1. On a direction given by this court under sub-section (2) of section 66 of the Indian Income-tax Act, the Income-tax Appellate Tribunal has drawn up the statement of the case, raising the following two questions :
'(1) Whether the Tribunal exceeded its power under section 33(4) of the Indian Income-tax Act in disallowing the claim of the petitioner to the extent of Rs. 1,13,000 (rupees one lakh thirteen thousand) on the ground that the said amount was not paid by the petitioner
(2) Whether there was any evidence on record to support the finding of the Tribunal that the petitioner had paid to Milkhiram Rs. 1,87,000 (rupees one lakh eighty seven thousand) and Rs. 3,00,000 (rupees three lakhs) ?'
2. In our view, it would not be necessary to answer the second question inasmuch as our answer to the first question would be sufficient for the disposal of the reference in favour of the assessee.
3. We are here concerned with the assessment year 1948-49. The assessee is a partnership firm consisting of six partners dealing in cloth and parachutes. One Milkhiram R. Goyal, who was carrying on business as the sole proprietor under the name and style of Milkhiram Brothers, was able to secure a contract for purchase of approximately 1,28,499 parachutes from Tata Aircraft Ltd., at the price of Rs. 93 1/2 lakhs on or about 1st November, 1946. On or about 13th November, 1946, Milkhiram assigned to the assessee the benefits of the said contract of purchase of the parachutes. The terms of the agreement of the aforesaid transfer between the assessee and Milkhiram are contained in a letter addressed to the assessee by Milkhiram, and it is annexed as annexure 'A'. Now, Milkhiram assigned to the assessee the benefits of the said contract of purchase of parachutes for a consideration of Rs. 3 lakhs. The assessee paid Milkhiram the sum of Rs. 3 lakhs by passing in his favour two cheques. Milkhiram passed receipt in favour of the assessee for the said two cheques in favour of Milkhiram towards the payment of the said sum of Rs. 3 lakhs, at the request of Milkhiram, the said amount was not paid by cheques, but was paid in cash, and this fact also is admitted by Milkhiram in his own handwriting in the form of an endorsement on the reverse of the said two cheques. Copies of the cheques along with the endorsements in the handwriting of Milkhiram forming part of the case are annexed as annexure 'B'.
4. The assessee filed a voluntary return of his income for the aforesaid assessment year 1948-49. The income shown by him in the return amounted to Rs. 8,12,000. In the computation of the said amount as his income, the assessee had deducted Rs. 3 lakhs. Apart from the aforesaid receipts passed in his favour by Milkhiram, the assessee filed also an affidavit before the Income-tax Officer, stating the facts regarding payment by him of Rs. 3 lakhs to Milkhiram, in support of his claim that he had paid Rs. 3 lakhs to Milkhiram and that it was a revenue expenditure. In the assessment order the Income-tax Officer observed that he was not satisfied whether the expenditure of Rs. 3 lakhs has been incurred by the assessee at all. He further held that even if the assessee had paid any amount to Milkhiram, it was not an expenditure relating to the business of the assessee but was of a capital nature. The relevant portion of the order is in the following terms :
'In view of all these facts, I am not satisfied whether expenditure of Rs. 3 lakhs has been incurred at all. I hold that the amount paid, if any, is not only of a capital nature but also not an expenditure relating to the business of my assessee. I therefore add back the amount of Rs. 3 lakhs debited to the profit and loss account.'
5. The assessee appealed to the Appellate Assistant Commissioner against the aforesaid order of the Income-tax Officer. The Appellate Assistant Commissioner remanded the case to the Income-tax Officer. In respect of the issue as to the factum of payment of Rs. 3 lakhs, the Appellate Assistant Commissioner observed as follows in his remand order :
'Dealing with the third ground the Income-tax Officer has disallowed the deduction claimed by the assessee firm on the ground that payment of Rs. 3 lakhs by the assessee is not conclusively proved and that on Mr. Goyal's evidence, it is suspicious, vide paragraph 8 of the Income-tax Officer's order. The appellant (the assessee) gives a forthright answer to this in paragraph 6 of his affidavit..... There is considerable force in the contentions of the appellant. In the face of the agreement of November 13, 1946, with Goyal's original receipt for Rs. 3 lakhs and his own admission of having received at least Rs. 1,87,000 in cash by adjustment, the Income-tax Officer could not brush aside the evidence adduced by the assessee and hold the entire payment as fictitious. In the light of the appellant's affidavit, this also requires re-examination by the Income-tax Officer and opportunity should also be given to the assessee firm to examine or cross-examine Milkhiram Goyal.'
