1988 (4) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sale by the company to the firm was a sham.
2. Justification of adding the firm's income to the company's income.
3. Existence of material evidence proving the sales by the firm were actually made by the company.

Summary:

Issue 1: Whether the sale by the company to the firm was a sham.
The main point for consideration was whether the business transactions between the assessee-company and Padinjarekara Corporation were sham, and if the income arising from such transactions should be assessed in the company's hands. The Income-tax Appellate Tribunal initially held that the transactions were sham for the assessment years 1970-71 and 1971-72. However, the High Court found that the Tribunal misapplied the decision in Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 and failed to properly analyze the distinct facts of the case. The High Court concluded that the firm was a reality and not a "dummy," and the transactions were genuine.

Issue 2: Justification of adding the firm's income to the company's income.
The Tribunal upheld the addition of Rs. 2,70,415 and Rs. 1,21,813 to the company's income for the assessment years 1970-71 and 1971-72, respectively. The High Court found that the Tribunal's conclusion was perverse and not supported by evidence. It was noted that the firm existed since 1959, had its own capital, and was assessed separately by the Department. The High Court concluded that the Tribunal's decision to add the firm's income to the company's income was unreasonable.

Issue 3: Existence of material evidence proving the sales by the firm were actually made by the company.
The Tribunal's finding that the sales by the firm were actually made by the company was based on suspicions and irrelevant evidence. The High Court observed that the firm had its own customers and the payments were made directly to the firm, not the company. The High Court held that there was no material evidence to prove that the sales made by the firm were actually made by the company.

Conclusion:
The High Court concluded that the Tribunal's findings were perverse and unreasonable. The questions referred were answered in favor of the assessee and against the Revenue. The Tribunal's decision was found to be based on a misunderstanding of the facts and misapplication of the law. The High Court directed that the firm's income should not be added to the company's income.