1. At the instance of the Revenue, the following questions have been referred for the opinion of this court under s. 256(2) of the I.T. Act, 1961 (hereinafter referred to as 'the Act') :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that M/s. Ramchand and Company is not a benami for the asessee-firm and, therefore, the income from the said business should be excluded from the assessment of the assessee-firm for the assessment years 1961-62 and 1962-63
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the onus is on the Department to prove that the firm, M/s. Ramchand and Company, was not a genuine firm carrying on business and the payment of commission and interest by the assessee-firm to M/s. Ramchand and Company was during the course of its regular business
3. Whether the finding of the Appellate Tribunal is based on valid and proper materials and is a reasonable view to take on the facts and in circumstances of the case ?'
2. The assessee is a firm consisting of four partners originally constituted on April 27, 1943. Subsequently, there were changes in the constitution of the firm and during the years relevant for the assessment years in question, the assessee-firm consisted of Satramdas, Gopaldas, Dharmadas and Mrs. Kimat Bai as partners. The first three partners are the sons of the fourth partner. The business of the firm is in piecegoods and artsilk on wholesale basis. For the assessment year 1961-62, the assessee returned an income of Rs. 1,70,870. In the course of the examination of the accountants of the assessee, it was found that the assessee had made must of its purchases through and had paid commission and, interest to another firm, M/s. Ramchand and Company, No. 217, Princess Street, Bombay-2. Out of the total purchases made by the assessee in a sum of Rs. 26,78,736, purchases through M/s. Ramchand and Company, Bombay, were for Rs. 23,43,384. M/s. Ramchand and Company, Bombay, consisted of three partners, namely, Ramchand Satramdas, who was none other than the sum of Satramdas, one of the partners of the assessee-firm, Mrs. Veena Dharamdas, wife of another partner of the assessee-firm and Mrs. Kamala Gopaldas, wife yet another partner of the assessee-firm. None of the partners of the firm, M/s. Ramchand and Company, Bombay, ever stayed at Bombay, though its business was stated to have been carried on at Bombay by a power of attorney of the name of Mothiram Basantrai, through whom the assessee had been making its purchases prior to the constitution of the firm, M/s. Ramchand and Company. M/s. Ramchand and Company, Bombay, received commission and interest over the purchases for the assessee and Mothiram Basantrai continued to the receive brokerage from those vendors from whom he made purchases. For the assessment years 1960-61 and 1961-62, the 9th Income-tax Officer, Market Ward, Bombay, passed orders on March 31, 1961, and October 31, 1961, respectively, determining the status of M/s. Ramchand and Company, Bombay, as that of an unrejistered firm on the ground that the firm was not a genuine one. On appeal to the AAC, that order was confirmed and on the further appeal to the Income-tax Appellate Tribunal, Bombay, in relation to the assessment year 1960-61, in this order dated May 28, 1963, the Tribunal observed as under :
'From the facts found by the income-tax authorities, we have no doubt that the assessee-firm was not a genuine firm and the sole object of its formation was to divert and route the purchases made by Motiram Basantrai trough the assessee and commercial purpose was served. By this procedure, the firm M/s. Lekhraj and Sons successfully reduced its taxable profits by claiming deduction in its own assessments of the commission and the interest paid by it to the assessee-firm on the purchases made by it. Since we agree with the Department that the assessee-firm is not a genuine firm, the income supposed to have been earned by it when assessed in the hands of M/s. Lekhraj and Sons, this assessment would be canceled by the Department. Registration had, therefore, been rightly refused.'
3. In view of this finding given by the Appellate Tribunal, Bombay, for the assessment year 1960-61, which was also subsequently confirmed for the year 1961-62 by the AAC, the ITO, in the course of the assessment proceedings of the assessee, directed the clubbing of the income of M/s. Ramchand and Company, Bombay, with the income of the assessee as returned and completed the assessment. For the assessment year 1962-63 also, to the income returned by the assessee in sum of Rs 2,42,426, the income of M/s. Ramchand and Company, Bombay, was clubbed and the assessment was completed. Against this, the assessee preferred appeals contending that the proceedings relating to M/s. Ramchand and Company, Bombay, were concerned with the question of its registration and any finding rendered therein by the Tribunal cannot justify the inclusion of the income of M/s. Ramchand and company, Bombay with that of the assessee or conclude that question against the assessee-firm. The AAC relied on the following circumstances viz., (i) none of the partners of M/s. Ramchand and Company, Bombay, ever stayed in Bombay, though the business was said to be carried on in Bombay, (ii) prior to the formation of M/s. Ramchand and Company, the assessee was effecting its purchases through Motiram Basantrai, who received commission and interest, (iii) after the formation of M/s. Ramchand and Company, Motiram Basantrai was made the power of attorney agent, (iv) M/s. Ramchand and Company did not have even a business permises in Bombay, (v) that the capital for the business of M/s. Ramchand and Company came from the assessee-firm and not through independent sources, (vi) M/s. Ramchand and Company though indebted to merchants in Bombay was receiving interest from the assessee-firm and paid no interest to the Bombay was receiving interest from the assessee-firm and paid no interest to the Bombay parties, and (vii) the expenses of the visits of the partners of the assessee-firm to Bombay were debited in the books of M/s. Ramchand and Company, and conducted that the business of M/s. Ramchand and Company belonged only to the assessee-firm and its income had, therefore, been rightly clubbed with the income of the assessee. In that view, the appeals were dismissed. On further appeal to the Tribunal, it was of the view that the Revenue had failed to establish that the capital of M/s. Ramchand and Company proceeded from the assessee-firm and concluded that the business of M/s. Ramchand and Company, Bombay, for the years under consideration, cannot be held to be the benami business of the assessee and, therefore, the income of M/s. Ramchand and Company should be deleted from the assessments of the assessee. Similar relief was granted to the assessee by the Tribunal as regards the assessment year 1962-63 also after upholding the addition of a sum of Rs. 1,300 disallowed on a claim for travelling expenses. Aggrieved by this, the Revenue has come up before this court on the questions referred to earlier.
