# Comnzissionef. of /nconze Tax, Gujarat v. A. Ran1an & Co. 61 J.T.R

- **Citation:** [1973] 2 S.C.R. 207
- **Court:** Supreme Court of India
- **Decided:** 1973
- **Case number:** Civil' Appeal No. 20 of 1969
- **Bench:** K .. s. HEGDE, P. JAGANl\IOHAN REDDY AN~ H. R. KHAN:-0.~
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/comnzissionef-of-nconze-tax-gujarat-v-a-ran1an-co-61-j-t-r-5837
- **Pages:** 8

## Headnote

Income Tax Act, 1961, s. 31-Item. of expenditure laid out or expande,/ who//.v and exclusively. for tire purpose of tire business-ccPaymena of.
selling agency commirsio~Power oj ·the Income Tax Officer. to decide
whether Selling Agency agreement is a genuine business arrangententSection 25&--Tribunal not stating a case for the opinion of the High
Court and High Court not calling for a state1nent
of case-Whether
justified.
. The assessee is a registered firm of three partners who are l>rothers,
·each having I/3rd share and is engaged in the manufacture and sale
of aluminium utensils.
In. the assessment year 1963·64, the
assessee
c)aimed to have paid Rs. 31,684/- to l\I/s. Eastem Sales Corporation a.
selling_ agency commission and claimed deduction of· the same under
section· 37 of the Act· a. an item of expenditure laid out or expanded.
The selling agency firm was principally a partnership firm of -the wives
and minor sons of the partners' assessee firm.
The selling agency_ agreement woo entered into on March 26, 1962, while the partnership of the
selling age:ncy firm came into existenc'.e on· April ·.13; 1962. The 1>usm.ss
address of the selling agency firm was the same ·as that of the arsessea
firm. The selling agency firm had no godown of its own nor any trans•
port vehicles. . The Tril>unal held that the selling agency firm had no
genuine i;ndependent existence and that the selling agency firm was only
· a m.ake·relieve arrangement and a device to minimise the tax liability of
E ··the assessee firm. · The .Tril>unal further he'd that the selling agency agree-
-ment' was not a genuine business . arrangement, and refused refen:pce
to High Court.
The High Court declined to call upon the Tribunal to
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state a case. as desired . by the assessee firm.
.
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. On appeal to this Court on the grounds (i) that the Tribunal misconstrued or misunderstood the selling agency agreement and the partnership deed and (ii) that the Tribunal ignored the oral evidence and
the s-ame had vitiated its conclusions and on the question whether any
question· of law arises from the order of the Tril>unal which required
the Tribunal. to state the case for the.opinion of the High Court,
Dismissing the appeal,
Held (i) ·The assessee by adopting a device h.ls made to appe.ir that
the income which belonged to it had l>een earned by some other person.
[213C]
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Comnzissionef. of /nconze Tax, Gujarat v. A. Ran1an & Co. 61 J.T.R.
II, followed:
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(ii) The mere existCiJl<:e·of an agreement l>etween th.; arsessee and its
selling agents or payment of certain amounts as commission, does not bind
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the lna>me Tax Officer to hold that the payment~ was made exclusively
and wholly· for the purpose of· the assessee.'s bu·iness. It is :still open
to the Income Tax. Officer to consider the relevant factors and deterH · mi;ne. for himself whether the Commission said to have been paid to the
selling agents is properly deductil>le under s.·37 of the Act. [214Al
Sw'1deshi Cotton Mills Co. Ltd. v. Commissio~~ of Inc~me T,,;,, u.P.,
63 I.T.R., 57,
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SUPREME COURT REPORTS
[1973) 2 S.C.R. •
-(iii) Held, further, that as the TribUlla! had not relied upon any
irrelevant evidence and the inferences were rationally arrived at. [212H]
.
