Sudhindra Mohan Guha, J.
1. The present reference relates to the assessment year 1962-63.
2. The assessee-company is a broker, dealer and exporter of jute goods. Its exports are mainly of carpet backing jute goods (hereinafter referred to as the wide hessian) to the USA. It started exports of this item in April, 1955, and made exports on consignment basis through its agent, M/s. White Lamb & Finlay (hereinafter referred to as WLF) up to November, 1955. During this period, WLF was paid a commission of 5 per cent. net on all exports and the assessee was reimbursing all other expenses incurred by WLF in the USA. The assessee, however, claimed that from December, 1955, its exports to WLF were on principal to principal basis. Under the new arrangement which was modified from time to time, it was further claimed that during the previous years goods were sold by the assessee to WLF on CIF basis, the assessee's selling price being 12 per cent. less than the list price in the USA. The list price was stated to be the expected selling price at which the goods were likely to be ultimately sold by WLF to their customers in the USA. Though there was no agreement in writing, one of the terms of sale was that if the goods were sold by WLF in the USA at a price lower than the list price on the basis of which the invoice was prepared, the assessee was to make good the deficiency. Similarly, in case, the exported goods were sold at a rate higher than the list price, the excess was to be made over by WLF to the assessee. For covering the loss on account of fall in the sale price, the assessee was under-drawing its invoice by about 5 per cent. to 15 per cent. which amount remained in the USA with WLF, of course, on assessee's account.
3. The ITO held that the assessee's exports of wide hessian to the USA through WLF continued to be on consignment basis. It was also found that the reasonable rate of net commission to WLF was 2 per cent. only as against the effective net commission rate of 7 per cent. allowed to them by the assessee. The case of the assessee was accepted, that, out of gross commission or gross margin of profit allowed at 12 per cent. , WLF was to incur certain expenses which he roughly estimated at 5 per cent. Accordingly, the ITO held that the commission or margin of profit to the extent of 5 per cent. of sale price allowed to WLF was without business consideration. Working out the total commission at the rate of 12 per cent. on the real sale price at Rs. 27,06,540, the ITO disallowed a sum of Rs. 11,27,730 as being payment without business consideration. It was further found that the assessee was under-drawing or under-invoicing WLF over and above the gross margin of 12 per cent. allowed to them. This amount, according to the ITO, was kept by the assessee in the USA with WLF with a motive and was never credited to its sales account. The sum of $ 1,08,400 was found to have accumulated in the USA out of its exports in the previous year. Its equivalent value being Rs. 5,16,200; the ITO made a separate addition of Rs. 5,16,200 on the ground that it was a part of the sale price of exported wide hessian kept back by the assessee in the USA.
4. On appeal by the assessee, the AAC observed that the margin of profit or the gross commission allowed at 12 per cent. was excessive. According to him, the reasonable rate of gross commission was 10 per cent. which was likely to leave WLF a net rate of commission at the rate of 5 per cent. and that was a reasonable rate. Accordingly, he reduced the disallowance from Rs. 11,27,730 to Rs. 5,00,000 only.
5. The AAC also found that the credit of $ 1,08,400 was built up partly on account of sale of wide hessian in the USA at a rate higher than the list price and partly on account of under-invoicing or under-drawing. He also found that the difference of credits on account of realisation of excess price for the previous year amounted to Rs. 25,957 only. As against this, he found there were certain debits in the assessee's accounts leaving practically not much balance on reality. Observing that he had taken into account the fact of under-invoicing in making the addition on account of excess commission, he deleted the addition of Rs. 5,16,200 made separately by the ITO. Both the ITO and the assessee came in appeal before the Tribunal.
6. It was argued on behalf of the assessee that it exported wide hessian cloth on principal to principal basis at a price agreed upon and on terms which were considered commercially expedient. The Department, on the other hand, contended that the assessee had exported goods on consignment basis as was done earlier and that the apparent change in the method of export was made only with a view to avoiding exchange difficulties.
7. Having regard to the nature of the transaction and other surrounding circumstances, the Tribunal observed that it could not easily ignore that the change-over to the new system was made with a view to avoiding exchange difficulties. According to it, the correspondence clearly showed that the assessee and WLF referred to each other as principal and agent and the assessee's interest in the goods remained till disposal by WLF. According to the Tribunal the facts justified the conclusion that whatever might be the form of the transaction, the assessee did not make an outright sale to WLF or, in other words, WLF continued to be the assessee's agent in spite of the apparent change brought about in the method of exports since December, 1955. With regard to the peculiar feature of the transaction, it held that even if the transaction could also be treated as outright sales, those were, as a matter of fact, not so, as that was never the intention of the parties.
