Case: Meenakshi Mills, Madurai Vs. The Commissioner Of Income-Tax,Madras

1. These appeals arise out of orders of assessment made on the appellant by the Appellate Tribunal, Madras Bench, for the years of account 1941-42, 1942-43 and 1943-44. The appellant applied under S.66 (1) of the Indian Income-tax Act (hereinafter referred to as the Act) to refer to the H. C. certain question which according to it arose out of the orders; but the Tribunal rejected the applications. The appellant then moved the H. C. under S.66 (2) of the Act for an order requiring the Tribunal to refer those question to the court, but the learned Judges held that the question on which reference was sought by the appellant were pure question of fact, and dismissed the applications. The matter now comes before us by way of special appeal.2. The facts material for the purpose of these appeals may shortly be stated. The assessee is a public company registered under the Indian Companies Act, and its Managing Agents are the firm of Messrs. K. R. Thyagaraja Chettiar and Co., whose partners are, Mr. Thyagaraja Chettiar and his two sons. The Company is resident and ordinarily resident in British India, its head office being at Madurai in the Madras State. It carries on business in the manufacture and sale of yarn, and for the purpose of that business it purchases cotton and occasionally sells it. Its profits arise for the most part from the sale of yarn and to some extent from the re-sale of cotton. According to the account books of the company, its profits from the business for the account year 1941-42 were Rs. 9,25,364, for 1942-43 Rs. 24,09,832, and for 1943-44 Rs. 29,13,881. In its returns, the appellant showed these amounts as its income chargeable to tax for the respective years. The Department did not accept the correctness of the figures as shown in the accounts. It contended that 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. According to the Department, the scheme evolved by the appellant for this purpose was this: Suppose the Company sold 25 bales of yarn to X for Rs. 50,000 at the then market rate and received the full amount of the price. The books of the company would show neither the sale to X nor its receipt of Rs. 50,000. Instead, there will be an entry in its books showing the sale of these very bales to A for Rs. 20,000 which will be about the cost price and in the books of A these goods will be shown as sold by it to X for Rs. 50,000. If the sale by the company to A and the connected sale by A to X were genuine, the Company would have made no profit on the sale, whereas A would have made a profit of Rs. 30,000 on it. But, in fact, both these sales were sham transactions; the only sale that took place was that by the Company to X and the price actually received by it was not Rs. 20,000 but Rs. 50,000. As a result of these paper transactions and manipulations, the profit of Rs. 30,000 made by the company was suppressed. This process was reversed when the company purchased cotton. The appellant purchased, let us say, 100 bales of cotton from X for a price of Rs. 5,000 and paid that amount to X. Neither this purchase from X nor the payment of Rs. 5,000 to him would appear in the books of the Company. Instead, the books of A will show these goods as purchased by it from X for Rs. 5,000 and the books of the appellant will show a purchase from A of those very goods for Rs. 8,000. Both these sales were fictitious, the only real transaction was the sale by X to the Company and the price actually paid therefore by the Company was only Rs. 5,000. By the device of sale by X to A and by A to the Company, the cost price had been inflated by Rs. 3,000 and the real profit had been concealed to the extent. The accounts of the company, therefore, did not reflect the true position as to the profits actually made by the appellant. The names of the intermediaries who according to the Department played the role of A in the above illustration - and they will hereafter be referred to simply as intermediaries-are given below with the amount of profits made on the sale of yarn in their names and concealed, or the extent of the cost price inflated on the purchase of cotton from them, as found by the Tribunal:3. The contention of the Department was1941-421. Meenakshi and Co. Sale of Yarn Rs. 35,8302. Sivagami and Co. do 35,4433. Mangyarkarasi and Co. do 34,5794. Alagu and Co. Purchase of cotton " 34,0031942-431. Meenakshi and Co. Sale of yarn "53,6352. Sivagami and Co. do "58,1033. Rukmani and Co. Ltd. Sale of yarn "3,97,4674. Sivagami and Co. Ltd.5. Rukmani and Co. Ltd. Purchase of cotton "33,533 1943-441. Pudukkottah and Co. Ltd.Sale of yarn "18,99,488Do Purchase of Cotton "12,703 2. Rukmani and Co. Ltd. Do "22,5043. Rajendra Ltd. Sale of yarn "1,06,436that the amounts shown as profits made by the intermediaries and mentioned above represented in fact the profits actually earned by the appellant, and that they should be added to the figures shown in its accounts as its profits. The appellant contested this position, and maintained that the state of affairs disclosed by its accounts was true, that its sales in favour of the intermediaries were genuine, and that, in fact, little or no profits were made by it in those transactions, that it purchased cotton only from the intermediaries and did pay them the amounts as shown in the accounts. These contentions were closely examined by the Income-tax Officer in the first instance. Then again by the Appellate Assistant Commissioner on appeal, and finally by the Appellate Tribunal, and on an elaborate consideration of the material placed before them, they held that the following facts were established:1. The sale of yarn by the appellant to the intermediaries mentioned above was for a price very much below the market rate, often for the cost price and some times for even less. No acceptable explanation had been given for this unusual feature. The yarn was in that period a scarce commodity, and it was a sellers market. The amounts