1. The assessee-company against whom an order under s. 23(A) of the Indian I.T. Act, 1922, has been made for the assessment year 1961-62 was assessed on a total income of Rs. 1,58,257. The income assessed included an amount of Rs. 75,744 which, according to the assessee, was the half share of the income of the joint venture between the assessee-company and one Naraindas Bhimji in respect of transactions of cloves and ivory in the accounting year ending 31st December, 1960. Before the ITO, the assessee had agreed that the amount of Rs. 75,744 which was shown by the assessee in the accounts as being due to be paid to Naraindas Bhimji should be included as a part of the assessee's income. The ITO after deducting Rs. 71,216 on account of income-tax and super-tax in respect of the assessed income found that the balance came to Rs. 87,041. The assessee should have distributed Rs. 56,577 as dividend, according to the ITO, in order to avoid application of the provisions of s. 23A. However, since the assessee-company was found to have distributed only Rs. 9,600 as dividend within the prescribed period and this figure falls short of the statutory minimum, the ITO in exercise of the powers under s. 23A(1) made an order requiring the assessee to pay an additional super-tax of Rs. 28,653.17.
2. The assessee appealed against the order of the ITO before the AAC. It was contended on behalf of the assessee before the AAC that the assessee's net profits as per profit and loss account came to Rs. 59,716 and if the past losses of Rs. 48,869 are taken into account, no distribution of dividend was possible out of the commercial profits. It was also urged before the AAC that after adjusting past losses of Rs. 48,869 and after making a provision of Rs. 57,000 for taxes and taking into account the distribution of Rs. 9,600 as dividend, the assessee's profit and loss appropriation account for the year actually showed a net debit balance of Rs. 57,752. The other contention raised before the AAC was that the amount of Rs. 75,744 which represented half share of the profits in the joint venture with Naraindas Bhimji was not the income of the assessee-company and that though the assessee had agreed that the entire profits of the said joint venture should be assessed as the assessee's income, so far as the computation of commercial profits for the purpose of s. 23A were concerned, that amount should be left out of account. The AAC, however, found that the assessee had no evidence at all to show that any business was in fact done by the joint venture with Naraindas Bhimji or that any part of the profits of its business had at any time been passed on to Naraindra Bhimji. The AAC also found that half of the profits of the said joint venture was only credited in Bhimji's name in the assessee's books but this was ultimately transferred to the assessee's own reserves in the accounting year ended 31st December, 1962. The contention of the assessee that half of the profits of the business belonged to Naraindra Bhimji was thus rejected. The AAC also took into account the fact that the assessee had agreed before the ITO to have the said amount of Rs. 75,744 included in the income of the assessee. The AAC, therefore, held that the provisions of s. 23A(1) were clearly attracted and the order of the ITO was proper.
3. The assessee then filed an appeal before the Income-tax Appellate Tribunal. The appeal before the Tribunal was disposed of on 24th February, 1969. It appears that when the matter was dealt with by the Tribunal, some documents were produced before the Tribunal relating to a suit, being Suit No. 400 of 1966, filed by two persons by name Ramchandra Ranchoddas and Janaksinha Gokuldas against M/s. Rawji Amarsi which was a partnership firm. That suit was filed on the original side of this court. In that suit, the plaintiffs had made a claim for Rs. 1,62,213.11 which included a sum of Rs. 1,53,818.41 and interest thereon at 12 per cent. from 18th February, 1966, up to the date of the suit. The claim for the principal amount of Rs. 1,53,818.41 was based on an account which was made on 7th August, 1963, and was Ex.'A' annexed to the plaint.
4. So far as this reference is concerned, only one item in that account appears to be relevant. That item is as follows :
'Rs. 98,608.80 - date 31-1-1962.
The particulars thereof are as under : Debited to the account of Rawji Amarsi & sons Pvt. Ltd. and credited to you.'
