Judgment sc-1998-1-932-936

A COMMISSIONER OF INCOME TAX, KARNAT AKA \~ I.._ MIS BED! AND COMPANY PVT. LTD.

FEBRUARY I8, 1998

B I

Income Tax Act, 1961 : Sections 256(1) and (2)-Mixed question of law and facts-Scope of interference by High Court-Lone transaction under c an agreement for promoting a paper mill-Assessment order treating the loan amount as income from business-Upheld by both the Appellate Assistant

, Commissioner and Tribunal-On reference, High Court's finding that the amount was loan and the Revenue failed to prove that it was income from business-On appeal, held that question of perversity in finding offact has D to be distinguished from mixed question of law and fact-High Court was justified in referring to the facts to answer the mixed question of law and fact. A.

Respondent-assessee's regular assessment for the year 1960-61 was passed by the Revenue. Subsequently it was noticed that certain amount has been received by the assessee purporting to be loan under an agreement The E Income-Tax Officer reopened the assessment and after issuing notice passed an assessment order treating the said ·amount as income from business. The respondent-assessee unsuccessfully challenged the assessment order before the Appellate Assistant Commissioner and Income Tax Appellate Tribunal on the ground that the said amount was received as loan to promote a paper mill and it was not a business income. However, on reference, the High Court F took the view that the apparent set of things disclosed that the said amount was loan and the Revenue failed to prove the contrary. Aggrieved, Revenue .,T has filed the present appeal.

Revenue contended that the High Court erred in arriving at its own G finding of fact and that unless the findings recorded by the Tribunal were perverse the High Court ought not to have interfered with the findings of facts. -'.. -......._ .. /

Dismissing the appeal, this Court

C.l.T. v. BED! AND COMPANY PVT. LTD. (QUADRI, J.] 933 findings of facts unless the subJect matter of the question referred to it hy A the Tribunal, either under sub-section (I) or sub-section (2) of Section 256 of the Income Tax Act, 1961 relates to the pen'ersity of the findings arrived at by the Tribunal. That sort of question has to be distinguished from a mixed question of facts and law, which also requires consideration and discussion of facts but docs not warrant returning findings of facts inconsistent with the findings recorded by the Tribunal while giving its opinion on the quci.1ion B / ~

\ referred to the High Court. However, in the instant case while answering the que~1ion, the High Court bad to deal with various facts on record to determine whether the amount in question was loan or income. H such discussion of facts has led to arriving at the conclusion that the amount was loan but not income, it cannot be urged that the High Court disturbed the finding of fact recorded by the Tribunal. (935-E-F) c

2Copy pinpoint2. The High Court was also .iustificd in holding that without recording any finding that the amount was in the nature of commission or any business receipt, the Tribunal was not justified in coming to the conclusion that it could be assessed as income. (936-C) -'-- D

3Copy pinpoint3. The facts on record apparently indicate that the transaction was one of loan. The circumstances relied upon by the Revenue, namely that the loan had been advanced without security, that the loan had not been repaid and no interest on the loan was paid by the assessee and that the agreement of loan was executed contemporaneously with other two agreements with regard of E supply of machine and construction of building for the paper Mill cannot, without any further material, lead to the inference that the amount was not loan hut business income. On the contrary the last mentioned circumstance supports the plea of the assessee that the said amount was received as loan. Therefore, there is no illegality in the judgment of High Court. (936-E-F) F J CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4122 of 1983.

From the Judgment and Order dated 4.8.80 of the Karnataka High Court in I.T.R. No. 180of1975.

K.N. Sh•.dda, (Hemant Sharma) for B.K. Parsad for th.e Appellant. G J. The Judgment of the Court was delivered by

QUADRI, J. The Revenue is in appeal, by special leave, against the order of the Karnataka High Court dated August 4, 1980, in I.T.R.C. No. 180 of 1975, answering the following question referred to it under Section 256(1) H

934 SUPREME COURT REPORTS [1998] l S.C.R.

A of the Income Tax Act, 1961, in the negative, that is, in favour oftlle assessee and against the Revenue. .i..___

"Whetl1er on tl1e facts and circumstances of the case the Tribunal was justified in law in upholding tlle assessment of tl1e sum of Rs. 32,58,500 as Ille income of Ille assessee for the assessment year 1960-61." B A brief narration of the facts leading to reference of tl1e said question T to the High Court, may be necessary to appreciate the contention urged before us. On December 5, 1961 an order of regular assessment of tlle respondent/assessee was passed for tlle assessment year 1960-61 for which tlle relevant accounting year ended on May 31, 1959. Subsequently it came c to tlle notice of tl1e Income Tax Officer tllat a sum of Rs 32,58,500 had been received by tlle assessee putporting to be loan advanced under agreement dated November 15, 1958 entered into between tlle assessee and Parsons & Whittemore. The assessee promoted Mis. Mandva National Paper Mills (for short "the Paper Mills"). The capital requirement of Ille Paper Mills was D proposed to be met by issue of equity and redeemable preference shares of ,I..

rupees two crores and by arranging supply of machinery of Rs. 1.82 crores from two of Ille associates of Parsons & Whittemore. In tllat connection tlrree agreements including Ille Joan agreement in question, were entered into among different parties on the same date.

