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TMI Blog1956 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... R IMAM., VENKATARAMA AIYAR JUDGMENT The Judgment of the Court was delivered by VENKATARAMA AYYAR, J.--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 section 66(1) of the Indian Income-tax Act (hereinafter referred to as the Act) to refer to the High Court certain questions which according to it arose out of the orders ; but the Tribunal rejected the applications. The appellant then moved the High Court under section 66(2) of the Act for an order requiring the Tribunal to refer those questions to the court, but the learned Judges held that the questions on which reference was sought by the appellant were pure questions of fact, and dismissed the applications. The matter now comes before us by way of special appeal. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om A of those very goods for ₹ 8,000. Both these sales were fictitious, the only real transaction was the sale by X to the Company and the price actually paid therefor by the company was only ₹ 5,000. By the device of sale by X to A and by A to the Company, the cost price had been inflated by ₹ 3,000 and the real profit had been concealed to that 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 : 1941-42 1. Meenakshi and Co. Sale of yarn ₹ 35,830 2. Sivagami and Co. do. ₹ 35,443 3. Mangayarkarasi and Co. do. ₹ 34,579 4. Alagu and Co. Purchase of cotton ₹ 34,003 1942-43 1. Meenakshi and Co. Sale of yarn ₹ 53,635 2. Sivagami and Co. do. ₹ 58,103 3. Ruk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agaraja Chettiar. 3. During the year 1942-43, two of the firms, Mangayarkarasi 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's 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 bloc to constituents of the appellant. 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 sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. 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 producing area, nor was a market for cotton there. The object with which the intermediaries had been set up in Pudukottah was obviously to screen portions of the profit earned by the appellant. On these facts, the Tribunal came to the conclusion that the contentions of the Department had been fully established, namely, that the intermediaries were dummies brought into existence by the appellant 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, 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 section 66(1) of the Act. Under that section, it is only a question of law that can be referred for decision of the Court, and it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 substantiated ? Mr. P. R. Das, learned counsel for the appellant, did, at the start, put his contention as high as that. But it became 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 contention 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 unusual 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. Reference should also be made in this connection to another contention which was pressed by Mr. P. R. Das at a later stage of the argument. He contended that the facts found showed that the intermediaries were benamidars not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper conclusion to come to on the facts. In other words, the jurisdiction in such cases is in the nature of a regular appeal on the correctness of the finding. And as a contested assessment--and it is only such that will come up before the Tribunal under section 33 of the Act, must involve disputed questions of fact, the determination of which must ultimately depend on findings on various preliminary or evideritiary facts, it must result that practically all orders of assessment of the Tribunal could be brought up for review before Courts. That will, in effect, be to wipe out the distinction between questions of law and questions of fact and to defeat the policy underlying sections 66(1) and 66(2). One should hesitate to accept a contention which leads to consequences so startling, unless there are compelling reasons therefor. Far from that being the case, both principle and authority are clearly adverse to it. Considering the question on principle, when there is a question of fact to be determined it would usually be necessary first to decide disputed facts of a subsidiary or evidentiary character, and the ultimate conclusion will depend on an appreciation of these facts. Can i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he further question that has to be determined is whether the above facts are sufficient to constitute adverse possession in law. Is the user continuous or fugitive ? Is it as of right or permissive in character ? Thus, for deciding whether the defendant has acquired title by adverse possession, the Court has firstly to find on an appreciation of the evidence what the facts are. So far, it is a question of fact. It has then to apply the principles of law regarding acquisition of title by adverse possession, and decide whether on the facts established by the evidence, the requirements of law are satisfied. That is a question of law. The ultimate finding on the issue must, therefore, be an inference to be drawn from the facts found, on the application of the proper principles of law, and it will be correct to say in such cases that an inference from facts is a question of law. In this respect, mixed questions of law and fact differ from pure questions of fact in which the final determination equally with the finding or ascertainment of basic facts does not involve the application of any principle of law. The proposition that an