Dhiraj/a/ Girdharilal v. Commissioner of income TWc, Bom/Ja.v, 26
.. l.T.R. 736, Commissioner of Income Tax, West Beng/4-11 v. Rajastlran
Mines Lrd., 78 ·l.T.R. 45 and Commissioner <>f Income Tax, Punjab v.
Indian Woo/k/i Textile Mills, 51 I.T.R. 291, held inapplicable.
(v) The Tribunal was justifi~d.in not stating a case for the opinion of
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the High Court under section 256(1) and the High Court ·was justified
in. not calling for statement of case under s. 256(2). [214C]
Cominissioner of l~co,;,e Tax, West Hen~] JI. v~ -Durga Prasad Atore,
,. , .
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82 I.T.R. 540, referrel to. ·
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## Text

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LACHMINARAYAN MADAN LAL
V;
COMMISSIONER OF INCOME-TAX, WEST BENGAL
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Septenlber 13, 1972
[K .. s. HEGDE, P. JAGANl\IOHAN REDDY AN~ H. R. KHAN:-0.~, JJ.J
Income Tax Act, 1961, s. 31-Item. of expenditure laid out or expande,/ who//.v and exclusively. for tire purpose of tire business-ccPaymena of.
selling agency commirsio~Power oj ·the Income Tax Officer. to decide
whether Selling Agency agreement is a genuine business arrangententSection 25&--Tribunal not stating a case for the opinion of the High
Court and High Court not calling for a state1nent
of case-Whether
justified.
. The assessee is a registered firm of three partners who are l>rothers,
·each having I/3rd share and is engaged in the manufacture and sale
of aluminium utensils.
In. the assessment year 1963·64, the
assessee
c)aimed to have paid Rs. 31,684/- to l\I/s. Eastem Sales Corporation a.
selling_ agency commission and claimed deduction of· the same under
section· 37 of the Act· a. an item of expenditure laid out or expanded.
The selling agency firm was principally a partnership firm of -the wives
and minor sons of the partners' assessee firm.
The selling agency_ agreement woo entered into on March 26, 1962, while the partnership of the
selling age:ncy firm came into existenc'.e on· April ·.13; 1962. The 1>usm.ss
address of the selling agency firm was the same ·as that of the arsessea
firm. The selling agency firm had no godown of its own nor any trans•
port vehicles. . The Tril>unal held that the selling agency firm had no
genuine i;ndependent existence and that the selling agency firm was only
· a m.ake·relieve arrangement and a device to minimise the tax liability of
E ··the assessee firm. · The .Tril>unal further he'd that the selling agency agree-
-ment' was not a genuine business . arrangement, and refused refen:pce
to High Court.
The High Court declined to call upon the Tribunal to
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state a case. as desired . by the assessee firm.
.
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. On appeal to this Court on the grounds (i) that the Tribunal misconstrued or misunderstood the selling agency agreement and the partnership deed and (ii) that the Tribunal ignored the oral evidence and
the s-ame had vitiated its conclusions and on the question whether any
question· of law arises from the order of the Tril>unal which required
the Tribunal. to state the case for the.opinion of the High Court,
Dismissing the appeal,
Held (i) ·The assessee by adopting a device h.ls made to appe.ir that
the income which belonged to it had l>een earned by some other person.
[213C]
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G
Comnzissionef. of /nconze Tax, Gujarat v. A. Ran1an & Co. 61 J.T.R.
II, followed:
·
'
.
(ii) The mere existCiJl<:e·of an agreement l>etween th.; arsessee and its
selling agents or payment of certain amounts as commission, does not bind
-.,.
the lna>me Tax Officer to hold that the payment~ was made exclusively
and wholly· for the purpose of· the assessee.'s bu·iness. It is :still open
to the Income Tax. Officer to consider the relevant factors and deterH · mi;ne. for himself whether the Commission said to have been paid to the
selling agents is properly deductil>le under s.·37 of the Act. [214Al
Sw'1deshi Cotton Mills Co. Ltd. v. Commissio~~ of Inc~me T,,;,, u.P.,
63 I.T.R., 57,
I
208
SUPREME COURT REPORTS
[1973) 2 S.C.R. •
-(iii) Held, further, that as the TribUlla! had not relied upon any
irrelevant evidence and the inferences were rationally arrived at. [212H]
.
