Company and the Rayal Talkie Distributors. Kamadhenu and Company purported to have an office at Madras. But that was in the premises which belonged to the Colours Trading Company. On 14th April, 1944, the Madura Knitting Company entered into an agreement with Sekhar and Company, Madura, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere made in each of the four years now under consideration. Each claim for each year had necessarily to be investigated separately. There was a full discussion in the orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal, with reference to the assessment year 1945-46. We shall first deal with those findings. With reference to V.S.M. Krishnaram, the Income-tax Officer pointed out that Krishnaram was a wholetime employee who devoted his entire time to the work of the Colours Trading Company. The finding of the Income-tax Officer was : Since Mr. Krishnaram happens to be a close relative of the managing partners, the payment to him appears to have been made more out of love and affection than for services rendered . With reference to Kamadhenu and Company the finding of the Income-tax Officer was even more specific : actually it is seen that no services of any kind have been rendered by Kamadhenu and Company . Dealing with Sekhar and Company, the Income-tax Officer recorded: Thus from all the evidence available it is clear that no business is canvassed by Sekhar and Company and the business shown to have been done in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question whether the payments were genuinely made or not, these were not expended wholly and exclusively for the purpose of the business . The finding of fact recorded by the Tribunal, that none of the three selling agents, Kamadhenu and Company, Sekhar and Company and Krishnaram, rendered any services under their respective contracts to the assessee company in the relevant account year 1944-45 to justify any payment to them, should suffice to reject the claim of the assessee company to a deduction under section 10(2)(xv) of the Act. It is on that narrow basis that we are content to rest our decision. The Tribunal also took other factors into account in deciding whether the amounts could be claimed to have been expended wholly and exclusively for the business of the assessee company. It is really not necessary for us to discuss these features. No doubt it was proved that the amounts paid to Sekhar and Company and Kamadhenu and Company were eventually credited to their accounts with the Colours Trading Company. But then, the Colours Trading Company was something quite independent of the Madura Knitting Company. The Tribunal was also of the view, that there was no need in 1944 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
