Skip to content


Commissioner of Income Tax Vs. Central India Machinery Manufacturing Company Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Civil Case No. 107 of 1977
Reported in(1985)45CTR(MP)126
AppellantCommissioner of Income Tax
RespondentCentral India Machinery Manufacturing Company Ltd.
Cases ReferredH. A. Shah and Co. v. Commr. of
Excerpt:
- indian penal code, 1890.sections 307 & 324: [lokeshwar singh panta & b.sudershan reddy,jj] assault proof - appellant allegedly dealt sickle blow to deceased - testimony of eye-witnesses showed that sudden altercation ensued between appellant and deceased - no evidence to indicate any previous enmity between parties - single blow of sickle had been inflicted by appellant on back of deceased - incised wound allegedly inflicted by appellant - however opinion of doctor proved that deceased had not died due to direct result of said injury held, appellant is therefore liable to be convicted under section 324 of i.p.c., sentence of 3 years imprisonment reduced to period undergone by appellant considering mental agony suffered by him - 263 by the cit in respect of lease rent payable is.....orderu. n. bhachawat, j. - this order shall dispose of miscellaneous civil cases no. 108 of 1977 and 109 of 1977 also, an in all these cases a common question is involved and the parties are the same.2. these are the applications made by the department u/s. 256(2) of the it act, 1961 (for short, hereinafter referred to as the act), praying that this court should require the itat to state the case and to refer the following question in the above respective cases for our answer :(i) m.c.c. no. 107/1977'whether, on the facts and in the circumstances of the case, the tribunal was justified in law in confirming the order the order of the aac whereby he held the expenditure in respect of lease rent amount to rs. 18,95,832 as wholly and exclusively, for the purpose of business and, accordingly,.....
Judgment:
ORDER

U. N. Bhachawat, J. - This order shall dispose of Miscellaneous Civil Cases No. 108 of 1977 and 109 of 1977 also, an in all these cases a common question is involved and the parties are the same.

2. These are the applications made by the department u/s. 256(2) of the IT Act, 1961 (for short, hereinafter referred to as the Act), praying that this court should require the ITAT to state the case and to refer the following question in the above respective cases for our answer :

(i) M.C.C. No. 107/1977

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the order the order of the AAC whereby he held the expenditure in respect of lease rent amount to Rs. 18,95,832 as wholly and exclusively, for the purpose of business and, accordingly, allowing the assessees claim ?'

(ii) M.C.C. No. 108/1977

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the order of the AAC whereby he held the expenditure in respect of lease rent amounting to Rs. 7,50,000 as wholly and exclusively for the purpose of business and, accordingly, allowing the assessees claim ?'

(iii) M.C.C. No. 109/1983

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the order of the AAC whereby he held the expenditure in respect lease rent amounting to Rs. 20 lakhs as wholly and exclusively for the purpose of business and accordingly, allowing the assessees claim ?'

3. The relevant respective assessment years for the respective cases are :

(1) For M.C.C. No. 107/1977 - 1968-69, for which the corresponding accounting year ended on 31-3-1967;

(2) For M.C.C No. 108/1977 - 1969-70, for which the corresponding accounting year ended on 31-3-1068, and

(3) For M.C.C. No. 109/1977 - 1967-68, for which the corresponding year ended on 31-3-1966.

4. All these cases relate to the same assessee, and from the facts so far stated and that would be stated hereinafter, it would be clear that except the years of assessment and the amounts, the question involved for decision is identical in all these cases, and the arguments have been advanced by the ld. counsel for the parties in M.C.C. No. 108 of 1977 stating that the same are the argument in the other two cases, viz., M.C.C. Nos. 107 of 1977 and 109 of 1977, also. The ITAT, Indore Bench, Camp Gwalior (for short, hereinafter referred to as the Tribunal) has also disposed of the appeal before it, viz., ITA Nos. 4470, 4471 and 4472 (Del)/73/74 by a common order dt. 7-3-1975 (Annexure F).

5. The assessee is a Private Limited Company having its head office at Gwalior and branches at Bharatpur and Bombay. It derives income from manufacture and sale of railway wagons, textile machines and cycles, etc. The railway wagons are manufactured at Bharatpur and the cycles at Bombay in the factory. The assessee-company had entered into a lease agreement on 1-10-1964 with M/s. Hind Cycles Ltd., Bombay, whereby it has taken the cycle factory of M/s. Hind Cycles Ltd., on lease and had greed to pay Rs. 25 lacs per annum as the lease money, which lease was further renewed on 1-3-1968 reducing the lease money from Rs. 25 lacs per annum to Rs. 12.50 lacs per annum. The assessee-company had claimed deduction of the amounts for the respective assessment years as detailed hereinbelow in regard to the lease money paid to M/s. Hind Cycles Ltd., on the ground that it was an expenditure wholly and exclusively for the purpose of the business of the assessee :

(i)

for asst. yr. 1967-68

Rs. 25,00,000

(ii)

for asst. yr. 1968-69

Rs. 23,95,832

(iii)

for asst. yr. 1969-70

Rs. 12,50,000

The assessee had in the earlier assessment years, i.e., the asst. yr. 1965-66 and 1966-67, also claimed similar deductions in respect of the lease money paid to M/s. Hind Cycles Ltd. on the very ground that it was an expenditure incurred wholly and exclusively for the purpose of business. This ITO had for the asst. yr. 1966-67 he had allowed the total deduction as claimed by the assessee, whereas for the asst. yr. 1966-67 he had allowed deduction only to the tune of Rs. 5 lacs holding that the balance amount was not paid for commercial consideration. The matter for the asst. yrs. 1965-66 and 1966-67 travelled upto the Tribunal, the matter for the asst. yr. 1966-67 having been decided earlier by the Tribunal by its in appeal on 31-10-1973 upholding the contention of the assessee-company and allowing the whole amount of the lease money was paid wholly and exclusively for the purpose of business, and on the basis of the order of the Tribunal, the proceedings for the asst. yr. 1965-66 at the stage of second appeal have been decide in favour of the assessee-company.

