Rajendra Nath Mittal, J.
1. This order will dispose of Income-tax References Nos. 23 and 24 of 1973.
2. The facts are that M/s. Patiala Biscuit . (now known as 'Dalmia Biscuit Private Ltd.') (hereinafter referred to as 'the Patiala Biscuit Company') derives income from the manufacture and sate of biscuits, confectionary and bread. The assessment year involved is 1967-68, for which the accounting period is the year ending December 31, 1966. A meeting of the board of directors took place on December 29, 1965, in which Mr. P.S. Narayanaswamy informed the board that several new biscuit factories had been established in the country and, as a result thereof, there was every likelihood of unhealthy competition between the manufacturers. He had discussed the matter with Mr. Ram Krishna Dalmia of New Delhi, who was agreeable to purchase the entire products of the company as its principal purchaser. He would dispose of the products at the rates fixed by the company from time to time. The work would be carried out by him as a sole trustee of the trust known as 'Durga Devi Fund' which had been created by Shrimati Krishna Devi Dalmia, wife of Seth Jai Dayal Dalmia, for the benefit of the children of Mr. Ram Krishna Dalmia in the name of Rajpura Biscuit Company (hereinafter referred to as 'the Rajpura Company'). He also placed a copy of the draft agreement embodying the terms and conditions, discussed and settled between him and Mr. Ram Krishna Dalmia. The board formed the opinion that it would be in the interest of the company to make the agreement. It was resolved that the agreement between the Patiala Biscuit Company and the Durga Devi Fund, by its sole trustee, Mr. Ram Krishna Dalmia, be made for the disposal of the production of the company as per draft agreement signed by the chairman of the meeting. It was also resolved that Mr. G.P. Mittal, secretary of the Patiala Biscuit Company, be authorized to execute the aforesaid agreement and sign the same on behalf of Patiala Biscuit Company. The trust was started by Shrimati Krishna Devi with a corpus of Rs. 5,000. The sole trustee of that trust was Mr. Rajn Krishna Dalmia and the beneficiaries were his minor children, seventeen in number. According to the terms of the trust deed, Mr. Ram Krishna Dalmia was competent to co-opt other trustees. In the event of such trustees being co-opted and Mr. Dalmia passing away, the remaining trustees would continue to act as trustees of the trust. In case Mr. Dalmia did not co-opt any trustees, three trustees were to be nominated by such person as was authorized by him (Mr. Dalmia) in writing during his lifetime and such person was competent to fill in subsequent vacancies also to make the total number of three trustees. On December 31, 1965, an agreement was entered into between Durga Devi Fund and Patiaia Biscuit Company bywhich Durga Devi Fund was appointed as the sole selling agents of the assessee-company. According to the agreement, the Rajpura Company was to purchase the entire production of the Patiala Biscuit Company as principal to principal and dispose of the same at the f.o.r. destination rates fixed by the Patiala Biscuit Company from time to time and, in case of default, would be responsible to make good the loss suffered by the Patiala Biscuit Company. The Patiala Biscuit Company was also given the right to sell and supply its products direct to the Government and to its own depot at Saharanpur or at any other depots which were to be opened in other places in future. The Rajpura Company had to take over the stockists, dealers and distributors and the pending orders as on December 31, 1965, of the Patiala Biscuit Company. The Rajpura Company was to bear the expenses of the organization and the Patiala Biscuit Company was to give the Rajpura Company an overall rebate of 15 per cent. on the goods purchased by it and a rebate of 2 per cent. on sales made by the Patiala Biscuit Company to the Government and its own depots. The rates of rebate were reduced to 10 per cent. on confectionary and bread subsequently.
