Pritam Singh Pattar, J.
1. The Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, referred the following questions of law under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in sustaining the disallowance of commission paid to Messrs. Textile Processing Agency'?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the amount of Rs. 6,800 paid as director's fee?'
2. The facts of this case are that the assessee, Messrs. Nirmla Textile Finishing Mills Private Ltd., is a company with limited liability. This company is exclusively engaged in the business of dyeing, bleaching and finishing and other such processes in almost all kinds of textile fabrics, i.e., woollen, art silk, nylon and staple, etc. The assessment year is 1961-62 for which the accounting year is financial year 1960-61. During the assessment year, the following were the directors of the company:
(1) Shri Jugal Kishore Mehra ;
(2) Shri Rishi Ram Aggarwal;
(3) Shri Madan Mohan Aggarwal;
(4) Shri Jai Gopal Mehra;
(5) Shri Het Ram Aggarwal.
3. In the profit and loss account, the assessee claimed brokerage and commission amounting to Rs. 96,080 and this sum included an amount of Rs. 69,228 paid to Messrs. Textile Processing Agency, Amritsar. The commission to this firm was stated to have been paid in pursuance of an agreement dated March 31, 1960, whereby this firm was appointed as agent of the assessee. The firm, Messrs. Textile Processing Agency, Amritsar, came into existence on April 1, 1960, under a partnership agreement, which was executed on the same day. The Income-tax Officer found that on March 31, 1960, when the agreement between the assessee and Messrs. Textile Processing Agency was executed, the firm, Messrs. Textile Processing Agency, was not in existence. Since the firm had not come into existence on that date there was no question of Dr. Het Ram Aggarwal entering into an agreement with the assessee as agent of that firm. Since one of the parties to the agreement did not, as a matter of fact, exist on the date when the agreement is purported to have been made, the agreement was held by the Income-tax Officer as void ab initio and the commission alleged to have been paid in pursuance of the agreement was accordingly held to be inadmissible. The Income-tax Officer further found that the partners of this firm were either directors in the assessee-company or they were closely related to the directors. The relationship of each of the partners with the directors of the assessee-company was given by the Income-tax Officer in the assessment order as under:
Name of the partner
Relation with director
Dr. Tirath Ram Aggarwal
son of Dr. Het RamAggarwal, director and brother of Sarvshri Madan Mohan Aggarwal, and Rishi Ram Aggarwal,directors.
Smt. Raj Rani
wife of Shri RishiRam Aggarwal, director.
Smt. Santosh Kumari
wife of Shri Madan MohanAggar-wal, director.
Shri Jaishi Ram Mehra
father of SarvshriJugal Kishore Mehra and Jai Gopal Mehra, directors.
Shri Jatinder Kumar Mehra
brother of Shri Jugal KishoreMehra and Jai Gopal Mehra, directors.
Shri Joginder Lal Mehra
brother of Shri Jugal KishoreMehra and Jai Gopal Mehra, directors.
Smt. Nirmala Kumari
wife of Shri JugalKishore Mehra, director.
wife of Shri Jai GopalMehra, director.
4. The Income-tax Officer came to the conclusion that, in view of the provisions of Section 314 of the Companies Act, 1956, and in the absence of any special resolution by the company according consent before appointing Messrs. Textile Processing Agency as agents, the appointment of the firm as agents was illegal. Relying on the Bombay High Court judgment in Commissioner of Income-tax v. Haji Aziz and Abdul Shakoor Bros. : 28ITR266(Bom) . and the Punjab High Court judgment in Raj Woollen Industries v. Commissioner of Income-tax he held that since Messrs. Textile Processing Agency was appointed to hold the office of profit under the company, in violation of the provisions of Section 314 of the Companies Act, 1956, the commission paid to it could not be allowed as deduction under Section 10(2)(xv). It was further found by the Income-tax Officer that the assessee had appointed Messrs. Textile Processing Agency as its agents to perform the following functions:
' (i) The agents were to advance or cause to be advanced on their behalf to the company on a request being made in writing by the company, a sum of Rs. 4 lakhs, on which the company was to pay interest at 7 1/2%.
(ii) They were to collect on behalf of the company realisations from customers and to be liable to the company for non-recoveries except in the case of insolvency of any of the customers or non-settlement of a dispute of a claim by the company with the customers.
(iii) They were to introduce customers to the company.'