6. The matter for the relevant assessment years also travelled upto the second appeal before the Tribunal, and the Tribunal vide its order dt. 7-3-1975 (Annexure F), upholding the contention of the assessee-company, held that the payment of the lease money was an expenditure wholly and exclusively for the business and, as such, was an allowable deduction u/s. 37(1) of the Act.

7. The department made application under s. 256(1) of the Act for each relevant assessment year, referred to hereinabove, requesting the Tribunal to refer the questions, extracted hereinabove, as questions of law arising out of the order of the Tribunal for our answer. The Tribunal vide its common order dt. 27-9-1975 (Annexure H) rejected the application holding that no question of law arises out of the order of the Tribunal. Hence the present applications in the respective cases.

8. It would also be relevant here to mention that the matter had come before this Court for the asst. yrs. 1965-66 and 1966-77 on an application made by the department u/s. 256(2) of the Act for each of these Act for each of these assessment years. For the asst. yr. 1965-66 the case registered in this court was M.C.C. No. 182 of 1976 and for the asst. yr. 1966-67 the case registered was M.C.C. No. 200 of 1976, and both these cases have been disposed of on 17-7-1981. The reasoned order is passed in M.C.C. No. 200 of 1976, vide which this Court has held that the conclusions arrived at by the Tribunal were conclusions of facts based on facts and not question of law arose so as to require the Tribunal to make a reference to this Court. The question, that was sought by the department to be referred, relevant for the present purpose, in M.C.C. No. 200 of 1976 was as under :

'(2) Whether, the Tribunal was justified in holding that the expenditure in respect of lease rent amounting to Rs. 20 lakhs was wholly and exclusively for the purpose of business and accordingly allowing the assessees claim ?'

We may, just for the sake of clarity and to avoid confusion mention that M.C.C. No. 182 of 1976 had come before this Court in the following manner. As already stated hereinabove in para 5 of this order, for the asst. yr. 1965-66, the ITO had allowed the deduction of the whole lease money, as claimed by the assessee, but, since for the asst. yr. 1966-67, the ITO allowed deduction only to the tune of Rs. 5 lacs, the CIT took up the matter in revision u/s. 263 of the Act and issued notice to the assessee to show cause as to why part of the amount allowed by the ITO should not be disallowed, and in that, the matter went up to the Tribunal. The Tribunal set aside the order of the commissioner, whereupon the department applied before the Tribunal to refer the following question for answer to this Court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the exercise of the jurisdiction u/s. 263 by the CIT in respect of lease rent payable is without jurisdiction and bad in law and accordingly cancelling the order u/s. 263 ?'

The Tribunal declined to make a reference. Thereupon, an application was made to this Court u/s. 256(2) of the Act for calling for a reference from the Tribunal on the forequoted question, and that application has been dismissed by this Court on the basis of the view taken by this court in M.C.C. No. 200 of 1976.

9. In our view, for the reasons recorded hereinafter, the case is covered by the decision of this Court dt. 17-7-1981 in the case of CIT, M.P. - 1, Bhopal v. M/s. Central India Machinery ., Birlanagar, Gwalior (Miscellaneous Civil case No. 200 of 1976) and in that view brevity in this order would have sufficed, but in the light of the long-drawn arguments advanced by the ld. Counsel for the department, the over-all desirability warrants a hopefully longer order.

10. It is not disputed before us that the basic facts in the instant cases are the same as were before the Court in M.C.C. No. 200 of 1976 (supra). It was also not disputed that the payments claimed as allowable deductions u/s. 37(1) of the Act were in terms of the same obligation, i.e., the lease, in respect of which the payment was made in M.C.C. No. 200 of 1976 (supra). The argument of the ld. Counsel for the department, though grotesque, can, for the sake of convenience in dealing with the same, be divided under two heads : (i) the decision of this court in M.C.C. No. 200/1976 (supra) does not lay down a correct law inasmuch as in that decision the Supreme Court cases (which shall be referred to hereinafter at an appropriate stage) have not been noticed. The Supreme Court has held that the final conclusion on the admissibility of an allowance claimed is one of law, or is a mixed question of fact and law and, as such, in the instant cases, the Tribunal should be directed to state the case and refer the question proposed for decision by this Court, and (ii) the order of the Tribunal does not disclose that it applied its own mind to the facts of the case and came to its own conclusion; therefore, the appeals, which were before the Tribunal, were not decided in accordance with law and, as such, a question of law, as proposed, does arise.

