M/S.PREMIER BREVERIES LTD.KARNATAKA Vs. COMMISSIONER OF INCOME TAX, COCHIN
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 1569 of 2007, Judgment Date: Mar 10, 2015
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1569 OF 2007
PREMIER BREWERIES LTD.,
KARNATAKA ... APPELLANT (S)
VERSUS
COMMISSIONER OF INCOME TAX,
COCHIN ... RESPONDENT (S)
WITH
CIVIL APPEAL NO. 3214 OF 2011
WITH
SLP(C) No. 10080 of 2014
J U D G M E N T
PRAFULLA C. PANT, J.
1. Civil Appeal No. 1569 of 2007 is directed against the judgment
and order dated 31.03.2005 of the High Court of Kerala by which in
exercise of jurisdiction under Section 256(2) of the Income Tax Act,
1961 (as it then existed) (hereinafter for short 'the Act') the
questions reframed by the High Court have been answered against the
appellant-assessee and in favour of the revenue. The question decided
by the High Court and relevant to the present appeal relates to the
entitlement of the assessee to the benefit of disallowance of
commission purportedly paid by the assessee to its commission agents
for procurement of order for supply of liquor. Following the
aforesaid judgment of the Kerala High Court, the Karnataka High Court
had decided a similar question arising in Income Tax Appeal No. 12 of
1999 and Income Tax Appeal Nos. 42, 44, 46 and 47 of 2001, in a like
manner i.e. against the assessee and in favour of the revenue.
Aggrieved by the aforesaid orders of the High Court of Karnataka which
pertains to different assessment years, Civil Appeal No. 3214 of 2011
and Special Leave Petition (C) No. 10080 of 2014 have been filed by
the assessee. In view of the fact that the decision of the Karnataka
High Court in I.T.A. No. 12 of 1999 had followed the decision of the
Kerala High Court impugned in Civil Appeal No. 1569 of 2007 and the
decision of the Karnataka High Court in the subsequent appeals before
it (impugned in Civil Appeal No. 3214 of 2011 and Special Leave
Petition (C) No. 10080 of 2014) essentially follows the decision
rendered in I.T.A. No. 12 of 1999, it will be necessary first to deal
with the issues arising in Civil Appeal No. 1569 of 2007 and depending
on the decision therein the remaining appeals will have to be
accordingly answered.
2. Succinctly, the appellants are engaged in the manufacture and
sale of beer and other alcoholic beverages. Certain States like
Kerala and Tamil Nadu had established marketing corporations which
were the exclusive wholesalers of alcoholic beverages for the
concerned State whereby all manufacturers had to compulsorily sell
their products to the State Corporations which, in turn, would sell
the liquor so purchased, to the retailers. It is pleaded by the
appellants that manufacturers of beverages containing alcohol have to
engage services of agents who would co-ordinate with the retailers and
State Corporations to ensure continuous flow/supply of goods to the
ultimate consumers. And on that ground they sought deduction under
Section 37 of the Act.
Civil Appeal No. 1569 of 2007
3. The claim made by the assessee in the facts noted above was
disallowed by the Assessing Officer by order dated 29.01.1993. The
said order of the Assessing Officer was confirmed by the Commissioner
of Income Tax (Appeals) by order dated 29.10.1993. The assessee had
moved the learned Income Tax Appellate Tribunal, Cochin Bench against
the aforesaid orders. The learned Tribunal took the view that the
assessee was entitled to claim for deduction. The said view of the
learned Tribunal has been reversed by the High Court in the Reference
made to it under Section 256 (2) of the Act.
4. We have noticed that in the Reference made to the High Court by
the learned Tribunal under Section 256(2) as many as 12 different
questions were framed and referred. The High Court reframed the
questions in the following manner.
"(i) Whether, on the facts and in the circumstances of the case
did the assessee discharge the burden of proof that lay on
it in support of the claim for Rs. 7,75,602/-?
(ii) Whether, on the facts and in the circumstances of the
case, did the assessee discharge the burden of proof that
lay on it in support of the claim for Rs. 22,72,192/-?