E On the said information, tlle Income Tax Officer, reopened the assessment of tlle assessee and issued notice under Section 147(a) of tlle Income Tax Act on November 25, 1968. Finding tliat Ille reply given to the said notice was not satisf2.ctory, and disbelieving tlle plea tl1at tl1e amount was advanced as loan, tlle Income Tax Officer treated it as income received from business and accordingly passed tl1e order of assessment, under Section 144 of the Income F Tax Act, bringing to tax the said amount of Rs. 32,58,500 on December 2, 1970. The respondent-assessee pursued the appeal before the Appellate Assistant r Commissioner who dismissed the san1e on December 16, 1972. The assessee's appeal before Ille Income Tax Appellate Tribunal was also dismissed on May 21, 1974. From tllat order of the Tribunal Ille above said question arose. G In tlle Tribunal the Accountant Member and Judicial Member wrote

" separate orders but concurred on tlle dismissal of tlle appeal filed by the assessee. The Accountant Member agreed witll the reasoning and conclusion of tlle Income Tax Officer and Ille Appellate Assistant Commissioner that the loan was not bonafide transaction; Ille Judicial Member took the view that H many of the circumstances relied upon by Ille Revenue were neutral and the

p. 935 Copy page pinpoint

others raised suspicion against the assessee but concurred in the conclusion A _;.._ reached by the Accountant Member on the ground that the assessee had suffered the assessment under Section 144 and there was paucity of material.

The High Court took note of all the factors mentioned in the order of the Tribunal but opined that the apparant set of things disclosed that the said B -..... -..,. amount was loan and that the burden of showing that the apparant was not real, lay heavily on the Revenue but apart from relying on certain circumstances no material was brought on record by the Revenue to hold that the said amount was income from business.

Mr. K.N. Shukla, learned counsel for the appellant-Revenue, argued that the High Court erred in arriving at its own finding of fact and that unless the c findings recorded by the Tribunal were perverse the High Court ought not to have interfered with the findings of facts. In our view the submission is too broad to merit acceptance. There cannot be any doubt that High Court will not address itself to recording findings of facts, unless the subject matter

.. A of the question referred to it by the Tribunal, either under sub-section ( 1) or sub-section (2) of Section 256 of the Income Tax Act, relates to the perversity of the findings arrived at by the Tribunal. That sort of question has to be distinguished from a mixed question of facts and law, which also requires consideration and discussion of facts but does not warrant returning findings of facts inconsistent with the findings recorded by the Tribunal while giving its opinion on the question referred to the High Court. In answering the question, in this case, the High Court had to deal with various facts on record to determine whether the amount in question was loan or income. If such discussion of facts has led to arriving at the conclusion that the amount was loan but not income ..Jt cannot be urged that the High Court disturbed the T finding of fact recorded by the Tribunal. F ·" Here the Tribunal did not find any material to record specific finding that the amount in question is in the nature of commission paid by Parsons & Whittemore to the assessee; it took note of the fact that the loan was advanced by agreement dated November 15, I 958 and that the Reserve Bank of India had accorded permission for obtaining the loan; it has also taken into G f consideration on earlier memorandum of understanding between the assessee and the representative of foreign Creditor, of July I 9, 1957, recording that the proposal to grant loan would materialise alongwith implementation of other agreements to be entered into with the Paper Mills Limited. The High Court in regard to the loan agreement dated November 15, 1958, observed that the H

p. 936 Copy page pinpoint

A agreement provided that the amount would be utilised for purposes of purchasing shares in the said Paper Mills and that the shares were accordingly l.._ purchased and they were treated as belonging to the assessee-company. The High Court also referred to a letter of the foreign Creditor addressed to the Income Tax Officer in November 1970 in response to hi~ querry letter and opined that the Foreign Collaborator maintained that the transaction was loan B as late as in November 1970. It also noticed the reasoning of the Revenue as ,.._ .,.-· reflected in the orders of the Income Tax Officer and the Appellate Assistant Commissioner. The High Court is also justified in its comment that without recording any finding that the amount was commission or business receipt, the Tribunal was not justified in coming to the conclusion that it could be c assessed as income. In our view the High Court has rightly held that the circumstances, taken singally or cumulative did not justify conclusion that the amount was not received as loan as it purported to be but was anything in the nature of commission of any receipt or business. In arriving at the conclusion to which it did, it was necessary for the High Court to refer to the facts and discuss them to answer the mixed question of facts and law and that is what the High court had done. >.

• The facts on record apparantly indicate that the transaction was one of loan. The circumstances relied upon by the Revenue, namely that the loan had been advanced without security, that the loan had not been repaid and no interest on the loan was paid by the assessee and that the agreement of loan was executed contemporaneously with other two agreements with regard to supply of machine and construction of building for the Paper Mill can not, without any further material, lead to the inference that the amount was not loan but business income. It appears to us that the last mentioned circumstance supports the plea of the assessee that the said amount was received as loan. F For the aforementioned reasons we do not find any illegality in judgment of the High Court under appeal. The appeal is, therefore, dismissed, but in the T circumstances of the case without costs.

S.V.K.I. Appeals dismissed.