8. The next question, that the Tribunal was confronted with was whether the gross commission or gross margin of profit allowed by the assessee to WLF at 12 per cent. during the previous year was excessive. On the materials before it, the Tribunal observed that it would not be correct to say that the assessee had increased the rate of commission or margin of profit voluntarily and without any business consideration. Thus the Tribunal did not agree with the ITO or the AAC that the gross commission rate of 12 per cent. was excessive or was paid for some consideration other than business. The Tribunal, therefore, deleted the disallowance of Rs. 5,00,000 maintained by the AAC.
9. As to the deleting of the addition of Rs. 5,16,200 by the AAC, the Tribunal considered the commission rate of 12 per cent. as reasonable, taking into account all the facts and circumstances relating to the transactions.
10. It was claimed that the assessee was following the cash system of accountancy with regard to its exports. It was argued that the sales were credited only when the amount had been realised and not when the invoices were prepared. On the other hand, it was pointed out by the Department that this was never the case of the assessee before the lower authority, and in any event, it was not open to the assessee to say that a part of the sale proceeds retained by it voluntarily in the USA did not form part of its sale, because it had chosen not to bring it into India. In the opinion of the Tribunal it was not open to an assessee to have kept back a part of the sale proceeds voluntarily and to say that the kept portion was not the sales proceeds as the assessee was following the cash method of accountancy. It was not in dispute that under-drawing was done only to build up a balance in the USA to enable the assessee to discharge some of its obligations which would have been otherwise difficult on account of the Reserve Bank's restrictions on remittances in so many ways. According to the Department, this indicated that the assessee was not following the cash system of accountancy with regard to its export sales, and a part of the sale price retained in the USA represented a part of the assessee's sale price in the USA for a purpose, with the legality or otherwise of which, the Tribunal was not concerned.
11. It was observed by the Tribunal that the list price was nothing but a tentative price and actually so far as the assessee was concerned, the sale price was 12 per cent. less than the price, at which the goods were ultimately sold by WLF. The accounts as per correspondence indicated that the actual sales were really over the list price and the credit balance was primarily built up on account of under-drawing or under-invoicing. Accordingly, the Tribunal held that the amount kept in the USA, by under-drawing or under-invoicing by the assessee, represented its sale price in the same manner in which the invoiced price, which was received, was the tentative sale price collected through the Bank. This, however, required adjustment on account of various receipts and disbursements on account of the assessee, keeping in view, the fact that the assessee had been held to be following the mercantile system of accountancy. In these premises to the extent the expected sale price, that is, 88% of the list price, was under-drawn or under-invoiced, according to the Tribunal, it would represent a part of the asses-see's sale price. For the forgoing reasons, the Tribunal set aside the order of the ITO and the ITO was directed to compute the portion of the sale price retained by the assessee in the USA which would be included as the assessee's income in the manner indicated by the Tribunal.
12. It was also argued on behalf of the assessee that the amounts remitted by or to the assessee, as a consequence of the credit or debit balance in its account in the USA, were received or paid by the assessee on behalf of the jute mills whose wide hessian the assessee had exported. It was, however, conceded, that the assessee's purchase from the jute mills were on principal to principal basis, that the actual purchases were preceded by formal contracts for forward purchases on the Not Transferable Specific Delivery Contract Forms prescribed by the Indian Jute Mills Association, and that there was no written stipulation, in the aforesaid contract forms or otherwise, suggesting that the assessee's commitment to WLF to make up the deficiency on actual sale or to meet other obligations and to receive the excess, if any, was on the jute mills' account. It was also admitted that the assessee was not maintaining mill-wise accounts and that the amounts received from or paid to WLF in this behalf were distributed or collected from the mills on their average proportionate sales of wide hessian to the assessee. The attention of the Tribunal was invited to the fact that such receipts and payments made to the USA were never credited or debited to the assessee's profit and loss account.
13. According to the Tribunal, the assessee had purchased wide hessian, which was the subject-matter of dispute herein, from the jute mills outright, and that so far as their legal relationship was concerned, the jute mills had no interest in the goods once they had performed their part of the contract by placing the goods alongside the vessel as per the assessee's instructions.
14. Thus it was concluded that the assessee had no legal obligation to make over its credit balance in the USA, built up on account of underdrawing or under-invoicing or other factors. In the opinion of the Tribunal, the assessee, if it had made over to the jute mills the amounts remitted to it by WLF or had collected the amount from the jute mills which it had to remit to WLF in the USA, it had done so purely out of extra commercial considerations.
