PETITIONER:
COMMISSIONER OF INCOME-TAX,WEST BENGAL
Vs.
RESPONDENT:
CALCUTTA AGENCY LTD.
DATE OF JUDGMENT:
21/12/1950
BENCH:
KANIA, HIRALAL J. (CJ)
BENCH:
KANIA, HIRALAL J. (CJ)
SASTRI, M. PATANJALI
DAS, SUDHI RANJAN
CITATION:
1951 AIR 108 1950 SCR 1008
CITATOR INFO :
D 1965 SC1905 (6)
R 1976 SC 772 (6)
ACT:
lndian Income-tax Act (XI of 1922), ss. 10 (2) (xv),
66–Reference–Jurisdiction of High Court–Duty to decide
case on facts stated by Tribunal–Accepting arguments of
counsel as poved facts and basing decision on them, impro-
priety of–Buisness expenditure-Payments to avoid disclosure
of misfeasance of directors–Burden of proof
HEADNOTE:
The jurisdiction of the High Court in the matter of
mooroetax references is an advisory jurisdiction and under
the Incometax Act the decision of the Appellate Tribunal on
facts is final unless it can be successfully assailed on the
ground that thoro was
1009
no evidence for the conclusions on facts recorded by the
Tribunal. It is therefore the duty of the High Court to
start by looking at the facts found by the Tribunal and
answer the questions of law on that footing. It is not
proper to depart from this rule of law as it will convert
the High Court into a fact finding authority, which it is
not, under the advisory jurisdiction.
As the statement of tile Case prepared by the Appellate
Tribunal in accodance with the rules framed under the In-
come-tax Act is prepared with the knowledge of the parties
concerned and they have full opportunity to apply for any
addition or deletion from that statement, if they have
approved of the statement made by the Tribunal, it is the
agreed statement of facts by the parties on which the High
Court has to pronounce its judgment.’ The High Court would
be acting improperly if it takes the arguments
one of the counsel for the assessee as if they were
facts and bases its conclusion on those arguments. One of
the directors of the assessee company, acting in the capaci-
ty of managing agents of certain ,Mills, had drawn some
hundis in the name of the Mills, and as the Mills repudiated
liability, suits were filed on the hundis against the Mills
and the assessees. The assessees thereupon agreed to reim-
burse the Mills by permitting the latter. to deduct a moiety
of the commission payable to them under the agreement of
managing agency, against payments which the Mills may have
to make under the decrees. In their assessment to income-tax
the assessees claimed that the amounts so deducted should be
excluded from their assessable income as business expendi-
ture under s. 10 (2,) (xv) of the incometax Act. The Appel-
late Tribunal found that the assessees had agreed to pay off
the decree amount from the remuneration due to them, that
the decree was passed against them evidently for some mis-
feasance committed by their directors, that the books of
both companies showed that the assesssea were paid their
remuneration in full, and that the expenditure was not
therefore laid out for the purpose of carrying on the busi-
ness, and also that, as the payment was made for the liqui-
dation of a debt, it was not a revenue expenditure. In the
High Court the assessees’ counsel argued, relying on the
case of Mitchell v. B. W. Noble Ltd.(1), that the payments
were matie by the assessees to avoid the publicity of an
action against them and the consequent exposure and less of
reputation as a managing agency company, and as such the
payments were deductible as business expenditure. The High
Court accepted this argument and reversed the decision of
the Tribunel.
Held, that the High Court acted wrongly in accepting the
arguments of the assessees’ counsel as if they were proved
facts and basing its decision on them; and, as the facts
necessary to support the claim for exemption under s. 10 (2)
(xv) had not been established at any stage of the case, the
assessees were not entitlecl to the deduction claimed.
(1) [1927J 1 K.B. 719.
129
1010
Judgment of the Calcutta High Court reversed.
JUDGMENT:
APPELLATE JURISDICTION: Civil Appeal No. 59 of 1950.
Appeal from a Judgment of the High Court of Judicature
at Calcutta (Harries C.J. and Chatterjea J.) dated 9th
September, 1949, in a reference under section 66 (2) of the
Indian Income-tax Act, 1922. (Reference No. 8 of 1949).
M.C. Setalvad, Attorney-General for India (G. N.
Joshi, with him) for the appellant.
S. Mitra (B. Banerjee, with him) for the respondents.
1950. December 21. The Judgment of the Court was deliv-
ered by
KANIA C.J.--This is an appeal from the judgment of
the High Court at Calcutta (Harries C.J. and Chatterjea
J.) pronounced on a reference made to it by the Income-
tax Tribunal under section 66 (2) of the Indian Income-
tax Act. The relevant facts are these. The respondents
are a private limited company which was brought into
existence to float various companies including cotton
mills. In November, 1932, the Basanti Cotton Mills Ltd.
was incorporated and the respondents were appointed their
managing agents. Their remuneration was fixed at a month-
ly allowance of Rs. 500 and a commission of 3 per cent.
on all gross sales of goods manufactured by the Mills
Company. The fixed monthly allowance was liable to be
increased in the event of the capital of the company
being increased. The details are immaterial. It ap-
pears that certain hundis were drawn by one of the direc-
tors of the respondent company, acting in the capacity of
the managing agents of the Mill Company, in the name of
the Mill Company and the same were negotiated to others.