11. The argument of the ld. Counsel for the assessee in counter can be grouped under the following heads : (1) The question proposed is a pure question of fact. (2) It has already been held by this Court in M.C.C. No. 200 of 1976 (supra) that the question proposed is a question of fact; hence no direction for reference can be given to the Tribunal. Thus, the present applications are barred by the principle of res judicata. (3) The question proposed is the one that was proposed before the Tribunal in the application u/s. 256(1)and this question does not cover the point of non-applicability of mind by the Tribunal. Hence no reference can be directed u/s. 256(2) of the Act on the ground of non-application of mind, more so when it has been so held in M.C.C. No. 200 of 1976 (supra). (4) The tribunal has decided the matter on due application of mind bearing in mind the principle of consistency.

12. It would be useful to extract hereinbelow the relevant excerpts from the decision of this Court in M.C.C. No. 200 of 1976 (supra).

'It was contended at length by the learned counsel that the Tribunal was not right in rejecting the inference drawn by the Income-tax Officer and the Appellate Assistant commissioner. It was further contended by the learned counsel for the revenue that inferences drawn by the Tribunal are not based on material before the authorities although learned counsel frankly conceded that in the application under section 256(1) made to the Tribunal and also in this application under section 256(2), the question hads not been posed about the Tribunal having based its conclusions on no evidence. The question as it has been framed and as was framed in the application under section 256(1) only is that the Tribunal was not justified to allow this deduction in the facts and circumstances of this case. The Tribunal has considered the circumstances in detail and it is apparent that the conclusion arrived at by the Tribunal is base on material before it and, therefore, it is nothing but a question of fact.

9. The Income-tax Officer and the Appellate Assistant Commissioner drew the inference on the basis :

(1) that M/s. Hind Cycles Ltd. was an old concern of 30 years;

(2) that it was a losing concern;

(3) that the rent of the premises if assessed reasonably could not be as high as the assessee agreed to pay, and

(4) that it is a Birla concern.

10. The Appellant Tribunal considered these facts in the context :

(1) that Hind Cycles Ltd. although is an old concern and the written down value of the machinery and the writter down value of the machinery and implements would be low but the machinery and implements coupled with the land and premises on the basis of market price would be sufficiently high;

(2) that although M/s. Hind Cycles Ltd. is a concern managed by the Birla Brothers but their financial interest in the concern is hardly 15%;

(3) that although it was a concern running in loss but had import licence of substantial value and authorisations for purchase if raw material at controlled prices; and

(4) the Income tax Officer considered the rental value of the premises but omitted to consider that it was not a lease of the premises or the land but a lease of the industry as a whole including the facilities or import licence and other things.

On these considerations, the Appellate Tribunal came to the conclusion that the view taken by the Income-tax Officer and Appellate Assistant Commissioner was not justified as there is no material on the basis of which an inference could be drawn that the lease was then not on commercial considerations but was something else, viz., shedding off the profits of the assessee company.

11. It is, therefore, apparent that the contention advanced by the learned counsel for the revenue that there was no material before a Appellate Tribunal to come to the conclusion cannot be accepted and it is because of this, it appears, that the petitioner in this petition did not seek a reference on the question about existence of the material but only sought a reference as to whether the Tribunal was justified or not in coming to the conclusion it reached.

xx

xx

xx

xx

xx

These inferences drawn by the Income-tax Officer and the Appellate Assistant Commissioner apparently were repelled by the Tribunal on the facts that M/s. Hind Cycles Ltd. although had some interest of Birla Bros., but the interest was only 15% and if they were to pout substantial sum like Rs. 25 lakhs per year as the lease money to help a losing concern, their own interest was nothing more than 15% interest. It does not appear to be logical that the assessee would have chosen to throw substantial money. The Tribunal, therefore, instead of drawing on imagination or suspicion, considered the Tribunal, therefore, instead of drawing on imagination or suspicion, considered the facts as were raised before the Tribunal and in view of those facts, conclusion is drawn. It could not be contended that as the Tribunal relied on facts instead of imagination or suspicion, the Tribunal committed any error of law. In this view of the matter, therefore, the conclusions arrived at by the Tribunal are conclusions based on facts and are conclusions of facts. In our opinion, therefore, no question of law arises.'

13. The forequoted excerpts speak for themselves that the points raised by the ld. Counsel for the department are covered by the decision in M.C.C. No. 200 of 1976 (supra). Since, as said in paragraph 10 of this order, the ld. Counsel for the department has argued with reference to the Supreme Court decisions, which we shall presently refer hereinafter, that the view taken by this Court in the M.C.C No. 200 of 1976 (supra), that no question of law arises, is wrong in face of those Supreme Court decisions, we proceed to consider these decisions.

I. Swadeshi Cotton Mills Co. Ltd. v. CIT, U.P. : [1967]63ITR57(SC)

14. The ld. Counsel for the department strenuously argued that in the decision it has been specifically held that the final conclusion as to whether an expenditure was laid out or expended wholly and exclusively for the purpose of the assessees business and, as such an allowable deduction, is one of law. For this he relied on the observation :

'The question as to whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. But, as observed by this Court in Eastern Investments Ltd. v. Commissioner of Income-tax : [1951]20ITR1(SC) , the final conclusion on the admissibility of an allowance claimed is one of law.'

and submitted that this observation of the Supreme Court makes it undebatable that the question sought to be referred is a question of law.

