TaxTMI 
TaxTMI 
1956 (9) TMI 1
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....or the purpose of these appeals may shortly be stated. The assessee is a public company registered under the Indian Companies Act, and its Managing Agents are the firm of Messrs. K. R. Thyagaraja Chettiar and Co., whose partners are Mr. Thyagaraja Chettiar and his two sons. The company is resident and ordinarily resident in British India, its head office being at Madurai in the Madras State. It carries on business in the manufacture and sale of yarn, and for the purpose of that business it purchases cotton and occasionally sells it. Its profits arise for the most part from the sale of yarn and to some extent from the re-sale of cotton. According to the account books of the company, its profits from business for the account year 1941-41 were Rs. 9,25,364, for 1942-43 Rs. 24,09,832, and for 1943-44 Rs. 29,13,881. In its returns, the appellant showed these amounts as its income chargeable to tax for the respective years. The Department did not accept the correctness of the figures as shown in the accounts. It contended that the company had earned more profits than were disclosed in its accounts, and that it had contrived to suppress them by resort to certain devices. According to the ....
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....ayarkarasi and Co. do. Rs. 34,579 4. Alagu and Co. Purchase of cotton Rs. 34,003 1942-43 1. Meenakshi and Co. Sale of yarn Rs. 53,635 2. Sivagami and Co. do. Rs. 58,103 3. Rukmani and Co. Ltd. and Sale of yarn Rs. 3,97,467 4. Sivagami and Co. Ltd. 5. Rukmani and Co. Ltd. Purchase of cotton Rs. 33,533 1943-44 1. Pudukottah and Co. Ltd. Sale of yarn Rs. 18,99,488 Do. Purchase of cotton Rs. 12,703 2. Rukmani and Co. Ltd. do. Rs. 22,504 3. Rajendra Ltd. Sale of yarn Rs. 1,06,436 The contention of the Department was that the amounts shown as profits made by the intermediaries and mentioned above represented in fact the profits actually earned by the appellant, and that they should be added to the figures shown in its accounts as its profits. The appellant contested this position, and maintained that the state of affairs disclosed by its accounts was true, that its sales in favour of the intermediaries were genuine, and that, in fact, little or no profits were made by it in those transactions, that it purchased cotton only from the intermediaries and did pay them the amounts as shown in the accounts. These contentions were closely examined by the Income-tax Officer in the fi....
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....arge quantities of yarn and sometimes on a scale far higher than other genuine commercial transactions, as for example, the sale of 1,850 bales on 17th April, 1942, to Rukmani and Co. No securities were taken from the intermediaries for this transaction. Having regard to the magnitude of the business, the capital of the intermediaries even on paper was negligible. 6. The intermediaries had most of them no offices of their own. Even when they had offices, these were arranged by the officers of the appellant. The concerns had no godowns, and their staff was meagre and recruited from the employees and servants of the appellant. Apart from signing the contracts, the intermediaries did nothing. 7. The profits earned by the firms were shown in their books as cash in their possession, but on a surprise raid the authorities were unable to discover any cash with them. The amount shown as profits in their accounts was, in fact, in the possession of the appellant company. 8. The intermediaries had, in fact, never to pay to the appellants for any of the purchases made by them, the course of the business being that they sold the goods purchased from the appellant to its old customers, who pa....
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....ct. Under that section, it is only a question of law that can be referred for decision of the Court, and it is impossible to argue that the conclusion of the Tribunal is anything but one of fact. It has been held on the corresponding provisions in the English Income-tax statutes that a finding on a question of fact is open to attack as erroneous in law only if it is not supported by any evidence, or if it is unreasonable and perverse, but that where there is evidence to consider, the decision of the Tribunal is final even though the Court might not, on the materials, have come to the same conclusion if it had the power to substitute its own judgment. In Great Western Railway Co. v. Bater, Lord Atkinson observed : "Their (Commissioners') determinations of questions of pure fact are not to be disturbed, any more than are the findings of a jury, unless it should appear that there was no evidence before them upon which they, as reasonable men, could come to the conclusion to which they have come : and this, even though the Court of Review would on the evidence have come to a conclusion entirely different from theirs." There is no need to further elaborate this position, because t....