15. As to the disallowance of loss of Rs. 39,824 on the ground that it represented a loss of speculative nature, it was claimed that the transaction which resulted in difference receipts and/or payment were hedging transaction and, therefore, the loss could not be treated as a speculative loss, But no evidence was, however, placed before the authorities. In the absence of necessary materials it was not possible for the Tribunal to accept the uncorroborated statement of the assessee. This ground, therefore, was rejected.
16. On the above facts and the findings found out by the Tribunal, the Tribunal was required to refer the following questions to this court for consideration :
'(1) Whether, the finding of the Tribunal, that after December, 1955, the assessee did not make outright sales of carpet backing cloth to White Lamp & Finaly, Inc. and that the relation between the assessee and White Lamb & Finlay, Inc. was that of principal and agent and not seller and purchaser, is perverse ?
(2) Whether there was any evidence before the Tribunal on which it could hold that-
(a) The parties found the system of export on consignment prior to December, 1955, to be cumbersome on account of any restrictions on remittances by the Reserve Bank ;
(b) There was any under-drawing on invoice after October, 1959 ;
(c) It was not the intention of the parties after December, 1955, that the property in the goods should pass to White Lamb & Finlay, Inc. ;
(d) The amount of sale price retaine.d in the USA was the assessee's income and that the assessee had no legal obligation to make it over to the jute mill companies and that it had done so (if at all) out of extra commercial considerations ?
(3) Whether, the finding of the Tribunal that the assessee did not keep its accounts on the cash system so far as sales of carpet backing cloth were concerned is perverse ?
(4) Whether, on the basis of the finding by the Tribunal that White Lamb & Finlay, Inc., was the agent of the assessee and that the assessee kept its accounts on the mercantile system, the directions given by the Tribunal to the Income-tax Officer are erroneous in law ?
(5) Whether, the finding of the Tribunal that loss of Rs. 39,824 arose out of a speculative transaction within the meaning of Section 43(5) of the Income-tax Act, 1961, and was, therefore, not allowable, is unreasonable and perverse ?'
17. At the outset both the parties addressed us as to the scope of a Court of Reference for interference in a case as hereunder. Undoubtedly, the scope of the Court of Reference is limited, when the findings of the Tribunal are questioned on the ground of perversity. It is the established principle of law that when two views are possible, the Court of Reference would not reject the view of the Tribunal or in other words, would not disturb its findings.
18. The Supreme Court had occasion to consider the scope of the High Court on reference in the case of Sree Meenakshi Mills Ltd. v. CIT : 31ITR28(SC) . It is held therein that findings oh questions of pure fact, arrived at by the Tribunal, were not to be disturbed by the High Court on a reference, unless it appeared that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion, to which they had come, and this was so, even though the High Court would, on the evidence, have come to a conclusion entirely different from that of the Tribunal. In other words, such a finding can be reviewed only on the ground that there is no evidence to support it or that it is perverse.
19. When conclusion has been reached on an appreciation of a number of facts established by the evidence, whether that is sound or not must be determined not by considering the weight to be attached to each single fact in isolation, but by asserting the cumulative effect of all the facts in their setting as a whole.
20. Thus a finding on a question of fact is open to attack by an application for reference as erroneous in law, when there is no evidence to support it or if it is perverse. The decision in the case of CIT v. Daulatram Rawatmull : 53ITR574(SC) , may be referred to. Having regard to the principle enunciated above, we are to enter into the facts and circumstances of the present case. In the case of CIT v. Greaves Cotton & Co. Ltd. : 68ITR200(SC) , the Supreme Court also gave a note of warning as to how to deal with such a case. Their Lordships observed:
' It is well established that the High Court is not a court of appeal in a reference under Section 66 of the Indian Income-tax Act, 1922, and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. The High Court should confine itself to the facts as found by the Appellate Tribunal and to answer the question of law referred to it in the context of these facts. A finding of fact may be defective in law if there is no evidence to support it or if the finding is unreasonable or perverse.'