3. The Rajpura Company was allowed a total rebate of Rs. 22,49,838 by the Patiala Biscuit Company. The Income-tax Officer, while making the assessment of the Patiala Biscuit Company on April 30, 1968, disallowed Rs. 4,03,938 which was earned as profit by the Rajpura Company from January 1, 1966, to December 31, 1966, on the ground that the agreement was a dubious document and was a device by Mr. Ram Krishna Dalmia to appropriate the income of the assessee-company in favour of his relatives-beneficiaries. He also held that there was no necessity for appointment of sole selling agents, as there was no fear of competition and the products of the company were such that they need no canvassing for being sold. He also gave a finding that, if the assessee had not appointed the Rajpura Company as its agents, the profits that it earned would have been earned by the Patiala Biscuit Company. The assessee went up in appeal before the Appellate Assistant Commissioner. He held that the Income-tax Officer could not be the judge of the necessity or otherwise for the appointment of the sole selling agent and that there was no material to hold that the sole selling agents were the benamidar of the Patiala Biscuit Company. He therefore, held that the Income-tax Officer could not make an addition of Rs. 4,03,938 on hypothetical considerations. He, consequently, accepted the appeal. The department having felt aggrieved by the order of the Appellate Assistant Commissioner went up in appeal before the Appellate Tribunal on the following grounds :
'(1) The Appellate Assistant Commissioner erred in deleting the addition of Rs. 4,03,938 without any adequate material.
'(2) It is prayed that the order of the Appellate Assistant Commissioner be set aside and that of the Income-tax Officer restored.
(3) The appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed of.'
4. The Appellate Tribunal held that the arrangement between the Patiala Biscuit Company and the Rajpura Company was a clear device by Mr. Ram Krishna Dalmia to divert or appropriate the income of the company for his relatives who are beneficiaries and to avoid proper incidence of tax. It further held that the payment of commission as stipulated under the agreement had an element of excessiveness in it and such element of excessiveness had to be quantified. According to it, the amount of Rs. 4,03,938 represented the amount of excessive expenditure which had resulted in a benefit to the relations of a person who had a substantial interest in the company. Consequently, it reversed the findings of the Appellate Assistant Commissioner on January 12, 1972, and restored that of the Income-tax Officer. The Patiala Biscuit Company, the assessee, made an application requiring the Tribunal to refer certain questions of law to the High Court which arose out of its order dated January 12, 1972. The Tribunal, in Reference No. 23 of 1970, referred the following question for opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amount of Rs. 4,03,938 was disallowable under Section 40(c) of the Income-tax Act, 1961, when the Income-tax Officer had not specifically referred to those provisions and the Appellate Assistant Commissioner had not considered the case with reference to these provisions
(2) Whether, on the facts and in the circumstances of the case, the finding of the Appellate Tribunal regarding the disallowance of Rs. 4,03,938 out of the remuneration paid to the sole selling agents is based on relevant material and is sustainable in law '
5. The assessee preferred a miscellaneous application on June 6, 1972, under Section 254(2) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), seeking rectification of the order of the Tribunal on the ground that the Tribunal fell into error in not construing the agreement between the assessee and its sole selling agents, Rajpura Company, and other evidence on record properly. It was held by the Tribunal that there were no sufficient grounds for rectification of its order, dated January 12, 1972. It consequently dismissed the application. The assessee also made an application under Section 256(1) of the Act for making a reference of certain questions of law to this court. On the application, the Tribunal in Reference No. 24 of 1973, referred the following question of law to this court:
'Whether, on the facts and the circumstances of the case, the Tribunal was justified in law in holding that there was no mistake apparent from the record in its order dated January 12, 1972, which could be rectified under Section 254(2) of the Income-tax Act 1961 ?'
6. It is contended by the learned counsel for the assessee that the Income-tax Officer while deciding the case did not place reliance on Section 40(c) of the Act and, therefore, the Tribunal could not place reliance on that section and hold that the amount of Rs. 4,03,938 represents the amount of excessive expenditure. He further submits that the opinion has to be formed in the first instance by the Income-tax Officer according to that section and in case he does not do so, then the Tribunal cannot form an opinion for the first time in the appeal before it. In order to decide this question, it is necessary to read the relevant clauses of Section 40 of the Act, which are as under :
'40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession ',--... (c) in the case of any company-
(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,
(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in Sub-clause (i) either wholly or partly for his own purposes or benefit,
if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom;.........'
