The judgment of the court was delivered by
VENKATADRI J. - This is a reference under section 66(2) of the Indian Income-tax Act. The questions of law on which the Tribunal has been directed to state a case are as follow :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the addition of Rs. 70,641 to the assessable income of the assesse ?
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim this item of Rs. 70,641 as an admissible deduction in computing the profits of the assessee under section 10(2)(x) of the Income-tax Ac ?'
The assessee is a public limited company carrying on business in cotton spinning in Vellakkinar, Coimbatore district. The mill was established in the year 1936. It had an installed capacity of 11,200 spindles. It had a labour force of 500 besides the regular staff. During the year ending 30th September, 1948, the assessee disclosed a turnover of Rs. 24,22,186. The Government exercised control over the prices of yarn during parts of the year. From April 24, 1948, to July 31, 1948, there was no control. By a circular dated April 22, 1948, the South Indian Mills Owners Association, of which the assessee-mill was a member, fixed the price of the various counts of yarn, and mills were advised to sell at those rates. The Income-tax Officer found that the sale during this period was about Rs. 13,61,702. The Income-tax Officer found that between April 24, 1948, and May 20, 1948, the assessees books showed that Rs. 3,53,205 worth of yarn as having been sold at the association rate of its employees and some villagers in and around the place where the mill was situated. The Income-tax Officer, on the facts of the case, was unable to give any credence to this part of the assessees case and he found that the ultimate buyers were regular dealers and the sales were at the open market rates, though in the books of account the assessee entered the association rates for the bales alleged to have been sold to its employees and certain villagers. He, therefore, estimated the profit at 20 per cent. and added about Rs. 70,000 to the income returned by the assessee.
The assessee filed an appeal to the Appellate Assistant Commissioner, who agreed with the finding of the Income-tax Officer and sustained the addition made by him. The Appellate Assistant Commissioner considered also the alternative argument of the assessee that the sum of Rs. 70,641 should be allowed as an expenditure as bonus paid to employees for loyal services but held that the claim did not satisfy the tests laid down under section 10(2)(x) of the Act. On further appeal to the Tribunal, the Tribunal held that the transactions relating to the labourers and villagers were spurious, effected to screen away profits from taxation. Thus, it confirmed the order passed by the revenue authorities.
Finally, when the matter came to this court under section 66(2) of the Act, this court, while directing the Tribunal to state a case, asked the Tribunal to clarify certain facts, namely whether it was the mill or the employees themselves who actually sold the yarn and received the profits, the extent of the allotment to villagers and the profits attributed to such allotment out of Rs. 70,641 and whether the sum of Rs. 70,641 was paid over by the mill to the labourers and villagers, and, if so, when. The Income-tax Officer collected information and materials, conducted an enquiry, investigated the case and submitted a report as directed by this court. Now, the reference has come before us for final hearing.
Learned counsel appearing for the assessee brought to our notice the observations of the Supreme Court in Keshaw Mills Co. Ltd. v. Commissioner of Income-tax that in calling for a supplementary statement of the case under section 66(4) of the Act, the High Court could require the Tribunal to include in such supplementary statement only such material and evidence as might already be on the record but which had not been included in the statement of the case made initially under section 66(1) or section 66(2) and that it had no jurisdiction to direct the Appellate Tribunal to collect additional material and make it a part of the supplementary statement. Following this statement of the law, we are excluding the materials collected by the Income-tax Officer after remand in disposing of this reference. Now the question for our consideration is whether the Income-tax Officer was right in coming to the conclusion that the sales of yarn by the assessee-mill to the labourers and villagers at the association rates were not really bona fide transactions and were only canalised through its employees to the ultimate purchasers who purchased the yarn at open market rates and the assessee realised excess profits without bringing them into its books of account.