lost by the Co. on these transactions during the three years, if they were genuine, would far exceed Rs. 25 lakhs. The sales therefore were notbona fide.2. The firms of Meenakshi and Co., Sivagami and Co., Mangyarkarasi and Co., and Alagu and Co., who were the intermediaries for the year 1941- 42, were all newly started for the first time in 1941. The partners of the firm were men of no means, and were all relations of Mr. Thyagaraja Chettiar, the chief partner of the Managing Agents firm and a dominant figure in charge of the companys affairs. None of them had done any business in yarn before. The personnel of these firms was drawn in different combinations from a group of half a dozen persons who were all the creatures of Mr. Thyagaraja Chettiar.3. During the year 1942-43, two of the firms, Mangyarkarasi and Co., and Alagu and Co., were closed and their place was taken by two private limited companies called Rukmani and Co., Ltd. and Sivagami and Co., Ltd. The shareholders of these companies were again drawn from the small group of persons who were partners of the firms and they were all Mr. Thyagaraja Chettiar men. These companies declared no dividends, even though they made considerable profits and the shareholders received no dividends nor even statements of accounts. In truth, they had no beneficial interest in the concerns.4. The business of the intermediaries, both firms and the companies, consisted solely in the purchase of yarn from the appellant and not from any other person, and the entirety of the yarn purchased was sold by them en blocto constituents of the appellants. Thus, the business of the intermediaries was, in fact, only a part of the business carried on by the appellant.5. The sales by the appellant in favour of these intermediaries were of large quantities of yarn and sometimes on a scale far higher than other genuine commercial transactions as for example, the sale of 1850 bales on 17-4-1942 to Rukmani and Co. No securities were taken from the intermediaries for this transaction. Having regard to the magnitude of the business, the capital of the intermediaries even on paper was negligible.6. The intermediaries had most of them no offices of their own. Even when they had offices, these were arranged by the officers of the appellant. The concerns had no godowns and their staff was meagre and recruited from the employees and servants of appellant. Apart from signing the contracts, the intermediaries did nothing.7. The profits earned by the firms were shown in their books as cash in their possession, but on a surprise raid the authorities were unable to discover any cash with them. The amount shown as profits in their accounts, was in fact in the possession of the appellant company.The intermediaries had, in fact, never to pay to the appellant for any of the purchases made by them, the course of the business being that they sold the goods purchased from the appellant to its old customers, who paid therefor.The intermediaries did not issue any delivery orders on the appellant in favour of the customers to whom they ostensibly sold the goods, but the goods were dispatched directly by the appellant to the customers and delivered to them.The customers to whom the goods delivered by the appellant as aforesaid paid the full price for which they purchased them from the intermediary firms, not to those firms with whom alone they had privity of contract but to the appellant direct, and these payments appear as receipts in the books of the appellant.After the Limited Companies were started in 1942-43 and 1943-44, the course of business adopted by the appellant showed a further mystification. There was firstly a sale of certain quantity of yarn by the appellant to company A, which sold it in turn to company B, which in turn sold it to company C, which ultimately sold it to the usual customer of the appellant. In spite of the numbers of links between the appellant and the customers, the goods were directly dispatched by the former to the latter, who paid by cheques the full amount due by them to their seller C, who straightway endorsed them in favour of the appellant. The intermediaries A and B did no act, and took no part in the ultimate payment of the price by the purchasers.Some of the intermediaries, firms and companies had been formed in Pudukottah State. At that time, that state was foreign territory, and the profit earned there would become taxable only if it was remitted to British India. Pudukottah is neither a cotton there (Sic). The object with which the intermediaries had been set up in Pudukottah was obviously to screen portions of the profit earned by the appellant.4. On these facts, the Tribunal came to the conclusion that the contentions of the department were fully established, namely, that the intermediaries were dummies brought into existence by the appellant for concealing its profits, that the sales standing in their name were sham and fictious, and that the profits ostensibly earned by them on those transactions were, in fact, earned by the appellant, and should be added to the amounts shown as profits in its accounts. The point for decision is whether there arises out of the order of the Tribunal any question which can be the subject of reference under S.66 (1) of the Act.Under that section, it is only a question of law that can be referred for the decision of the court, and it is impossible to argue that the conclusion of the Tribunal is anything but one of fact. It has been held on the corresponding provisions in the English Income-tax statutes that a finding on a question of fact is open to attack as erroneous in law only if it is not supported by any evidence, or if it is unreasonable and perverse, but that where there is evidence to consider, the decision of the Tribunal is final even though the Court might not, on the materials, have come to the same conclusion if it had the power to substitute its own judgement.InG. W. Rly. Co. v. Bater, (1922) 8 Tax Cas 231 at page 244 (A), Lord