6. On receiving the case on remand, an opportunity was given by the Income-tax Officer to the assessee to cross-examine Goyal, and the report made by the Income-tax Officer on this issue is in the following terms :
'From all these it appears that Shri Milkhiram Goyal admits having received Rs. 1,05,000 in cash, Rs. 82,000 in goods and so far as the balance of Rs. 1,13,000 is concerned, he does not categorically deny the payment. He states throughout that some settlement was reached, but he is not able to give any evidence regarding this. However, the assessee firm has all along held the sum of Rs. 3 lakhs has been paid entirely in cash. In any event, Shri Milkhiram Goyal admits having received Rs. 1,87,000 in cash and goods and for the balance, he does not categorically deny the payment.'
7. Now, when the appeal was disposed of by the Appellate Assistant Commissioner after receiving the remand report, the Appellate Assistant Commissioner, on examination of the entire evidence on record, held that the assessee had paid Rs. 3 lakhs to Milkhiram Goyal as the price for the transfer of the benefits of the aforesaid contract. He however held that the said payment of Rs. 3 lakhs by the assessee to Milkhiram Goyal was an expenditure of a capital nature, and hence not allowable as a deduction. In this view of the matter, the appeal of the assessee was dismissed. The assessee took a further appeal to the Tribunal. The Tribunal accepted the contention of the assessee that the payment was not of a capital nature, but was a revenue expenditure, observing in paragraph 5 as under :
'We, therefore, do not agree with the income-tax authorities that the payment in question was a capital payment. We think it is a revenue payment.'
8. The Tribunal, however, went into the question as to whether the entire amount of Rs. 3 lakhs has been paid by the assessee to Milkhiram Goyal or not. The Tribunal held that the evidence on record does not justify a finding that the assessee had proved that the sum of Rs. 3 lakhs was paid to Milkhiram Goyal. It held that the assessee only paid Rs. 1,87,000 and not Rs. 3 lakhs to Milkhiram Goyal. The Tribunal therefore directed that the sum of Rs. 1,87,000 be allowed as allowable deduction in computing the assessable income of the assessee. It appears that when the appeal was heard on 27th November, 1957, Mr. Palkhivala, counsel for the assessee objected to the Tribunal's going into the question as regards the quantum of payment, as according to Mr. Palkhivala that question was neither the subject-matter of the appeal, nor a question raised by the respondent before the Tribunal. The objection raised by Mr. Palkhivala is stated in the following terms by the Tribunal in the statement of the case in paragraph 7 thereof :
'At the time of further hearing on 27th November, Mr. Palkhivala, the learned counsel for the assessee, contended that Rs. 3 lakhs was a revenue expenditure and that the Tribunal had no jurisdiction to examine and determine the question of 'factum' payment of Rs. 3 lakhs by the assessee, as the same, according to him, was not disputed by the income-tax authorities.'
9. As already stated, the Tribunal had gone into the question and held that the assessee has been able to prove only the payment of the Rs. 1,87,000 out of the said amount of Rs. 3 lakhs. The application made by the assessee under sub-section (1) of section 66 was rejected by the Tribunal. On the application made by the assessee, the aforesaid two questions have now been referred to us under section 66(2).