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....unal was not justified. This clearly is an erroneous approach to the whole question. When a 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 assessing the cumulative effect of all the facts in their setting in the picture as a whole. In Edwards (Inspector of Taxes) v. Bairstow, Lord Radcliffe stated : "...... I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur." This furnishes the corrective to the course adopted by counsel for the appellant in his argument. And a more serious objection to it, and one of substance is that it relates merely to matters of appreciation of evidence, and does not support the position that there is no legal evidence in support of the finding of the Tribunal. For example, one of the facts on which the Tribunal relied for its conclusion was that t....
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....ment. He contended that the facts found showed that the intermediaries were benamidars not for the appellant but for Mr. Thyagaraja Chettiar of the Managing Agents firm. The significance of this contention lies in this that it grants--and Mr. P. R. Das was quite frank about it--that the facts found did point to the fact that the intermediaries were dummies, leaving outstanding for decision only the question whether on the evidence they were benamidars for the appellant or for Mr. Thyagaraja Chettiar. This is a question which will be separately considered. But it is manifest that this argument is destructive of the contention of the appellant that there is no legal evidence to support the conclusion of the Tribunal that the intermediaries were mere dummies. The result then is that the finding of the Tribunal viewed as one of fact, which in truth it is, is supported by evidence, and is not unreasonable and is not open to attack on any of the grounds on which such a finding could be assailed in a reference under section 66(1). It was next contended for the appellant that inference from facts was a question of law, and that as the conclusion of the Tribunal that the intermediaries wer....
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....haracter, and the ultimate conclusion will depend on an appreciation of these facts. Can it be said that a conclusion of fact, pure and simple, ceases to be that when it is in turn a deduction from other facts ? What can be the principle on which a question of fact becomes transformed into a question of law when it involves an inference from basic facts ? To take an illustration, let us suppose that in a suit on a promissory note the defence taken is one of denial of execution. The Court finds that the disputed signature is unlike the admitted signatures of the defendant. It also finds that the attesting witnesses who speak to execution were not, in fact, present at the time of the alleged execution. On a consideration of these facts, the Court comes to the conclusion that the promissory note is not genuine. Here, there are certain facts which are ascertained, and on these facts, a certain conclusion is reached which is also one of fact. Can it be contended that the finding that the promissory note is not genuine is one of law, as it is an inference from the primary facts found ? Clearly not. But it is argued against this conclusion that it conflicts with the view expressed in seve....
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....f law. The proposition that an inference from facts is one of law will be correct in its application to mixed questions of law and fact but not to pure questions of fact. The following observations of Lord Atkinson in Herbert v. Samuel Fox & Co. Ltd. clearly bring out the principle above stated : " ...Your lordships were pressed with the usual argument, that as the County Court judge, though a judge of law and fact, is the sole judge of fact, his findings cannot be disturbed if there be any evidence before him upon which he, as a reasonable man, could find as he has found. That argument is quite sound if it be applied to pure findings of fact. It is utterly unsound if it be applied either to findings on pure questions of law or on mixed questions of law and fact ...... It is wholly illegitmate, in my view, in cases such as the present, by finding in the words of the statute to endeavour to secure for a finding on a pure question of law, or on a mixed question of law and fact, that unassailability which properly belongs only to a finding on a question of a pure fact". These observations were made in a case under the Workmen's Compensation Act, 1904. But the same principles hav....
