TMI Blog1976 (2) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... t Ode in Kaira District and it has branches at Tiruchirapally and Vellore. The Income-tax Officer, while making the assessments for the respective assessment years under reference, added back certain items on the ground that the purchase price of tobacco paid to seven partners of the assessee-firm as well as to Chaturbhai Kishabhai Patel, father of three of the partners of the assessee-firm was inflated. According to him, in the previous year relevant to the assessment year 1962-63, an amount of Rs. 7,692 was the amount in respect of inflation in purchase price of tobacco as mentioned above; in the assessment year 1963-64, the amount was Rs. 11,538; in the assessment year 1964-65, the amount of inflation was Rs. 11,305 and in the assessment year 1965-66, the amount of inflation in purchase price of tobacco was Rs. 22,717. The Income-tax Officer arrived at these figures in the following manner. He found that the average purchase price of tobacco paid by the assessee-firm to outside parties worked out to Rs. 32 per 20 Kgs., the price range varying from Rs. 5 to Rs. 45.25 per 20 Kgs. As against these figures, in respect of purchase of tobacco effected from the seven partners and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-firm, was a progressive farmer and that during 1968-69 he had requested for a trial of new improved high yielding selections of bidi-tobacco. The Tribunal held that this certificate was of a general nature and referred to the year 1968-69 and was not relevant to the assessment years under reference. Similarly, a letter dated September 16, 1970, from the Institute of Agriculture, Anand, to the assessee-firm had also been produced before the Appellate Assistant Commissioner but that letter also was found by the Tribunal to be of a general nature and it did not bring out the fact that the quality of tobacco purchased by the assessee-firm from the partners and from Chaturbhai Kishabhai Patel during the accounting years relevant to the assessment years under reference was superior. The assessee-firm had also produced before the Appellate Assistant Commissioner certain statements showing the profits made on certain mixtures out of tobacco purchased from outside parties and from the partners, but these statements, according to the Tribunal, did not in any way bring out the essential fact that the quality of tobacco purchased from the partners was primarily of superior nature. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " The assessee's tobacco account shows that the assessee credited the agricultural tobacco of the partners at much higher price than average price which the assessee pays for purchasing tobacco from the agriculturists and also through dalals. The assessee has given me a list of purchases from the agriculturists. From the scrutiny of this statement it appears that the average price comes to round about Rs. 30 per 20 Kgs. of the tobacco purchases. The assessee explained that the, tobacco of the partners was of a better quality. So better price was credited. The assessee, however, could not prove how the agricultural tobacco purchased from the partners was of a better quality than that purchased from the agriculturists. It is further found that in some cases the assessee has shown purchases at price of Rs. 46 per 20 Kgs. but nearly 98 per cent. of the tobacco is purchased at the average price as stated above. Thus, the assessee has inflated purchase price of agricultural tobacco without any sufficient reason. " Thereafter, he worked out the figure of Rs. 7,692 by following the process which we have set out hereinabove. For the assessment year 1963-64, the Income-tax Officer obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 : " In the circumstances and facts of the assessee's case, the only irresistible conclusion which can be drawn is that the assessee has definitely inflated the price of the purchases of tobacco from (a) partners and relatives ; and (b) from other agriculturists and inflation in purchase price being Rs. 0.78 in respect of (a) and Rs. 0.24 in respect of (b) in view of the average purchase rates given earlier. " In connection with the transaction of purchase and sale between the assessee and persons connected either as partners or as partners of the managing agency firm with the assessee before the department, there are three cases which require to be considered. The first in point of time is Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax [1955] 28 ITR 952 (Mad). In that case the account books of the assessee, a limited company, showed that some of its goods were sold to its managing agency firm, to one of its directors, and to a firm in which one of its directors was a partner, at prices much lower than the market rates, and the income-tax authorities, finding that the sales to these persons at lower prices were not bona fide sales and were effected to benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits in this manner at Rs. 85,754. The Appellate Assistant Commissioner and the Appellate Tribunal took the view that the transaction was one of a division and distribution of the assets and, applying the principle of the decision in Sir Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 ITR 506 (SC) and Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 ITR 928 (Bom), accepted the contention of the assessee. On these facts the Gujarat High Court held that the Tribunal was correct in holding that the said twenty-eight shops which were taken over by the partners at the time of the discontinuance of the firm's business should be valued at the book figure of Rs. 89,000 and not at Rs. 1,70,000, the then market price. The taxing authorities had no right to substitute the market price in place of the price or value agreed to between the parties to a transaction, unless the transaction had been shown to be a sham one or the value shown was not the value in the books of account. At page 133 of the report, Shelat C.J., delivering the judgment of the court, observed--See [1966] 59 ITR 120 (Guj): " On the footing that the transaction was a business transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the price or value agreed to between the parties to a transaction, unless the transaction has been shown to be a sham one or unless the price paid or the value shown was not the value in the books of account." It may be pointed out that the decision of the Madras High Court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax [1955] 28 ITR 952 (Mad) was approved and followed by the Supreme Court in Commissioner of Income-tax v. Calcutta Discount Company Ltd. [1973] 91 ITR 8 (SC) and there the Supreme Court held : " Where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. An assessee can so arrange his affairs as to minimise his tax burden." Hegde J., after noting the decision of the Madras High Court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax [1955] 28 ITR 952 (Mad) and the earlier decision of the Supreme Court in Commissioner of Income-tax v. A. Raman Company [1968] 67 ITR 11 (SC) observed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was that the firm's profit was shown less by reason of the fact of sale to the partners at an under-value. In the instant case before us it is alleged that the firm's profit has been shown to be less by reason of the fact that the purchases from the partners are shown to be at an inflated price. The Supreme Court has pointed out in Calcutta Discount Company's case [1973] 91 ITR 8, 13 (SC), quoting from Commissioner of Income-tax v. A. Raman Company [1968] 67 ITR 11 (SC): " Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer 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. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. " In the instant case, it is nobody's case that the transactions of sale from the partners and Chaturbhai Kishabhai Patel to the assessee-firm were not bona fide transactions nor is it the case of the department that they were sham transactions or that the price ..... X X X X Extracts X X X X X X X X Extracts X X X X
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