14.1. On a complete reading of the decision it can safely be said that the submission of the ld. Counsel for the department is misconceived. This decision has not laid down as a rule of thumb of universal application, that in all cases. Without anything mire, the final conclusion on the admissibility of an allowance claimed is one of law. Their Lordships have in this decision, by gaving an illustration, explained when the final conclusion on the admissibility of an allowance claimed would be a question of law. To quote :

'It is for example open to the assessee to contend that the decision arrived at by the income-tax authorities was based on no evidence at all. If the assessee satisfies the court that the decision of the income-tax authorities is based on no evidence then the question at issue becomes one of law and the court would be entitled to say that the decision of the Income-tax Officer is defective in law. But, as we have already stated, it is not open to the assessee to contend that merely because of the existence of an agreement between the employer and the employee and the fact of actual payment, the Income-tax Officer must hold that the payment was made exclusively and wholly for the purpose of the business. It is manifest that the Income-tax Officer is entitled to examine the circumstances of each case to determine for himself whether the remuneration paid to the employee or any portion thereof was properly deducted under section 10(2)(xv) of the Income-tax Act.'

This s. 10(2)(xv) is of the Indian IT Act, 1922, which corresponds to s. 37(1) of the Act. From the above it is evident that their Lordships of the Supreme Court neve intended to lay down nor, in fact, laid down not, in fact, laid dawn, as a universal rule, irrespective of the facts and circumstances of an individual case, that a final conclusion on the admissibility of an allowance claimed is one of law. This is further borne out from the following discussion :

'In view of these facts and circumstances, the Appellate Tribunal held that the expenditure was not incurred wholly and expenditure was not incurred wholly and exclusively for the purposes of the business of the appellant-company. The same view has been taken by the High Courts which also found that the appellant was not entitle to claim deduction of this expenditure under section 10(2)(xv) of the Income-tax Act. In our opinion, learned counsel on behalf of the appellant had been unable to show that the view taken by the High Court is, in any way, vitiated in law.'

14.2. What we have said about the ratio of this case is reinforced by the decision of their Lordships of the Supreme Court in CIT, U.P. v. A. Tellery and Sons Pvt. Ltd. : [1967]63ITR288(SC) by the very Bench, which had decided this l.e., Swadeshi Cotton Mills case (supra). The relevant observation from A. Tallerys case (supra) is set out below :

'It is true that the question whether the assessee is entitled to a deduction of certain expenditure under section 10(2)(xv) of the Act should be decided on the facts of each particular case but the final conclusion on the question is always one of law. To put it differently, the question whether the expenditure was laid out or expended wholly and exclusively for the purpose of the business is a question which involves, in the firest place, the ascertainment of facts by the Appellate Tribunal, and in the second place, the application of the correct principle of law of the facts so found. The question, therefore, is a mixed question of fact and law. Ti is a question of law because the Tribunal has to determine what is the meaning to be given to the statutory phrase 'expenditure laid out or expended wholly and exclusively for the purpose of such business.' The proper construction of statutory language is always a matter of law and, therefore, the claim of the assessee in any particular case that he is entitled to a deduction of certain items of expenditure under section 10(2)(xv) of the Act involves the application of the law to the facts found in the setting of the particular case.'

II. Bengal Enamel Works Ltd. v. CIT, West Bengal : [1970]77ITR119(SC)

15. In this case the principle laid down in Swadeshi Cotton Mills case (supra) has been reiterated and it has been held :

'Resolution of the assessee fixing the remuneration to be paid to an employee and production of vouchers for payment together with proof of rendering service do not exclude an enquiry whether the expenditure was laid out wholly and exclusively for the purpose of the assessees business. It is open to the tax officers to hold - agreement to pay and payment not-withstanding - that the expenditure was not laid out wholly and exclusively for the purpose of the business : Swadeshi Cotton Mills. Co. Ltd. case : [1967]63ITR57(SC) . But an inference from the facts found that the expenditure was wholly and exclusively laid out for the purpose of the business is one of law and not of fact, and the High Court in a reference under section 66 of the Income-tax Act is competent to decide that inference raised by the Tribunal is erroneous in law.'

III. CIT, West Bengal v. Royal Calcutta Turf Club : [1961]41ITR414(SC)

16. The facts and the holding in this case, as capsulised in the Headnote, is an under :

'The Royal Calcutta Turf Club was an association of persons whose business was to hold race meetings on a commercial basis. The turf club itself did not own any horse or employ jockeys. As it was of opinion that there was a risk of jockeys becoming unavailable and that such unavailability would seriously affect its business, the turf club established in 1948 a school for the training of Indian boys as jockeys. During the year ending March 31, 1949, the turf club spent a sum of Rs. 62,818 on the running of the school and claimed that amount as a deduction under section 10(2)(xv) of the Income-tax Act :

Held, (i) that though the question whether an item of expenditure was wholly and exclusively laid out for the purpose of the assessees business must be decided on the facts of each case, the final conclusion was one of law;

(ii) that the amount spent by the turf club was not in the nature of a capital expense because no asset of an enduring nature was created thereby;

(iii) that as the amount was spent for the preservation of its business, it was laid out wholly and exclusively for the purpose of the business of the turf club and was an allowable deduction under section 10(2)(xv) of the Income-tax Act.'