4. The learned counsel for the Revenue drew our attention to the several circumstances catalogued earlier and adverted to by the AAC in his order to contend that M/s. Ramchand and Company was only a benami for the assessee and, therefore, the Tribunal was not in order in directing the deletion of the clubbing of the income of M/s. Ramchand and Company with that of the assessee. On the other hand, the learned counsel for the assessee submitted that the Tribunal had, on a consideration of all the relevant materials relating to the benami nature of M/s. Ramchand and Company, found as a fact that the capital contribution for M/s Ramchand and Company did not proceed from the assessee-firm and that on such a finding, which was essentially one of fact arrived at by the Tribunal, the first question referred for the opinion of the court cannot be stated to arise at all as a question of law. Reliance was placed in this connection on some decisions as well.
5. We have carefully considered this submission. The orders of the assessing authority and the AAC in this case clearly establish that the firm of M/s. Ramchand and Company, Bombay, was also considered to be not a genuine firm but projected as a device to successfully reduce the taxable profits of the assessee by claiming a deduction on commission and interest paid. To justify the clubbing of the income of M/s. Ramchand and Company, Bombay, with that of the assessee, emphasis has been laid on this aspect. It was on that basis, the protective assessment made on M/s. Ramchand and Company at Bombay was directed to be when cancelled, when its income was assessed in the hands of the hands of the assessee in this case. The Tribunal even, as observed by it in paragraph 9 of its order, has bestowed its attention only to a consideration of the question whether M/s. Ramchand and Company, Bombay, is the benami business of the assessee in this case. Proceeding to consider that question, the Tribunal stated that he who alleges benami must establish it and in this case, the Revenue has got to market it good that M/s. Ramchand and Company is benami for the assessee. It is in this context, the Tribunal examined the entries in the books of account made available, which showed that Ramchand Satramdas received a gift of Rs. 9,500 from his father and that had been credited in the books of M/s Ramchand and Company. Similarly, the entries in the books of account further disclosed that M/s. Veena Dharamdas, another partner of M/s. Ramchand and Company, received by a transfer a sum of Rs. 6,000 from her grandmother, Thirathbai, who had an account in the books of the assessee even before April 1, 1958, and this amount was withdrawn and invested as her capital in M/s. Ramchand and Company. Regarding another partner, Kamala Gopaldas, she had an account with the assessee and there was a credit balance of about Rs. 8,200 which was withdrawn and brought into M/s. Ramchand and Company as her capital contribution. Subsequently, a gift for Rs. 2,500 received by her from her grandmother was also brought into M/s. Ramchand and Company. In view of these entries in the books of account, the Tribunal concluded that the Department had failed to establish that the capital contribution for M/s. Ramchand and Company came from the assessee-firm. Apart from thus tracing the source of capital contributi on by the three partners of M/s. Ramchand and Company, Bombay, the Tribunal did not find, on the materials, any motive for the setting up of M/s. Ramchand and Company as a benami firm. Adverting to the relationship between the parties who were partners of the assessee-firm and M/s. Ramchand and Company, the Tribunal concluded that one of the partners of the assessee-firm, namely, Mrs. Kimat Bai was not interested in M/s. Ramchand and Company and, therefore, all partners of the assessee-firm, cannot be stated to have derived any benefit by setting up M/s. Ramchand and Company as a benami firm consisting of those relations. Though the Tribunal referred to the fact that the partners of M/s. Ramchand and Company were not residing in Bombay, yet, according to it, there was nothing to show that its affairs were actually controlled by the assessee and that the profits of M/s. Ramchand and Company flowed back to the assessee. Ultimately, the Tribunal found that it was difficult to say that the Revenue had discharged the burden of proving that M/s. Ramchand and Company was a benami for the assessee. In that view, the Tribunal directed the the deletion from the assessments of the assessee for the two years in question the income of M/s. Ramchand and Company. Thus, it is seen that in deciding the question whether the income of M/s. Ramchand and Company can be clubbed with that of the assessee, the Tribunal has predominantly taken into account the different considerations that would be applicable in deciding the question of the benami nature of M/s. Ramchand and Company and had found as a fact that M/s. Ramchand and Company had not been established by the Revenue to be benami for the assessee. That conclusion of the Tribunal, undoubtedly, is one which is supported by the materials referred to and discussed in the order of the Tribunal. We are not, therefore, inclined to accept the argument of the learned counsel for the Revenue and we, therefore, answer question No. 1 in the affirmative.
