Harnam Dass Maheshwar vs Commissioner of Income Tax

R.P. Sethi, J.—Heard the learned counsel for the parties. What is the scope and ambit of section 256 of the income tax Act, 1961 ('the

Act'), is the main question to be determined in this case, section 256 provides:

Statement of case to the High Court. --(1) The assessee or the Commissioner may, within sixty days of the date upon which he is served with

notice of an order u/s 254, by application in the prescribed form, accompanied where the application is made by the assessee by a fee of two

hundred rupees, require the Appellate Tribunal to refer to the High Court any question of law arising out of such order and, subject to the other

provisions contained in the section, the Appellate Tribunal shall, within one hundred and twenty days of the receipt of such application, draw up a

statement of the case and refer it to the High Court:

Provided that the Appellate Tribunal may, if it is satisfied that the applicant was prevented by sufficient cause from presenting the application within

the period hereinbefore specified, allow it to be presented within a further period not exceeding thirty days.

(2) If, on an application made under sub-section (1), the Appellate Tribunal refuses to state the case on the ground that no question of law arises,

the assessee or the Commissioner, as the case may be, may, within six months from the date on which he is served with notice of such refusal,

apply to the High Court, and the High Court may, if it is not satisfied with the correctness of the decision of the Appellate Tribunal, require the

Appellate Tribunal to state the case and to refer it, and on receipt of any such requisition, the Appellate Tribunal shall state the case and refer it

accordingly.

(3) Where in the exercise of its powers under sub-section (2), the Appellate Tribunal refuses to state a case which it has been required by the

assessee to state, the assessee may, within thirty days from the date on which he receives notice of such refusal, withdraw his application, and, if he

does so, the fee paid shall be refunded.

A perusal of this section would show that a reference in terms of this section can be made to the High Court on a question of law arising out of the

proceedings under the Act. The High Court is required to insist upon the strict compliance of the requirements of section 256 before entertaining

any reference.

It was held in Meenakshi Mills, Madurai Vs. The Commissioner of Income Tax, Madras, , that only a question of law can be referred for

decision to the Court. A finding on a question of fact can also be attacked as erroneous in law only if it is not supported by any evidence or if it is

unreasonable and perverse, but 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. The Supreme Court in that case summed up the

position for making the reference as under:

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 u/s 66(1).

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.

A finding on a question of fact is open to attack u/s 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.

When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact."" (p. 65)

G. Venkataswami Naidu and Co. Vs. The Commissioner of Income Tax, , the case of Sree Meenakshi Mills Ltd. (supra) was referred to and it

was held:

This question has been exhaustively considered by this Court in Meenakshi Mills, Madurai Vs. The Commissioner of Income Tax, Madras, . In

this case the Appellate Tribunal had come to the conclusion that certain sales entered in the books of the appellant company in the names of certain

intermediaries, firms and companies, were fictitious and the profits ostensibly earned by them were in fact earned by the appellant which had itself

sold the goods to the real purchasers and received the prices. On this finding the Tribunal had ordered that the profits received from such sales

should be added to the amount shown as profits in the appellant's books and should be taxed. The appellant applied for a reference to the Tribunal

u/s 66(1) and the High Court of Madras u/s 66(2) but his application was rejected. Then it came to this Court by special leave under article 136

and it was urged on its behalf that the Tribunal had erred in law in holding that the firms and companies described as the intermediaries were its

benamidars and that its application for reference should have been allowed. This plea was rejected by this Court because it was held that the

question of benami is purely a question of fact and not a mixed question of law and fact as it does not involve the application of any legal principles

for its determination. In dealing with the argument urged by the appellant this Court has fully considered the true legal position in regard to the

limitation of the High Court's jurisdiction in entertaining references u/s 66(1) in the light of several judicial decisions bearing on the point. The

ultimate decision of the Court on this part of the case was that 'on principles established by authorities only such questions as relate to one or the

other of the following matters can be questions of law u/s 66(1): (1) the construction of a statute or a document of title; (2) the legal effect of the

facts found where the point for determination is a mixed question of law and fact; and (3) a finding of fact unsupported by evidence or

unreasonable and perverse in nature'. Having regard to this legal position this Court held that the question of benami was pure question of fact and

it could not be agitated u/s 66(1)."" (p. 363)

No question of law can be said to arise within the meaning of this section unless the Tribunal has violated or ignored any principle of law or the

finding is based on no evidence or inadmissible and irrelevant evidence. The mere fact that another forum of fact may have taken different view

does not give rise to a question of law requiring reference to the Court u/s 256(2). The decision of the Tribunal cannot be looked into through a

microscope so as to discover a minor lapse here or an incautious opinion there to be used as a peg on which to hang an issue of law. If a

conclusion is arrived at by the Tribunal without there being any material the point can be held to be a question of law requiring reference to this

Court. Similarly, a question as to whether the Tribunal properly exercised its discretion in refusing to allow a question cannot be termed a question

of law - Manji Dana Vs. Commissioner of Income Tax, Madhya Pradesh Bhandara and Nagpur, . Where a finding of fact arrived at by the

Tribunal is based on material on the record and there is no satisfactory evidence to substantiate the claim of the assessee, it has to be held that no

question of law arose from the order of the Tribunal requiring the reference to this Court. Unless a question of law arises from the facts and

circumstances of the case or the order of the Tribunal, no reference can be made to this Court nor this Court can issue any direction to the

authorities under the Act for making a reference to this Court u/s 256.