21. The case of the assessee as found from the statement of the case was that from December, 1955, its exports to WLF were on principal to principal basis. But under the new arrangement, it was claimed by the assessee that during the previous year goods were sold by the assessee to WLF on c.i.f. basis, the assessee's selling price being 12 per cent. less than the list price in the USA. The list price was stated to be the expected selling price at which the goods were likely to be ultimately sold by WLF to their customers in the USA. It should be noted that the notice of appropriation under an ordinary c.i.f. contract is not intended to pass, and does not pass, the property. The property cannot pass under a contract of sale until the goods are ascertained ; the property passes at the time when the parties, so intend, but in the absence of any express intention, that can generally be gathered from the terms of the contract, the conduct of the parties and the circumstances of the case, on c.i.f. contract, as the initials indicate, the price is to include costs, insurance and freight. The case of Rose T. Smyth and Co. Ltd. v. T. D. Bailey Son & Co.  3 All ER 60, may be referred to. As to the observation made by the Tribunal that in the correspondence between the parties WLF referred to the assessee as1 its principal and the assessee also referred to WLE as its agent, Mr. Ginwalla, the learned counsel for the assessee, points out that the terminology used by the parties is not decisive of the legal relationship between the parties. He refers to the decision in the case of Hope Prudhomme & Co. v. Hamel and Horley Ltd., ; wherein it was held that in modern business, the so-called agent may really be a buyer if he is so treated. Next, he refers to the decision in the case of W. T. Lamb 6- Sons v. Gorin Brick Co.  1 KB 710 ; 101 LJ KB 214. In this case, certain manufacturers of bricks and other building materials, by an agreement in writing appointed a firm of builders' merchants as 'sole selling agents of all bricks and other materials manufactured at their works'. The agreement was expressed to be for 3 years and afterwards continuous, subject to 12 months' notice by either party. While the agreement was in force the manufacturers informed the merchants, that they intended in the future to sell their goods themselves without the intervention of any agent, arid thereafter they effected sales to customers directly. An action was then brought by the merchants for breach of the agreement. It was held by the court of appeal that the effect of the agreement was to confer on the plaintiffs the sole right of selling the goods manufactured by the defendants at their works, so that neither the defendants themselves nor any agent appointed by them other than the plaintiffs, should have the right of selling such goods; It was held that the agreement was one of vendor and purchaser and not one of principal and agent ;
22. The manufacturers had no concern at what rate the sole selling agents sold the goods to customers. It was clear from these facts that the sale by the selling agents to customers was a transaction in which the manufacturers were not interested and there was no privity of contract between the manufacturers and the ultimate purchasers.
23. He referred to the case of Sri Tirumala Venkateswara Timber & Bamboo Firm v. CTO : 2SCR476 . In this case, their Lordships of the Supreme Court observed (p. 316):
'As a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid and not as agent for the proceeds of the sale. The essence of an agency to sell is the delivery of the goods to a person who is to sell them not as his own property but as the property of the principal who continues to be the owner of the goods and will, therefore, be liable to account for the sale proceeds. The true relationship of the parties in each case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the legal relationship.'
24. In a very recent case, the Supreme Court again had occasion to consider the case of agency, vide the case of Bhopal Sugar Industries Ltd. v. STO : 3SCR578 . In this case, it was held that it is well settled that while interpreting the terms of an agreement, the court has to look to the substance rather than the form of it. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'seller' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did not in fact intend that the said status would be conferred. Thus, the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. In a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of a sale has, however, undergone a revolutionary change, having regard to the complexities of the modern times and the expanding needs of the society, which had made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale, even though the seller may, by virtue of an agreement, impose a number of restrictions on the buyer, e.g., fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale, subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent on taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent, he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer--pure and simple.
25. On this background, the status of the WLF was to be ascertained.
26. Admittedly, there was no agreement in writing between the parties to indicate as to the nature of the transaction. The various correspondence between the parties had been placed before the Tribunal and it was asked to draw inference from them as to the nature of transactions between the parties. We were also taken through the relevant correspondence between the parties by learned advocates of both the parties. The main controversy was, therefore, with regard to the inference to be drawn from the correspondence as stated before. From the correspondence placed before the Tribunal, the Tribunal came to the conclusion that prior to December, 1955, the assessee was exporting wide hessian cloth to the WLF on consignment basis. The net commission paid to the WLF during the aforesaid period was 5 per cent. of the export value of the goods and some other expenses incurred by WLF in the USA were reimbursed by the assessee. The assessee again had been purchasing wide hessian from the mills of Bird's group as a principal broker, its margin of profit being only 12 annas per cent. The parties found this system to be cumbersome on account of the Reserve Bank's restriction on remittance in many ways. The parties, therefore, changed to the new system under which the exports of wide hessian to WLF in the USA were on c.i.f. basis. The list price was only the tentative sale price and in case of WLF realising less or more than the aforesaid list price, the excess or deficiency was to be on the assessee's account. The assessee was guiding WLF in the matter of not only the sale price at the time when huge stock of goods piled up in the USA, but also from time to time including the submission of the list price in a particular way. Again, the assessee was under-drawing or under-invoicing the bills further by a margin of 5 per cent. to 15 per cent. in order to build up a credit balance in the USA perhaps for the purpose of meeting its obligation in the USA such as to make good the loss suffered by WLF in the event of sales being at a price lower than the list price and to meet the other commitments of reimbursing the expenses, etc. Under the new scheme, the rate of commission or the margin of profit allowed to WLF was 10 per cent. to 12 per cent. The gross commission or the gross margin of profit at that rate was agreed upon taking into account, inter alia, the expenditure incurred by WLF including credit insurance, sub-agent's commission, etc.