In this case, the leading case, viz. Eastern Investments Ltd. v. CIT : [1951]20ITR1(SC) , which is relied in Swadeshi Cotton Mills case (supra), has been applied. The decision of the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal & Co. : [1960]38ITR601(SC) has also been explained and relied on in this case. For an intelligent understanding of the ratio of this case, it would be advisable to extract hereinbelow the following excerpt of this judgment relating to the application of Eastern Investments Ltd.s case (supra) and Chandulal Keshavlals case (supra) :

'As to the first question this Court has held in Eastern Investments Ltd. v. Commissioner of Income-tax : [1951]20ITR1(SC) that 'though the question must be decided on the facts of each case, the final conclusion is one of law.' In Commissioner of Income-tax v. Chandulal Keshavlal & Co. : [1960]38ITR601(SC) , this Court said :

'Another test is whether the transaction is properly entered into as a part of the assessees legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby [Eastern Investments Ltd. v. Commissioner of Income-tax : [1951]20ITR1(SC) ]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessees business and there is evidence to support this finding.'

But those observations must be read in the context. In that case the assessee firm was the managing agent of a company and at the request of the directors of the latter agreed to accept a lesser commission for the year of account that it was entitled to. It was found by the Appellate Tribunal there that the amount was expended for reasons of commercial expediency and was not given as a bounty but to strengthen that managed company so that if its financial position became strong the assessee would benefit thereby, and on the evidence the Tribunal came to the conclusion that the amount was wholly and exclusively for the purpose of such business. It was on this evidence that the expense was held to be wholly and exclusively laid out for the purpose of the assessees business and this was the finding referred to. In that case the Tribunal had not misdirected itself as to the true scope and meaning of the words 'wholly and exclusively laid out for the purpose of the assessees business,' In the present case the Income-tax Appellate Tribunal had misdirected itself as to the true scope and meaning of these words. In our opinion, in the circumstances of this case, it cannot be said that the finding of the Tribunal was one of fact.'

Thus, the ratio of this case is that whether with regard to the final conclusion as to whether a particular expenditure constituted an expenditure, admissible and deductible allowance under s. 37(1) of the Act, raises a question of law or not, has to be decided in the context of the facts and circumstances of each case.

IV. Commissioner of Income-tax, Bombay City-I v. Greaves Cotton and Co. Ltd. : [1968]68ITR200(SC) .

17. In this case the question for consideration was whether a sum of Rs. 18 lacs, the compensation money payable to the assessee companys managing agents for termination of the managing agency agreement, was admissible as an expenditure wholly and exclusively laid out by the assessee-company for the purpose of its business. The Tribunal had arrived at the finding that the termination of the managing agency agreement was with an oblique motive and not a bona fide transaction and, as such, the sum of Rs. 18 lacs was not an admissible deduction. The High Court, on reference under s. 66(1) of the Indian IT Act, 1922, reversed the finding of the Tribunal. The matter went before the Supreme Court which held that the High Court was not competent to interfere with the finding of the Tribunal, as it was a finding of fact. The Superme Court, however, set aside the finding of the Tribunal as defective in law, as it was arrived at without taking into account all relevant material adduced by the parties and remanded the case. The relevant part of the Headnote of the report of this case, wherein the principle laid down in this case is capsulised, is set out below :

'The question whether a certain expenditure was laid out or expended wholly or exclusively for the purpose of the assessees business is a question which involves, in the first place, the ascertainment of facts by the Appellate Tribunal and, in the second place, the application of the correct principle of law to the facts so found. The question, therefore, is a mixed question of fact and law. It is a question of law because the Appellate Tribunal has to determine what is the meaning of the statutory phase 'expenditure laid out or expended wholly or exclusively for the purpose of business'. The proper construction of the statutory language is always a matter of law and, therefore, the claim of the assessee in any particular case that he is entitled to deduction of certain items of expenditure under section 10(2)(xv) involves the application of the law to the facts found in the setting of the particular case. But this does not mean that in the hearing of a reference on this question the High Court is entitled to go beyond the findings of fact recorded by the Appellate Tribunal. The High Court should confine itself solely to the facts found and proceed to apply the principle of law in the background and setting of the facts found by the Appellate Tribunal.

Where, in considering whether a sum of Rs. 18 lakhs appropriated by the respondent company in its accounts as compensation payable to its managing agents for termination of the managing agency agreement was admissible as an expenditure wholly and exclusively laid out by the respondent for the purpose of its business under section 10(2)(xv), the Appellate Tribunal had arrived at the finding that the termination of managing agency was not a bona fide transaction and it was done for an improper or oblique motive, and on the amount of Rs. 18 lakhs was an admissible deduction under section 10(2)(xv) the High Court held that the termination of the managing agency agreement was in the interests of commercial expediency and there was no evidence which could lead to the managing agency agreement was in the interests of commercial expediency and there was no evidence which could lead to the inference that the termination of the managing agency agreement was done with any oblique motive :

Held, that the question whether the termination of the managing agency agreement by the respondent company was not a bona fide and was done for an oblique or improper purpose was essentially a question of fact and the High Court had no jurisdiction to embark upon a reappraisal of the evidence before the Appellate Tribunal and interfere with the finding of fact that the termination of the managing agency agreement was not a bona fide transaction.

The Supreme Court, however, set aside the finding of the Tribunal as defective in law as it was arrived at without taking into account all relevant material adduced by the parties and remanded the case for disposal by the Appellate Tribunal after recording a clear finding on the question, it being open to it to re-hear the appeal u/s. 66(5).'