The Nath Bank Ltd. claimed payment of these hundis. The
Mill Company repudiated its liability as it appeared
from the books of the Mill Company that they had not the
use of the sum of Rs. 1 80,000 claimed by the Nath Bank
Ltd. under the hundis. The Nath Bank Ltd. instituted
four suits
1011
against the Mill Company, in two of which the respondent
company were party-defendants. The Mill Company was advised
to settle the suits and the respondent company entered into
an agreement with the Mill Company, the material part of the
terms of which runs as follows :--
"Memorandum of Agreement made between the Calcutta
Agency Limited of the one part and Basanti Cotton Mills Ltd.
of the other part. WHEREAS the Nath Bank Limited demanded
from the Mills the payment of the sum of Rs. 1,80,000 and
interest thereon AND WHEREAS the said Mills repudiated their
liability in respect thereof as it appeared from the books
of the said Mills that the said Mills did not have the use
of the said sum of Rs. 1,80000 or any part thereof AND
WHEREAS the said Nath Bank Ltd. thereupon instituted four
suits in High Court being suit Nos. 1683, 1720, 1735 and
1757 of 1939 for the said aggregate sum of Rs. 1,80,000 and
the interest thereon AND WHEREAS the said Mills have been
advised to settle the said suits amicably AND WHEREAS the
Calcutta Agency Limited by its Directors, S.N. Mitter or
S.C. Mitter, having been and being still the Managing Agents
of the said Mills have undertaken to reimburse the said
Mills in respect of the decrees to be made in the said four
suits in the manner hereinafter appearing NOW THESE
PRESENTS WITNESS AND IT IS HEREBY AGREED AND DECLARED
(i) That out of the commission of 3% payable by the said
Mills to the said Agency under Regulation 131 of the Arti-
cles of Association of the Company, the Company shall have
paramount lien on and deduct and set off a moiety thereof
against any payment which the said Mills may make in respect
of the decrees or any of them and/or costs of the said
suits.
(ii) The said moiety shall be one half of the commis-
sion so payable less such sum as the Directors of the Mills
may from time to time allow to be deducted."
Under the said agreement, the respondent company paid
to the Mill Company Rs. 22,500made up of
1012
Rs. 18,107 as principal and Rs. 4,393 as interest in the
accounting year. The assessee company claimed this before
the Income-tax Appellate Tribunal as a deduction permitted
under section 10 (2) (xv) of the Indian Income-tax Act.
The relevant part of that section runs as follows :--
"10. (1) "The tax shall be payable by an assessee under
the head 'Profits and gains of business, profession or
vocation' in respect of the profits or gains of any busi-
ness, profession or vocation carried on by him'
(2) Such profits or gains shall be computed after making
the following allowances, namely :--
(xv) any expenditure (not being in the nature of capital
expenditure or personal expenses of the assessee) laid out
or expended wholly and exclusively for the purpose of such
business, profession or vocation.
In the statement of the case submitted by the Tribunal
after reciting the fact of the incorporation of the company
and the terms of the compromise mentioned above, the argu-
ments urged on behalf of the assessee company have been
recapitulated. The first argument was that under the first
proviso to section 7 of the Indian Income-tax Act, this
payment was liable to be exempted. The Tribunal rejected
that argument. On the reference, the High Court also reject-
ed the same and it was not presented before us. The next
argument of the respondents was that in respect of Rs.
22,500 it was entitled to exemption under section 10(2) (xv)
of the Income-tax Act on the ground that the payment was an
expenditure which was not in the nature of a capital expend-
iture or personal expenses of the applicant company but was
an expenditure laid out wholly and exclusively for the
purpose of its business. They urged that if the applicant
company did not agree to pay this amount, Basanti Cotton
Mills Ltd. could have brought a suit against the company to
realise this amount due on the hundis which would
1013
have exposed the applicant company to the public and in
order to save themselves from the scandal and maintain the
managing agency they agreed to 'the deduction of of certain
amounts from the managing agency commission due to it and
thereby brought it within the principles of the decision of
Mitchell v.B.W. Noble Ltd.(1) The Tribunal found as facts:
(1) 'I?hat the applicant company agreed to pay off the
decretal amount from the remuneration which they are enti-
tled to get from the Basanti Cotton Mills. (2) The decree
was passed against the applicant company evidently for
certain misfeasance committed by its directors and the
applicant company agreed to pay it off from its remunera-
tion. (3) The books of account of Basanti Cotton Mills Ltd.
would show that they were paying the applicant company in
full its remuneration and the books of the applicant company
also show that it was entitled to its remuneration in full.