5. During the assessment year, the assessee-company did not receive any advance from/or through the Textile Processing Agency to meet its financial requirements. It had to take a temporary overdraft of Rs. 1,08,168 from Messrs. National and Grindlays Bank Ltd., and it also raised loans from the market inasmuch as the amount of unsecured loans increased from Rs. 1,22,961 on March 31,1961, to Rs. 2,23,299 at the end of the accounting year 1960-61. Thus, according to the Income-tax Officer, the primary function was not actually performed by the agency and it was nut meant to be performed. He also found that the two important functions mentioned there were also not in fact performed by Messrs. Textile Processing Agency. It was found that the commission payable to Messrs. Textile Processing Agency was not determined strictly in accordance with the agreement. For these reasons and also in view of the fact that all the partners of Messrs. Textile Processing Agency were closely related to the director of the assessee-company, the Income-tax Officer held that the agreement was only a device for diverting the profits of the company to the directors or their relatives and he accordingly disallowed the commission of Rs. 69,228 paid to the Textile Processing Agency.
6. The assessee-company claimed director's fee amounting to Rs. 6,800 during the year under :
Dr. Het Ram Aggarwal
Shri Madan Mohan Aggarwal
Shri Rishi Ram Aggarwal
Shri j. K.Mehra
Shri Jai Gopal Mehra
7. This amount was disallowed by the Income-tax Officer holding thatMessrs. Textile Processing Agency in which Dr. Het Ram Aggarwal andother directors were partners was holding office or place of profit under thecompany in contravention of the provisions of Section 314(1) of theCompanies Act, 1956, and, therefore, according to the provisions of Section 314(2) of that Act, all the directors shall be deemed to have vacatedtheir offices with effect from April 1, 1960, and consequently the amount ofRs. 6,800 paid as fee to the directors was disallowed. The assessee filed anappeal against this order before the Appellate Assistant Commissioner, whocame to the conclusion that the whole of the commission should not havebeen disallowed and directed that the expenses incurred on the office and establishment of the agency firm for this purpose should be deducted from the gross commission and only the net commission, which amounted to Rs. 35,419, should be added. He, thus, allowed a deduction of Rs. 33,809 out of the above said commission amount, but otherwise the appeal was dismissed. The assessee filed a further appeal before the Tribunal, which was dismissed on October 17, 1970. Thereafter, the assessee made an application under Section 256(1) of the Income-tax Act, 1961, before the Tribunal to refer the above-mentioned question of law. This petition was allowed and the two questions were referred to this court for opinion.
8. Section 314(1) of the Companies Act, 1956, lays down that except with the previous consent of the company accorded by a special resolution, no director of a company, no partner or relative of such a director, no firm in which such a director or relative is a partner, no private company of which such a director is a director or member, etc., shall hold any office or place of profit except that of managing director, etc.
9. Section 314(2) of that Act runs as follows:
' If any office or place of profit under the company or a subsidiary thereof is held in contravention of the provisions of Sub-section (1), the director concerned shall be deemed to have vacated his office as director with effect from the first day on which the contravention occurs; and shall also be liable to refund to the company any remuneration received, or the monetary equivalent of any perquisites or advantage enjoyed by him, in respect of such office or place of profit.'
10. Messrs. Textile Processing Agency was appointed as agent of the the assessee-firm, vide agreement dated March 31, 1960, whose copy is annexure ' A '. This agreement was executed on behalf of Messrs. Textile Processing Agency with the assessee-firm by Dr. Het Ram Aggarwal, who was its partner and was also the director of the assessee-firm. The other partners of this Messrs. Textile Processing Agency are near relatives of the other directors of the assessee-firm mentioned above. Consequently, in view of the provisions of Section 314(2) of the Companies Act, all the directors will be deemed to have vacated their offices as directors with effect from April 1, 1960, when Messrs. Textile Processing Agency was appointed to hold the office or place of profit under the company. Therefore, the result is that the director's fee amounting to Rs. 6,800 paid to the directors of the assessee-company was rightly disallowed as a deduction by the department. The Tribunal was right in disallowing this amount of Rs. 6,800 paid as director's fee. Question No. 2 must be answered in the affirmative, i.e., in favour of the department and against the assessee.