Dhiraj/a/ Girdharilal v. Commissioner of income TWc, Bom/Ja.v, 26
.. l.T.R. 736, Commissioner of Income Tax, West Beng/4-11 v. Rajastlran
Mines Lrd., 78 ·l.T.R. 45 and Commissioner <>f Income Tax, Punjab v.
Indian Woo/k/i Textile Mills, 51 I.T.R. 291, held inapplicable.
(v) The Tribunal was justifi~d.in not stating a case for the opinion of
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the High Court under section 256(1) and the High Court ·was justified
in. not calling for statement of case under s. 256(2). [214C]
Cominissioner of l~co,;,e Tax, West Hen~] JI. v~ -Durga Prasad Atore,
,. , .
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82 I.T.R. 540, referrel to. ·
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CIVIL APPELLATE JURISDICTION :
Civil' Appeal No.
20
of 1969.
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Appeal by.special leave from the order dated July 1, 1968
of the Income Tax Appellate Tribunal ,'A' Bench, Calcutta, in
Income Tax Reference No. 26 of.1968.
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M. C. Setalvad, D. N. Mukherjee, C. K. Ray and G: S.
Chatterjee, for the appellant.
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S. C. Manchanda, P. I. Juneja: B; D. Sharma and R. N.
Sachthey, for the respondent.
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The Judgment of the Court was delivered by' .
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HEGDE, J. Aggrieved by the order of tlie High Court, declin- .
ing to call upon the Income-tax Appellate Tribunal 'A' Bench,
Calcutta to state a case as desired by it, the assessee has brought
this appeal by special leave. The q'uestion for decision is whether
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any question of law arose from the order of ~he Tribunal which
required the Tribunal to state the case for the opinion of the High
Court.·
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The as~essee is a registered firm ·of three partners, Madanlal
Bagaria, Bajranglal Bagaria .and Sohanlal Bagaria; each having
a I /3rd share fn the partn~rship. The partners are brothers. Its
business is that of manufacture and sale of aluminium· ·utensils.
Up'° the assessment year 1962-63, the firm was making its sales
direct to the customers.· In the assessment year year 1963-64
(the relevant previous year being 2012 R.N.
13-4-1963 to
1-4-1964) the asses.see claimed to have; paid Rs.
31,684/- to
Messrs. . Eastern Sales Corpn. as selling agency commission and
claimed deduction of the same under s. 37 of the Indian Incometax Act; 1961 (to pe hereinafter referred to as the Act) as an
item of expenditure laid out or expanded wholly and exclusively
tor the purpose of the business. The Income-tax. Officer rejected
that claim. But the Appellate Assistant Commissioner in appeal
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LACHMINARAYAN v. C.I.T. (lfegde, J.)
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allowed the same. The A.A.C. after summari:;ing the conclusions
reached by the I.T.O. and setting out the
arguments advanced
on either side, concluded 'by o1'>erving :
"On a careful consideration of the facts and circumstances, l am inclined to take the view
that the discount should be allowed as a deduction, as having been
laid out wholly and exclusively for the purpose of the
appellant's business.
The facts narrated above, clearly
indicate that there has been a phenomenal increase in
the sales of the appellant, after the appointment of the
selling agents.
The mere fact of the partners of the
selling agents being closely related to the partners of
the appellant firm is of little consequence,
in the absence vf proof of collusion between the two concern5.
Instead of the payment being made to total strangers,
the discount in the present case has been paid to a firm,
constituted by the near relations of the partners of the
appellant and what is more, the payment was
against
actual service rendered.
The depositions, recorded by
the I.T.O. referred to above, clearly bring out that the
selling agency firm contacted the customers and thereby
improved sales of the appellant."
Aggrieved by the decisions of the A.A.C., the
Department
took up the matter in appeal to the Income-tax Appellate Tribunal. ·The Trit.unal rcvcrs~d the orJer ·Df the A.A.C. and
restored that of the I.T.O. lt cime to the conclusion that the socalled selling agency agreement between. the asscssce firm and the
selling agency firm was only a make-believe arrangement. It was
merely a device to rniniJTiise the tax liability of the assessee firm
and it was not a genuine busine5' arrangement. It arrived at that
conclusion on the basis of the followieg facts :
The selling agency firm had four major partners. Two minors
· were also entitled to share in the benefits of that partnership.
One of the major partner was Shiva Kumari Bagaria
wife
of
Madan Lal Bagaria, one of the partners in the assessee finn. She
had a I/3rd share in the profits of the selling agency firm.
Another partner of that firm was Triveni Devi
Bagaria wife
of
B2i-~nglal Bagaria, a partner in
the assessee firm.
She had
l/9th share in the pp1fits of the selling agency firm.
Bajrannlal's
major son Kanti Prasad Bagaria was another partner in the
0 selling agency finn.
He had l/9th share in the orofits of that firJTI.
Nwdlal Bagaria. th.e minor son of Bajranglal "Bagaria was
entitled to get l/9th share in the profits of the selling agency firm.
In effect the wife and the children of Bajranglal were entitled to
1/3 rd share in the profits of the selling agency firm.
Another
partner of the selling agency firm was $anarshi Devi Bagaria,
!5-L348Sup.C.I./73
2 10
SUPREME COURT REPORTS
[1973] 2 S.C.R.
wife of Sohan Lal Bagaria, one of the partners in the assessee
firm.
She had l/9th share in the profits of the selling agency
firm.
Shyamsunder Bagaria, minor son of Sohanlal was entitled
to get I/6th share in the profits of the selling agency Jinn. This
shows that the wife and son of Sohanlal were entitled to I/3rd
share in the profits of the selling agency finn.
From these facts,
the Tirbunal inferred that the selling agency firm is nothing but
another manifestation of the. assessee finn. The Tribunal further
came to the conclusion that on the day the selling agency agreement was entered into viz. 011 March 26; 1962, the selling agency
firm had not even come into existence. It came into existen£e
for the first time on April 13, 1962. The partnership agreement
clearly shows that the partn~rship came into existence only on
April 13, 1962. This discrepancy between the two
documents
was emphasised by the Tribunal in support of its conclusion that
the agreement in question was a mere make-believe
do~ument.
The Tribunal also took into consideration that out of the partners, two were minors who could not have rendered any
assistance in the matter of selling the products of the assessee finn;
three of the partners of the finn were !aides who had no prior
business experience and consequently they would have been of
little assistance in carrying on the activities of the selling agency
firm.
The only male adult who was the partner in the selling
agency finn was Kanta Prasad Bagaria who had only a
I/9th
share in the profit> of the finn.
Further Kanta Prasad was a
partner in another manufacturing concern situate at a place quite
distant from the place where the selling agency business was said
to have been carried on. The Tribunal further took note of the
fact that the busi11ess address of the selling agency finn was the
same as that of the assessee finn.
The selling agency !inn had
no godown of its own nor any transport vehicles.
On the basis
of these findings, it reached the conclusion that the selling agency
firm had no genuine existence.
Prima facie all the'e are findings
of fact.
Mr. M. C. Setalvad, appearing for the assesse.e challenged the
findings reached by the Tribunal on two grounds viz. ( 1) . that
the Tribunal misconstrued or misunderstood the two documents
viz. the selling agency agreement dated March 26, 1962 and the
partnership deed dated April 13, 1962 and (2)
the Tribunal
ignored the oral evidence and the same has vitiated its conclusions.
On the basis of those contentions he urged that the facts
found and the· conclusions reached by the Tribunal are vitiated.
Mr. Setalvad is not right in his contention that there is no
discrepancy between the agreement dated March 26, 1962 and
the partnership deed dated April 13, 1962. The selling ager.cy
agreement proceeds on the basis that the partnership is already in
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existence.