(iii) Whether, on the facts and in the circumstances of the
case, the Tribunal is right in law and fact in holding
that the payment to Golden Enterprises was only for
business purpose or and was in business interest?"
The questions reframed by the High Court were in respect of the
payments made to M/s. R.J. Associates and one Golden Enterprises who,
the assessee claimed, had rendered services as commission agents.
5. Though one item of claim for deduction pertained to the
corporate management charges paid by the assessee to U.B. Limited and
an issue pertaining to the said claim was one of the twelve questions
initially framed in the Reference, in the questions reframed by the
High Court, the said question does not find any mention. Be that as
it may, the High Court on the reasons recorded in its order dated
31.03.2005 thought it proper to reverse the findings and conclusions
recorded by the learned Tribunal. Eventually, in the ultimate
paragraph of its order the High Court after recording the conclusion
that the "Tribunal has committed a grave error in not properly
understanding the transaction entered into between the assessee and
others" set aside the order of the Tribunal and upheld the order of
the Commissioner (Appeals) and answered the questions in favour of the
revenue by holding that the assessee had not discharged the burden so
as to entitle it to deduction under Section 37 of the Act. Aggrieved,
this appeal has been filed by the assessee.
6. Three propositions have been advanced before us on behalf of the
contesting parties. The first is whether the High Court could have
reframed the questions after the conclusion of the arguments and that
too without giving an opportunity to the assessee. The answer to the
above question, according to the appellant, is to be found in M.
Janardhana Rao vs. Joint Commissioner of Income Tax[1] wherein this
Court has held that questions of law arising in an appeal under
Section 260-A of the Act must be framed at the time of admission and
should not be formulated after conclusion of the arguments. Though the
decision in M. Janardhana Rao (supra) is in the context of Section 260-
A of the Act, it is urged that the same principles would apply to the
exercise of jurisdiction under Section 256 of the Act (as it then
existed) particularly as the jurisdiction under Section 256 is more
constricted than under Section 260-A of the Act.
7. The second issue raised is the jurisdiction of the High Court
to set aside the order of the Tribunal in the exercise of its
Reference Jurisdiction. The point is no longer res integra having been
settled in C.P. Sarathy Mudaliar vs. Commissioner of Income Tax,
Andhra Pradesh[2] wherein this Court has taken the view that setting
aside the order of the Tribunal in exercise of the Reference
Jurisdiction of the High Court is inappropriate. This Court had
observed that while hearing a Reference under the Income Tax Act, the
High Court exercises advisory jurisdiction and does not sit in appeal
over the judgment of the Tribunal. It has been further held that the
High Court has no power to set aside the order of the Tribunal even if
it is of the view that the conclusion recorded by the Tribunal is not
correct.
8. The third question that has been posed for an answer before us
is with regard to the correctness of the manner of exercise of
jurisdiction by the High Court in the present case. Learned counsel
for the assessee has elaborately taken us through the judgment of the
High Court to contend that the evidence on record has been re-
appreciated with a view to ascertain if the conclusions recorded by
the Tribunal are correct. The manner of exercise of jurisdiction, in
the absence of any question of perversity of the findings of the
learned Tribunal has been assailed before us. Reliance has been placed
on para 16 of the judgment of this Court in the case of Sudarshan
Silks & Sarees vs. Commissioner of Income Tax, Karnataka[3] which is
in the following terms.
"16. In the present case, the question of law referred to the
High Court for its opinion was, as to whether the Tribunal was
right in upholding the findings of the CIT (Appeals) in
canceling the penalty levied under Section 271(1)(c). Question
as to perversity of the findings recorded by the Tribunal on
facts was neither raised nor referred to the High Court for its
opinion. The Tribunal is the final court of fact. The decision
of the Tribunal on the facts can be gone into by the High Court
in the reference jurisdiction only if a question has been
referred to it which says that the finding arrived at by the
Tribunal on the facts is perverse, in the sense that no
reasonable person could have taken such a view. In reference
jurisdiction, the High Court can answer the question of law
referred to it and it is only when a finding of fact recorded by
the Tribunal is challenged on the ground of perversity, in the
sense set out above, that a question of law can be said to
arise. Since the frame of the question was not as to whether the
findings recorded by the Tribunal on facts were perverse, the
High Court was precluded from entering into any discussion
regarding the perversity of the finding of fact recorded by the
Tribunal."
