JAGADISAN J. - Jayaram Mills Ltd., Rajapalayam, referred to in this judgment as the assessee, is a public limited company carrying on business in the manufacture and sale of cotton cloth called gadas. In assessing its income under the Indian Income-tax Act for the assessment year 1952-53, the Additional Income-tax Officer, Virudhunagar, included a sum of Rs. 26,000 as part of the income earned by the assessee by sale of gadas. This was objected to by the assessee on the ground that the amount did not represent profits in its hands but has income earned by a trust called Raja Charity Trust. The officer overruled this contention and taxed the said amount as income in the hands of the assessee. Appeals preferred by the assessee to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal were unsuccessful. On an application to this court under section 66(2) of the Act the following question was directed to be referred by the Tribunal along with the statement of the cas :
'Whether there was any material for the Tribunal to hold that the sum of Rs. 26,000 was the taxable income of the assessee company?'
The facts leading up to the assessment can be quite briefly stated. The assessee purported to sell 69 bales of gadas to the Raja Charity at the following rate : 26 bales at Re. 1 per yard; 17 bales at Rs. 1-1-0 per yard; 10 bales at Rs. 1-3-0 per yard and 16 bales at Rs. 1-5-0 per yard. One Sri Kandaswami acted on behalf of the trust in this transaction which was on April 20, 1951. On the same day the trust claims to have sold the identical goods to one Moolchand Narayandas of Mathurai at the following rate : 26 bales at Rs. 1-4-0 per yard; 17 bales at Rs. 1-5-0 per yard; 10 bales at Rs. 1-7-0 per yard and 16 bales at Rs. 1-9-0 per yard. The sum of Rs. 26,000 represents the difference between the price at which the assessee purported to sell the gadas to the trust and the price for which the trust is supposed to have sold to Moolchand Narayandas. The short question is whether there was really a sale by the assessee to the trust and then by the trust to Moolchand Narayandas or there was really in effect and in substance a sale by the assessee to Moolchand, the trust having been deliberately interposed so as to make it appear that the profit arising out of the transaction was earned only by the trust. The Income-tax Officer holding that the sum of Rs. 26,000 was really profit earned by the assessee observed thu :
'The ultimate buyers are the usual customers of the mills and the broker is the regular broker of the mills. In this background the interposing of the charity trust between the mills and the ultimate buyers is not a genuine transaction but merely illusory. I would, therefore, hold that the medium adopted by the assessee for the purpose of selling 69 bales in question, viz., Raja Charity Trust, was artificial and would treat the profit of Rs. 26,000 forgone in favour of the trust as their income.'
On appeal the Appellate Assistant Commissioner after reviewing the facts recorded the following findin :
'I have no doubt that the introduction of the trust is purely a sham affair and the real sale is to Moolchand Narayandas directly by the mills.'
In the further appeal to the Tribunal its finding was as follow :
There is, therefore, a complete artificiality over this transaction. We agree with the Appellate Assistant Commissioner that this is a sham transaction and the profit from this has been rightly treated as the income of the assessee.'
Can it be said that the finding arrived at by the subordinate Tribunals that there was really one sale by the assessee to Moolchand, and that the alleged transaction in favour of the trust or by the trust was not true at all is one unsupported by the evidence on record? We have no doubt that the conclusion arrived at by the department and by the Tribunal is absolutely correct.
The managing director of the assessee-company is one P.A.C. Ramaswami Raja and he is also the managing trustee of the trust - Raja Charity Trust. There is another institution called P.A.C. Ramaswami Raja Education Charity Trust formed for the purpose of conducting a High School. This Ramaswami Raja is also a member of the governing body of this institution. The Income-tax Officer has referred to the fact that a sum of Rs. 31,000 in all has found its way to the education charity. It is quite clear that Ramaswami Raja is very much interested in the welfare and progress of these trust institutions, and that he wanted to provide them with moneys. There are two ways of doing it. Ramaswami Raja, as managing director of the assessee company, might earn the money and pass it on to the institutions, or he might allow these institutions, to earn money for themselves. If what happened in this case really was that with the help and aid of Ramaswami Raja, the charity earned money, the income will only be that of the trust and not that of the assessee. But we are unable to draw this inference from the facts. It is to be noted that trading in gadas is not one of the activities of the trust. The records disclose that this is the only transaction of purchase and sale indulged in by the trust. It is unlikely that a charitable institution would have been put to the risk and hazard of a business venture. It is true that the books of accounts produced in the case do show as if Moolchand paid the price only to the trust and not to the assessee. But that is only conduct in accordance with the apparent tenor of the transactions. This shows that the parties concerned assiduously kept to the form so that it might be contended that the profits were earned only by the trust and not by the assessee. Moolchand who is only a customer of the assessee lost nothing in making it appear as if the payment was to the trust as he had in any event to pay for the goods either to the trust or to the assessee and it did not matter to him how he recorded the transaction in his books. Before it can be said that the trust indulged in a business venture of this kind, there must be some satisfactory evidence to show that it was within the province of an institution to carry on a business activity, that it undertook it in the normal course of the management of its affairs, and that there was no necessity for it to function merely as a name-lender to a transaction between the assessee and a third party. Having regard to the fact that Ramaswami Raja is the moving spirit behind the transactions, who was as much interested in the assessee-company as in the Raja Charity Trust, and having regard to the fact that the purchase was effected through the normal channels of the assessee-company, namely, its brokers and to its constituent, the inference drawn by the department and the Tribunal that the transaction was a sale effected by the assessee to Moolchand is proper and just.
We, therefore, answer the question against the assessee who will pay the costs of the department. Counsels fee Rs. 250.