27. From the correspondence, the Tribunal concluded that in order to avoid the exchange difficulties the asseesee-company suggested that WLF make claims in a manner different from the actual state of affairs. It is also found that in order to ensure that in case of sale by WLF at a price less than the list price, the exchange difficulties might not come in the way of remitting the necessary amount, the assessee under-drew the invoices by 5 per cent. to 15 per cent. further. In this manner, according to the Tribunal, the assessee was building up a credit balance in the USA and had a running account with WLF, in which account the surplus realised by WLF over the list price of goods exported was credited and deficiency of sale made was debited. Certain other expenses which the assessee was obliged to incur were also debited to this account. Credits in this account were never credited by the assessee in its sales account. Similarly, the debits in this account were never debited by the assessee to its sales account. The assessee received certain amounts from WLF and also made payment when it was found that the amounts lying to its credit in the USA were not sufficient to meet the assessee's obligation or were far in excess of its obligations.
28. On the facts stated above, it is to be seen whether the assessee exported wide hessian cloth on principal to principal basis at a price agreed upon and on terms which were considered commercially expedient or in other words, whether the transactions were outright sale or whether WLF was only the assessee's agent.
29. While considering the point the Tribunal observed that the particular transferred transaction might appear to be outright sale under the law but it might not be so as a matter of fact. It is further observed that the prime element of sale is that the title of goods must pass to the buyer on the completion of sale and the property in the goods passed only when the parties intended to pass. For finding out the intention the cumulative effect of the circumstances in which the transactions had taken place was to be assessed properly. Then, according to the Tribunal, an outright sale and a sale on consignment basis might share certain common features but according to the Tribunal the facts of the case indicated that the assessee did not make an outright sale in spite of the apparent change over brought about in the method of exporting the goods since December, 1955.
30. Proceeding on the basis, therefore, that the assessee's exports to WLF were not on principal basis, the Tribunal next considered whether the gross commission allowed to WLF at 12 per cent. during the previous year would be treated as excessive. The rate of commission was agreed upon at 10 per cent. as a short-term measure in 1956 and was to be reduced to 8% later on; but subsequent correspondence showed that WLF in the USA was finding it increasingly difficult to work with the assessee on those terms. The Tribunal referred to WLF's letter dated November 15, 1957, to the assessee. Thereafter, the assessee agreed to the commission rate of 12 per cent. According to the Tribunal, the above facts were borne out from the correspondence mentioned herein, the letter dated May 30, 1958. addressed by the assessee to Mr. D. A. Paterson. Mr. Paterson's letter to Mr. David Pilkington dated July 8, 1958, the assessee's letter to Mr. Paterson dated November 20, 1958, and WLF's letter to the assessee dated December 8, 1958. Thus it was concluded by the Tribunal that the rate of commission was modified from January 1, 1959, by the assessee only in the interests of business and not for any other consideration. Thus, the Tribunal could not agree to the disallowance of Rs. 5,00,000 maintained by the AAC.
31. Mr. Ginwalla refers to the letter dated February 11, 1956, addressed to WLF. It is stated therein by the assessee that since commencing shipment of carpet backing cloth on a net c.i.f. basis, they had been experiencing some difficulties with the local customs authority. Next he refers to the letter dated February 18, 1956, addressed to the Chartered Bank of India regarding the letter of credit favouring WLF, New York. Letter dated February 20, 1956 is addressed to the Reserve Bank of India as to shipment of rolls of wide hessian cloth to Philadelphia. Letter dated August 10, 1956, addressed to WLF mentioned about the letter of credit. Letter dated September 13, 1956. also mentioned about the letter of credit. It states that the Reserve Bank had been pressing the assessee for details of disbursement against the assessee's revolving letter of credit.
32. Mr. B. L. Pal, the learned advocate for the Revenue, refers to the letter dated October 26, 1956, wherein WLF gave out an account of gross commission earned, interest charges, warehouse charges and commission paid by WLF. He particularly draws our attention to the fact the bank interest and warehouses were a tremendous burden . for WLF to bear during the inactive period. It is contended by him that such a complaint cannot be made by a principal to a principal. Mr. Ginwalla draws our attention to the letter dated November 29, 1956, in which the assessee expressed the hope that WLF would be more successful in increasing the volume of their sales.
33. Next Mr. Ginwalla refers to the letter dated April 17, 1957, addressed to WLF by the assessee, in para. 10 of which it was stated that the assessee must apply to the Reserve Bank for permission to remit to WLF, the sum that would be due in respect of the claim on sales at rebate and sales at the then reduced prices. There was also a request for sending the statements in regard to consignment stock and the stock held by the WLF. Another reminder for the position of stock was given by the letter dated May 9, 1957. Next, was the letter dated June 25, 1957, addressed by WLF to the assessee, stating that since the amounts of money involved were so substantial as against the commission they earned on the sales of those goods they found that the bank financing charges were, in fact, reducing their net commission to a vanishing point. The letter dated July 2, 1957, was addressed to the Joint Chief Controller of Exports and Imports giving out various difficulties in conducting business with WLF and for seeking approval of the reduction in price of wide hessain for, carpet backing so that they might make the necessary applications to the Reserve Bank of India. The letter dated July 17, 1957, addressed to WLF, mentioned about consignment stock and the consignment account deals with goods which WLF were charging back to the assessee because they had been returned by the carpet manufacturers. But, according to the assessee, the Reserve Bank would not agree to a procedure of this nature in respect of goods purchased on a c.i.f. basis. The Asst. Controller, Exchange Control Dept., Reserve Bank of India, was addressed on August 2, 1957, praying for a sanction of the remittance of certain amounts to the assessee's agents in the USA, M/s. WLF, in connection with their shipments of wide hessain to that country. On September 6, 1957, there was a telephone conversation with Mr. Larson of WLF regarding adjustment of loss on consignment goods. In the letter dated October 8, 1957, the assessee admitted that a certain merchandise of defective quality had been sold to them. According to Mr. Ginwalla, this went to establish that WLF were not agents. On November 15, 1957, WLF intimated the assessee as to real terms of business in the following lines: 'Basically our arrangements for 1956; contemplated our acting as your agents for the sale of wide loom hessian. We were to sell for you on a fixed commission basis, that commission being 5% of the list selling price. Because of currency regulations of the Reserve Bank, however, we agree to pay for the goods as shipped on the basis of your billing us at list 'price less 10% representing the c. i. f. price of the goods. Ex. the 10% of list price, we tfere to pay duty, entry and landing charges, financing charges, agent's commission, etc., all of which came to approximately 5% of the sale price'. In reply, on 20th November, 1957, the assessee intimated that they had never and could never agree that WLF or any other sales agent should receive a guaranteed 5% rate of commission.
34. On May 20, 1958, Mr. Pilkington of Bird & Company complained that in the financing of unsold goods of WLF they were paying the bank more interest than they contemplated.
35. Mr. Pal refers to the telephonic call whereby the assessee asserted that to meet continental competition WLF had to give up 10% rebate. The assessee was to reimburse WLF for their loss of granting those rebates on goods they had already bought and paid for. According to Mr. Pal, a principal would not be reimbursed in such a fashion. Next, he refers to the letter dated March 28, 1957, to which a note was appended giving details of the list of stock held by WLF as on April 1, 1957, with the invoice values. It was essential that this list be prepared in accordance with the assessee's invoices and should show B. G. invoice values. Next, Mr. Pal, with reference to the letter adiressed to the Joint Chief Controller of Exports and Imports on July 2, 1957, argues that c.i.f. system was introduced only to have a better financing system. He also refers to the admission made by WLF in their letter dated November 15, 1957, to which we have already referred.
36. We may also refer to the letter dated September 26, 1958, addressed to the Chartered Bank whereby the assessee stated that payment were due to be made by them to their agents in the USA in connection with the shipment of wide hessian on account of a revision of prices, payment against faulty goods delivered and other reasons, and, according to the Tribunal, it was their intention to adjust those dues against the undrawn balance remaining to their credit in the States with their agents. On December 8, 1958, WLF requested the assessee that with effect from January 1, 1959, their rate of gross commission on the sale value of carpet backing be 12 per cent.
37. Thus, on the correspondence referred to above, the Tribunal came to the conclusion that the assessee's export transactions continued to be on consignment basis even after December, 1955. At the same time, the Tribunal noted that the real issue before the Tribunal was not whether WLF were the assessee's agent or outright buyer. The point at issue was whether or not the commission or margin of profit allowed by the assessee to WLF on its export of wide hessian was reasonable. Of course, the assessee claimed that exports had been made on an outright sale basis at prices invoiced for and as such it was not for the I.T. authorities or for the Tribunal to consider the reasonability or otherwise of the margin of profit allowed to WLF. As stated earlier, the Tribunal accepted the assessee's alternative submission, namely, that commission or margin of profit allowed to WLF was reasonable. The relation between the parties was to be ascertained to see whether the finding of the Tribunal was perverse. The correspondence between the parties would reveal that the assessee adopted a novel procedure for exports to the USA. On the materials on record we do not think that the Tribunal was wrong in coming to the conclusion that the assessee did not make an outright sale of carpet backing cloth to WLF. Of course, from some of the correspondence, it would appear that there were characteristics of the transactions, indicating that the relation between the parties was not that of principal and agent but that of vendor and purchaser. Thus the argument of Mr. Gin-walla cannot be brushed aside very lightly. Be that as it may, as we have stated earlier, if the finding of the Tribunal do not appear to be unreasonable or perverse, that should be accepted or, in other words, should not be interfered with. In this view of the matter, we propose to point out that the finding of the Tribunal as per question No. 1, were neither unreasonable nor perverse.
38. As to question No. 2(a), a reference may be made to the assessee's letter dated April 4, 1955, to WLF and their reply, dated July 29, 1955. It would appear that the Reserve Bank was not in favour of deductions being made from the total value of the goods to cover expenses incurred in the United States. To meet their objection, the assessee thought of the idea of opening a revolving letter of credit which would always keep WLF in funds to meet expenses at their end. In reply, the WLF stated that the letter of credit was in the amount of $5,000 expiring on August 12, 1955, It would be several months before they could use the whole of it and as such they suggested that it be extended to December 31, 1955. By that time they could have a wider experience of expenses and they hoped to come to an arrangement that would obviate the expenses necessary for continuing with this cumbersome procedure.
39. As to question No. 2(b), the Tribunal had taken into consideration Mr. Pilkington's letter dated October 11. 1961, to WLF. The relevant portion being 'as a matter of principle we must insist that new price lists are not issued without our prior approval'. In January, 1961, Pilkington wrote as under : 'We should continue to involve at current prices and should not raise the price to you even though from the second quarter your selling price has been increased. This should enable us to build up a larger credit balance at your end than the present and will give us a cushion against the write down of stocks that in due course appears inevitable'. The Tribunal also referred to the tour of Mr. Pilkington in May, June, 1961. The net balance of $1,00,000 should be sufficient to cover the sum that would be due to WLF for some months. The Tribunal pointed that this amount had never been taken as a credit in the mills account and was, therefore, in that respect, a hidden asset.
40. As to question No. 2(c) the Tribunal referred to the tour notices of Mr, Pilkington dated June 6, 1956. The assessee's letter dated July 2, 1957, addressed to the Joint Chief Controller and WLF's letter dated November 15, 1957, to the assessee, WLF's letter dated January 16, 1959, to Mr. Pilkington, Mr. Pilkington's reply to WLF dated January 27, 1959, and the minutes of the meeting held in London on June 12, 1959. On a consideration of these pieces of evidence, the Tribunal agreed with the I.T. authorities that it was not the intention of the parties that after December, 1955, the property in the goods should pass to WLF.
41. As to question No. 2(d), the Tribunal observed that it was admitted by the assessee that the purchases were made by the assessee from the mills outright under contract on I.J.M.A. form and that in terms of the contract the mills had no interest in the goods, once they had performed their part of the contract by placing the goods alongside the vessel as per the assessee's instruction. So the Tribunal came to the conclusion that the payment made by the assessee to the mills, or payment accepted by the assessee from the mills for making over or receiving from WLF could not be under any legal obligations or, in other words, if it had done otherwise, it had done so for extra commercial consideration.