6. The learned counsel for the Revenue, however, strenuounsly contended that the Tribunal has omitted to consider the question of M/s. Ramchand and Company being a genuine firm. Indeed, it was pointed out earlier that the order of the Income-tax Appellate Tribunal, Bombay, proceeded only on the basis of M/s. Ramchand and Company not being a genuine firm and that was why registration was also refused and a protective assessment was made with a direction to delete such an assessment, when that income was included in the income of the assessee and this aspect has not been considered or investigated at all by the Tribunal and a finding rendered. The order of the Tribunal does not disclose that there was any consideration of the question of genuineness of M/s. Ramchand and Company. Though the attention of the Tribunal was primarily directed to a consideration of the benami nature of M/s. Ramchand and Company, the Tribunal lost sight of the two different classes of transactions comprehended within the expression 'benami', but which vary differently in their legal character and incidents, as pointed out by the Supreme Court in Sri Meenakshi Mills Limited v. CIT : 31ITR28(SC) . In one class of cases, it signifies a real transaction, as for instance, when X disposes of property to Y, but the sale deed mentions Z as the purchaser. In such a case, the sale is a genuine one, but the real purchaser is Y, Z being the benamidar. Normally, this is the kind of transaction usually referred to and understood as a benami transaction. There is also another class of transactions normally referred to as benami transactions, though not quite accurately, but include a sham transaction, as for instance, when X purports to sell his property to Y without any intention that his title should cease or pass to Y. The difference between these two cases is that in the former, there is an operative transfer culminating in the vesting of title, while in the latter, there is no such vesting and the transferor continues to retain title despite the execution of the sale. It is only in the former class of cases when a dispute arises as to whether a person named in the deed is a real transferee or not, an enquiry into the question as to who paid the consideration for the transfer would be necessary. In this case, there has been no determination in the light of what has been stated above as to whether the firm, M/s. Ramchand and Company, is a genuine one or not. The learned counsel for the assessee was unable to draw our attention to any part of the order of the Tribunal relating to this aspect of the genuineness of the firm, M/s. Ramchand and Company, Bombay. Inasmuch as the very for the inclusion of the income of M/s. Ramchand and Company with that of the assessee was that M/s. Ramchand and Company was not a genuine firm, that question will have a material bearing upon the stand taken by the assessee that it ought not to be so clubbed. Unfortunately, that aspect had been missed by the Tribunal.
7. Inasmuch as the Tribunal had not adverted to the aspect relating to the genuineness of M/s. Ramchand and Company, Bombay, its conclusion that the inclusion of the income of M/s. Ramchand and Company with that of the assessee is not proper or correct cannot be stated to have been based on valid or proper materials. On the basis of the order of the Tribunal, as it is, no answer can be rendered with reference to questions Nos. 2 and 3. In CIT v. Greaves Cotton and Co. Ltd. : 68ITR200(SC) , the Supreme Court has laid down the proper course to be adopted in such cases in the following terms at page 209 :
'We have, therefore, reached the conclusion that the question of law referred to the High Court cannot be answered in view of the defective finding by the Appellate Tribunal which is recorded without consideration of all the evidence. It will be open to the Appellate Tribunal to rehear the appeal under section 66(5) of the Act and record a clear finding after hearing the parties and after considering all the relevant material in the case as to whether the amount of Rs. 18 lakhs paid by the respondent company to the managing agents on the termination of the managing agency agreement was an admissible deduction under section 10(2)(xv) of the Income-tax Act. After recording a clear finding on the question, the Appellate Tribunal will finally dispose of the appeal.'
8. In this case also, we have earlier pointed out how questions Nos. 2 and 3 referred to this court cannot be answered because the genuineness of the firm M/s. Ramchand and Company had not been touched upon by the Tribunal in its order and in that sense, no finding with reference to that has also been recorded. Without, therefore, answering question Nos. 2 and 3, we direct the Tribunal to rehear the appeal and record a clear finding regarding the genuineness of the firm, M/s. Ramchand and Company, Bombay, and dispose of the appeal. We, therefore, return the reference on questions Nos. 2 and 3 unanswered for further consideration of the appeal by the Tribunal on the lines indicated earlier. There will be, however, no order as to costs.