18. The ld. Counsel for the department to reinforce his contention had referred to the decisions of Madras and Delhi High Courts : (i) CIT, Madras-1 v. Amalgamations (P) Ltd. : [1977]108ITR895(Mad) and (ii) Siddho Mal & Sons v. CIT (1980) 15 CTR (Delhi) 95 respectively. We do not propose to discuss these decisions, inasmuch as the do not lay down anything different from what has been held in the fore-quoted Supreme Court authorities. We have mentioned them to complete the list of authorities that were cited by the ld. Counsel for the department with regard to his argument falling under the first head.

19. Before we proceed further we would like to discuss the authority of the Supreme Court in the basic case, viz., Eastern Investments Ltd. (supra). In that case the question for consideration was :

'Whether in the circumstances of this case, the interest paid by the assessee on debentures was incurred solely for the purpose of making or earning such incomes, profits or gains which are assessable under sub-s. (2) of s. 12.'

This question involved the question of a deductible allowance under section 12(2) of the India IT Act, 1922, as it stood before its ammedment in 1939 and read as under :

'12.(1)

xxx

xxx

xxx

(2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains provided that no allowance shall be made on account of any personal expenses of the assessee.'

The contention of the assessee fell before the ITAT and also before the High Court. It was agreed all through that the expenditure was not in the nature of a capital expenditure, but the view of the CIT was that (a) it was not an expenditure incurred for the purpose of earning income, profits and gains of the assessee-company and (b) even if it was, it was, at any rate, not an expenditure incurred solely for that purpose. In general, both the ITAT and the High Court (in the reference before it) took that view. The matter came in appeal before the Supreme Court. As stated in this judgment, the question before the Supreme s. 12(2) of the Indian IT Act, 1922, on which the decision of the appeal before it rested. To quote :

'The decision of this appeal rests on the true construction of s. 12(2).'

In that connection, the Supreme Court laid down the following principles :

(a) though the question must be decided on the facts of each case the final conclusion is one of law.- Indian Radio & Cable Communication Ltd. v. CIT, Bombay : [1937]5ITR270(Bom) and Tata Hydro Electric Agencies Ltd. v. The CIT, Bombay (1937) 5 ITR 202;

(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned-John, Moore v. Stewart & Lloyds Ltd (1906) 6 Tax Las 501 & Ushar Wittshire Brawery Ltd. v. Bruce (1915) A.C. 433;

(c) it is enough to show that the money was expended 'not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business.' - British Insulated & Helsby Cables Ltd. v. Atherton (1928) A.C. 205;

(d) beyond that no hard and fast rule can be laid down to explain what is meant by the word 'solely'.

And then the Supreme Court while construing the section 12(2) set aside the judgment of the High Court on the ground that the High Court took into account certain irrelevant matters and misconstrued the assessee-company, as may be demonstrated from the following observations :

'The next point on which some stress was placed was that there was complete identity of person between the person whose shares were sold and the person who took the debentures and that the transaction resulted in considerable benefit to him. In the absence of suggestion of fraud this is not relevant at all for gaving effect to the provisions of s. 12(2), Income-tax Act.'

xx

xx

xx

xx

xx

'The H.C. doubted whether the transaction could be brought within the functions of an investment company and found it difficult to reconcile it with the objects set out in the Memo. of Assocn. But we seen no such difficulty. Cl. 5 empowers a reduction of capital of the Co. and cl. 3(3) empowers the Co. to borrow or raise money by the issue of debentures. The matter is clearly 'Writ in the bond. Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an appln. to reduce the capital of the Co. The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out however mistaken the directions and shareholders of the Co. may have been.'

xx

xx

xx

xx

xx

The H.C. consd. that the capital of the C. could have been reduced in other ways. But that again is not the point. There are usually many ways in which a given thing can be brought about in business circles but it is not for the Ct. to decide which of them should have been employed when the Ct. is deciding a question u/s. 12(2), Income-tax Act.'

20. Thus, what is deductible from this decision is that whether the final conclusion about the deductible allowance u/s. 37(1) of the Act raises a question of law, or a mixed question or law and fact, or only a question of fact, and has to be determined in the context of the facts and circumstances of an individual case. In this case, their Lordships of the Supreme Court never intended to lay down as a rule of universal application that, without anything more, a final conclusion about a deductible allowance raises a question of law, or a mixed question of law and fact.

20A. On the survey of the fore-referred decisions of the Supreme court, the principles deductible are these : (i) for determining whether an expenditure is a deductible allowance as business expenditure u/s. 37(1) of the Act, the doctrine of lifting the veil applies, that is to say, the taxing authorities are entitled to examine the circumstances of each case to determining whether an expenditure is a deductible allowance as business expenditure u/s 37(1) of the Act, the doctrine of lifting the veil applies, that is to say, the taxing authorities are entitled to examine the circumstances of each case to determine whether the expenditure was an expenditure in curred wholly and exclusively for the Purpose of the business. The existence of an agreement, under which an expenditure claimed to be a deductible allowance was incurred and/or actually paid, will not debar the taxing authorities to satisfy themselves and determine the question and (ii) the question whether an expenditure -wholly or partly - was for extra - commercial reasons and not for the purpose of the business, has to be decided on the facts and in the light of the circumstances of each case. No rule of thumb or an exhaustive list of the expenditure, which can be held as deductible allowance, can be prepared. We shall quote with advantage in this respect the observation of their Lordships of the Supreme Court in Indian Aluminium Co. Ltd. v. CIT, West Bengal : [1972]84ITR735(SC) :

'The language seems to be simple enough but it has engendered judicial conflict not only in India but also in England. Eminent Judges have striven to formulate correct tests to determine whether an expenditure has been laid out or expended wholly and exclusively for the purposes of business or not, but no one has been able to find a test in the application of which differences of opinion do not arise. It seems to us therefore, essential that, in each case, the courts must always keep in mind the language of the section.'