42. Now let us take up question No. 3. According to the assessee, it was not following the cash system of accountancy with regard to its exports. It was claimed by the assessee that so far as its business in carpet backing cloth was concerned it kept its accounts on the cash system of accountancy and not on the mercantile system. The copies of bill registers and other books of account were produced to prove that during the period when it was under-drawing on the invoice (from July, 1957, to October, 1959,) the amounts of sale price that were entered in its profit and loss account were the amounts actually drawn and received by it and not the full c.i.f. price appearing on its invoice to WLF, that is to say, if the price of the carpet manufacturers in the USA was $ 100 the c.i.f price to WLF appearing on the invoice would be $ 90, but the assessee would draw only say 90% of or $ 81 ; the amount stated in the profit and loss account would be the rupee equivalent of $ 81 at the banker's buyer rate for. dollar bill of the particular usance. Similarly, when there was no under-drawing on the invoice, the amount entered in the profit and loss account would be not $ 90 but as per the amount actually received from the bank for the bill at the bank's buying rate for dollar bills of the particular usance. Thus, according to the assessee, the sales were credited only when the amounts were realised and not when the invoices were prepared. It may be mentioned that it was not the case of the assessee that part of the sales transactions were accounted for on the mercantile basis and the balance on cash basis. Such a case was made out for the first time in the Tribunal. It is pointed out by Mr. Pal, that it was evident that under-drawing was done only to build up a balance in the USA to enable the assessee to discharge some of its obligations which would have been otherwise difficult on account of the Reserve Bank's restrictions on remittance in so many ways. Thus, it was apparent that the assessee was not following the cash system of accountancy with 310 INCOME TAX REPORTS [VOL. 139 regard to its export sales and the part of the sale price retained in the USA represented a part of the assessee's sale price kept in the USA for meeting various claims.
43. It was pointed out earlier that the list price was a tentative price but the sale price was 12 ,per cent. less than the price at which the goods were ultimately sold by WLF and the credit balance was primarily built up on account of under-drawing or under-invoicing. It was held by the Tribunal that the amounts kept in the USA by under-drawing or under-invoicing, represented its sales price in the same manner in which the invoiced price which was received was the tentative sale price collected through the bank. According to the Tribunal, this would require adjustment on account of various receipt and disbursement on account of the assessee keeping in view the fact that the assessee had been held to be following mercantile system of accountancy. Of course, the Tribunal also observed that the fact in this behalf, as available on records, was very much insufficient. As such the ITO was directed to compute the portion of sales price, retained by the assessee in the USA, which would be included as the assessee's income.
44. For the reasons stated above, we are of the opinion that the Tribunal was right in holding that the assessee had not kept its accounts on the cash system so far as the sales of carpet backing cloth were concerned.
45. As regard question No. 4, a, part of the question has already been dealt with before. According to the Tribunal, for the reasons given in answer to question No. 3, the expected sale price, that is, 88 per cent. of the list price was under-drawn or under-invoiced and it would represent a part of the assessee's sale price. It was further observed that the assessee would be entitled to claim expenses incurred by WLF in the USA which, under the terms, the assessee was obliged to reimburse provided such expenses were not contingent. In the circumstances the Tribunal had not given a finding as to the extent of under-drawing or under-invoicing. It directed the ITO to determine such under-drawing or under-invoicing with reference to actual facts that might be placed before him and to estimate that in case proper and full particulars were not made available. The direction given in the order were to provide guidance to the ITO and he would be at liberty to ascertain the kept back portion of sales which was to be included in the computation of assessee's income under the year of assessment. The assessee would be at liberty to place his case in true perspective before the ITO. In this view of the matter, no exception can be taken to the directions given by the Tribunal to the ITO for ascertaining the amounts collected by way of under-drawing or under-invoicing.
46. Now let us take up tbe last question, that is, question No. 5. There is no dispute to the fact that the assessee paid Rs. 3,38,365 as difference in gunny transaction settled otherwise than by actual delivery and that it received Rs. 3,14,253 out of which 5 per cent. belonged to another company. Thus the loss was estimated at Rs. 39,824, According to the asses-see, the transactions which resulted in a difference between the receipts and/or payments, were hedging transactions and, therefore, the loss could not be treated as a special speculative loss. It was observed by the Tribunal that there was no evidence to establish that those transactions were really hedging transactions. As such the aforesaid loss were disallowed.
47. The Tribunal, with reference to Section 43(5) of the Act observes that only such transaction can be held as hedging transaction which are entered in the course of merchanting business to guard against loss through future price fluctuation in respect of contracts for actual delivery of merchandise sold. Entering into contracts in course of business is said to be not sufficient for the purpose. It was for the assessee to prove that that was done with a view to guard against future loss in respect of contracts for actual delivery of merchandise. According to the Tribunal, the assessee failed to discharge the onus which lay on it. The only evidence placed by the assessee was the oral evidence of assessee representative Mr. Duncan Smith. The oral testimony of course remained uncorroborated. In this view of the matter, the finding of the Tribunal that the sum of Rs. 39,824 was not allowed does not appear to be unreasonable and perverse.
48. Thus in view of the finding of the Tribunal and in view of the materials placed before us, we answer questions Nos. 1, 3, 4 and 5 in the negative and question No. 2 in the affirmative and all in favour of the Revenue.
49. Each party to pay and bear its own costs.
Sabyasachi Mukharjee, J.
50. I agree.