10. Mr. Palkhivala contends that the only question raised by the assessee before the Tribunal was whether the payment of Rs. 3 lakhs held by the Appellate Assistant Commissioner to have been made by the assessee to Milkhiram was capital in nature or a revenue expenditure. The factum of payment of Rs. 3 lakhs was not in dispute before the Tribunal inasmuch as neither the assessee nor the Income-tax Officer had raised that question. The Tribunal, therefore, acted without jurisdiction in suo motu going into the question and varying the finding of the Appellate Assistant Commissioner on that issue. In our opinion this contention is well founded. As already stated, when the Tribunal desired to deal with the question of factum of payment of Rs. 3 lakhs, an objection was raised by Mr. Palkhivala, who had appeared before the Tribunal on behalf of the assessee, that the Tribunal had no jurisdiction to examine and determine the question of factum of payment inasmuch as that factum of payment was not disputed by the income-tax authorities. Now, the statement of the case states that an objection was so raised by Mr. Palkhivala. It however does not say that the Income-tax Officer had raised the question before it challenging the finding of fact arrived at by the Appellate Assistant Commissioner, safely be assumed that the said objection was not raised by the Income-tax Officer. Now, if that be the true position that the finding of the Appellate Assistant Commissioner on this issue was not challenged before the Tribunal, then, in our view, the Tribunal had no jurisdiction to suo motu go into the question. The powers of the Tribunal in dealing with an appeal under section 33 are no doubt very wide, but are not absolute, and the said powers are contained in sub-section (4) of section 33, and rules 12 and 27 of the Rules framed under sub-section (8) of section 5A of the Act. Sub-section (4) of section 33 is as follows :
'The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner.'
11. Rule 12 of the aforesaid Rules provides that the appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule. Rule 27 provides that the respondent, though he may not have appealed, may support the order of the Appellate Assistant Commissioner on any of the grounds decided against him. It is well settled that the expression 'thereon' occurring in sub-section (4) of section 33 means on the subject-matter of the appeal before the Tribunal. Reading these rules together with sub-section (4) of section 33, it is clear that the subject-matter of appeal before the Tribunal is the grounds of appeal raised by the appellant in his memorandum of appeal, the grounds which the Tribunal allows him to raise under rule 12, and the contentions raised by the respondent before the Tribunal in support of the order made by the Appellate Assistant Commissioner by challenging the adverse finding against him. The scope and ambit of the provisions of sub-section (4) of section 33 and the aforesaid rules, viz., rules 12 and 27, have been considered by us recently in Income-tax Reference No. 50 of 1959 Commissioner of Income-tax v. Hazarimal Nagji & Co. decided on 6th October, 1961, and Income-tax Reference No. 60 of 1960 J. B. Greaves v. Commissioner of Income-tax decided on 17/18th July, 1962. The ratio of these two decisions, relevant for the purposes of this reference, is as stated above.
12. It has, therefore, to be seen whether the appellant before the Tribunal, i.e., the assessee, had raised the question as to the quantum of payment before the Tribunal in his grounds of appeal. Mr. Joshi contends that in ground No. 3 of the memorandum of appeal filed by the assessee before the Tribunal, the issue as to the quantum of payment has been raised. The ground is in the following terms :
'The learned Appellate Assistant Commissioner ought to have allowed the said payment of Rs. 3 lakhs in computing the business income of the appellant firm.'
13. We find it difficult to accept this contention of Mr. Joshi. Now, the Appellate Assistant Commissioner had found in favour of the assessee that the assessee had paid the entire amount of Rs. 3 lakhs to Milkhiram Goyal. The Appellate Assistant Commissioner had not allowed the said sum to be deducted in the computation of the profits, only on the ground that the payment was capital in nature. That being the only finding against the assessee, it would be unreasonable to read in the third ground that the assessee was challenging the finding in his favour. But, on the other hand, it would be reasonable that the challenge raised in ground No. 3 related only to the adverse finding against the assessee.
14. It is next contended by Mr. Joshi that the assessee had agreed to the proposal made by the Tribunal that both his appeal and Milkhiram's appeal should be heard together, and from this agreement, it should be question as to the quantum of payment. Now, it would not be correct to infer from the statement of the case, that the assessee has given any consent to both the appeals being heard together. On the other hand, all that had happened is that the Tribunal fixed both these appeals for hearing on the same day and no objection thereto was raised by the assessee. This is what the Tribunal has stated in the statement of the case in paragraph 7 thereof :
'The appeal (assessee's appeal) was heard on 16th October, 1957. The assessee argued that the said sum of Rs. 3 lakhs was not in the nature of capital expenditure but a revenue expenditure. The income-tax authorities had subjected the sum of Rs. 3,00,000 to tax in the hands of Milkhiram on the basis that he received the said sum from the assessee. Later on, the Tribunal became aware of the fact that Milkhiram's appeal regarding the said sum was also pending before the Tribunal. The Tribunal, therefore, fixed the appeal of Milkhiram for hearing and that of the assessee for further hearing on 27th November, 1957. Both the appeals were heard together without objection of parties.'
