Commissioner of Income Tax vs Lekhraj and Sons

V. Ratnam, J.—At the instance of the revenue, the following questions have been referred for the opinion of this Court u/s 256(2) of the

income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that Ramchand & Co. is not a benami for

the assessee-firm and, therefore, the income from the said business should be excluded from the assessment of the assessee-firm for the

assessment years 1961-62 and 1962-63?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the onus is on the department to

prove that the firm Ramchand & Co. was a genuine firm carrying on business and the payment of commission and interest by the assessee-firm to

Ramchand & Co. was during the course of its regular business?

Whether the finding of the Appellate Tribunal is based on valid and proper materials and is a reasonable view to take on the facts and in the

circumstances of the case?

The assessee is a firm consisting of four partners originally constituted on 27-4-1943. Subsequently, there were changes in the constitution of the

firm and during the years relevant for the assessment years in question, the assessee-firm consisted of Satramadas, Gopaldas, Dharmadas and

Mrs. Kimat Bai as partners. The first three partners are the sons of the fourth partner. The business of the firm is in piecegoods and art-silk on

wholesale basis. For the assessment year 1961-62, the assessee returned an income of Rs. 1,70,870. In the course of the examination of the

accounts of the assessee, it was found that the assessee had made most of its purchases through and had paid commission and interest to another

firm Ramchand & Co., No. 217, Princes Street, Bombay-2. Out of the total purchases made by the assessee in a sum of Rs. 26,78,736,

purchases through Ramchand & Co. were for Rs. 23,43,384. Ramchand & Co. consisted of three partners, namely, Ramchand Satramdas, who

was none other than the son of Satramadas, one of the partners of the assessee-firm, Veena Dharmadas, wife of another partner of the assessee-

firm and Mrs. Kamala Gopaldas, wife of yet another partner of the assessee-firm. None of the partners of the firm Ramchand & Co. ever stayed

at Bombay, though its business was stated to have been carried on at Bombay by a power of attorney agent of the name of Motiram Basantrai,

through whom the assessee had been making its purchases prior to the constitution of the firm Ramchand & Co. Ramchand & Co. received

commission and interest over the purchases from the assesses and Motiram Basantrai continued to receive brokerage from those vendors from

whom he made purchases. For the assessment years 1960-61 and 1961-62 the Ninth ITO, Market Ward, Bombay, passed orders on 31-3-

1961 and 31-10-1961, respectively, determining the status of Ramchand & Co., as that of an unregistered firm on the ground that the firm was not

a genuine one. On appeal to the AAC, that order was confirmed and in further appeal to the Tribunal, in relation to the assessment year 1960-61,

in its order dated 28-5-1963, the Tribunal observed as under:

From the facts found by the income tax authorities, we have no doubt that the assessee-firm was not a genuine firm and the sole object of its

formation was to divert and route the purchases made by Motiram Basantrai through the assessee and that commercial purpose was served. By

this procedure, the firm of Lekhraj & Sons, successfully reduced its taxable profits by claiming deduction in its own assessment of the commission

and the interest paid by it to the assessee-firm on the purchases made by it. Since we agree with the department that the assessee-firm is not a

genuine firm the income supposed to have been earned by it when assessed in the hands of Lekhraj & Sons this assessment would be cancelled by

the department. Registration had, therefore, been rightly refused.

In view of this finding given by the Appellate Tribunal, for the assessment year 1960-61, which was also subsequently confirmed for the year

1961-62 by the AAC, the ITO, in the course of the assessment proceedings of the assessee, directed the clubbing of the income of Ramchand &

Co., with the income of the assessee as returned and completed the assessment. For the assessment year 1962-63 also, to the income returned by

the assessee in a sum of Rs. 2,42,426 the income of Ramchand & Co. was clubbed and the assessment was completed. Against this, the assessee

preferred appeals contending that the proceedings relating to Ramchand & Co, were concerned with the question of its registration and any finding

rendered therein by the Tribunal cannot justify the inclusion of the income of Ramchand & Co. with that of the assessee or conclude that question

against the assessee-firm. The AAC, relied on the following circumstances, viz., (i) none of the partners of Ramchand & Co. ever stayed in

Bombay, though the business was said to be carried on in Bombay; (ii) prior to the formation of Ramchand & Co., the assessee was effecting its

purchases through Motiram Basantrai, who received commission and interest; (iii) after the formation of Ramchand & Co., Motiram Basantrai was

made the power of attorney agent; (iv) Ramchand & Co. did not have even a business premises in Bombay; (v) that the capital for the business of

Ramchand & Co. came from the assessee-firm and not through independent sources; (vi) Ramchand & Co. though indebted to merchants in