21. Thus, the legal position on the question of making a reference or calling a reference is nothing different that what has been laid down in Sree Meenakshi Mills Ltd., Madurai v. CIT, Madras 0044/1956 : [1956]1SCR691 :

'The position for making a reference under s. 66 may thus be summed up :

(1) when the point for determination its a pure question of law such as construction of a statute or document of title, the decision of the Tribunal is open to reference to the court under s. 66(1).

(2) When the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the court.

(3) A finding on a question of fact is open to attack under s. 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.

(4) When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact.'

22. Bearing in mind the legal position, conspectus whereof is given in paragraph 21 of this order, we proceed to examine whether the question sought for reference does arise as a question of law, or as a mixed question of fact and law from the order of the Tribunal. It would be pertinent at his stage to focus attention on the undisputed fact that in the instant cases, the Income-tax Officer, on the basis of his predecessors order, in the case of the assessee for the asst. yr. 1966-67 (which was the subject-matter of reference in M.C.C. No. 200 of 1976 (supra) before this Court) held that the payment of lease money was not for commercial consideration except to the extent of Rs. 5 lacs and, therefore, the amount of the lease money beyond Rs. 5 lacs in each of the instant cases was disallowed by the ITO. In other words, the case of the department in the instant cases rests on the holding for the asst. yr. 1966-67. In that assessment year what was the order of the Tribunal upholding the assessees claim for the lease money as deductible allowance has been referred to and discussed in the judgment of this Court in M.C.C. No. 200 of 1976 (supra), the relevant excerpts whereof have been extracted in para 12 of this judgment. From these extracted excerpts it would be apparent that the contention of the department had been that the amount of lease money beyond Rs. 5 lacs was expediency but was given as a bounty to the lessor-company, i.e. M/s. Hind Cycles Ltd., which was also a Birla concern. There was no dispute as to the true scope and meaning of the words 'wholly and exclusively laid out for the purpose of the assessees business' or of any part of s. 37(1) of the Act. The question, therefore, in all the instant cases was whether the amount beyond Rs. 5 lacs of the lease money was given as a bounty. The Tribunal in the assessment case for the year 1966-67 discussing all the facts that the amount in question i.e., the lease money, beyond Rs. 5 company and, thus, the finding of the Tribunal was held by this court in the judgment in M.C.C. No. 200 of 1976 (supra) as a finding of fact giving rise to no question of law or a mixed question of fact and law justifying the calling of a reference u/s. 256(2) of the Act. The basis of the order of the Tribunal in the instant cases being that order of the Tribunal, in the setting of the facts and the legal position discussed hereinabove, after surveying the Supreme Court cases, which, of course, do not find a mention in the judgment of this court is M.C.C. No. 200 of 1976 (supra), we do not find any cogent reason for taking a view different than what has been taken by this Court in M.C.C. No. 200 of 1976 (supra). That decision is binding on us at it does not take a view contrary to the law laid down by the Supreme court. In this view of the matter, the argument of the ld. counsel for the department advanced under the firest head has to be repelled and is, accordingly, repelled.

23. We now turn to the argument of the ld. counsel for the department under the second head. Era we proceed to dilate further, we consider it advisable to dilate further, we consider it advisable to extract herein below the relevant part of the order of the Tribunal :

'2. In appeal the AAC observed as under :

'The payment of Rs. 25 lakhs was first examined by the ITO at great length in the appellants assessment for assessment year 1966-67 wherein he had reached a conclusion that payment to the extent of Rs. 20 lakhs out of the same was not for commercial consideration. Taking this view in the matter the ITO had disallowed Rs. 20 lakhs in that year. The facts and circumstances of the case being similar, the ITO also disallowed Rs. 20 lakhs in the assessment year 1967-68 Rs. 18,95,832 in assessment year 1968-69 and Rs. 7-1/2 lakhs in the assessment year 1969-70. The appellant company disputed the disallowance of Rs. 20 lakhs was wrongly made. This appeal was heard and disposed of by me and in my order dated 8-3-1973 I endorsed the view of the ITO. It has, however, now been pointed out to me that by its order dated 31-10-1973 the Income-tax Appellate Tribunal, Bombay, Bench A has reversed the finding and held, after taking into consideration the various circumstances and the assets of the Hind Cycles Ltd., that when the appellant entered into the lease agreement it did so in a business like manner with a hope of earning large profits and simply because the result of the venture proved to be a failure after some time, it could not be said that the lease agreement itself was uncommercial in nature. The appellant has filed with me a copy of the Tribunals order dated 31-10-1973 and on perusal thereof it is found that the Tribunal has indeed accepted the appellants claim. The Tribunal has held that the appellant took the lease only to run the business and not to oblige the Hind Cycles Ltd. which in 1964 was not in a sound position. The Tribunal was also satisfied that the lease arrangement was genuine and the quantum of lease agreed to of Rs. 25 lakhs per year was not at all abnormal. The Tribunal has observed that what they had to do in matters like this was not to look back and see what happened subsequent to the agreement but they had only to look into the circumstances that prevailed at that time when the appellant entered into the lease agreement in 1964. Taking the totality of the circumstances into consideration the Tribunal found that the appellant was entitled to the claim made to the allowance to the extent of Rs. 25 lakhs during the assessment year in question, instead of Rs. 5 lakhs allowed by the ITO. In this view of the matter, the Tribunal allowed the appellant companys claim for deduction of Rs. 25 lakhs. It was urged before me that the facts and circumstances of the case in the instant years are in all material respects the same as in the assessment year 1966-67 and, therefore, respective disallowances in these years also were wrong. There is force in the appellants submission. In assessment year 1966-67 the Tribunal has held after considering all facts and circumstances of the case that the lease agreement entered in 1964 was genuine and the lease rent agreed to of Rs. 25 lakhs per year was not excessive or abnormal. As the facts in the assessment years under appeal are not different from those of assessment year 1966-67, In would respectfully follow the Tribunals decision dated 31-10-1973 for assessment year 1966-67 and allow in the years under appeal deduction of lease rent as claimed instead of Rs. 5 lakhs allowed by the ITO. As a result the ITO would allow further deduction of Rs. 20 lakhs in assessment year 1967-68, Rs. 18,95,832 in assessment year 1968-69 and Rs. 7 1/2 lakhs in assessment year 1869-70.'

