TMI Blog1988 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... l which heard the appeals for these years, by order dated .March 31, 1983 and by order dated May, 1983, decided the matter in favour of the assessee and against the Revenue and held that the Incometax Officer has not established that the sales by the company to the firm are sham and that it cannot be held that the profits earned by the firm constituted the income of the assessee-company. ITR Nos. 316 and 317 of 1980 relate to the assessment years 1970-71 and 1971-72 and relate to the levy of penalty and the references are at the instance of the Revenue. It was held by the Appellate Tribunal that no penalty is exigible. ITR Nos. 207 and 208 of 1980 relate to the assessment years 1965-66 and 1966-67 and are at the instance of the Revenue, since it was held by the Appellate Tribunal that the reassessments made under section 147(a) of the Act for the assessment years 1965-66 and 1966-67 were invalid. Similarly, ITR No. 89 of 1986 is at the instance of the Revenue for the assessment year 1964-65, wherein the Tribunal held that the reassessment is invalid. O.P. No. 5842 of 1981 relates to the assessment year 1975-76, filed by the Revenue to direct the Appellate Tribunal to refer certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were in fact sales by the applicant ? 3. Whether, on the facts and in the circumstances of the case, there was any material on record to show, much less to prove, that the sales prima facie made by the firm were in fact sales made by the applicant to outsiders and that the profit Rs. 1,27,813 accruing or arising therefrom is profit assessable in the hands of the applicant ? The assessee-company (hereinafter referred to as " the company ") is deriving income mainly from the sale of centrifuged latex. For this purpose, latex is purchased from various estates and subjected to the centrifugal process in their factory at Kottayam. In the assessment year 1970-71, the assessee-company received a total amount of Rs. 18,36,915 from the Padinjarekara Corporation, a firm(hereinafter referred to as " the firm ") and similarly in the assessment year 1971-72, it received a sum of Rs. 12,64,008. The difference of the total price realised as per the invoices issued by the firm, and the total price as per the invoices issued by the company to the firm was Rs. 2,70,415, for the year 1970-71, and Rs. 1,46,124, for the year 1971-72. These sums were added as the income of the company and brought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the firm is only an intermediary interposed by the company to syphon off sizable profits of the company and the transaction between the company and the firm, in this regard, is sham. The shareholders in the company were P. I. Punnen, P. I. Philipose, P. I. Kurien, P. C. Kurien, P. C. Cherian and P. C. Abraham. They had equal shares. The partners of the firm were the wives of the directors of the company and their investment in the firm was equal. The partners had their own capital and the profits were enjoyed by them. The firm was accepted as genuine and the Department granted registration. All the receipts for payments are signed by the partners. They are attending to the firm's business. While making the assessment of the company for the year 1970-71, by order dated March 22, 1973, the Income-tax Officer held that almost all the quantities of skim crepe were transferred to the firm, that the only business of the firm was to receive skim crepe from the company and then make sales on the same day to the customers, that the selling price of the firm is much higher than the selling price of the company, that all the shareholders of the company are directors therein, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer. Though the factors brought out by the Income-tax Officer raise a strong suspicion that the firm is a benami for the company, the presumption is overwhelmingly in favour of the ostensible owner, the partners of the firm are persons of independent means and the profits earned by them were credited to their accounts and it has not been shown that any portion of these profits have gone to the shareholders of the company. In view of these factors, the plea of the Income-tax Officer that the transaction between the company and the firm is a sham one, cannot be accepted and the addition made on that ground should be deleted. Similarly, the Appellate Assistant Commissioner, while disposing of the appeal for the year 1971-72 by order dated February 24, 1975, held that on consideration of the facts and circumstances of the case, there is no material for holding that the firm is a benami for the assessee-company. He held that it cannot be said that the firm is not doing any business at all, that one of the witnesses examined by the Income-tax Officer stated that be is doing business only with the firm and has negotiated purchase prices, etc., with its partners, that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's case and the points of dissimilarity are not of such gravity as to call for a different conclusion and, looking at the evidence cumulatively, the inference of the Income-tax Officer was the only inference possible. In this view of the matter, the Appellate Tribunal held that the Income-tax Officer has established that the sale by the company to the firm was only a sham