(4) In the circumstances the Tribunal held that the expendi-
ture was not laid out wholly and exclusively for the purpose
of carrying on the business. (5) Besides, the Tribunal was
of the opinion that in this case it was not a revenue ex-
penditure at all. As the payment had to be made towards
liquidation of the decretal amount the Tribunal held, in the
circumstances of this case, that it was a capital payment.
On behalf of the respondent it was argued in the further
alternative that the Privy Council decision in Raja Bijoy
Singh Dudhuria's case(2) would cover the present case. That
contention was rejected by the Tribunal.
This statement of the case prepared by the Incometax
Tribunal and submitted to the High Court for its opinion was
perused by the parties and they had no suggestions to make
in respect of the same. The statement of the case was thus
settled with the knowledge and approval of the parties.
When the matter came before the High Court, Mr. Mitra, who
argued the case for the present respondents, as shown by the
judgment of the High Court, urged as follows:--" If the
applicant company had not agreed to pay the amount mentioned
[1927] 1 K.B. 719.
1014
in the aforesaid agreement, then the Basanti Cotton Mills
Ltd. would have sued the company for the realisation of the
amounts due on the hundis and it seems that there would have
been no defence to the action. This would have subjected the
applicant company to the danger of public exposure and in
order to save itself from the scandal and in order to main-
tain the managing agency, the applicant company agreed to
deduct certain amounts from the managing agency commission
and therefore such expenditure came within section 10(2)(xv)
of the Act.” The High Court thereafter noticed several
cases including Mitchell’s case(1) and towards the close of
the judgment delivered by Chatterjea J. observed as
follows:–”In this case it is clear that the agreement was
entered into with a view to avoid the publicity of an action
against the managing agents and consequent exposure and
scandal andin order to maintain the managing agency so that
the company could carry on its business as before. The
payment in question did not bring in any new assets into
existence nor in my opinion can it properly be said that it
brought into existence an advantage for the enduring benefit
of the company’s trade. The Appellate Tribunal observed that
the decree was evidently passed against the appellant compa-
ny forcertain misfeasance by its directors and the appellant
company agreed to pay it off from its remuneration ……
The object of the agreement was to enable the company to
remove a defect in carrying on the business of the company
and to earn profits in its business. Therefore this case is
covered by the judgment of the Court of Appeal in Mitchell’
scase(1) …… “Applying this line of reasoning the High
Court differed from the conclusion of the Tribunal and
allowed the deduction to the respondent company under sec-
tion 10(2) (xv) of the Income-tax Act, as claimed by the
respondents. The Commissioner of Income-tax, West Bengal,
has come in appeal to us.
Now it is clear that this being a claim for exemption
of an amount, contended to be an expenditure falling under
section 10(2)(xv), the burden of proving the
(1) [1927] 1 K.B. 719.
1015
necessary facts in that connection was on the assessee, it
being common ground that the commission was due and had
become payable and was therefore the business income of the
assessee company liable to be taxed in the assessment year.
The jurisdiction of the High Court in the matter of income-
tax references is an advisory jurisdiction and under the Act
the decision of the Tribunal on facts is final, unless it
can be successfully assailed on the ground that there was no
evidence for the conclusions on facts recorded by the Tribu-
nal. It is therefore the duty of the High Court to start by
looking at the facts found by the Tribunal and answer the
questions of law on that footing. Any departure from this
rule of law will convert the High Court into a fact-finding
authority, which it is not under the advisory jurisdiction.
The statement of the case under the rules framed under the
Income-tax Act is prepared with the knowledge of the parties
concerned and they have a full opportunity to apply for any
addition or deletion from that statement of the case. If
they approved of that statement that is the agreed statement
of facts by the parties on which the High Court has to
pronounce its judgment. In the present case the parties
perused the statement of case and as disclosed by the note
made at the end of it had no suggestions to make in respect
thereof. It is therefore clear that it was the duty of the
High Court to start with that statement of the case as the
final statement of facts. Surprisingly, we find that the
High Court, in its judgment, has taken the argument of Mr.