In the instant case the petitioner filed two returns for the period from 1-4-1969 to 15-12-1969 and from 15-12-1969 to 31-3-1970 before the

ITO, Ward B, Srinagar. In the return for the period ending 15-12-1969 the petitioner had shown a loss of Rs. 22,694 and in the other return a

profit of Rs. 36,860. The ITO did not accept the statement of the petitioner regarding his return showing a loss of Rs. 22,694 holding that in fact

the petitioner had not suffered any loss in the contract. The appeal preferred by the petitioner was disposed by the Appellate Commissioner giving

him some benefit. On being aggrieved by the order of the Appellate authority, the petitioner preferred another appeal before the respondent No. 2

submitting therein that the record would show that the Tribunal had acted illegally in not accepting the plea of the petitioner. It is submitted that as

the order of the Tribunal is based on mere surmises and conjectures, the same is being termed as involving a substantial question of law requiring a

reference to this Court u/s 256. The ITO in his order of assessment had held:

The assessee-firm derives income from military contract work for the construction of building and roads. Copies of trading account, balance sheet

and personal account of partners have been filed. Notice u/s 143(2) was issued and complied with. In response to this notice, Shri Shamboo Nath,

Accountant, attended the proceedings with Shri Subhash Datt, Advocate, who has filed the letter of authority. Books of account consisting of cash

book, ledgers, vouchers and bank pass book were produced and examined. Case has been discussed. The various trading accounts are

discussed, hereunder:

Contract CWEK - 13/68-69 Uri

The assessee received a sum of Rs. 3,88,500 on account of payments in respect of this contract from M.E.S. authorities excluding the cost of

cement, iron and other material work-in-progress. The contract was regarding the construction of certain accommodation at Uri. The assessee has

not filed any separate profit and loss account in respect of this contract. The expenses incurred with regard to this contract have been shown

collectively with the expenses of contract No. CWEK-47/69-70. Total payments in respect of both these contracts have been shown at Rs.

4,06,360 and on these payments the assessee has shown total loss of Rs. 22,693. The assessee has not added the value of stores and material.

The value of material comes to Rs. 50,000 on estimated basis. After adding this amount, loss would further increase. The trading result shown by

the assessee is not accepted. The assessee was asked to explain the reasons for low rate of profit. It was submitted by the assessee that the

Contract No. CWEK was taken by the assessee during the accounting period 1968-69 and building at Uri was to be constructed. At the time

when the tenders were called for this contract work, the MES authorities quoted the figures of Rs. 4,37,665 for which the tenders were called as

according to the rates prescribed in the SSR amounts should have been at Rs. 5,04,685 instead of Rs. 4,37,665 of the tendered amount given by

the MES authorities. Thus, the MES authorities quoted the tender less by Rs. 67,020. The result was that the assessee was not able to correctly

marshal the facts and the wrong estimate was given which ultimately resulted in loss to the assessee. Moreover, when the contract was taken by

the assessee they had no experience of the Uri side. Uri being just at the border the military authorities used to impose curfew during day time

which continued till morning. In Uri actually there is no labour and the assessee had to arrange the labour from distant places. All these things

resulted in the slow working of the contract. All these facts resulted in loss to assessee. No other arguments were advanced by the assessee.

The assessee produced various vouchers in respect of expenses claimed by them. These were examined in detail: (1) The books of account

produced by the assessee suffer from various defects. The history of the case is the same as was in the past. The assessee admittedly does not

maintain any stock-tally in respect of material consumed and purchased. In the absence of any stock-tally it is not possible to verify if the entire

purchases of material have duly been accounted for in the sales or in the closing stock. (2) The assessee does not maintain any account for the

timber, sand, bajri consumed for the construction of buildings. (3) No day-to-day record of the consumption of raw-material has been kept. (4)

Payments made to the labourers are identified by thumb impressions and these are not open to proper verification.

All these defects were brought to the notice of the assessee and they have not furnished any satisfactory explanation for these defects. The various

arguments advanced by the assessee with regard to loss incurred in the contract have been considered. Keeping in view the past history of the

case and various submissions made by the assessee, I feel that a net rate of 10 per cent would meet the ends of justice and apply the same.

Similarly, the AAC vide order Annexure-B passed a reasoned order. The Tribunal vide Annexure-C after appreciating the facts and circumstances

of the case and the judgments of the authorities below came to the conclusion that his appeal was liable to be dismissed.

The facts and circumstances of the case clearly show that the respondent-authorities have passed the orders after properly appreciating the

evidence led, documents produced and the arguments advanced in the case. No question of law is involved requiring any interference by this

Court. The petition which has no merit, is accordingly dismissed, but without any orders as to costs.