7. Mr. Bhagirath Dass has laid great emphasis on the words 'if in the opinion of the Income-tax Officer' and urged that the opinion has to be formed at first by the Income-tax Officer and not by the Appellate Assistant Commissioner or the Income-tax Appellate Tribunal. We regret our inability to accept this contention of the learned counsel for the assessee. It had been conceded by Mr. Bhagirath Dass that if the Income-tax Officer had not taken into consideration some section of the Act and the same was applicable, it could be taken into consideration by the appellate authorities. It is an established principle of law that the appeals are in continuation of original proceedings. Therefore, we are of the view that opinion can be formed under Section 40(c) by the authorities before whom the matter comes up in appeal. No doubt, the words used in the section are ' the Income-tax Officer ' but it will include the other authorities whohave to hear appeals against the order of the Income-tax Officer. This matter is not res integra. The Supreme Court has taken a similar view in Commissioner of Income-tax v. McMillan & Co. : 33ITR182(SC) . In that case, their Lordships were interpreting the proviso to Section 13 of the Indian Income-tax Act, 1922, which related to the method of accounting. In that section similar language had been used by the legislature, namely, 'in the opinion of the Income-tax Officer'. S.K. Das J., while speaking for the court, observed as follows :
'Whether the income, profits and gains can properly be deduced from the assessee's method of accounting is undoubtedly a matter which the Appellate Assistant Commissioner can go into when he has seizin of the appeal from the order of assessment of the Income-tax Officer. If the Income-tax Officer has failed to apply his mind to the proviso to Section 13 or has come to a wrong determination for or against the assessee in the computation of the income, the Appellate Assistant Commissioner can correct that error when he has seizin of the assessment on an appeal filed by the assessee. Whether in a particular case a remand will be the proper order depends on the circumstances of each case : the Appellate Assistant Commissioner has the power to correct the error in the way most suitable in the circumstances of the case.
The proviso to Section 13 does not import any limitation on the power of the Appellate Assistant Commissioner under Section 31 which gives him power to revise every process which leads to the ultimate computation or assessment, and there is nothing in the language of Section 31 which imposes any restriction on the powers of an Appellate Assistant Commissioner so as to prevent him from exercising the power under the proviso to Section 13.
It is, therefore, open to the Appellate Assistant Commissioner, on an appeal preferred by the assessee, to reject for the first time the method of accounting employed by the assessee on the ground that the income, profits and gains of the assessee cannot be properly deduced therefrom even though the Income-tax Officer has not applied the proviso to Section 13 and has not expressly said so.'
8. The same view was taken in the later judgment by that court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : 66ITR710(SC) . In that case, the Supreme Court was interpreting Section 33(4) of the Indian Income-tax Act, 1922, wherein the powers of the Appellate Tribunal are given. Shah J., while speaking for the court, observed as under :
'Under Section 33(4) the Appellate Tribunal is competent to pass such orders on appeal 'as it thinks fit'. There is nothing in the Income-tax. Act which restricts the Tribunal to the determination of questions raisedbefore the departmental authorities All questions, whether of law or of facts, which relate to the assessment of the assessee may be raised before the Tribunal. If for reasons recorded by the departmental authorities in respect of a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him.'
9. All the aforesaid observations show that the Tribunal could form an opinion under Section 40(c) even if that question was not raised before the Income-tax Officer. It was not necessary for the Tribunal to have remanded the case if it considered that there was sufficient material before it to base its opinion. We, therefore, do not find any substance in the contention of the learned counsel for the assessee.
10. The next contention of the learned counsel for the assessee is that the agreement entered into between the assessee and the Rajpura Company was an agreement of sale from principal to principal. He further submits that Mr. Ram Krishna Dalmia had given a guarantee for purchasing all the goods produced by the assessee and implementing the agreement and in case the assessee had suffered any loss on account of the default of the Rajpura, Company, he would have been personally responsible to reimburse the assessee. He further submits that in the circumstances the Tribunal misdirected itself in holding that the amount of Rs. 4,03,938, earned as profit by the Rajpura Company, represented the amount of excessive expenditure of the assessee under Section 40(c) of the Act. In order to decide this question, it will be necessary to peruse the deed of agreement executed between the parties. It is stated in the deed that several biscuit factories were being established in the country and, as a result thereof, there was likelihood of unhealthy competition between the manufacturers and, therefore, to meet the contingency, it was desirable to make pucca arrangement for the disposal of the entire production. The agreement had to remain in operation for a period of three years commencing from January 1, 1966. The relevant clauses of the agreement are as follows:
'(3) That the second party subject to Clause 4 hereunder shall purchase the entire production of the first party as principal to principal, and dispose of the same at the f.o.r. destination rates fixed by the first party from time to time and, in case of default, would be responsible to make good the loss suffered by the first, party in this behalf. The second party shall make payment to the first party regarding such purchases in the manner stated in Clauses 8 & 9 hereunder.