Bombay was receiving interest from the assessee-firm and paid no interest to the Bombay parties; and (vii) the expenses of the visits of the

partners of the assessee-firm to Bombay were debited in the books of Ramchand & Co., to conclude that the business of Ramchand & Co.

belonged only to the assessee-firm and its income had, therefore, been rightly clubbed with the income of the assessee. In that view, the appeals

were dismissed. On further appeal to the Tribunal, it was of the view that the revenue had failed to establish that the capital of Ramchand & Co.

proceeded from the assessee-firm and concluded that the business of Ramchand & Co. for the years under consideration, cannot be held to be the

benami business of the assessee and, therefore, the income of Ramchand & Co. should be deleted from the assessments of the assessee. Similar

relief was granted to the assessee by the Tribunal as regards the assessment year 1962-63 also after upholding the addition of a sum of Rs. 1,300

disallowed on a claim for travelling expenses. Aggrieved by this, the revenue has come up before this Court on the questions referred to earlier.

The learned counsel for the revenue drew attention to the several circumstances catalogued earlier and adverted to by the AAC in his order to

contend that Ramchand & Co. was only benami for the assessee and, therefore, the Tribunal was not in order in directing the deletion of the

clubbing of the income of Ramchand & Co. with that of the assessee. On the other hand, the learned counsel for the assessee submitted that the

Tribunal had, on a consideration of all the relevant materials relating to the benami nature of Ramchand & Co. found as a fact that the capital

contribution for Ramchand & Co. did not proceed from the assessee-firm and that on such a finding which was essentially one of fact arrived at by

the Tribunal, the first question referred for the opinion of the Court cannot be stated to arise at all as a question of law. Reliance was placed in this

connection on some decisions as well.

We have carefully considered this submission. The orders of the assessing authority and the AAC in this case clearly established that the firm of

Ramchand & Co. was also considered to be not a genuine firm but projected as a device to successfully reduce the taxable profits of the assessee

by claiming a deduction on commission and interest paid. To justify the clubbing of the income of Ramchand & Co. with that of the assessee,

emphasis has been laid on this aspect. It was on that basis the protective assessment made on Ramchand & Co. was directed to be cancelled,

when its income was assessed in the hands of the assessee in this case. The Tribunal, even as observed by it in para 9 of its order has bestowed its

attention only to a consideration of the question whether Ramchand & Co. is the benami business of the assessee in this case. Proceeding to

consider that question, the Tribunal stated that he who alleges benami must establish it and in this case, the revenue has got to make it good that

Ramchand & Co. is benami for the assessee, It is in this context the Tribunal examined the entries in the books of account made available, which

showed that Ramchand Satramdas received a gift of Rs. 9,500 from his father and that had been credited into the books of account of Ramchand

& Co. Similarly, the entries in the books of account further disclosed that Mrs. Veena Dharmadas, another partner of Ramchand & Co., received

by transfer a sum of Rs. 6,000 from her grandmother Thirathbai, who had an account in the books of the assessee even before 1-4-1958 and this

amount was withdrawn and invested as her capital in Ramchand & Co. Regarding another partner Kamla Gopaldas, she had an account with the

assessee and there was a credit balance of about Rs. 8,200 which was withdrawn and brought into Ramchand & Co. as her capital contribution.

Subsequently, a gift for Rs. 2,500 received by her from her grandmother was also brought into Ramchand & Co. In view of these entries in the

books of account, the Tribunal concluded that the department had failed to establish that the capital contribution for Ramchand & Co., came from

the assessee-firm. Apart from this tracing the source of capital contribution by the three partners of Ramchand & Co., the Tribunal did not find on

the materials, any motive for the setting up of Ramchand & Co., as a benami firm. Adverting to the relationship between the parties who were

partners of the assessee-firm and Ramchand & Co., the Tribunal concluded that one of the partners of the assessee-firm, namely, Mrs. Kimat Bai

was not interested in Ramchand & Co. and, therefore, (all partners of the assessee-firm cannot be stated to have derived any benefit by setting up

Ramchand & Co. as a benami firm consisting of those relations. Though the Tribunal referred to the fact that the partners of Ramchand & Co.

were not residing in Bombay, yet, according to it, there was nothing to show that its affairs were actually controlled by the assessee and that the

profits of Ramchand & Co. flowed back to the assessee. Ultimately, the Tribunal found that it was difficult to say that the revenue had discharged

the burden of proving that Ramchand & Co. was benami for the assessee. In that view, the Tribunal directed the deletion from the assessment of

the assessee for the two years in question the income of Ramchand & Co. Thus, it is seen that in deciding the question whether the income of

Ramchand & Co. can be clubbed with that of the assessee, the Tribunal had predominantly taken into account the different considerations that

would be applicable in deciding the question of the benami nature of Ramchand & Co. and had found as a fact that Ramchand & Co. had not

been established by the revenue to be benami for the assessee. That conclusion of the Tribunal, undoubtedly, is one which is supported by the

materials referred to and discussed in the order of the Tribunal. We are not, therefore, inclined to accept the argument of the learned counsel for

the revenue and we, therefore, answer the question No. 1 in the affirmative.