inference from facts is one of law will be correct in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is this process of inference which may, according to its nature, be a finding of law or of fact, or a mixed finding of law and fact . The result of the authorities then is that inference from facts would be a question of fact or of law according as the point for determination is one of pure fact or mixed question of law and fact. Is there anything in the authorities cited by the appellant which militates against this conclusion. In Edwards (Inspector of Taxes) v. Bairstow, the point for determination was whether the transaction entered into by the assessee was an adventure in the nature of trade. The finding of the Commissioners was that it was not. But that was reversed by the House of Lords who held that on the facts found it was an adventure in the nature of trade. The very expression in the nature of trade requires that the adventure should possess certain elements which in law would invest it with the characteristics of a trade. The question is, therefore, one of a mixed law and fact. That is precisely how the matter is dealt with by Lord Radcliffe. He observes at page 589 : My Lords, I think that it is a question of law what meaning is to be given to the words o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such. This decision, therefore, is no authority for the position that where a finding is given on a question of fact based upon an inference from facts, that is always a question of law, and the following observation of Lord Radcliffe at page 592 is directly against it : I do not think that inferences drawn from other facts are incapable of being themselves findings of fact although there is value in the distinction between primary facts and inferences drawn from them. In Bomford v. Osborne the Commissioners had held that 230 acres out of a plot of 550 acres belonging to the assessee should be separately assessed as gardens for the sale of produce , while the remaining lands should be taxed on the basis of their annual value. The assessee disputed the correctness of this finding, and contended that the 230 acres in question were not gardens as contemplated by rule 8 of Schedule B of the Income Tax Act, 1918. The House of Lords agreed with this contention and discharged the assessment. One of the points raised on behalf of the Crown was that the finding of the Commissioners was one of fact and was therefore final. This contention was repelled on the ground that whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to super-tax. The finding of the Board of Referees was that distribution of profits had not been made within a reasonable time, but their decision was reversed by the House of Lords on the ground that there was no evidence in support of it. Thus, there is nothing in the decision itself which has any bearing on the present controversy. The appellant, however, relies on the following observations in the speech of Lord Porter at page 667 : I think that the final conclusion is not a fact but an inference from facts previously set out, and that, therefore, that conclusion is not binding upon the tribunal to which the case is referred unless it appears from the previous findings that there are facts which support it. In the present case I cannot find such support. In the context, what these remarks mean is that when the final conclusion is one of fact and is itself an inference from other facts, it is open to attack on the ground that the basic facts themselves do not constitute evidence in support of the final conclusion--a position which does not arise here. Then there is the observation of Lord Maugham in Cameron v. Prendergast that inferences from facts stated by the Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that finding unless there is no evidence to support it. If, however, the Commissioners state the evidence which was before them, and add that upon such evidence they hold that certain results follow, I think it is open, and was intended by the Commissioners that it should be open, to the court to say whether the evidence justified what the Commissioners held. I am satisfied that the case stated by the Commissioners falls under the latter head . On these observations, the argument of the appellant was that whenever the Tribunal found certain basic facts and stated its conclusions thereon, its determination was open to review by court, and that it was immaterial whether these conclusions were of fact or of law. The answer to this contention is furnished by the decision in The American Thread Company v. Joyce, wherein the true scope of these observations has been fully considered and authoritatively settled. There, Hamilton J. pointed out that what the observations meant was that if the Commissioners merely stated certain findings of fact and while expressing what according to them was their effect, did not intend that the expression should be taken as their finding thereon, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und it, and that there was evidence upon which they might find it, and if they did find it, and if there was evidence upon which they might find it, there is no question of appeal here at all ...... I should have been contended absolutely to say that I entirely agree with every word of Mr. Justice Hamilton's judgment : The American Thread Company v. Joyce. This decision is particularly important as the finding in that case was itself, as appears from the judgment of Hamilton J., an inference from facts found and, nevertheless, it was decided that it was a question of fact on which the finding of the Commissioners was final. I