5. We shall refer to this entry in detail later. For the present it is sufficient to point out that it only shows that the liability of the assessee-company to Janaksinha & Co. was taken over by M/s. Rawji Amarsi. The Tribunal had also before it the affidavit filed by Amritlal Rawji who is the partner of the defendant-firm, viz., M/s. Rawji Amarsi. It is also necessary to note at this stage that the assessee-company was not the defendant in Suit No. 400 of 1966. When the appeal was heard by the Tribunal, the contention that the sum of Rs. 75,744 which was not originally shown by the assessee-company as a part of its total income as being 50 per cent. share of Naraindas Bhimji in a joint venture was again canvassed. It was argued on behalf of the assessee that in any case the said amount was a disputed amount which the assessee would at any time be called upon to pay commercial profits liable to be distributed amongst the shareholders.It was contended before the Tribunal on behalf of the department that the assessee had not produced any evidence to show that the business in cloves an ivory was a 'joint venture business' of the assessee-company and Naraindas Bhimji. The Tribunal, however, held that the amount of Rs. 75,744 was at any rate a disputed amount. The one reason which seems to have weighed with the Tribunal heavily for accepting the contention of the assessee was that the amount representing 50 per cent. share of Naraindas Bhimji had been so entered in the assessee's accounts and there was no reason why the assessee would make an entry which would create a liability for the assessee for such a large amount. The Tribunal found that though the credit entry of Rs. 75,744 was taken to the reserve fund in the year 1962, there was substantial force in the assessee's contention that this was done only with a view to see that the period of limitation for recovery of this amount by Naraindas Bhimji was not saved by any acknowledgement by the assessee itself. The second circumstance which also weighed with the Tribunal was that the assessee had not carried this amount to the profit and loss account for the relevant period. Thus, the Tribunal having taken the view that the amount of Rs. 75,744 was a disputed amount which the appellant-company would be required to pay at any time in future, it could not be considered as a commercial profit available to the appellant for distribution to the shareholders.
6. Arising out of this order of the Tribunal, the following question has been referred to this court under s. 66(1) of the Indian I. T. Act, 1922 :
'Whether, on the facts and in the circumstances of the case, it was rightly held that the provisions of section 23A of the Indian Income-tax Act, 1922, were not attract ?'
7. Mr. Joshi appearing on behalf of the revenue argued that the assessee had not been able to produce any material to show that in the relevant previous year, i.e., the year ending 31st December, 1960, there was any joint venture between the assessee-company and Naraindas Bhimji and in the absence of such evidence the Tribunal ought not to have held that there was any dispute with regard to the amount of Rs. 75,744 which which the assessee would be required to pay some time in future as claimed by it. It is, therefore, contended that the AAC and the ITO had rightly included Rs. 75,744 as part of the commercial profits of the assessee-company and the Tribunal should not interfere with the order of the AAC.
8. On behalf of the assessee, it was very vehemently argued that the Tribunal had accepted the relevant entries in the accounts of the assessee and this court should not interfere with the view of the Tribunal which is based on the entires made in the account books. It was further contended that in any case the account books would be sufficient evidence to show that the sum of Rs. 75,744 had also been recorded as the 50 per cent. share of the profits of the joint venture between the assessee-company and Naraindas Bhimji and the amount, being a disputed amount, should be left out of consideration for the purpose of consideration of the commercial profits of the assessee-company.
9. At the state of the arguments the material produced before the Tribunal was also produced before us and certain documents which have now been made a part of the statement of the case have been made available to us. An additional document which we have taken on record as a part of the statement of the case is the written statement of the defendant partnership firm in Suit No. 400 of 1966. As we understood the argument on behalf of the assessee at the initial stage of the hearing, it was that the amount which is shown as being 50 per cent. share of the profits in the joint venture was not only in dispute at the material time, but that certain amounts recovered by the plaintiffs in Suit No. 400 of 1966 in pursuance of a consent decree in July, 1972, would be referable to a dispute relating to the alleged half share of the profits of Naraindas Bhimji in the joint venture relating to the transaction of cloves and ivory.
10. It is necessary to point out that the question which has been referred is whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of s. 23A of the Indian I.T. Act, 1922, were not attracted. A consideration of the question referred to us would necessarily require us to determine the validity of the reasons on which the Tribunal had reached the conclusion that the provisions of s. 23A of the Indian I.T. Act, 1922, were not attracted. As already pointed out, one of the reasons and indeed the main reason which the Tribunal has recorded for reaching the conclusion that s. 23A of the Indian I.T. Act, 1922, was not attracted was that the entries were made by the assessee-company in its account books showing that a sum of Rs. 75,744 was 50 per cent. share of the profits of Naraindas Bhimji. Unless the validity of this reason is gone into, it is not possible to effectively decide the question referred to this court. It will not, therefore, be possible to sustain the contention raised by Mr. Dwarkadas at one stage that the finding has been recorded by the Tribunal with regard to the correctness of the accounts of the assessee and this court would not, therefore, be justified in going into that question because the correctness of the entries would become a question of fact. Apart from that, we are not able to find any positive finding anywhere in the order of the Tribunal about the correctness of the accounts. All that the Tribunal has said is that a certain figure has been entered in the accounts and that would be sufficient to show that the amount is in dispute.