and, therefore, he was correct in assessing the income of the firm in the hands of the assessee itself. From this appellate order of the Tribunal dated April 17, 1976, the questions of law, specified hereinabove, have been referred to this court for our opinion. Dr. Pal attacked the approach, reasoning and conclusion of the Appellate Tribunal. Counsel submitted that the Appellate Tribunal misunderstood and misapplied the decision of the Supreme Court in Meenakshi Mills' case [1957] 31 ITR 28. The Tribunal misdirected itself and omitted to consider the salient facts in this case ; material aspects on record were overlooked and proper weight was not given to admitted facts and circumstances ; and that the conclusion of the Appellate Tribunal is perverse and the conclusion it has come to is such that no rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of a particular Supreme Court decision, it raises a mixed question of fact and law. These propositions of law are well-settled by the decisions of courts-Edwards (Inspector of Taxes v. Bairstow [1955] 28 ITR 579 (HL); [1955] 3 All ER 48, Sree Meenakshi Mills Limited v. CIT [1957] 31 ITR 28 (SC), Mehta Parikh and Co. v. CIT [1956] 30 ITR 181 (SC), CIT v. Radha Kishan Nandlal [1975] 99 ITR 143 (SC), CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC), CIT v. S. P. Jain [1974] 97 ITR 370 (SC) and Shankerlal H. Dave v. CIT [1980] 124 ITR 733 (Guj). Mixed questions of fact and law, misconstruction of the ratio of the decision of the Supreme Court : Where it is apparent that misconception in law by the Appellate Tribunal is the reason for having arrived at a finding of fact, this court will have jurisdiction, under section 256 of the Income-tax Act, to set aside the finding. (See Farmer v. Cotton's Trustees [1915] AC 922 at p. 932 and Edwards v. Bairstow [1955] 3 All ER 48 at p. 57). So also, if any inference from facts made by the Appellate Tribunal does not logically accord with and follow from them, then, one must say that there is no evidence to support it. To come to a conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , its decision as to the legal effect of those findings is a question of law which can be reviewed by the court. (3) A finding on a question of fact is open to attack under section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse. (4) When the finding is one of fact, the fact that it is itself an inference from other basic f acts will not after its character as one of f act. " In CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349, the Supreme Court, at page 357, held as follows : " Findings on questions of pure fact arrived at by the Tribunal are not to be disturbed by the High Court on a reference unless it appears that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion to which they have come and this is so, even though the High Court would, on the evidence, have come to a conclusion entirely different from that of the Tribunal. In other words, such a finding can be reviewed only on the ground that there is no evidence to support it or that it is perverse. Further, when conclusion has been reached on an appreciation of a number of facts, whether that is sound or not must be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Tribunal posed the question with regard to the relevant or proper law relating to the facts arising in the case and without any analysis, surmised that the instant case is fully governed by the decision of the Supreme Court in Meenakshi Mills' case [1957] 31 ITR 28. We are afraid that the Appellate Tribunal has totally misunderstood and misapplied the decision of the Supreme Court in Meenakshi Mills' case [1957] 31 ITR 28. In Meenakshi Mills' case, the issues which arose for determination were whether the sales entered in the books of the appellant (Sree Meenakshi Mills Ltd.) in the names of intermediaries were genuine and if not, to whom the goods were sold and for what price. The appellant/company (Sree Meenakshi Mills Ltd.) was managed by managing agents. The Revenue did not accept the correctness of the figures as shown in the accounts. In its view, the company had earned more profits than were disclosed in its accounts, and that it had contrived to suppress them by resort to certain " devices ". The " device " was by purported sale of the goods to intermediaries. The Revenue took the stand that the sales to intermediaries were sham transactions and the only real and gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect. (11) The intermediaries took no part in the ultimate payment of the price by the purchasers. (12) Some of the intermediaries were formed in Pudukottah, which was then a foreign territory which was not a cotton-producing area, nor was there a market for cotton in that area, with a view to screen portions of the profit earned by the appellant-company. On the above (telling) facts, the Appellate Tribunal found that the intermediaries were " dummies " brought into existence by the appellant-company for concealing its profits, that the sales standing in their names were " sham " and " fictitious " and that the profits ostensibly earned by them on those transactions were, in fact, earned by the appellant/company. It should also be noticed that the aforesaid findings entered by the Appellate Tribunal were not disputed before the court (page 37). Indeed, on behalf of the appellant, it