1. Two questions have been referred to us on this reference and they are :
'(1) Whether on the facts and circumstances of the case there was a business connection in British India between the appellant firm and Messrs. B.V. Bhumraddi and Company of Bombay
(2) Whether the Tribunal was justified in law in refusing to consider the contention of the Commissioner that the income of the assessee, or part of the income thereof, was received in British India (as it then was) ?'
2. The assessees are T.M. Bhumraddi and B.M. Bhumraddi, two brothers, who were the proprietors of Shivanand Oil Mills. They had three oil mills in the Hyderabad State at Gulbarga, Yadgiri, and Zahirabad. The oil manufactured at Zahirabad was wholly sold in the Hyderabad State, but the oil manufactured at Gulbarga an Yadgiri was sold in British India; and it is in respect of these sales that the two questions have arisen. The relevant assessment years are 1940-41, 1941-42, 1942-43 and 1943-44. It appears that prior to the 7th of April, 1940, which fell within Samvat year 1996 being the previous year to the assessment year 1941-42, one Purshottam Surchand was acting as an agent of the assessees in British India for the purpose of sale; and it was held that there was a business connection in British India for the assessment year 1940-41 and this finding was accepted by the assessees and has not been made the subject-matter of the reference. Subsequent to the 7th of April, 1940, the assessees sold oil manufactured in the mills at Gulbarga and Yadgiri to B.V. Bhumraddi & Co., the proprietor of which was their uncle, B.V. Bhumraddi. The facts found by the Tribunal in the statement of the case are that B.V. Bhumraddi was doing his own business in Bombay, he kept no stock of oil and what he did was that he entered into contracts for sale of oil in Bombay and thereafter purchased the oil himself mainly from the assessees, but also from others in some cases. The oil was sent direct by the assessees to the customers. It was weighed at the factory of the customers and any rebate that was payable in respect of weight or quality was ultimately borne by the assessees. The Tribunal also finds as a fact - and this is by far the most important finding for the purpose of the questions that we have to answer - that the transactions between the assessees and B.V. Bhumraddi were as between principal and principal. The goods were despatched f.o.r. Gulbarga or Yadgiri stations and the freight was borne by B.V. Bhumraddi and not by the assessees. The assessees drew hundis on B.V. Bhumraddi for the price of the oil purchased by him and some of these hundis were discounted by the assessees through Purshottam Surchand, who was in Bombay, that is, some of the hundis were discounted in British India. The Tribunal also considered in what respect there was any difference between the position that obtained prior to the 7th of April, 1940, and the position that obtained after the 7th of April, 1940; but that is an approach which appears to us to be irrelevant for the purpose of determining the question before us. Whether it was rightly or wrongly held that there was a business connection prior to the 7th of April, 1940, is not a question that arises before us for determination; and all that we are concerned with on this reference, so far as question No. (1) is concerned, is whether on the facts found it could have been held that there was any business connection in British India within the meaning of section 42, sub-section (1), of the Income-tax Act. In our opinion, there is nothing whatever in those facts to warrant any finding of a business connection. The moment the Tribunal found as it did that the transactions were between principal and principal, there would have to be other strong and independent facts to establish some business connection. Mr. Amin for the Department has attempted to persuade us to look into the record and to hold that this finding of the Tribunal is not justified and that Mr. B.V. Bhumraddi was in fact an agent of the assessees. It is not open to this court upon this reference to do so. The facts as found by the Tribunal bind us and they could only have been challenged before this court by asking for a reference as to whether there was any evidence to justify that finding. No such question has been raised on the present reference and we did not, therefore. allow Mr. Amin to draw our attention to the record to show that Mr. B.V. Bhumraddi was in fact an agent, although the Tribunal found that the relationship between the assessees and B. V. Bhumraddi was that of principal and principal.
3. Then Mr. Amin attempted to justify a business connection on a passage from the report of the Appellate Assistant Commissioner on remand, which has been reproduced in the statement of the case and which states as follows :
'Once a year the uncle sent debit or credit notes to the assessee for any deficit or excess in weight, and for minus or plus colour allowance as adjusted between him and the Bombay buyers. There was no written agreement or contract between the uncle and the assessee for such adjustments which in effect meant that is was the assessee who had finally to bear losses or to receive profits on account of differences in weights and quality.'
4. We must confess our inability to understand what the Appellate Assistant Commissioner wishes to convey when he refers to the assessees bearing losses or receiving profits. There are no losses or profits involved when an adjustment is made in the price either by way of a rebate or an addition in respect of weight or quality, and, therefore, there is no question of the assessees bearing any loss or profit. If a rebate was rightly claimable by a person who purchased the goods from B.V. Bhumraddi, undoubtedly, he would have had the right to claim it in his turn from the assessees; and, therefore, if the rebate was ascertained in this particular case on a weightment made at the factory of the customers of B.V. Bhumradd, it does not alter the rights of B.V. Bhumraddi as against the assessees and he would still be entitled to this rebate which he was bound to give to his own customers by reason of either weight or quality. The fact, therefore, on which reliance is sought to be placed by Mr. Amin for establishing a business connection, namely, that there were some profits or losses in the sale made in India by B.V. Bhumraddi, which were borne by the assessees, does not survive for considerations. The fact that some of the hundis which were drawn on B.V. Bhumraddi in Bombay were cashed in Bombay also does not, in our opinion, by itself establish any business connection whatsoever. We are, therefore, of opinion that there is an entire absence of any business connection in this case and there was absolutely no material on which it would have been held that there was a business connection.