11. We shall now deal with the relevance of the documents in Suit No. 400 of 1966, which were produced before the Tribunal and which, it appears, had weighed with the Tribunal in reaching the conclusion that the amount in question was in dispute. We have already pointed out that the assessee was not the defendant in that suit, though Rawji Amarsi was no doubt a sister concern of the assessee. But the fact remains that in that suit no claim was made against the assessee. The claim in the suit was made on the basis of what is described as an Ankada arrived at after a settlement of August 7, 1963 (Ex.'A' to the plaint). This document in substance shows that a sum of Rs. 1,53,826.89 is accepted as the amount payable by Rawji Amarsi, i.e., the defendant-firm of M/s. Janaksinha and Co. The plaintiffs in that suit stated that they were carrying on business in Zanzibar, East Africa, in the name and style of M/s. Janaksinha and Co. The figure of Rs. 1,53,826.89 is made up of three items out of which the first item of Rs. 2,747.80 is shown as the balance payable on November 1, 1960, by one Rawji Amrutlal to M/s. Janaksinha and Co. The second item reflects the liability of Rs. 52,470.29 of Amrutlal Rawji being taken over by the firm of Rawji Amarsi and which amount the firm Rawji Amarsi had agreed to pay to M/s. Janaksinha and Co. The third amount is of Rs. 98,608.80, the entry with regard to which has been extracted earlier. This was a liability of the assessee-company to M/s. Janaksinha and Co. but had been taken over by the firm, Rawji Amarsi, and the firm, Rawji Amarsi, has made itself liable to pay that amount to M/s. Janaksinha and Co. The suit filed by the plaintiffs was based on this account. As already pointed out, the assessee was not the defendant in that suit and legally so far as the plaintiffs were concerned, the assessee-company stood discharged from the liability of Rs. 98,608.80. Apart from that, we have tried to find out from the learned counsel for the assessee whether the original liability of the assessee-company for Rs. 98,608.80 was in any way connected with the amount of Rs. 75,744 which is shown to be 50 per cent. share of the profits of the joint venture and payable to Naraindas Bhimji. Mr. Dwarkadas has fairly stated before us that it is not possible to contend that Rs. 75,744 formed part of the liability of Rs, 98,608.80 which has been taken over by the firm, Rawji Amarsi. Even the list of sundry creditors of the assessee-company which has been made available to us by the learned counsel for the assessee leads us to the same conclusion. M/s. Janaksinha and Co. is separately shown as a creditor to the extent of Rs.98,997 86 as on December 31,1960. As on that date Narindas Bhimji is separately and independently shown as a creditor to the extent of Rs. 1,70,158.34. It is not disputed that this figure is made up of the earlier alleged liability of Rs. 94,414.34 in respect of the alleged half share of the profits of the joint venture for the calendar year ending December 31, 1959, and the sum of Rs. 75,744 which is said to be the half share of the profits of the joint venture in the year ending December 31, 1960. It, therefore, appears that the claim made in the Suit No. 400 of 1966 by the erstwhile partnership of M/s. Janaksinha and Co. against the partnership of Rawji Amarsi is not even remotely connected in any way with the amount of Rs. 75,744. The allegation in that suit have, therefore, no relevance whatsoever for the determination of the question as to whether there was at all any joint venture between the assessee-company and Naraindas Bhimji and whether the said amount of Rs. 75,744 could be in dispute. It does not appear to us from the order of the Tribunal that the Tribunal gave any detailed consideration to the documents which were produced before it.