15. It is not possible for us to hold from the aforesaid observations in the statement of the case that the assessee had consented that the Tribunal should go into the question of the quantum of payment in his appeal. There is no doubt in this respect at all, because the Tribunal itself in its statement of the case has stated that on 27th November Mr. Palkhivala objected to its going into the question on the ground that the Tribunal had no jurisdiction to go into the question in his appeal.
16. Mr. Joshi wanted to refer to some departmental correspondence between the Commissioner of Income-tax and the Income-tax Officer, relating to the inquiry made by the Commissioner as to whether any issue was raised on behalf of the Income-tax Officer by the departmental representative before the Tribunal as to the quantum of payment. We did not allow Mr. Joshi to place that correspondence before us inasmuch as in our view that would not be relevant material for the purpose of the decision on this reference.
17. Mr. Joshi then referred to the statement made by the Commissioner in reply to the statement of fact made by the assessee along with his application under section 66(1). In the statement of facts, the assessee had specifically stated that on 16th October the departmental representative had stated before the Tribunal that he did not dispute the fact of payment and the only point urged by both the sides was whether payment of Rs. 3 lakhs was in the nature of capital expenditure or revenue expenditure. The statement further reiterates that at the time of the adjourned hearing on 27th November, 1957, an objection was raised on behalf of the assessee, questioning the jurisdiction of the Tribunal to go into the question of quantum of payment in the appeal of the assessee, as the factum of payment was not disputed by the income-tax authorities. The Tribunal, though it took down the objection of the assessee, had dealt with the question suo motu. The portion from the statement of the Commissioner to which Mr. Joshi drew our attention is in the following terms :
'In the same paragraph, the statement 'the departmental representative stated that he did not dispute the fact of payment' is entirely without foundation in fact. It is futile to suggest that the Tribunal suo motu gave a finding upon a question as to which the parties to the appeal did not have any dispute. For these reasons, the respondent suggests that the enclosure to the application should only be considered to the extent that it contains facts admitted and/or found by the Tribunal and the respondent also relies on the orders of the Income-tax Officer and the Tribunal for necessary facts of the case.'
18. Now, though the assessee has in terms stated that no objection was raised by the departmental representative before the Tribunal, there is no specific averment in the statement of the Commissioner that in fact such an objection was raised. The statement of the Commissioner is more argumentative in nature than a statement of fact. In the statement of case the Tribunal also does not say so.
19. Lastly, Mr. Joshi contends that the objection raised by Mr. Palkhivala was noted by the Tribunal, and in spite of the objection of Mr. Palkhivala, the Tribunal has proceeded to deal with the issue, and therefore, from the fact that the Tribunal has proceeded to deal with the issue in spite of the objection, we must assume that the Income-tax Officer had raised this question before the Tribunal. We see hardly any room to assume any fact. The Tribunal was directed to submit a statement of the case on two question. The Tribunal has submitted the statement of the case. In the statement of the case, it is stated that an objection was raised on behalf of the assessee that the Tribunal had no jurisdiction to deal with the question as to the quantum of payment by the assessee to Milkhiram, inasmuch as it was a fact found in favour of the assessee and no objection was raised to the finding of fact of the Appellate Assistant Commissioner by the Income-tax Officer. Though the Tribunal has referred to this objection of Mr. Palkhivala in the statement of the case, it has not stated in the statement of the case that the departmental representative or the Income-tax Officer had raised any contention in respect of the quantum of payment before it. If it was the correct position, that the Income-tax Officer or the departmental representative had raised any such contention before the Tribunal, it would be reasonable to assume that the Commissioner would have seen that this fact is incorporated in the statement of the case. This being the position on record, in our opinion, the Tribunal was in error in dealing with the question as to the quantum of payment made by the assessee to Milkhiram.
20. Our answer to the first question referred to us is in the affirmative. In view of our answer to the first question, it is not necessary to record any answer to the second question. The Commissioner shall pay the cost of the assessee.
21. Question answered in the affirmative.