3. Aggrieved by the order of the AAC the revenue has filed these appeals before us. In our view since the AAC in allowing the claim of the assessee has followed the order of the Tribunal for the assessment year 1966-67, we do not think there is any substance in the appeal filed by the department. Since the department has not been able to distinguish the circumstances that were prevailing in the assessment year 1966-67, we deem it proper to follow the decision of the Tribunal as has been done by the AAC and hence the order of the AAC does not call for any interference. In the result all the three appeals filed by the revenue are dismissed.'

24. From the fore-extracted order of the Tribunal, specially para 3, it is apparent that the Tribunal did apply its mind to its previous order in the assessment case for asst. yr. 1966-67, and since no distinguishing circumstances were pointed out so as to persuade the Tribunal to take a different view from its previous order, it did not choose to re-write the effect of the evidence and reiterate the reasonings of its previous order. It would not be out of place to mention here the dictum of the Supreme Court in Girijanandini Devi and Others v. Bijendra Narain Choudhary : [1967]1SCR93 :

'It is not the duty of the appellate Court when it agrees with the view of the Trial Court on the evidence either to restate the effect of the evidence either to restate the effect of the evidence or the reiterate the reasons given by the Trial Court. Expression of general agreement with reasons given by the Court, decision of which is under appeal would ordinarily suffice.'

25. From the fore-quoted dictum of the Supreme Court, it is evident that for the appellate Court when it affirms the finding of the Trial Court, expression of general agreement with reasons given by the Trial Court, decision of which is under appeal, would ordinarily suffice. We would hasten here to make it clear lest we be misunder standing this aforesaid dictum of the Supreme Court that the expression of general agreement with reasons should be on the consideration and applicability of the mind to the evidence. When expression of general agreement by the appellate Court is sufficient, there is no understandable reason why, while deciding a case based on the same set of facts which has been considered and decided between the same parties earlier, such a course is not permissible to the Tribunal. It would be of significant relevance here to extract hereinbelow the observation of Chagla C.J. (as he then was) in H. A. Shah and Co. v. Commr. of IT and EPT (1956) 30 ITR 418.

'Therefore, in our opinion, an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the earlier decision has taken into consideration all material evidence. We should also like to sound a note of warning especially with regard to a Tribunal like the Appellate Tribunal, that it should be extremely slow to depart from a finding given by an earlier Tribunal. Even though the principle of res judicata may not apply, even though there may be no estoppel by record, it is very desirable that there should be finality and certainty in all litigations including litigations arising out of the Income-tax Act.'

In the instant case, the Tribunal, which decided the case of the asst. yr. 1966-67 and the relevant assessment years in the instant cases, is the same, of course the persons manning the Tribunal at the relevant times are different. Tribunal at the relevant times are different. But all the same since it was the same tribunal and, as stated in the order of the Tribunal extracted hereinabove, no distinguishing circumstances having been pointed out so as to persuade it to take a view different from the one taken earlier, it was justified in not restating the effect of the evidence and not reiterating the reasons given in its earlier decision : to iterate, particularly when there is no dispute that the basic facts in the two cases are the same.

26. From the fore-extracted order of the Tribunal, it is apparent that the Tribunal has applied its mind and thereafter it has decided the cases in the light of its earlier decision.

27. As a sequel to the foregoing discussion, we hold that the decision of the Tribunal is after an application of mind and is in accordance with law. It does not give rise to any question of law. It does not give rise to any question of law on the ground that the decision of the Tribunal is without application of its own mind to the facts of the cases. Consequently, the arguments of the learned counsel for the department under the second head are also repelled.

28. Before parting with this discussion under the second head of the argument of the ld. Counsel for the department, we would like to make it clear that since we have disagreed with the arguments of the ld. Counsel for the department, we have disagreed with the arguments of the ld. Counsel for the department, it would be a matter of mere academic interest to decide whether the argument under the second head is available to the department as being covered under the question proposed, for referring which a direction is sought to the Tribunal by the department. We have left this point open without expression any opinion on it. For the similar reason, we do not find it necessary for the decision of the present cases to dwell upon the other contentions of the ld. Counsel for the assessee capsulised by us in para 11 of this order.

29. In the result the applications are dismissed. We, however, make no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //