Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, WEST BENGAL CALCUTTA
Vs.
RESPONDENT:
CALCUTTA DISCOUNT CO., LTD.
DATE OF JUDGMENT10/04/1973
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
KHANNA, HANS RAJ
CITATION:
1974 AIR 1358 1973 SCR (3) 952
1974 SCC (3) 260
ACT:
Income-tax-Right of assessee to avoid tax.
Appellate Tribunal--disposal of appeal on
technicalities--Duty to consider substance of the matter.
HEADNOTE:
The assessee company floated a subsidiary company during the
relevant previous year and transferred to that subsidiary
company various shares held by it at a certain rate.. The
authorities under the Income-tax Act, 1922, held that the
assessee and its subsidiary were two different legal
entities, that the transaction was a bona fide transaction
and that the assessee had not made any secret profits out of
that transaction. The Income-tax officer, however, valued
the shares transferred at the market rate and held that the
assessee company must be deemed to have made a profit. In
appeal, the Appellate Assistant Commissioner set aside the
order of the Income-tax Officer and remitted the case to him
for finding out whether the assessee had really made any
profits from the transaction. The Tribunal dismissed the
appeal of the Income-tax Officer against that order,
summarily, on the ground that the Income-tax Officer had not
taken the necessary pleas that the decision of the Appellate
Assistant Commissioner was incorrect in law. On reference,
the High Court held that the order of the Tribunal was an
interlocutory one and that an application to make a
reference to the High Court did not lie.
Dismissing the appeal to this Court.
HELD: (1). The Tribunal, instead of dealing with the
substance of the matter had been unduly influenced by
procedural technicalities. The conclusion of the Tribunal
that the appeal memorandum was not in accordance with law
was also not correct as no specific formula is necessary for
seeking relief at the hand of any court or tribunal if the
necessary grounds are taken. [955D-E]
(2) But the view of the Appellate Assistant Commissioner
was correct and there was no necessity to decide whether the
Tribunal erred in dismissing the appeal summarily. [958F-G]
It is a well accepted principle of law that an assessee can
so arrange his affairs as to minimise his tax burden.
Hence, if the assessee in this case arranged its affairs in
such a manner as to reduce its tax liability by starting a
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subsidiary company and transferring its shares to that
subsidiary company and thus forgoing part of its own profits
and at the same time enabling its subsidiary to earn some
profits, such a course is not impermissible under law.
[957E-F]
Commissioner of Income Tax, Gujarat, v. A. Raman and Co. 67
I.T.R. II followed.
Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of
Income-tax, Madras, 28 I.T.R. 952, approved.
Sharkey (Inspector of Taxes) v. Wernker, 1956 Appeal Cases,
58 and Dooar’s Tea Co. Ltd. v., Commissioner of Agricultural
West ,Bengal, 44, I.T.-R. G, distinguished and explained,
953
JUDGMENT:
CIVIL APPELLATE JURISDICTION : C.A.No. 495 of 1970.
Appeal by certificate from the judgment and order dated July
25, 1969 of the Calcutta High Court in Income-Tax Reference
No. 61 of 1966.
S.C. Manchanda, S. P. Nayar and R. N. Sachthey, for the
appellant. Sachin Chaudhuri, M. C. Chagla, T. A.
Ramachandran and D. N. Gupta, for the respondent.
The Judgment of the Court was delivered by
HEGDE, S.-This is an appeal by certificate. It arises from
the decision of the Calcutta High Court in a reference under
S. 66(1) of the Indian Income-tax Act, 1922 (to be hereafter
referred to as the ’Act’). Three questions of law were
referred to the High Court for ascertaining its opinion.
Those questions are :--
(1) Whether in view of the fact that the
Tribunal’s order dated 22nd July 1964 was an
interlocutory order the Tribunal was competent
to entertain an application purported to be
under Section 66(1) of the Indian Income Tax
Act, 1922, in respect of such order ?
(2) If the answer to question No. 1 above be
in the, affirmative, whether on the facts and
in the circumstances of the case the Tribunal
exercised its discretion judicially in not
allowing the applicant’s petition for raising
the additional grounds ?
(3) Whether on the facts and in the
circumstances of the case, the Tribunal erred
in dismissing the appeal summarily on the
grounds stated in its appellate order dated 3-
9-1964 ?