The assessee-mill, a public limited company carrying on business in cotton spinning with 11,200 spindles, was established in the year 1936. During the accounting year October 1, 1947, to September 30, 1948, there were periods of control and decontrol of yarn price in the market. There was no control from April 24, 1948 to July 31, 1948. During the period of decontrol, in the interest of the mills in Coimbatore district, the South Indian Mill Owners Association, of which the assessee-mill is a member, fixed the price of yarn of several counts by a circular dated April 22, 1948, and the mills were advised to sell yarn at those rates. Though there was no legal obligation in the sense that a violation would entail civil or criminal liability, still there was a compelling normal obligation, a breach of which would be a breach of etiquette involving loss of membership of the association. The rates prescribed by the association were only recommendatory. It was only during this period especially between April 24, 1948, to May 20, 1948, about 468 bales of yarn worth Rs. 3,53,205 were alleged to have been sold to the assessees employees and villagers, about 57 in number, at the association rates. During this period, the mill also sold bales of yarn to some of their dealers, directors, their friends and relatives at the association rates. We are not now concerned with the yarn sold either to the dealers or to the directors and their friends, as a finding his been given by the revenue authorities that the bales of yarn were allotted to them at the association rates and that they in turn sold them to their friends or ultimate purchasers at the market price. A finding has also been given that the mill do not benefit by such transactions dealt with by the directors or their friends, when they sold the goods at the market rates. When the assessee submitted the return for the year in question the Income-tax Officer suspected the alleged transactions of sale of yarn to the labourers and villagers. Naturally, the Income-tax Officer before giving a finding on that question, collected particulars, gathered information, conducted an elaborate enquiry by summoning some of the labourers and villagers and also called upon the mill to explain the reason for such allotment of bales of yarn to a handful of labourers and villagers. During such enquiry and investigation, the Income-tax Officer found that there was no regular allotment as such in the books maintained by the mills of yarn to labourers and villagers. The modus operandi seems to be, as and when a labourer to whom bales are alleged to have been sold brings the ultimate purchaser at the mill premises, he would direct the mill authorities to deliver the bales to the ultimate purchaser and he would realise from the purchaser the market price and from and out of the sale proceeds he would pay the association rate of the bales to the mill retaining the surplus sale proceeds for his use and benefit. When an explanation was called by the Income-tax Officer for such allotment of bales, the mill authorities represented to the officer that when there was a general strike by all the labourers of textile mills in the entire Coimbatore district in February, 1948, the assessee-mill alone worked successfully and peacefully with the loyal and wholehearted co-operation and support of the labourers and villagers, that during this period the mill did good business and that the mill authorities though that such persons should be compensated for the valuable services rendered by them during the strike period. As rightly found by the Income-tax Officer, their was no documentary evidence as such, viz., any resolution passed by the directors in their meeting nor any written order assed by the managing director. There was no reasonable explanation by the mill why only about 57 labourers out of the strength of 500 were selected for the allotment of bales at the association rates, when the entire staff was responsible for smooth running of the mill during the strike period. Equally, no material was placed before the revenue authorities in what way the villagers helped the mill authorities during the strike period. Further, none of these labourers or villagers took delivery directly from the mill of the bales of yarn allotted to them. The entire quantity of bales alleged to have been sold to them as bounty was distribute among the few dealers, about six in number. These six dealers came to the mill premises and took delivery of the bales of yarn at the market price, as if they were sold to them by the labourers to whom the bales of yarn were alleged to have been sold at the association rates or concessional rates. In some cases when the dealers paid the money at the market rates for the bales, the mill authorities entered only the association rate in their books of account. The Income-tax Officer found no authorisation on behalf of the labourers to sell the yarn to the persons to whom the yarn bales were sold. There was also no evidence to show that the surplus sale proceeds were distributed to all the labourers of the mill. In one instance, the labourer seems to have deposed before the officer that he did not know the details of the transactions, namely, at what price the yarn was sold by the mill, and that he received only a sum of Rs. 500. Another labourer deposed that he was given the option to take delivery of the yarn and to sell it on his own account, yet because of inexperience he asked the mill authorities to sell the bales and to give him the profit. He did not know for what price the yarn was sold to the ultimate purchaser. Again, in respect of 225 bales of yarn taken delivery of by S. Muthuswami Gounder of Karur, the assessee has stated that their books of account did not show the receipts from the ultimate buyers and disbursements to the buyers (employees, on whose behalf the deliveries were effected) and explained that was because the accounts related to sums properly due to the mill. Some of these labourers who were examined by the Income-tax Officer stated that they never handled the money on account of these transactions except for receiving some small margin of profit. There were discrepancies in the quantities as between the supplies alleged to have been made by the mill and the sales admitted by the six merchants to whom the labourers and villagers were said to have sold the bales, and the Income-tax Officer his referred to these discrepancies in detail. Taking a broad picture of the transactions of the mill during this period, it is clear - and it will give that impression - that the mill authorities, in order to circumvent the circular issued by the South Indian Mill Owners Association to sell yarn at the association rate, adopted this dubious procedure, which is too tall a story to believe.