11. In Aluminium Corporation of India Ltd. v. Commissioner of Income-tax the Supreme Court held as follows :
' When a question refers to the facts and circumstances in the case, it means the facts and circumstances as found by the Tribunal. If any party wants to challenge the correctness of the findings given by the Tribunal either on the ground that the same is not supported by any evidence on record or is based on irrelevant or inadmissible evidence or is unreasonable or perverse, a reference raising any one of these grounds must be sought for and obtained.
The jurisdiction of the High Court on a reference under Section 66 of the Indian Income-tax Act, 1922, is only an advisory jurisdiction. The High Court can only pronounce its opinion on the questions referred to it. It cannot sit as an appellate court from the decision of the Tribunal.'
12. In Lachminarayan Madan Lal v. Commissioner of Income-tax the facts were that the assessee, a firm carrying on the business of manufacturing and selling aluminium, aluminium utensils, consisted of three partners, each having a one-third share therein. Up to the accounting period relevant for the assessment year 1962-63, it made its sales direct to the customers. For the assessment year 1963-64, it claimed deduction of commission paid to a selling agency firm. That selling agency firm had four major partners, three of whom were the wives of the partners of the assessee-firm and the fourth a major son of one of them. Two minors were admitted to the benefits of partnership. The shares in the selling agency firm of the respective wife and son of each partner in the assessee-firm were equal to one-third. The Tribunal found: (i) that on the day the selling agency agreement was executed, viz., March 26, 1962, the selling agency firm had not even come into existence ; it had come into existence later, on April 13, 1962 ; (ii) that the ladies had no prior business experience; (iii) that the only male adult partner in that firm was a partner in another manufacturing concern situate at a place quite distant from the place where the selling agency business was said to have been carried on; (iv) that the business address of the selling agency firm was the same as that of the assessee; (v) that the selling agency firm had no godown of its own nor any transport vehicles. On these findings the Tribunal reached the conclusion that the selling agency firm was not genuine and the agreement was only a make-believe arrangement and that it was merely a device to minimise the assessee's tax liability. On these facts, it was held as under :
' That the finding of the Tribunal were findings of fact and no question of law arose out of the Tribunal's order. This was a case where the assessee, by adopting a device, had made it to appear that the income which belonged to it had been earned by some other person.
The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under Section 37 of the Act.'
13. It was further held in this case that on the facts it was open to the Tribunal to reject the oral evidence in the light of the surrounding circumstances of the case.
14. The decision of the Supreme Court in the above two cases is aptly applicable to the present case. In the instant case, the Judicial Member of the Tribunal with whom the Accountant Member agreed, sustained the disallowance of the payment of Rs. 35,419 made by the assessee-company to Messrs. Textile Processing Agency and observed in para. No. 10 of his order dated October 17, 1970, as follows:
' When we keep in view the constitution of the firm and the relationship of the partners with the directors of the company, the whole affair smacks of collusion. Undoubtedly, the company has a right to reduce its incidence of taxation within the four corners of law. This may not be moral but is legal. However, reduction of tax under veil of legality is neither legal nor moral. The way the agreement has been entered into on March 31, 1960, and the firm has been brought into being on April 1, 1960, with the constitution as narrated above and the relationship with the directors as shown is an attempt at reduction of tax liability under the garb of agreement and a partnership deed. In such cases of reduction of tax, the revenue is competent to unveil the veil of legality from the documents like the agreement and the partnership and arrive at the true state of affairs. The agreement and the partnership deed when looked at in the entirety of circumstances prevailing in the instant case lead to a conclusion that these two documents have been executed merely to evade proper taxation on income which the company is earning. While the avoidance of taxation is the right of the assessee, the purported reduction in tax in the manner attempted amounts to hoodwinking the revenue which is beyond law. In the desire to reduce the tax liabilities the assessee should not and cannot be permitted to resort to measures which are neither legal nor moral. It is a social evil to evade tax and evasion of tax cannot be allowed. The assessee has attempted at evasion of tax and attempted it consciously, deliberately with the sole motive of not paying the tax liabilities legally due from it. Such attempts have to be nipped in the bud. Lest they spread over because if they spread over they can undermine the whole social fabric and bring on the surface tendencies which are harmful to the society itself and the assessees themselves in the ultimate. The instant case cannot have sympathy of any one because it is a patent case of evasion of tax purported to be achieved through the instrumentality of an agreement and a partnership deed which has but only a thin veneer of legality. The relationship of the partners of the firm with the directors of the company does go to