Atkinson(Commissioners) determinations of questions of pure fact are not to be disturbed any more than are the findings of a jury, unless it should appear that there was no evidence before them upon which they, as reasonable men, could come to the conclusion to which they have come: and this, even though the Court of Review would on the evidence have come to a conclusion entirely different from theirs.There is no need to further elaborate this position, because the law as laid down in these observations is well settled, and has been adopted in the construction of S.66 of the Act.Now, the determination of the Tribunal in the present proceedings being one of fact, it is open to review by the court only on the ground that it is not supported by the evidence or that it is perverse. The appellant understood this position quite correctly and in its application under S.66 (1) it stated the only question which it wanted the Tribunal to refer to the court with reference to the present controversy in the followingon the facts and in the circumstances of the case there is any legal evidence to support the finding that the four firms, Meenakshi and Co., Sivagami and Co., Mangyarkarasi and Co., and Alagu and Co. were benamidars for the for the appellant and that the profits made by these firms were profits made by thewas for the accounting year 1941-42. The question was similarly worded for the subsequent years also except that the names of the intermediaries were different for the different years. The question as framed assumes, it will be noted, that the Tribunal had held that the intermediaries were benamidars for the appellant, and on this assumption were grounded several contentions which were passed on behalf of the appellant. Whether this assumption and the contentions based thereon are well founded is a different matter, and will be considered in due course. But apart from that, it will be seen that the only ground of attack which was directed against the finding of the Tribunal was that there was no legal evidence. This is of course a contention open to the appellant; but has that been sustained. Mr. P. R. Das, learned counsel for the appellant, did, at the start, put his contention as high as that. But it become abundantly clear when his argument began to unfold itself that it amounted to no more than this that the conclusion drawn by the Tribunal from the facts found by it was unsound and erroneous. He did not, it must be stated, dispute the facts themselves, but he took them one after another, and contended that they were susceptible of inferences other than those drawn by the Tribunal. He next offered explanations for them which would make them consistent with the contentions of the appellant. And he finally wound up by saying that the conclusion reached by the Tribunal was not justified. This clearly is an erroneous approach to the whole question.When a conclusion has been reached on an appreciation of a number of facts established by the evidence, whether that is sound or not must be determined not by considering the weight to be attached to each single fact in isolation, but by assessing the cumulative effect of all the facts in their setting in the picture as a whole. In Edwards (Inspector of Taxes) v. Bairstow, (1955) 28 I. T. R. 579 (B) Lord Radcliffethink that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found tofurnishes the corrective to the course adopted by counsel for the appellant in his argument.6. And a more serious objection to it, and one of substance is that it relates merely to matters of appreciation, of evidence, and does not support the position that there is no legal evidence in support of the finding of the Tribunal. For example, one of the facts on which the Tribunal relied for its conclusion was that the partners of the intermediary firms were new to yarn business and came on the scene for the first time in 1941. The appellant contends that no significance could be attached to this, as the partners belonged to the Nattukkottai Chetti caste, which was a trading community. But surely this does not render the evidence irrelevant or inadmissible. It only affects the weight to be attached to it. Then again, the Tribunal as made a point of it that the goods were sold by the appellant to the intermediaries for a price far below the market price, sometimes even below the cost price. The answer of the appellant to this was that they were forward contracts and that the price of yarn on the dates of those contracts was low. But the Tribunal declined to accept this explanation for the reason - and that, a good one- that there were no contract registers from which the dates on which the contracts were entered into could be verified, and that the contract notes themselves were not serially numbered. If this is not a matter of pure appreciation of evidence, it is difficult to see what else is. The Tribunal also referred to the fact that the only business which the intermediaries did was to purchase yarn from the appellant and sell it to its own constituents. The answer of the appellant to this was that there was no need for the intermediaries to purchase from other manufacturers when all their needs were met by the appellant and that there was nothing usual in their selling all their yarn to its customers. It is unnecessary to say anything about the worth of this contention, for that is a matter exclusively for the Tribunal to assess. What has now to be considered is whether this circumstance on which the Tribunal relied is or is not cogent evidence in support of its conclusion. It will be preposterous to contend that it is not. No useful purpose will be served by examining the contentions of the appellant with reference to the other facts on which the Tribunal relied for its conclusion. They are of the same pattern as the above, and bear, at their best, on the weight to be attached to the facts and not to their relevancy or admissibility and there is no question of want of legal evidence in support of the conclusion of the Tribunal.