must now refer to another catena of cases relied on by the appellant in support of its contention that inferences from facts are questions of law. They are decisions of the Privy Council as to when a court of second appeal having authority to review decisions of the lower appellate court on a question of law could interfere with its findings of facts. In Ram Gopal v. Shamskhaton, one Daud Rao was sought to be made liable on a mortgage to which he was not a party on the ground that he had knowledge of it and had accepted it. In holding that the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as that the question as to the character of land was one of fact not open to consideration in second appeal. In Dhanna Mal v. Motisagar, the point for determination was whether the facts proved were sufficient to establish a right of permanent occupancy. Discussing how far a finding on that question by the lower appellate court could be disturbed in second appeal, Lord Blanesburgh observed at page 185 : It is clear, however, that the proper effect of a proved fact is a question of law, and the question whether a tenancy is permanent or precarious seems to them, in a case like the present, to be a legal inference from facts and not itself a question of fact. The High Court has described the question here as a mixed question of law and fact--a phrase not unhappy if it carries with it the warning that, in so far as it depends upon fact, the finding of the court of first appeal must be accepted . These observations again emphasise the distinction between inferences which are themselves questions of fact and inferences on mixed questions of law and fact. This question was the subject of further consideration by the Privy Council in Wali Mohammad v. Mohammad Baksh, Secretary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by some error of law. Subsequently to the date of the judgments under appeal, the Board has had occasion to emphasise the fact that this rule is equally applicable to cases, such as this, in which the findings of the lower appellate court are based on inferences drawn from the documents exhibited in evidence. If an inference from documents exhibited in evidence is a question of fact, an inference from facts found on the evidence must equally be so. There is one more decision of the Privy Council bearing on this question. In Lakshmidhar Misra v. Rangalal, the question was whether the finding of the Subordinate Judge in appeal that there had been a dedication of certain lands as cremation ground could be reversed in second appeal. In holding that the finding was open to review by the High Court, Lord Radcliffe observed : Issue No. 5, (whether the land was a cremation ground) is essentially a mixed question of law and fact. There are findings of fact by the Subordinate Judge which must indeed be accepted as binding in any consideration of this matter on further appeal ; but his actual conclusion that there had been a dedication or lost grant is more properly regarded as a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reading of what the Tribunal had found will presently be considered. Assuming that such is the finding, what is the ground for holding that a finding of benami is one of mixed law and fact ? The only basis for such a contention is that the finding that a transaction is benami is a matter of inference from various primary basic facts such as who paid the consideration, who is in enjoyment of the properties and the like. But that is not sufficient to make the question one of mixed law and fact unless, as already stated, there are legal principles to be applied to the basic findings before the ultimate conclusion is drawn. But no such principles arise for application to the determination of the question of benami which is purely one of fact, and none has been suggested by the appellant. In Gangadara Ayyar v. Subramania Sastrigal, the Federal Court had to consider whether concurrent findings of benami by the Courts below could be reviewed by it, and it was held that it could not be done as the practice of the Court was not to interfere with concurrent findings of fact unless there were exceptional grounds therefor and that there were none such in that case. It should be noted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, when A sells properties to B but the sale deed mentions X as the purchaser. Here the sale itself is genuine, but the real purchaser is B, X being his benamidar. This is the class of transactions which is usually termed as benami. But the word benami is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B. The fundamental difference between these two classes of transactions is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee, in the latter there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. It is only in the former class of cases that it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But in the latter class of cases, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant could not arise, and the further question as to who found the capital for the intermediaries is altogether irrelevant. Likewise, on the finding that the yarn was really sold by the appellant not to the intermediaries but to its own constituents and that they paid the price therefor to the appellant, the question who had the benefit of the transaction could not arise either. (2) It is next contended that some of the intermediaries were private limited companies registered in accordance with the provisions of the Companies Act and were in law distinct legal entities as held in Aron Salomon v. A. Solomon and Company Limited, and that they could not be