12. It is also apparent from the written statement which is now made available to us and it is not disputed that the contents thereof are substantially the same as the affidavit of Amrutlal Rawji filed on November 28, 1966, in the suit that the claim in the suit did not have any relevance whatsoever to the so-called dispute between the assessee-company and Naraindas Bhimji. We have scrutinised the written statement of the defendant-firm in that suit. The written statement gives in detail the series of transactions from 1957 to 1962 between M/s. Janaksinha and Co. and the firm, Rawji Amarsi. It appears from the written statement that Naraindas Bhimji was also a partner of a firm, M/s. R. Damodar Bhimji, and Co. and there were dealings between the defendant-firm and the firm of M/s. R. Damodar Bhimji and Co. The transactions which have been recited in the written statement chronologically do not refer to any joint venture between the assessee-company and Naraindas Bhimji in the calendar year 1960. The first transaction is of the year 1957 relating to 230 bales of cloves sent to India which was supposed to be a joint venture between the firm of R. Damodar Bhimji and the firm of M/s. Rawji Amarsi and Co. The transactions in the year 1959-60, referred to in the written statement, are certain barter transactions whereby the firm of R. Damodar Bhimji and Co. was to send ivory to India and the defendants were to send cycles and ivory carving from India. The third transaction referred to is of the year 1961 which was for establishing an industrial undertaking and then is the transaction of 7th of August, 1963, on the basis of which the suit was filed by the two plaintiffs. There is not even a whisper in the written statement with regard to any joint venture between the assessee-company and Naraindas Bhimji. A critical perusal of the several documents relating to Suit No. 400 of 1966 does not, therefore, help the assessee even to establish prima facie that there was any joint venture with regard to cloves and ivory between the assessee-company and Naraindas Bhimji.
13. The question which then arises is whether merely because the entries have been made by the assessee-company to show that a certain amount is due to Naraindas Bhimji on account of his 50 per cent. share, it must follow that there was a joint venture as alleged. Now, when the Tribunal has observed that the amount is a disputed one, it is difficult for us to appreciate on what material this inference of dispute is drawn. This is not a case where Naraindas Bhimji had at any time made a claim against the assessee-company in respect of the alleged half share of the profits of the joint venture. Indeed, it was not possible for the learned counsel for the assessee to show that any such claim was made by Naraindas Bhimji even up to the date on which the Tribunal decided the appeal filed by the assessee. The alleged profit is in respect of the calendar year 1960. From the year 1960 onwards, Naraindas Bhimji has made no claim whatsoever in respect of the profits of the alleged joint venture. If no such claim has been made, it is difficult to see as to how the assessee can even make out a case that there has been a dispute with regard to the said amount. The dispute in such a case will only contemplate that the claimant is claiming a particular amount and assessee is disputing his liability. Such a state of affairs does not exit in the present case. If no claims is made by Naraindas Bhimji at any time, it is difficult to see as to how it is open to the assessee to say that it will be called upon at any time in future to pay that amount. Indeed, the Tribunal has accepted this argument on behalf of the assessee. But we are constrained to observe that there is no material on record on which the Tribunal could have drawn any inference that the amount was in dispute. The assessee itself has at no time offered to pay this amount to the alleged claimant, Naraindas Bhimji. On the other hand, the conduct of the assessee appears to be to the contrary. One of the explanations given for transferring the amount to the reserve is that Naraindas Bhimji should not be able to take advantage of a possible acknowledgement resulting from the said amount being shown as being due to Naraindas Bhimji in the account books of the assessee. Therefore, the assessee itself does not admit that the amount belongs to Naraindas Bhimji. Strictly speaking, there is no evidence at all either in the form of correspondence or in the form of any transaction which can be identified as belonging to any joint venture to show that the assessee-company had at any time entered into a joint venture along with Naraindas Bhimji. It is in this context that one has to consider the entries which are made in the accounts by the assessee.
14. It is no doubt true that in the profit and loss account only Rs. 75,743.89 have been shown as the profit of the alleged joint venture and in the list of sundry creditors Naraindas Bhimji has been shown as a creditor. This by itself will not prove that there was a joint venture. The entry has no independent value by itself. This entry must be related to certain transactions. Those transactions will have to be established and scrutinised. It will have to be found out between whom those transactions have taken place, who were the parties to those transactions and what role those parties have played in those transactions. Unless these matters are inquired into, merely because the assessee has chosen to show that Naraindas is a creditor in respect of a certain amount, the necessary conclusion that there were any transactions of joint venture cannot be drawn. The maximum value which these entries can have is that they can be a piece of evidence. But these entries could not be conclusive evidence and they will have to be considered in the light of several circumstances referred to earlier. As a matter of fact, these entries have lost their credibility when the assessee had conceded before the Ito that the entire amount should be treated as the income of the assessee. No doubt it is now contended that this concession was made only with a view to avoid penalty proceedings. There is, however, no foundation for such argument anywhere in the record. It is stated that penalty proceedings were not taken. It is not possible for us to go into that aspect of the case, but if the assessee was right in its case that these profits are not wholly belonging to the assessee, it could have stuck to its stand especially when the amount is fairly large and its inclusion was likely to attract the provisions of s. 23A of the Indian I. T. Act, 1922. It appears from the order of the Tribunal that in its view the fact that the entries were made in the name of Naraindas Bhimji was sufficient to prove the existence of the joint venture. We have already pointed out earlier that the inference of a joint venture would have to be drawn on several circumstances none of which has been brought on record. What seems to have weighed with the Tribunal is that no person would create a liability against himself by making entries. It appears that the Tribunal has lost sight of the fact that such an entry could always be made with a view to deflate the profit of the company and thus to rule out the possibility of s. 23A of the Indian I. T. Act. Whether Naraindas Bhimji had knowledge of this entry or not and whether he would have made a claim relying solely on the basis of this entry is a very doubtful proposition. It, therefore, appears to us that no material had been produced by the assessee to show that there was in fact any joint venture. There is also thus no question of the amount being a disputed amount.