Mitra as if they were facts and have based their conclusion
solely on that argument. Nowhere in the statement of the
case prepared by the Tribunal and filed in the High Court,
the Tribunal had come to the conclusion that the payment was
made by the assessee company to avoid any danger of public
exposure or to save itself from scandal or in order to
maintain the managing agency of the appellant company. The
whole conclusion of the High Court is based on this unwar-
ranted assumption of facts which are taken only from the
argument of counsel for the present respondents before
1016
the High Court. The danger of failing to recognise that the
jurisdiction of the High Court in these matters is only
advisory and the conclusions of the Tribunal on facts are
the conclusions on which the High Court is to exercise such
advisory jurisdiction is illustrated by this case. It seems
that unfortunately counsel for the respondents caught hold
of Mitchell’s case(1) and basing his argument on the circum-
stances under which a payment could be described as a busi-
ness expenditure falling within the terms of section 10 (2)
(xv), argued that the facts in the present case were the
same. Instead of first ascertaining what were the facts
found by the Tribunal in the present case, the process was
reversed and the procedure adopted was to take Mitchell’s
case(1) as the law and argue that the facts in the present
case covered the situation. 1n our opinion this is an
entirely wrong approach and should not have been permitted
by the High Court. The High Court fell into a grave error in
omitting first to ascertain what were the facts found in the
case stated by the Tribunal. The High Court overlooked that
in Mitchell’s case(1) the whole discussion started with a
quotation from the case stated by the Commissioners as the
facts of the case.
A scrutiny of the record in the present case shows that
before the Income-tax Officer the assessees claimed only a
deduction of the interest of Rs. 5,582 as a permissible
deduction under section 10 (2) (iii) of the Income-tax Act.
That claim was rejected by the Income-tax Officer. When the
matter went to the Assistant Income-tax Commissioner it was
argued that the Income-tax Officer was in error in not
allowing the deduction of interest and was also wrong in not
allowing the entire sum of Rs. 22,500 as a deduction on the
ground that portion of the income (viz., Rs. 22,500) should
be treated as not earned or deemed to be earned by the
assessees at all, having regard to the decision of the Privy
Council in Raja Bijoy Singh Dudhuria’s case(2) The first
paragraph of the order of the Appellate Assistant Commis-
sioner contains the following
1017
statement :–” In disallowing this (interest) c]aim the
Income-tax Officer was following the decision of my prede-
cessor in his order dated the 18th March 1942 in Appeal No.
1-C-11 of 1941-42. My predecessor observed: “Nothing is in
evidence to show that the managing agency company had sur-
plus money and such money was invested or that there was any
need to borrow.Thus the need to borrow is not established.
There is no doubt that money was borrowed but unless it can
to proved that the borrowing is for the purpose of the
business and the loan was used in the business, the interest
cannot be allowed under section 10(2)(iii).”
The second objection raised before the Appellate Assist-
ant Commissioner was in these terms :–” That the Income-tax
Officer should have allowed the said sum of Rs. 22,500 as
allowable expenditure being allocation of a sum out of the
revenue receipt before it became income in the hands of the
assessee.” The wording of the objection and the argument
noticed in the order of the Appellate Assistant Commissioner
show that the contention was that this sum should be treated
as not having become the income of the assessee at all
because it was deducted at the source by the Mill company.
Reliance was placed for this contention on Raja Bijoy Singh
Dudhuria’s case(1). The contention was rejected. At the
third stage, when the assessee urged his contentions before
the Income Tax Appellate Tribunal,-he thought of urging as
an argument that this was a permissible deduction under
section 10 (2)(xv) because of the principles laid down in
Mitchell’s case(2). No evidence, it appears, was led before
the Income Tax Tribunal, nor has the Tribunal recorded any
findings of fact on which the principles laid down in Mitch-
ell’s case(2) could be applied. The Tribunal’s conclusions
of facts were only as summarized in the earlier part of the
judgment. It is therefore clear that the necessary facts
required to be established before the principles laid down
in MiZchell’s case(’2) could be applied, have not been found
as facts in the present case at any stage of the proceedings
and the High Court was in error
(1) 6 I.T.C. 449. (2) [1927] 1 K.B. 719.
130
1018
in applying the principles of Mitchell’s case(1) on the
assumption of facts which were not proved. The High Court
was carried away, it seems, by the argument of the coun-
sel and through error accepted the argument as facts.
Indeed, if it had noticed the contention urged before the
Income-tax Officer it would have seen at once that the
argument was in a measure conflicting with that contention
which was based on the footing of Rs. 1,80,000 being a loan
to the assessee on which it had to pay interest, which was
sought to be deducted under section 10 (2) (iii) of the
Income-tax Act. In our opinion, therefore, this appeal
should be allowed on the simple ground that the facts neces-
sary to be established by the respondents to support their
claim for exemption under section 10(2)(xv)of the Indian
Income-tax Act have not been established at any stage of the
proceedings and therefore they are not entitled to the
deduction claimed. The appeal is therefore allowed with
costs here and before the High Court.
Appeal allowed,
Agent for the appellant: P.A. Mehta.
Agent for the respondents: Ganpat Rai.
(1) [1927] 1 K.p,. 719