(4) That the first party shall be free to sell and supply its products direct to the Government and to its own depot at Saharanpur or any otherdepot which it opens at other places in future on the rates and terms thought fit by it, subject to Clause 7(b) hereunder.
(5) That the first party shall transfer and the second party shall take over, subject to Clause 4 above, all the first party's present stockists, dealers and distributors, and their pending orders as on 31-12-1965, and the second party shall be free to deal with them in the way it likes, make changes in their appointments, terms and conditions or make new appointments, etc., etc., at its own discretion.
(7) That the first party shall allow to the second party :
(a) Subject to Clause 6 above under which the second party has been made to bear various kinds of expenses and the yearly average of which is estimated to be about 12% an over-all rebate of 15% on the goods purchased by the second party under Clause 3 above, calculated on the sale prices charged by the second party from the customers.
(b) 2% only on the goods covered under Clauses 4 and 12 hereof. (13) That as the appointment of the second party mentioned above has been made by the first party on the personal surety given by Shri Ram Krishna Dalmia, he (Shri Ram Krishna Dalmia) shall be responsible in his personal capacity too for the implementation, defaults and all kinds of monetary responsibilities with regard to this agreement on behalf of the second party.'
11. It may be mentioned that none of the income-tax authorities has held that the deed is a sham transaction between the parties. A reading of the aforesaid clauses shows that the Rajpura Company had to purchase all the goods produced by the assessee for a period of three years as principal to principal. The Rajpura Company had to take over all the stockists, dealers and distributors and the pending orders as on December 31, 1965, from the assessee and it was free to make any changes in their appointments, terms and conditions. It was also authorized to make necessary arrangements at its own discretion. It was to be paid an overall rebate of 15% on the goods purchased by it from the assessee. Later on, however, by a separate agreement, the amount of rebate was reduced to 10% on confectionary and bread. Mr. Ram Krishna Dalmia became a surety for implementation of the agreement. In case the agreement between the parties was genuine, it cannot be said that the rebate which was given to the Rajpura Company by the assessee would become an expenditure by the assessee. It is the outlook of the seller to dispose of its goods in any manner it likes. It can sell the goods at cheaper rates. If the transaction is genuine, the assessee cannot be taxed for the income which would have accrued to it in case it had not sold the goods at cheaper rates. In the aforesaid view, we are fortified by the observations of the Supreme Courtin Commissioner of Income-tax v. A. Raman and Co. : 67ITR11(SC) , which are as under:
'The law does not oblige-a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands ; income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment, a case for commencing a proceeding for reassessment under Section 147(b) may be made out. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.'
12. Following the aforesaid view, in Commissioner of Income-tax v. Calcutta Discount Company Ltd. : 91ITR8(SC) it observed that, where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. It further observed that the assessee could so arrange his affairs as to minimise his tax burden. The above observations clearly go to show that the assessee is the sole, judge, as to how it has to run its business. It can even circumvent the law in a legitimate way. The agreement between the Rajpura Company has not been held sham transaction by the income-tax authorities. It cannot be held by any stretch of imagination that the rebate given by the assessee is an expenditure within the meaning of Section 40(c) of the Act. At the most it can be said that the assessee sold goods to the Rajpura Company at cheaper price, which it could do. We are, therefore, of the opinion that the Tribunal has not taken relevant material into consideration in disallowing an amount of Rs. 4,03,938 out of the payments made to the Rajpura Company and the finding of the Tribunal is not sustainable in law.
13. A preliminary objection was raised by Mr. D.N. Awasthy, the learned counsel for the revenue, that the question whether the case is covered by, Section 40(c) of the Act or not cannot be' raised before this court as the same has not been referred to it.