The High Court answered the first question in favour of the
assessee and came to the conclusion that it was unnecessary
to answer the remaining two questions. Mr. Manchanda,
learned counsel for the Revenue did not seek to get any
answer from us on questions 1 and 2. His arguments were
confined to question No. 3.
The material facts of the case as could be gathered from the
case stated by the Tribunal are as follows--
Herein we are concerned with the assessment of the assessee
for the assessment year 1947-48, relevant accounting year
being the financial year 1946-47, The assessee company
floated a subsidiary company named Messrs. Clive Row
Investment (Hold-
L797Sup.CI/73
954
ing) Co., Ltd., during the relevant previous year and
transferred to that subsidiary company various shares held
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by it. In return the subsidiary company transferred to the
assessee company its shares of the value of Rs.1-
38,81,173/-. The book value of the shares transferred by
the assesses company to its subsidiary was Rs.,
1,66,69,391/-. Thus the assessee company sustained a’ loss
of Rs. 27,02,398,/- but it did not claim that loss in the
return made on, the ground that the transfer in question was
made to its own subsidiary. The Income Tax Officer valued
the shares transferred by the assessee company to its,
subsidiary at the market rate and on that basis came to the
conclusion that the assesses company must be deemed to have
made a profit of Rs. 1,02,40,546/-. The Income Tax Officer
did not hold that the transaction between the assessee
company and its subsidiary was not a bona fide transaction
or the assessee company had made any secret profits out of
that transaction. In other words, according to the Income
Tax Officer even though the assessee company had not made
any profits in fact, it must be deemed to have made a pro-
fit of Rs. 1,02,40,546/- solely on the ground that the
market value of the shares transferred by the assessee
company to its subsidiary is much more than their book
value.
Aggrieved by the decision of the Income Tax Officer the
assessee went up in appeal to the Appellate Assistant
Commissioner. The Appellate Assistant Commissioner opined
that the basis adopted by the Income Tax Officer was
unsustainable and hence set aside the order of the Income
Tax Officer and remitted the case back to that Officer for
finding out whether the assessee had really made any profits
in the transaction in question. As against that order the
Income Tax Officer went up in appeal to the Income Tax
Appellate Tribunal. In the appeal memo the, Income Tax
Officer took only three grounds, namely :
"(1) For that on the facts and in the
circumstances of the case the learned
Appellate Assistant Commissioner of Income-tax
should have held that the shares transferred
by the assessee company to its subsidiary
during the year of account should be valued,
for the purposes of assessment under the
Indian Income-tax Act, at their market price.
(2) For that the learned Appellate Assistant
Commissioner of Income-tax misappreciated the
facts of the present case and wrongly applied
the decision of the ,Madras High Cour
t in 28
I.T.R. 952.
(3) For that the learned Appellate Assistant
Commissioner, ignored the principle that the
cases of the present type the sum to be taken
for the disposal of the stock-in trade of the
assessee is not what the assessee
955
has chosen to treat as his receipt but what he
would normally have received for it in the due
course of trade."
He did toot plead that the order of the Appellate Assistant
Commissioner was incorrect in law and therefore, should be
set aside. It appears that at the hearing the counsel for
the assessee took the plea that as the Income Tax Officer
had not taken the ground that the order of the Appellate
Assistant Commissioner was not in accordance with law,
consequently it should be set aside, the Tribunal could not
grant the relief asked for by the Income Tax Officer. At
that stage, as, seen from the, records, the Income Tax
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Officer applied for amending his appeal memo but that prayer
was rejected by the Income Tax Appellate Tribunal.
Ultimately the Tribunal dismissed the appeal of the Income
Tax Officer summarily on the ground that necessary pleas
have not been taken. Thereafter, at the instance of the
Revenue the questions, set out earlier were referred to the
High Court.
The procedure adopted by the Tribunal appears to us to be
some what strange. The Tribunal instead of dealing with the
substance of the matter appears to have been unduly
influenced by procedural technicalities. we are also not im-
pressed with the conclusion of the Tribunal that the appeal
memo was not in accordance with law. No specific formula,
is necessary for seeking relief at the hands of any court or
Tribunal if the necessary grounds are taken in the appeal
memo.
Had we come to the, conclusion that the decision of the
Income Tax Appellate Commissioner was wrong in law we would
have had no hesitation in answering the three questions for-
mulated above in favour of the Revenue and directing the
Tribunal to reconsider the matter. But’, in the view that
we are taking the answers to those questions would become
purely academic.