held to be benamidars for the appellant without deciding the matters mentioned by Atkinson, J. in Smith, Stone and Knight v. Birmingham Corporation. The learned Judge observed at page 121 : It seems therefore to be a question of fact in each case, and those cases indicate that the question is whether the subsidiary was carrying on the business as the company's business or as its own. I have looked at a number of cases--they are all revenue cases--to see what the courts regarded as of importance for determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a finding that they were such bodies would have had no effect on the chargeability of the appellant to tax on the profits made by it on the sales in question. The question of the true status of the intermediaries would have assumed practical importance if they had done business other than the sales in question and had made profits thereon, and those profits were sought to be taxed as profits made by the appellant. It would then be a legitimate contention for the appellant to advance that that could not be done unless the intermediaries were found to have been really benamidars for it. In that case, it would have been important to consider who found the capital for the concerns and who was running them. But here, the tax is levied only on the profits ostensibly earned by the intermediaries on the sales which stand in the books of the appellant in their names. If those sales are sham, then the order of assessment must stand even if the intermediaries were real concerns, which had found their own capital and earned their own profits in other transactions. If an individual A carrying on his own business lends his name to the business transaction of B, the latter cannot escape the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant points for decision are, what profits were made on those sales and by whom. On the finding that the appellant sold the goods direct to the ultimate purchasers and recovered the price therefor, it is only the appellant that could be taxed for the profits made thereon and not the Managing Agent. It is of no consequence that in form the order is that the profits of the intermediaries should be added to those of the appellant, because, as pointed out in discussing the previous contention of the appellant of which the present is but a repetition in another form, the intermediaries did no other business than the sales concerned in this assessment, so that the profits of the business mean the same thing as profits made on the concerned sales. There is another aspect of the matter, which calls for notice. If the contention of the appellant that the intermediaries were benamidars for Mr. Thyagaraja Chettiar is accepted, it means that he had, by availing himself of his position as Managing Agent, unjustly enriched himself at the expense of the shareholders to the tune of over ₹ 25 lakhs. Now, Mr. Thyagaraja Chettiar is the dominant member of the firm of Managing Agents. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? It was argued by the learned Solicitor-General for the respondent that if on the facts two inferences were possible and the Tribunal chose to draw one and not the other, it was not a matter in which the Court could interfere, if the inference is one of fact. That is a proposition of law well settled, and has not been disputed. Now, on the facts, two inferences are possible. One is that the object of the Managing Agent was to defraud the shareholders by purchasing goods himself at a low valuation for his own benefit and that the intermediaries were set up by him for that purpose. The other is that they were set up for the purpose of concealing portions of the profits earned by the company so as to reduce the tax to which it was liable to be assessed. The former involves cheating the shareholders ; the latter, evading the tax due to the State. Is it an unreasonable inference for the Tribunal to draw that the motive by which the Managing Agent was actuated was the latter and not the former ? Is it not more legitimate to presume that the Managing Agent wanted to benefit the shareholders by reducing the tax rather than he wanted to defraud them by himself purchasing the goods for a lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pronouncements on the particular statutes there under consideration and were not on the question of assessment of profits and gains under the Indian Income-tax Act. Applying this decision, the appellant having been found to have sold its goods to the ultimate purchasers and received the prices, there can be no question but that the profits had accrued to it both in the business and in the legal sense and that liability to tax had arisen. If an individual were to sell goods and receive the price therefor, that would be income accrued or arisen, liable to tax in his hands even though he should have failed to enter it in his accounts. A party cannot avoid tax by adopting the simple expedient of not disclosing its receipt in his books. That will be a case of income accrued or arisen but concealed and not of income not accrued or arisen. This is conceded by the appellant. But it is argued that different considerations arise in the case of companies registered under the Indian Companies Act, because there are provisions in the Act as to how the profits are to be disposed of, such as distribution of dividends or adding to the reserve and until that was done, there was no accrual of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 States of Travancore, Cochin, Pudukottah 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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