14. In the draft statement, the following three questions were proposed:
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the respondent to urge a new ground in respect of the disallowance of Rs. 4,03,938 under the provisions of Section 40(c) of the Income-tax Act, 1961, as this ground was neither considered by the Income-tax Officer nor arose out of the order of the Appellate Assistant Commissioner
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in itself examining the provisions of Section 40(c) and to arrive at a decision that the amount to the extent of Rs. 4,03,938, out of Rs. 22,49,838 represented excessive or unreasonable remuneration paid by the assessee to the sole selling agents
(3) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal regarding the disallowance of Rs. 4,03,938 out of the remuneration paid to the sole selling agents is based on proper material and is sustainable in law '
15. Only two questions have been referred to this court in Reference No. 23. Question No. 3 from the draft statement has been reproduced as question No. 2 in the statement of the case. Out of questions Nos. 1 and 2 in the draft statement, a consolidated question was framed which was numbered as question No. 1. Question No. 1 consists of two parts. The first part clearly shows that the Tribunal has referred the question for decision as to whether the Appellate Tribunal was right in holding that the amount of Rs. 4,03,938 was disallowable under Section 40(c) of the Act. In case the Tribunal wanted that this court should not go into the question whether Section 40(c) is applicable to the present case or not, it could frame the question as question No. 1 was incorporated in the draft statement. In question No. 1 incorporated in the statement of the case, the Tribunal has used the word 'holding' and not 'considering'. Mr. Awasthy wants us to read the word 'holding' as 'considering'. We are unable to do so. A reading of the proposed questions and the questions referred clearly shows that the Tribunal advisedly used the word 'holding' in question No. 1. This matter even can be considered by this court under question No, 2. According to it, it is to be determined whether the disallowance of Rs. 4,03,938 out of the remuneration paid to the Rajpura Company is sustainable in law. The Tribunal has held it to be disallowable under Section 40(c) of the Act. Thus, Section 40(c) is to be taken into consideration in finding out whether the disallowance is sustainable in law or not. We, are, therefore, of the view that the question whether Section 40(c) is applicable to the present case or not can be considered under part 1 of question No. 1 and also under question No. 2.
16. In Income-tax Reference No. 24 of 1973, it is contended by the learned counsel for the assessee that the Tribunal had not interpreted Section 40(c)of the Act correctly and the mistake was apparent on the record. He argues that the Tribunal should have ordered rectification under Section 254(2) of the Act. Section 254(2) says that the Appellate Tribunal may, with a view to rectifying any mistake apparent from the record, amend any order passed by it under Sub-section (1) and shall make such amendment if the mistake is brought to its notice by the assessee or the Income-tax Officer. The question that arises is whether the mistake in the present case is apparent from the record. The Supreme Court has interpreted the aforesaid section in T.S. Balaram, Income-tax Officer, Company Circle IV Bombay v. Volkart Brothers : 82ITR50(SC) , wherein it has been observed that a mistake apparent from the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. It is further held that a decision on a debatable point of law is not a mistake apparent from the record. We have already given the facts and the interpretation of the law above. A reading of the case clearly shows that the mistake cannot be said as apparent on the face of the record. It depends upon the consideration of the facts and the interpretation of law. In our view, the Tribunal rightly held that no application was maintainable under Section 254(2) of the Act.
17. In view of the aforesaid discussion, our replies to the questions are as follows:
Income-tax Reference No. 23 of 1973.
Reply to Question No. 1.
18. The Tribunal was not right in holding that the amount of Rs. 4,03,938 was disallowable under Section 40(c) of the Income-tax Act, 1961. The Tribunal, however, could take into consideration Section 40(c) of the aforesaid Act, even though it was not referred to by the Income-tax Officer, and the Appellate Assistant Commissioner.
Reply to question No. 2.
19. The finding of the Appellate Tribunal regarding the disallowance of Rs. 4,03,938 out of the remuneration paid to the sole selling agents is not based on relevant material and is not sustainable in law.
Income-tax Reference No. 24 of 1973.
20. The Tribunal was justified in law in holding that there was no mistake apparent in its order, dated January 12, 1972, which could be rectified under Section 254(2) of the Income-tax Act, 1961.
21. In the circumstances of these cases, however, we make no order as to costs.
Man Mohan Singh Gujral, J.
22. I agree.