was (impliedly) conceded that the facts found did point to the fact that the intermediaries were dummies (page 38.) The entire arguments centered round the question whether the intermediaries could be held to be benamidars for the appellant-company. The Supreme Court observed that the word " benam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itious ". The crucial facts found by the Appellate Tribunal unambiguously demonstrated that sales to the intermediaries were not bona fide, the intermediaries were only started for the first time, they had no beneficial interest in the concerns, the intermediaries had no offices of their own, the profits shown as cash in their books was not found, but was found in the possession of the appellant-company, that for the sale effected by the appellant-company through the intermediaries, the price was paid by the customers themselves directly to the company and the amounts were not paid to the intermediaries with whom alone they had privity of contract, and they took no part in the ultimate payment of the price by the purchasers. On the facts of this case, all the authorities proceeded only on the basis that there was sale of skim crepe by the company (the assessee) to the firm and there was a further sale by the firm to its various customers. There was a transfer of property to the firm. The firm sold the goods to the various customers. This was never disputed by any of the authorities. There was no payment by any of the customers directly to the assessee-company. On pages, 6, 8, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the goods by the company to the firm and by the firm to various customers. At least one of the major customers of the firm, Dingra, categorically deposed that he purchased the goods from the firm and delivery was taken from its godown. The firm was granted registration. The profits were assessed in its hands. Consideration did pass from the firm to the company for the purchases. All the receipts for payments were signed by the partners. It should also be remembered that the firm, in the instant case, was started as early as 1959, it owned immovable properties and it was carrying on business till 1963. It is only from the year 1964-65 that the firm began to buy goods from the company. The sales by the company to the firm were found to be genuine. It is only, for the first time, during the assessment year 1970-71 that a different view was taken. While making the assessment for the year 1971-72, the Income-tax Officer also allowed salary and allowances to the personnel of the firm as also P. F. contributions of its employees in the assessment of the firm and unless such persons were factually employed, it is beyond comprehension as to how this deduction could be allowed at all. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished that the sale by the company to the firm was only sham. We are of the view that the facts in this case do not at all justify the finding of facts which fell within the ratio laid down in Meenakshi Mills' case [1957] 31 ITR 28. The Appellate Tribunal, in paragraphs 2 and 3 of the order, proceeds on the basis that the business of the company was in latex and that the price charged from the customers was Rs. 40 to 60 per kg. Both these are apparent mistakes. This sale was of " skim crepe ". The price charged was not Rs. 40 to 60 per kg. The Tribunal also proceeded on non-existing or incorrect facts. While making the assessment for the year 1971-72, the Income-tax Officer himself conceded and allowed the salary and allowances, excluding the allowance to two partners, and P. F. contribution of employees. But, the Appellate Tribunal, in paragraph 17 of its order, proceeds on a misconception that the firm does not have any staff for selling. So also, the.. Appellate Tribunal has totally ignored the uncontradicted statement Of one of the major Purchasers of the firm, Dingra, who categorically stated that he has taken delivery of goods at Kottayam from Padinjarekara Corporation (t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give proper weight to the distinct features present in the instant case which were not present in Meenakshi Mills' case [1957] 31 ITR 28. Essential matters which are on record were overlooked. What is more, the decision of the Supreme Court in Meenakshi Mills' case [1957] 31 ITR 28 was misunderstood and misapplied. On these premises, we have to hold that the finding and conclusion of the Appellate Tribunal to the effect that the Income-tax Officer has established that the sale by the company was only a sham cannot be reasonably entertained, and on the basis of facts proved in this case, no person acting judicially and properly instructed with regard to the relevant law could come to the determination as the Appellate Tribunal did. We are of the view that the reasoning and conclusion of the Appellate Tribunal are perverse. The conclusion does not logically accord with the facts and circumstances or the finding stated by the Tribunal. The Tribunal has proceeded on non-existing facts. There is total misdirection in its entire approach. The finding arrived at by the Appellate Tribunal is totally inconsistent with the evidence on record and also with admitted or proved facts. In these ..... X X X X Extracts X X X X X X X X Extracts X X X X
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