5. We, therefore, answer question No. (1) in the negative.
6. Regarding question No. (2), there is a statement in the order of the Tribunal at the end in these terms :
'In the view that we have taken we are not considering what income was received in British India' and the contention of Mr. Amin on this reference is that the Department attempted to argue before the Tribunal that part of the profits from sales in India were received in British India and in that manner to support the taxation of those profits. The Tribunal, in the view that it took, has applied the provisions of section 42(1), but estimated that only fifty per cent. of the total income accrued in British India and subjected to tax fifty per cent. only of the profits. Now, the right of the Income-tax Commissioner to urge that part of the profits were received in India would depend upon whether this was the case of the Department at any stage in these proceedings, for, if it was not, it was not open to the Income-tax Commissioner to raise for the first time a new case before of the Tribunal when the assessees were the appellants before the Tribunal. We had occasion to consider the exact scope of the powers of the Tribunal in New India Life Insurance Co. v. Commissioner of Income-tax, and we there held that the power of the Tribunal is confined to dealing with the subject-matter of the appeal and the subject-matter of the appeal is constituted by the grounds of appeal preferred by the appellant and it is these grounds of appeal that the Tribunal is empowered to determine. In supporting the decision of the Appellate Assistant Commissioner appealed from the Income-tax Commissioner may no doubt support it on any ground other than the one on which the Appellate Assistant Commissioner had come to that conclusion; but such a ground must arise on the record of the assessment proceedings and must have been raised on behalf of the Department at some stage of those proceedings. No new ground can be raised for the first time before the Tribunal by the respondent. The question, therefore, is whether in this case the Department had ever canvassed the position that any part of the income of the assessees was received in British India. On this part of the case the facts stated by the Tribunal are these :
Generally speaking, it was not the Income-tax Officer's case that the profit on the sale of oil in British India was received in British India. We have already stated that the Income-tax Officer referred to the receipt of income in the assessment order only for the 1942-43. When the case was remanded to the Appellate Assistant Commissioner no question of receipt of the profit in British India arose. It was in the remand report that the Appellate Assistant Commissioner tried to make out a case that the profit on the sale of oil in British India was received in British India.'
7. Therefore, apart from the reference in the order of the Income-tax Officer for the assessment years 1942-43, it was not the Department's case that any part of the income was received in British India; and apparently the reference by the Income-tax Officer for the assessment year 1942-43 was not a finding which was accepted by the Appellate Assistant Commissioner even for that year, with the result that when the matter came first before the Tribunal, it was not the Department's case that any portion of the income was received in British India. The Tribunal, feeling that more facts would have to be elicited for the purpose of determining the questions that they were called upon to determine, remanded the matter to the Appellate Assistant Commissioner for a report, and the order of remand, which is dated 5th January, 1950, specifically states that the principal question to be determined was whether the income accrued or arose in British India; and it is on this question that the remand was made to get a correct picture of the assessee's mode of doing business. The Appellate Assistant Commissioner, therefore, was not concerned with finding any facts that would justify a finding of receipt of income in British India; but forgetting the scope of the remand, the Appellate Assistant Commissioner thought fit in his remand report to state that in his opinion income was also received in British India. This was not done by the Appellate Assistant Commissioner when he was sitting in appeal over the orders of the Income-tax Officer but this was done by him when the matter was remanded to him for a specific purpose; and the Department is now seeking to take advantage of the finding of the Appellate Assistant Commissioner and to claim that the income of the assessees was received in British India either wholly or in part. In our opinion, it was not open to the Department to take up this contention before the Tribunal when it had not been raised either before the Income-tax Officer or before the Appellate Assistant Commissioner and the facts in respect of which had not been found until the stage that the assessees filed an appeal to the Income-tax Tribunal.
8. There appears to be a somewhat unfortunate position as to whether the Department did in fact raise or attempt to raise this question before the Tribunal. In the statement of the case, the Tribunal, one of whose members was a party to the order out of which this reference arises, states, that the matter was not argued at the hearing of the appeal; but the Department's representative maintains that the question was argued. What is significant, however, is that if the matter was not argued, it is somewhat difficult to see what the Tribunal was referring to in the concluding sentence in their order, namely, 'In the view that we have taken we are not considering what income was received in British India.' In the statement of the case itself the Tribunal says that this sentence is not clear, and it is difficult to say what the members of the Tribunal had in mind at that time. In this state of the record, where it is necessary to determine whether or not the question was raised before the Tribunal, we would have found it somewhat difficult to do so. But fortunately, in the view that we take of the matter, whether or not it was raised before the Tribunal, it was not open to the Department to raise it before the Tribunal, and, therefore, the second question must be answered in the affirmative.
9. Income-tax Commissioner to pay costs.
Reference answered accordingly.