Reasoning: 25. Applying these principles, admittedly there is no question here of construction of any statutory provision or document of title. The issues which arise for determination whether the sales entered in the books of the appellant in the names of the intermediaries were genuine and if not, to whom the goods were sold and for what price are all questions of fact. Their determination does not involve the application of legal principles to facts established in the evidence. The findings of the Tribunal are amply supported by evidence and are eminently reasonable. It should, therefore, follow that there is no question which could be referred to the Court under S.66 (1).It must be said of this contention that it was raised before the Tribunal and negatived. Being a question of law, the appellant had a right to have it referred to the court under section 66 (1). But the question as framed by the appellant in its application under section 66 (1) did not specifically raise this point; nor does it appear to have been argued in the High Court. As the matter is now concluded by the authority, it will be an idle formality to direct the tribunal to refer the question for the decision of the court. The powers of this Court in appeal under Article 136 are not intended to be exercised for such a purpose. That disposes of the main and substantial questions that have been agitated in these proceedings.37. There is one other matter in respect of which the appellant sought reference to the court in its application under section 66 (1). The facts relating to this matter are that during the periods of assessment with which the appeals are concerned, the appellant opened branches in the State of Travancore, Cochin, Pudukkottah and Mysore, and sold yarn to its constituents in those States through these branches. The point in dispute is whether the profits made by the appellant on those sales are chargeable to tax. The contention of the appellant before the Tribunal was that the matter was governed by section 14(2)(c), and that the profits could be taxed only if they were remitted to British India. That was not disputed by the Department, but they contended that as the appellant sold in the States goods manufactured by it in British India, the governing provisions were sections 42(1) and 42(3), and that under these provisions, the appellant was liable to be taxed on such portions of the profits as were apportionable to the manufacture of the goods in British India. That was accepted by the Tribunal, and the profits were apportioned in the ratio of 85:15. In its application under section 66 (1), the appellant raised the contention that sections 42 (1) and 42 (3) applied only to non-residents, and that it was only section 14 (2) (c) that would apply to residents and applied to have that question referred to the decision of the court. But the Tribunal held that the decision of this Court inCommissioner of Income-tax v. Ahmedbhai Umarbhai and Co.,1950 S C R 335: (AIR 1950 S C 134) (Z10) had settled that sections 42 (1) and 42 (3) applied both to residents as well as non-residents and consequently declined to refer the question.The correctness of this decision does not appear to have been contested before the High Court, the only point dealt with in the judgement of the learned judges being as to the correctness of the ratio in which the apportionment was made. Even in this Court, it was only this question that was pressed on the strength of the decision inCommissioner of Income-tax and Excess Profits Tax and B. and O. v. S. Sen,1949-17 ITR 355  : (AIR 1952 Orissa 89) (Z 11). Section 14 was mentioned in the course of the argument, but no contention was advanced that sections 42 (1) and 42 (3) applied only to non-residents, and the decision in 1950 S C R 335: (AIR 1950 S C 134) (Z10), was not even so much as referred to in the course of the argument, and the appellant did not even ask for this question being referred. That apart, in view of the decision in 1950 S C R 335: (AIR 1950 S C 134) (Z10), no purpose would be served by directing a reference of this question, and the Tribunal was right in observing that "it is not even of academic interest to refer the said question to the High Court". On the question whether the fixation of ratio was correct, we are of opinion that it is a pure question of fact, and is not open to reference under section 66 (1).