The learned counsel for the revenue, however, strenuously contended that the Tribunal has omitted to consider the question of Ramchand & Co.

being a genuine firm. Indeed, it was pointed out earlier that the order of the Tribunal, proceeded only on the basis of Ramchand & Co. not being a

genuine firm and that was why, registration was also refused and a protective assessment was made with a direction to delete such an assessment,

when that income was included in the income of the assessee and this aspect has not been considered or investigated at all by the Tribunal and a

finding rendered. The order of the Tribunal does not disclose that there was any consideration of the question of genuineness of Ramchand & Co.

Though the attention of the Tribunal was primarily directed to a consideration of the benami nature of Ramchand & Co., the Tribunal lost sight of

the two different classes of transactions comprehended within the expression ''benami'' but which are different in their legal character and incidents,

as pointed out by the Supreme Court in Meenakshi Mills, Madurai Vs. The Commissioner of Income Tax, Madras, . In one class of cases, it

signifies a real transaction, as for instance, when X disposes of the property to Y but the sale deed mentions Z as the purchaser. In such a case the

sale is a genuine one, but the real purchaser is Y, Z being the benamidar. Normally, this is the kind of transaction usually referred to and

understood as a benami transaction. There is also another class of transactions normally referred to as benami transactions, though not quite

accurately, but include a sham transaction, as for instance, when X purports to sell his property to Y without any intention that his title should cease

or pass to Y. The difference between these two cases is that in the former, there is an operative transfer culminating in the vesting of title, while in

the latter, there is no such vesting and the transferor continues to retain title despite the execution of the sale. It is only in the former class of cases,

when a dispute arises as to whether a person named in the deed is a real transferee or not, an enquiry into the question as to who paid the

consideration for the transfer would be necessary. In this case, there has been no determination in the light of what has been stated above as to

whether the firm Ramchand & Co. is a genuine one or not. The learned counsel for the assessee was unable to draw our attention to any part of

the order of the Tribunal relating to this aspect of the genuineness of the firm Ramchand & Co. In as much as the very basis for the inclusion of the

income of Ramchand & Co. with that of the assessee was that Ramchand & Co. was not a genuine firm, that question will have a material bearing

upon the stand taken by the assessee that it ought not to be so clubbed. Unfortunately that aspect had been missed by the Tribunal. Inasmuch as

the Tribunal had not adverted to the aspect relating to the genuineness of Ramchand & Co., its conclusion that the inclusion of the income of

Ramchand & Co. with that of the assessee is not proper or correct cannot be stated to have been based on valid or proper materials. On the basis

of the order of the Tribunal, as it is, no answer can be rendered with reference to question Nos. 2 and 3. In Commissioner of Income Tax,

Bombay City I Vs. Greaves Cotton and Co. Ltd., the Supreme Court has laid down the proper course to be adopted in such cases in the

following terms:

We have therefore reached the conclusion that the question of law referred to the High Court cannot be answered in view of the defective finding

by the Appellate Tribunal which is recorded without consideration of all the evidence. It will be open to the Appellate Tribunal to rehear the appeal

u/s 66(5) of the Act and record a clear finding after hearing the parties and after considering all the relevant material in the case as to whether the

amount of Rs. 18 lakhs paid by the respondent-company to the managing agents on the termination of the managing agency agreement was an

admissible deduction u/s 10(2)(xv) of the income tax Act. After recording a clear finding on the question, the Appellate Tribunal will finally dispose

of the appeal.

In this case also, we have earlier pointed out how question Nos. 2 and 3 referred to this Court cannot be answered because the genuineness of the

firm Ramchand & Co. had not been touched upon by the Tribunal in its order and in that sense, no finding with reference to that has also been

recorded. Without, therefore, answering question Nos. 2 and 3 we direct the Tribunal to rehear the appeal and record a clear finding regarding the

genuineness of the firm Ramchand & Co. and dispose of the appeal. We, therefore, return the reference on question Nos. 2 and 3 unanswered for

further consideration of the appeal by the Tribunal on the lines indicated earlier. There will be, however, no order as to costs.