9. In the present case, the High Court while hearing the Reference
made under Section 256 (2) of the Act had set aside the order of the
Tribunal. Undoubtedly, in the exercise of its Reference Jurisdiction
the High Court was not right in setting aside the order of the
Tribunal. However, reading the ultimate paragraph of the order of the
High Court we find that the error is one of form and not of substance
inasmuch as the question arising in the Reference has been
specifically answered in the following manner.
"We therefore set aside the order of the Tribunal and uphold
that of the Commissioner (Appeals) and answer the questions in
favour of the Revenue by holding that the assessee had not
discharged the burden that it is entitled to deductions under
Section 37 of the Income Tax Act. Reference is answered
accordingly."
The reliance placed on behalf of the appellant-assessee on
Sudarshan Silks & Sarees (supra) therefore is of no effect.
10. The twelve questions referred to the High Court under Section
256(2) of the Act may now be set out below :
1) Whether, on the facts and in the circumstances of the case
and also in view of the prohibition of outside service by
KSBC, was the Tribunal right in law and fact in allowing
the expenditure of RS. 7,75,602/- by/and/ deleting the
addition of Rs. 7,75,602/-?
2) Whether, on the facts and in the circumstances of the case,
did the Tribunal have any materials to show that the above
expenditure of Rs. 7,75,602/- was wholly and exclusively
for the assessee's business?
3) Whether, on the facts and in the circumstances of the case,
did the assessee discharge the burden of proof that lay on
it in support of the claim for Rs.7,75,602/-?
4) Whether, on the facts and in the circumstances of the case,
the Tribunal is right in law and fact in allowing the
expenditure of Rs.22,72,192/- by/and/deleting the addition
of Rs.22,72,192/-?
5) Whether, on the facts and in the circumstances of the case,
did the Tribunal have any materials to show that the above
expenditure of Rs. 22,72,192/- was wholly and exclusively
for the assessee's business?
6) Whether, on the facts and in the circumstances of the case,
did the assessee discharge the burden of proof that lay on
it in support of claim for Rs. 22,72,192/-?
7) Whether, on the facts and in the circumstances of the case,
the Tribunal is right in law and fact in holding that:
"the engagement of Golden Enterprises for carrying out
certain support services was in the business interest" and
is not the above finding also based on surmised and
conjectures like "that two sales officers of UB Group
stationed at Madras did not do or at any rate could not
have done any sub line service at the unit level" wrong,
unreasonable and unsupported by materials?
8) Whether, on the facts and in the circumstances of the case
is the increase in sales noted in paragraph 10 (page 18) of
the order of the Tribunal based on the increase in the
quantum or increases in price and if the increase in sales
is based on an increase in price is not the same an
irrelevant consideration and the order vitiated?
9) Whether, on the facts and in the circumstances of the case,
should not the Tribunal have considered the contention of
the Revenue that "ultimately Golden Enterprises has in turn
appointed one Abhinava Agencies for doing such work and
therefore Golden Enterprises did not have the necessary
infrastructure to do the services" in its correct
prospective without side treching the issue by observing
"what happened between Golden Enterprises and Abhinava
Agencies is not of the concern of the assessee...."and is
not the above finding wrong and lacks prospective when the
case behind entrustment with Golden Enterprises was for
lack of infrastructure with the assessee?
10) Whether, on the facts and in the circumstances of the case
and reason behind entrustment by the assessee with Golden
Enterprises being for lack of infrastructure with the
assessee, will such an assessee entrust the job to the one
who lacks infrastructure and to the one who in turn entrust
to another agency and are not the order and the findings,
without adverting to the above aspects, wrong and hence
vitiated?
11) Whether, on the facts and in the circumstances of the case,
the Tribunal is right in law and fact in holding that
"considering the need for such services and the opportunity
cost of having a regular marketing force, the payment to
Golden Enterprises was only for business purposes and was
in business interest" and are not above findings wrong,
unreasonable, unsupported by materials and based on surmise
and conjectures?