The assessee could have entered into an agreement
only with an existing firm.
It is true as contended by Mr.
Setalvad that a partnership arrangement may be oral but the
question here is whether the selling agency finn was in existence
on March 26, 1962. For finding out when that firm came into
existence, we have to refer to the partnership deed dated April
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13, · 1962. That document in clear tenns says that it has come
into e~dstence on that day. It is true as· is contended by Mr.
Setalvad that the selling agency agreement says that the same will
come into force on April 13, 1962. But that is not the question
before us.
We are here concerned with the question whether the
selling agency firm existed on March 26, 1962. On th3{ quesC . tion the Tril)unal's conclusion is not open to challenge. There
is discrepancy between the two documents.
It was next urged by Mr. Setalvad that the Tribunal has i~
nored the oral evidence and as such its findings cannot be accepted.
We are unable to accept this contention as well.
It is
true that the Tribunal has not elaborately discussed the oral eviD,
dence.
But it is not correct to say that the oral evidence bas
been ignored. In paragraph 6 of the Tribunal's order, it notices
the reliance placed by the as!!Cssee on the oral evidence. But it
declined to place any reliance on the same.
In paragraph 9 of
its order, the Tribunal observed :
"If the matter had to be decided only on the basis
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of the agreement, the partnership deed of the selling
agency firm and the statements of the customers and of
the partners of the selling agency finn and we have to
take them at their face value, we would not have been
inclined to interfere with the decision of the Appellate
Assistant Commissioner that the selling
agency comF
mission was incurred wholly and exclusively for
the
purpose of the business; but we are obliged to hold that
the so-called selling agency arrangement was only a
make believe arrangement, as a device for minimising
the tax liability of the assessee firm and that it is not a
genuine business arrangement."
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After saying so it proceeded to give reasons in support of that
conclusion.
In other words the Tribunal thought that it is unable to accept the oral evidence as its face value in view of the
surrounding circumstances of the case. It was open to the Tribunal to t!o so. We may also notice at this stage the reference
in the Tribunal's order to the fact that the selling agency firm had
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no transport vehicles of its own is based on the oral evidence in
the case.
The Tribunal also did not believe the oral evidence
led on behalf of the assessee that the darwan of the selling agency
firm went in the lorry for delivering the goods sold.
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SUPREME COURT REPORTS
[1973] 2 SJ:;.R.
Mr. Setalvad took us through the oral evidence recorded by
the l.T.O. with a view to satisfy us that the Tribunal has ignored
important pieces of evidence.
After going through the same we
are unable to disagree with the conclusion reached by the Tribunal that not much value can be attached to that evidence. It
was open to the Tribunal to· reject the oral evidence in the light
of the surrounding circumstances of the case.
It is true that the A.A.C. did observe that :
"The depositions
recorded by the ITO, referred to
above clearly bring out that the sillling
agency firm
contacted the customers and· thereby improved sales of
the appellant."
This was merely a ipse dixit. No reasons were given in support of that conclusion. The A.A.C. has not examined the evidence before him. He has not considered whether that evidence
was believable or not. On the other hand the Tribunal for the
reasons it has st1ted was not able to place reliance on it.
Mr. Setalvad invited our attention to number of decisions in
support of this contention that the Tribunal's order is a pl'ima
facie perverse order. We shall now consider those decisions.
In Dhirajlal Gi,.d/Jal'ila/ v. Commissioner of Income-tax, Bombay(') this Court ruled that when a court of fact acts on matedal,
partly relevant and partly irrelevant, it is impossible to say to
what extent the mind of the court was affected by the irrelevant
material used by it in arriving at its finding. Such a finding is
vitiated because of the use of inadmissible material and thereby an
issue of law arises. In this case, we have not been able to accept
Mr.
Setalvad's contention that any part of the evidence
relied on by the Tribunal was either irrelevant or inadinissible.