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....hat it is a question of law what meaning is to be given to the words of the Income Tax Act 'trade, manufacture, adventure or concern in the nature of trade', and for that matter what constitutes 'profits or gains' arising from it. Here we have a statutory phrase involving a charge of tax and it is for the courts to interpret its meaning having regard to the context in which it occurs and to the principles which they bring to bear upon the meaning of 'income'." Lord Somervell agreed with the opinion expressed by Lord Radcliffe. The Lord Chancellor, dealing with this aspect of the case, referred to the decision in Cooper v. Stubbs and Jones v. Leeming, where it had been held that whether trading activities amounted to carrying on business was a pure question of fact, and observed at page 587 : "Yet it must be clear that to say that such an inference is one of fact postulates that the character of that which is inferred is a matter of fact. To say that a transaction is or is not an adventure in the nature of trade is to say that it has or has not the characteristics which distinguish such an adventure. But it is a question of law, not of fact, what are those....
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....contention was repelled on the ground that whether the lands were gardens within rule 8 was not a pure question of fact. The following observations in the speech of Lord Wright at page 38 may be quoted : "It has been strenuously contended as a main argument on behalf of the Crown that the questions here to be discussed are questions of 'fact and degree'. But, in my opinion, the true effect of the facts found cannot be ascertained until the true construction of rule 8 has been examined and its true application to the facts ascertained. There are, in addition to incidental questions, two main questions of law, namely, what is the meaning of 'gardens for the sale of the produce' and how is that meaning to be applied to an acreage which is worked as a single mixed farm in one unit." Thus, the basis of the judgment was that the question decided by the Commissioners was one of mixed law and fact, and that their determination was open to review by the courts. There is nothing in this decision again which supports the contention of the appellant that findings on questions of fact based on inference from other facts should be regarded as questions of law. On the other hand....
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....ferences from facts stated by the Commissioners are matters of law and can be questioned on appeal." Does this remark mean that inferences from facts found are questions of law in all cases, whether these inferences are inferences of facts or of law ? There being nothing in the observation to throw any light on this question, we must examine the facts of the case to ascertain its true import. There, the assessee who had been a Director in a building company for 44 years wanted to resign his office, but he was persuaded to continue as an advisory director on a reduced remuneration and a payment of pound 45,000, and this arrangement was embodied in a deed. The question was whether these amounts were taxable as profits arising from an office. The Commissioners had held that the consideration for the payments was the promise of the assessee not to resign his office, and that therefore they were not profits arising from any office. The House of Lords held, affirming the judgment of the majority of the Court of Appeal, that the amounts were paid to the assessee in consideration of his continuing as a director, and were therefore taxable. Thus, the only point for determination in the case....
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....en as their finding thereon, then it must be taken that they had referred to the decision of the court the question as to what inference should be drawn from the basic findings, but that if they had not merely stated the basic findings but had also stated their conclusions thereon intending that they should be their determinations on the question, then those determinations, if conclusions of fact, would be binding on the court and that the assessee would then have been stated out of court. Dealing with the statement of the Commissioners which was under reference before him, the learned Judge observed at page 22 : "It appears to me, therefore, that it is quite clear that the Commissioners have done this : they have stated their determination, with which the appellants are dissatisfied ; they have stated the facts as found upon which they so determined. The facts as found they have stated in the first part of paragraph 17, and then they have stated in the previous paragraphs the materials on which they so found, and in so doing they have invited, and only invited, the determination in point of law of the question whether there was evidence upon which they could reasonably arrive at ....
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....olding that the facts found did not establish any ground of liability, Sir Richard Couch observed : "A finding that the bond shewed that the mortgage deed was accepted by the defendant, as a binding obligation upon him, would be an inference of law, an inference which, in their Lordships' opinion, is not a just one from the facts which the Commissioner held to be proved. The knowledge of the mortgage, and saying that the money due upon it was repayable, do not amount to an agreement by him to be bound by it. As the mortgage did not purport to be made in any way on behalf of Daud Rao it was not a case for ratification. A new agreement or obligation was necessary to bind him." Then, after referring to the observations of Lord Watson in Ramratan Sukal v. Mussumat Nandu that "It has now been conclusively settled that the third court, which was in this case the court of the Judicial Commissioner, cannot entertain an appeal upon any question as to the soundness of findings of fact by the second court ; if there is evidence to be considered, the decision of the second court, however unsatisfactory it might be if examined, must stand final", Sir Richard Couch continued : "The presen....