12) Whether, on the facts and in the circumstances of the case,
i) The assessee is entitled to claim any deduction under the
head corporate and management charges?
ii) Should not the Tribunal have disallowed the entire claim
for Rs. 14,36,200/-
11. A reading of the questions initially framed and subsequently
reframed show that what was done by the High Court is to retain three
out of twelve questions, as initially framed, while discarding the
rest. Some of the questions discarded by the High Court were actually
more proximate to the question of perversity of the findings of fact
recorded by the learned Tribunal, than the questions retained. From a
reading of the Order of the High Court it is clear that the High Court
examined the entitlement of the appellant assessee to
deduction/disallowance by accepting the agreements executed by the
assessee with the commission agents; the affidavits filed by C.
Janakiraman and Shri A.N. Ramachandra Nayar, husbands of the two lady
partners of RJ Associates and also the payments made by the assessee
to RJ Associates as well as to Golden Enterprises. The question that
was posed by the High Court was whether acceptance of the agreements,
affidavits and proof of payment would debar the assessing authority to
go into the question whether the expenses claimed would still be
allowable under Section 37 of the Act. This is a question which the
High Court held was required to be answered in the facts of each case
in the light of the decision of this Court in Swadeshi Cotton Mills
Co. Ltd. Vs. Commissioner of Income Tax[4] and Lachminarayan Madan Lal
vs. Commissioner of Income Tax West Bengal[5]. In fact the High Court
noted the following observations of this Court in Lachminarayan
(supra) :
"The mere existence of an agreement between the assessee 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 payments might have
been made. It is still open to the Income tax Officer to
consider the relevant facts and determine for himself whether
the commission said to have been paid to the selling agents or
any part thereof is properly deductible under Section 37 of the
Act."
12. There were certain Government Circulars which regulated, if not
prohibited, liaisoning with the government corporations by the
manufacturers for the purpose of obtaining supply orders. The true
effect of the Government Circulars along with the agreements between
the assessee and the commission agents and the details of payments
made by the assessee to the commission agents as well as the
affidavits filed by the husbands of the partners of M/s. R.J.
Associates were considered by the High Court. The statement of the
Managing Director of Tamil Nadu State Marketing Corporation Ltd.
(TASMAC Ltd.), to whom summons were issued under Section 131 of the
Act, to the effect that M/s. Golden Enterprises had not done any
liaisoning work with TASMAC Ltd. was also taken into account. The
basis of the doubts regarding the very existence of R.J. Associates,
as entertained by the Assessing Officer, was also weighed by the High
Court to determine the entitlement of the assessee for deduction under
Section 37 of the Act. In performing the said exercise the High Court
did not disturb or reverse the primary facts as found by the learned
Tribunal. Rather, the exercise performed is one of the correct legal
inferences that should be drawn on the facts already recorded by the
learned Tribunal. The questions reframed were to the said effect.
The legal inference that should be drawn from the primary facts, as
consistently held by this Court, is eminently a question of law. No
question of perversity was required to be framed or gone into to
answer the issues arising. In fact, as already held by us, the
questions relatable to perversity were consciously discarded by the
High Court. We, therefore, cannot find any fault with the questions
reframed by the High Court or the answers provided.
13. For the aforesaid reasons, Civil Appeal No. 1569 of 2007 has to
fail and it is accordingly dismissed.
Civil Appeal No.3214 of 2011 and SLP(C) No.10080 of 2014
14. In the light of the above, Civil Appeal No.3214 of 2011 and SLP
(C) No.10080 of 2014 are also dismissed.
.....................................J.
[RANJAN GOGOI]
.....................................J.
[PRAFULLA C. PANT]
NEW DELHI,
MARCH 10, 2015.
-----------------------
[1] (2005) 2 SCC 324
[2] 1966 Vol. LXII ITR 576
[3] (2008) 12 SCC 458
[4] 1967 (63) ITR 57
[5] 1972 (86) ITR 439