show that the whole affair was preplanned, predesigned not merely to reduce the incidence of tax but to evade tax. On such people, the rigours of law must be imposed rigorously because those who play with fire and have their fingers burnt cannot complain of the burnt fingers. Those who try to hoodwink the revenue and are caught have no right to complain. We must appreciate the efforts of the Income-tax Officer who has passed a very reasoned order and disallowed the total commission paid to the Textile Processing Agency. Muc(sic) was made of the fact that the recipient has been separately taxed. It is well known and well settled that the tests which apply when judging the admissibility of a claim are quite different from those which obtain while assessing the recipient. In a sense it is an extraneous consideration so far as the assessee before us is concerned. An assessee ' B' may tell the Income-tax Officer that he has received a sum of money from ' A ' and is taxable. The Income-tax Officer is legally bound to tax him but that does not mean that ' A', the disburser, would automatically get a deduction in his assessment. Ordinarily, ' B' is assessed on his receipts and ' A' gets the deduction in his assessments. But that is true of ordinary and normal transactions. In case of attempted evasion when 'A' and 'B' act in concert and the final result of the total scheme is evasion of tax, altogether different principles apply. '
15. These are facts and circumstances as found by the Tribunal. If the assessee wanted to challenge the correctness of the findings given by the Tribunal either on the ground of the same being not supported by any evidence on record or based on irrelevant evidence, etc., a reference raising any one of these grounds must have been sought for and obtained from the Tribunal, but this was not done and, therefore, according to the law laid down by the Supreme Court in Aluminium Corporation of India's case , the contention of the counsel for the assessee that these findings were not correct cannot be entertained. The agreement was entered into between the assessee and Messrs. Textile Processing Agency on March 31, 1960, and at that time this firm was not in existence and consequently Dr. Het Ram Aggarwal had no locus standi to enter into an agreement with the assessee as agent of that firm and the agreement is illegal. One of the partners of this firm, namely. Dr. Het Ram, was a director of the assessee-company and the other partners of the firm are closely related to the directors of the assessee-company and the findings of the Tribunal that this agreement by the assessee-company with this firm was only a device to divert the profits of the company to the directors or their close relatives are unassailable.
16. It was next contended by Mr. Kapur, the learned counsel for the assessee, that the company had been appointing agents for the last several years and the commission paid to various agents had been allowed during the last so many years and that decision operated as res judicata and the Tribunal had no right to disallow the commission paid to Messrs. Textile Processing Agency. In support of this contention, he relied on a judgment of this court reported as Commissioner of Income-tax v. Dalmia Dadri Cement Ltd. wherein it was held as under:
'. . . . That though as a general rule the principle of res judicata is not applicable to decisions of income-tax authorities and an assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year, this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act and 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 later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. '
17. He also relied on Commissioner of Income-tax v. Durga Prasad More : 82ITR540(SC) .wherein it was held as follows :
' That though it was true that neither the principle of res judicata nor the rule of estoppel was applicable to assessment proceedings, the fact that the assessee included the income of the premises in his returns for several years, after objecting to its inclusion in the year 1942-43, was a circumstance which the taxing authorities were entitled to take into consideration, in the absence of any satisfactory explanation.'
18. The law laid down in both these cases is not applicable to the present case. In the instant case, the firm, Messrs. Textile Processing Agency, came into existence on April 1, 1960, but an agreement was entered into between the assessee-company and this firm, whereby the latter was appointed as the agent of the assessee, vide the agreement dated March 31, 1960, whose copy is annexure ' A '. During the previous years, the assessee-company had been appointing other firms as agents and paying commission to them and that amount was deducted from their income. However, no decision of any officer of the income-tax department pertaining to Messrs. Textile Processing Agency was made prior to this occasion, and, therefore, the question of res judicata does not arise at all. The doctrine of res judicata will apply only if there is an earlier decision on the same question, which cannot be reopened. There is no force in the contention of the learned counsel for the assessee and the same is repelled.
19. No other point was urged before us. For the reasons given above, it is held that the Tribunal was right in sustaining the disallowance of the commission paid to Messrs. Textile Processing Agency and question No. 1 must be answered in the affirmative, i.e., in favour of the department and against the assessee.
20. In the result, both the questions referred by the Tribunal for the opinion of this court are answered in the affirmative, i.e., in favour of the department and against the assessee. There will be no order as to costs.
D.K. Mahajan, C.J.