Learned counsel for the assessee seriously contended before us that, when the revenue authorities were satisfied that the bales of yarn sold to the friends and relatives of the directors were bona fide transactions, they should have equally believed the explanation offered by the assessees employees that some bales were allotted to them at the association rate for the loyal services rendered by them during the strike-period. But there is a definite finding in regard to the sales to the directors friends that they were bona fide sales, and we are not concerned in this reference with those transactions. In respect of them, the revenue authorities relied on the principle laid down in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax, where this court held that the sales would not be regarded as mere sham transactions unless there was sufficient evidence to prove that, and that in the absence of evidence to show that the sales were sham transactions or that the market prices were in fact paid by the purchasers, the mere fact that goods were sold at the concessional rate to the benefit of the purchasers at the expense of the company would not entitle the income-tax department to assess the difference between the market price and the price paid by the purchasers as profits of the company. But that principle cannot be applied to the instant case, because the Income-tax Officer has not found a single instance where the bales were taken delivery of by the labourers themselves to whom they were alleged to have been sold at the association rates. This is certainly a make-believe affair to circumvent the circular of the South Indian Mill Owners Association to sell yarn bales at the association rate, and to secrete the surplus amount realised by them from the ultimate purchasers without bringing them into their books of account.
Learned counsel for the assessee further contended before us that in all these cases where the directors or their friends, to whom the goods were sold at the association rate, sold the goods in the business premises itself at their instance and on their terms to the ultimate purchasers, they have been held good by the revenue authorities and that, therefore, the same principle should have been followed in the case of sales by the labourers and villagers. Once again, we reiterate that in the instant case the definite finding of the department is that the goods were not sold to the employees or villagers at the association rates and that, on the other hand, they were sold at the open market rate to the ultimate purchasers but the assessee entered only the association rate in their books of account and that the assessee offered the unbelievable explanation that the goods were sold to the ultimate purchasers at the open market price only by the employees to whom they were sold at the association rate. It is clear that during the period when the association issued the circular the price of yarn in the open market was definitely higher then the association rate. It is during this period that the mill is alleged to have sold bales of yarn to its employees and villagers at the association rate. But there is sufficient material to show that these transactions were sham and that they were not intended to benefit the employees or villagers but on the other hand the mill authorities wanted to benefit themselves at the expense of the employees and villagers by selling the goods at the prevailing market price and using the names of the employees and villagers as a cloak to circumvent the circular issued by the association.
Learned counsel for the assessee contended that, in any event, the sum of Rs. 70,641 sought to be added to the income of the assessee for the year in question should be considered as bonus paid to the labourers for loyal services rendered by them during the strike-period under section 10(2)(x) of the Act. It is generally understood that bonus is given only after ascertainment of the profits of the company for the year in question. The amount sought to be added is not with reference to the profits of the year; on the other hand, it is unaccounted money earned by the company. This amount was not brought into the books of account, even to compute the profits for the year in question. In these circumstances, the amount cannot be considered as bonus paid to its employees. Further, it is not proved that the money earned by the alleged 57 labourers was distributed to all the labourers of the mill. We cannot, therefore, accept the contention alternatively put forward by learned counsel for the assessee.
It is well-settled that the assessment in any particular year must be based not on mere suspicion or bare guess but on legitimate material from which a reasonable inference of income having been earned during the accounting year in question could be drawn. It is not also for this court to assess the value of the evidence; out jurisdiction is only to consider whether there was material on which the conclusion could have been reasonably reached. It seems to us that, on the basis of the admitted and proved facts, the inference made by the department appears to be well justified. The findings of the department are based on ample and overwhelming evidence. It is indisputable that the Income-tax Appellate Tribunal is essentially a fact-finding Tribunal. Its findings on questions of fact are final and binding, unless the findings are open to attack on the ground that there is no evidence to support it or that its findings are perverse. In Omar Salay Mohamed Sait v. Commissioners of Income-tax their Lordships of the Supreme Court, while considering the question whether certain cash credits in the name of the assessees wife did really belong to the assessee therein, reiterated the principles when a finding of fact of the Tribunal can be attacked in the following proposition :
'(1) When the point for determination is 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 section 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 section 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.'
Bearing these principles in mind, if we examine the present case, certainly we cannot say that the finding of the Tribunal is vitiated by reason of its having relied on surmises or suspicion. Nor can we say that the department included the sum of Rs. 70,641 to the assessable income of the assessee on bare guess. It follows that the findings of the Tribunal cannot be assailed.
In the result, we answer both the questions referred to us in favour of the department and against the assessee. The department will be entitled to its costs. Counsels fee Rs. 250.