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....f State for India in Council v. Rameswaram Devasthanam and Lakshmidhar Misra v. Rangalal. In Wali Mohammad v. Mohammad Baksh, Sir Benod Mitter exhaustively reviewed the authorities on the questions and stated the law in the following terms : "No doubt questions of law and fact are often difficult to disentangle, but the following propositions are clearly established : (1) There is no jurisdiction to entertain a second appeal on the ground of erroneous finding of facts, however gross the error may seem to be : see Durga Choudrain v.Jawahir Singh Choudhri. (2) The proper legal effect of a proved fact is essentially a question of law, but the question whether a fact has been proved when evidence for and against has been properly admitted is necessarily a pure question of fact : see Nafar Chandra Pal v. Shukur. (3) Where the question to be decided is one of fact, it does not involve an issue of law merely because documents which were not instruments of title or otherwise the direct foundation of rights, but were really historical materials, have to be construed for the purpose of deciding the question : see Midnapur Zamindary Co. v. Uma Charan Mandal. (4) A second appeal would not....
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....d from those facts than as a finding of fact itself." These observations lend no support to the broad contention of the appellant that inferences from facts are of necessity and always questions of law. We have discussed the authorities at great length, as some of the observations contained therein appear, at first sight, to render plausible the contention of the appellant, and it seems desirable that the true meaning of those observations should be clarified, lest error and misconception should embarrass and fog the administration of law. The position that emerges on the authorities may thus be summed up : (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....
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....tter of inference from primary facts found which are set out at page 573. But it was nevertheless held to be a question of fact. In Misrilal v. Surji, it was held by the Privy Council that a finding of benami was one of fact not open to attack in second appeal. This contention of the appellant must accordingly be rejected. It was next contended that the finding of the Tribunal that the intermediaries firms and companies were benamidars for the appellant was bad for the following reasons : (1) It had been I reached without due consideration of several matters relevant for such a determination. (2) The finding of benami in so far as it related to the companies was bad for not considering the tests laid down in Smith, Stone and Knight v. Lord Mayoy, Aldermen and Citizens of the City of Birmingham as material for a decision on the point. (3) On the facts found, the proper conclusion to come to was that the intermediaries were benamidars not for the appellant but for Mr. Thyagaraja Chettiar of the Managing Agents firm. These contentions will now be considered. As regards the first contention, the argument on behalf of the appellant was this : An important test for determining wheth....
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....rce in the contention of the appellant that a finding as to who furnished the capital for the intermediaries was requisite before they could be held to be benamidars, if the Tribunal had held them to be benamidars in the former sense but not in the latter. We must, therefore, examine what it is that the Tribunal has actually found. Now, the Tribunal has not held that any of the transactions with which the assessment proceedings are concerned are benami. Indeed, the word "benami" does not find a place anywhere in its order. It is only in the question which the appellant framed for reference to the Court in its application under section 66(1) that it has chosen for the first time to introduce the word "benamidar". That apart, looking at the substance of the finding, the point that arose for determination before the taxing authorities was what profit the appellant had made on certain sales standing in its books in the names of the intermediaries. If the sales were true, the amount shown in the books as price received therefor would be the basis for working out the profits, and that was the stand of the appellant ; but the authorities held that those sales where sham and the entries re....
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....arter, Apthorpe v. Peter Schoenhofen Brewery Co., Ltd., Frank Jones Brewing Co. v. Apthorpe, St. Louis Breweries v. Apthorpe, and I find six points which were deemed relevant for the determination of the question who was really carrying on the business ? In all the cases, the question was whether the company, an English company here, could be taxed in respect of all the profits made by some other company, a subsidiary company, being carried on elsewhere. The first point was : were the profits treated as the profits of the company ?--when I say 'the company' I mean the parent company--secondly, were the persons conducting the business appointed by the parent company ? Thirdly, was the company the head and the brain of the trading venture ? Fourthly, did the company govern the adventure, decide what should be done and what capital should be embarked on the venture ? Fifthly, did the company make the profits by its skill and direction ? Sixthly, was the company in effectual and constant control ?" The contention of the appellant is that before the intermediaries could be hold to be benamidars for the appellant, findings ought to have been recorded on the six points mentioned ....