Hence this decision has no bearing on the point in issue in this
case.
In Commissioner of Income-tax, West Bengal-ll v.
Rajasthan Mines J,td., (') this Court held that it is open to the parties to
challenge a conclusion of fact drawn by the Tribunal on the
j!round that it is not supported by any legal evidence or that the
impugned conclusion drawn from the relevant facts is not rationally possible. Tf such a plea is established, the court has to consider whether the conclusion in question is not perverse and should
not. therefore, be set aside. It is not possible to say on the facts
and in the circumstances of this case that the conclusions of fact
drawn by the Tribunal is not supported by any legal evidence or
that the same could not be rationally arrived at.
(I) 26, !TR 736.
(2) 71, !Tit, 45.
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LACHMINARAYAN v. C.I.T. (Hegdc, !.)
213
In Commissioner of lncome-ta.x, Guiarat v. A. Raman &
Cr. ( 1) this Court restated the well accepted proposition that the
law does not oblige a trader to make the maximum profit that
he can out of his trading transactions. Income which accrue.s to
a trader is taxble in his hands but income which he could have,
but has not earned, is not made taxable as income accrued to
him. Avoidance of tax liability by so
arranging
commercial
affairs that charge of tax is distributed is not prohibited. A tax
payer may resort to a device to divert the income before it accures
or arises to him.
Effectiveness of the device depends not upon
considerations of morality but on the operation of the Incometax Act. But this Court in the same case further observed that by
adopting a device, if it is made to appear that the income which
belonged to the assessee had been earned by some other person,
that income t)lay be brought to tax in the hands of the assessee.
According to the findings given by the Tribunal this case belongs to the latter category namely that the assessee by adopting
a device has made to appear that the income which belonged to
it had been earned by some other person.
Mr. Setalvad ·placed considerable reliance on the decision of
this Court in Commissioner of Income-tax,
Pzmjab
v.
Indian
Woollen Textile Mills('). Therein this Court observed that in
that case the Tribunal assumed the only fact on which its conclusion was founded and had ignored other relevant matters on
which A.A.C. had relied in support of its conclusion. Consequently the Tribunal must be held to have misdirected itself in
law in arriving at its finding.
We have earlier considered th•
contention of Mr. Setalvad that the Tribunal had misdirected itself but we have not been able to accept the same.
Hence the
ratio of this decision is of no assistance to the appellant.
Reference was also made to the decision of this Court in
Commissioner of Income-tax West Bengal II v.
Durga Prasad
More( 3 ). We fail to see how this decision c.an lend any assistance
to the appellant's case.
In that case this Court reversing
the
decision of the High Court held that it could not be said that the
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finding of the Tribunal as to the unreality of the trust put forward
was not based on evidence or was otherwise vitiated.
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In our opinion the facts of this case come within the rule laid
down by this Court in Swadeshi Cotton Mills Co. Ltd. v. Commis.sioner of lncome-ta.x, U.P:f,') The question whether an amount
claimed as an expenditure was faid out or expanded wholly and
exclusively for the purpo!:e of the business has to be decided on
II) 67, I.T.R. ll,
13) 82 l.T.R. 540.
l2l 51, l.T.R. 291.
14) 63, l.T.R. 51.
214
SUPREME OOURT REPORTS
[1973] 2s.C.R.
the facts and in the light of the circ11mstancei in each case. The
mere existence of an agreement between the asiessee and its. selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly
for the purpose of the assessee's business. Although there might
be such an agreement in existence and the payment~ might have
been made, it is still open to the Income-tax Officer to consider
the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part
thereof is properly deductible unjer s. 37 of the Act.
For the reasons mentioned above, we are of opinion that the
Tribunal was justified in not stating a case for the opinion of the
High Court under s. 256( 1) of the Act and the High Court was
justified in not calling for a statement of case under sub-<. (2)
of s. 256.
In the result this appeal fails and the same is dismissed with
costs.
S.B.W.
Appeal dismissed.
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