15. Mr. Dwarkadas appearing on behalf of the assessee has referred us to a decision of the Calcutta High Court in CIT v. Universal Fertiliser Co. P. Ltd. : 114ITR47(Cal) . That was a case in which certain amounts which appeared in the loan account in the books of the assessee were held not to have been proved as genuine loans and the question was whether addition of those amounts could be taken into consideration for the computation of commercial profits of the assessee and the High Court held that mere failure of the assessee to prove the genuineness of certain transactions, though it would give a right to add back the amounts to the income of the assessee for the purpose of assessment, would not make the amounts available for the purpose of distributing surplus under s. 23A in the absence of any other evidence. In the same decision that court has observed that if an item is deliberately omitted from the accounts, it cannot be said that commercial principles prevent that amount from being added to the profits in order to arrive at the real commercial or accounting profits. The Division Bench of the Calcutta High Court has observed in the context of s. 23A of of the Act (1922) as follows (p. 51) :
'Therefore, unless there is evidence that the amounts which are added back were actually in the hands of the assessee to be available for distribution of dividend, in this case it would be difficult to sustain the view that the assessee should have distributed dividend at all. It may be that in a particular case when addition is made to the income disclosed by the assessee, there are facts and circumstances which justify the holding of the fact that the amounts added back are available for distribution. But in this case there is no other fact except that the assessee has failed to prove the genuineness of certain loan transactions. The failure of the assessee to prove the genuineness of certain loan transactions would give the revenue a right to add back these amounts to the income of the assessee for the purpose of assessment. But mere failure, in the background of the provisions of section 23A of the Indian Income-tax Act, 1922, would not, in our opinion, make the amounts added back, in the absence of any other evidence, available for the purpose of considering the distributable surplus.'
16. The contention of Mr. Dwarkadas appears to be that there is no difference between a case where an addition is made because certain loan accounts have not been proved and a case, like the instant one, where a liability, which is shown to exist in the account books, is conceded by the assessee to be non-existent. It is difficult for us to see as to how the decision relied upon is of any assistance to the assessee. The ratio of the decision in Universal Fertiliser Co. P. Ltd.'s case : 114ITR47(Cal) is that the ITO must find that the amounts added back were actually in the hands of the assessee to be available for distribution of dividend. Therefore, if the disputed items are available in the hands of the assessee, even according to the Calcutta High Court, they can be taken into account for the computation of the commercial profits.
17. On the facts and in the circumstances of the instant case, it is not disputed on behalf of the assessee that the amount of Rs. 75,744 is in its hands. Indeed, that is the very basis of the contention that it will be called upon to pay the amount to Naraindas Bhimji at any time. Therefore, when the assessee conceded that the entire amount should be treated as the income of the assessee before the ITO, the concession was not in respect of any fictional income. The concession was in respect of the profits actually earned and held by the assessee. Such a case cannot be compared with a case where fictional additions have been made on the ground that loans have not been proved and they are being considered for the purpose of computation of the commercial profits.
18. Having heard the learned counsel for the assessee at considerable length, we are not satisfied that there is any evidence in this case to establish that there was any joint venture between the assessee-company and Naraindas Bhimji which would enable the assessee to set apart 50 per cent. of the share of the profit in question so as to have them left out of consideration for the purpose of computation of commercial profits. We must, therefore, set aside the decision of the Tribunal that the provisions of s. 23A would not be attracted in the present case. The AAC, in our view, was justified, after taking into consideration the entire evidence in this case, in holding that the provisions of s. 23A(1) were applicable in the case of the assessee.
19. The question referred to us is, therefore, answered in the negative and against the assessee. The assessee to pay the costs of this reference.