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.... that A had also his own genuine business. Likewise, if companies doing their own business lend their names to business transactions of other persons, those other persons cannot be heard to say that they are not taxable on the profits of these transactions for the reason that the companies were also carrying on their own business. Therefore, on the finding that the sales were sham, no question arises as to the constitution or status of the intermediaries. It is true that the Tribunal has directed that all the profits earned by the intermediaries should be added to the profits of the appellant, but that is because it has found that the intermediaries did no business other than the transactions of the appellant. And this finding clearly reveals how hollow and unsubstantial the contentions of the appellant are as to the sources of capital for the intermediaries and the application of the tests laid down in Smith, Stone and Knight v. Birmingham Corporation. It is a most unreal question to raise of firms and companies whose only business consists of sham transactions as to who found the capital for them or who was running them. (3) It is next contended that though the facts proved migh....
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....t all times and has been representing it in the assessment proceedings at all stages, and it is through this firm that the appellant speaks in the present appeals. The position then is that Mr. Thyagaraja Chettiar as Managing Agent of the appellant charges himself in his individual capacity with conduct which is grossly fraudulent and infamous, so that the company might escape its liability to tax. This, to our minds, is a most surprising position to take. But we are not concerned here with the ethics of it and must consider it on its merits so long as the law does not bar it. But what are its merits ? The position which the appellant took up with reference to this matter at the several stages of the assessment has been neither uniform nor even consistent. Thus, before the Appellate Assistant Commissioner its argument was that the Managing Agent had been the protector of the interests of the company at all times, that he had "stood by it in its lean years" and should "not therefore be presumed to have acted against the interests of the company" and that therefore the transactions in the names of the intermediaries should be accepted as genuine. Before the Tribunal, the contention w....
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.... former conclusion and it is one which could reasonably be come to on the materials, it is not one which the Court can review, being one of fact. This ground of attack also must be rejected. In the result, all the contentions of the appellant based on the assumption that the intermediaries had been held to be benamidars for the appellant must be overruled on the ground that on the findings of the Tribunal they do not really arise. Lastly, it was contended that the profits earned by the intermediaries had not been brought into the books of the company as its income, had not been included in its balance-sheet and had not been distributed as dividends or added to its reserves, and, not having been treated as its income or profits, could not be taxed. The decisions in St. Lucia Usines and Estates Company Limited v. Colonial Treasurer of St. Lucia, Commissioner of Taxes v. The Melbourne Trust Limited, and Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraja of Darbhanga were quoted in support of this contention. This question is, however, no longer res integra, and is covered by the decision of this Court in Commissioner of Income-tax v. K.R.M.T.T. Thyagaraja Chetty. There, ....
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....th the disposal of it. Income which has accrued to an assessee might remain undisposed of by him, but the liability to tax attaches to it under the provisions of the Indian Income-tax Act as soon as it accrues. It is no concern of the revenue how and when profits are disposed of by the assessees, and for this purpose it makes no difference whether the assessee is an individual or a company, both of them being equally liable to tax on income and profits when they have arisen or accrued. The provisions of the Companies Act as to the disposal of profits are designed to protect the interests of the shareholders and have no effect on the right which the State has under the provisions of the Act to impose a tax on income when it arises or accrues. It should also be mentioned that though the decision in Commissioner of Income-tax v. K.R.M.T.T. Thyagaraja Chettiar relates to a firm and not a company, the decisions in St. Lucia Usines and Estate Company Limited v. Colonial Treasurer of St. Lucia and Commissioner of Taxes v. The Melbourne Trust Limited which were held to be inapplicable to the imposition of a charge under the Indian Income-tax Act related to companies, and the argument and t....