The Appellate Assistant Commissioner came to the conclusion
that the assessee and its subsidiary were two different
legal entities. This conclusion was not and could not be
challenged. All the authorities under the Act have come to
the conclusion that the transaction between the assessee and
its subsidiary company was a bona fide transaction and the
assessee had not made any secret profits out of the
transaction in question. It may be that the assessee had
transferred its valuable shares at cost price to.-its
subsidiary in order to so arrange its affairs as to reduce
its tax burden. The question whether such an arrangement is
permissible or not, we shall presently examine.
956
As seen earlier the Appellate Assistant Commissioner came to
the conclusion-that unless the income Tax Officer on the
basis of material before him is able to come to the
conclusion that the assessee had really made profits in the
transaction, it is not permissible for him to add back to
the assessee’s return any fictional income.. In our opinion
that conclusion is fully in accordance with law.
The question that when an assessee transfers some of his
stock-in trade to another person at a price less than the
market price, whether that assessee can be considered to
have made any profit merely because he has transferred some
of Ms stock-in trade not at the market price but at a lesser
price, came up for consideration before the High Court of
Madras in Sri Ramalinga Choodambikai Mills Ltd. v
Commissioner of Income-tax, Madras(1) The facts of ’that
case as set out in the head-note are a limited company sold
certain goods showed in its stock-in trade to its managing
agency firm and to another firm in which one of its
directors was interested. The sales in question were held
to be bona fide sales. At the same time it was held that
the goods were sold at a concessional rate. The Income Tax
Officer sought to tax the assessee therein after computing
the profits earned by that firm on the basis of the market
price of the goods, sold and not the actual price at which
those goods were sold. The assessee challenged the said
basis. The Tribunal upheld the contention of the assessee.
It came to the conclusion that the assesses had, in reality,
made no profits at all. The High Court agreed with the
conclusion reached by the Tribunal. It opined that in the
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absence of any evidence to show either that the sales were
sham transactions or that the market prices were in fact
paid by the purchasers, the mere fact that the goods were
sold a,, a concessional rate to benefit the purchasers at
the expense of the company would not entitle the Income-tax
department to assess the difference between the market price
and the price paid by the purchasers, as profits, of the
company.
A somewhat similar question came up for consideration before
this Court in Commissioner of Income Tax, Gujarat v.A. Raman
and Co. (2) It is unnecessary of set out the facts of that
case and it is sufficient to refer to the relevant
observations in the judgment. Shah J. (as he then was),
speaking for the Court stated the law at page 17 of the
Report thus:-
"The plea raised by the income-tax officer is
that income which could have been earned by
the assesses was not earned, and a part of the
income was earned by the Hindu undivided
families. That according to the Income-tax
Officer was brought about by a subterfuge
(1) 28 I. T. R. 952.
(2) 67 I. T. R. 11
957
or contrivance. Counsel for the Commissioner
contended that if by resorting to a "device or
contrivance’ income which would normally have
been earned by the assessee is divided between
the assessee and another person, the Income-
tax Officer would be entitled to bring the
entire income to tax as if it had been earned
by him. But the law does not oblige a trader
to make the maximum profit that he can out of
his trading transactions. Income which
accrues to a trader is taxable in his hands :
income which he could have, but has not
earned, is not made taxable as income accrued
to him. By adopting a advice, if it is made
to appear that income which belonged. to the
assessee had been earned by some other person,
that income may be brought to tax in the hands
of the assessee, and if the income has escaped
tax in a previous assessment a case for
commencing a proceeding for reassessment under
section 147 (b) may be made out. Avoidance of
tax liability by so arranging commercial
affairs that charge of tax is distributed is
not prohibited.. A tax payer may resort to a
device to divert the income before it accrue$
or arises to him. Effectiveness of the device
depends not upon considerations of morality,
but on the operation of the Income-tax Act.
Legislative injunction in taxing statutes may
not, except on peril of penalty, be violated,
but it may lawfully be circumvented.’
It is a well accepted principle of law that an assessee can
so arrange his affairs as to minimise his tax burden.
Hence, if the assessee in this case has arranged his affairs
in such a manner as to reduce his tax liability by starting
a subsidiary company and transferring its shares to that
subsidiary company and thus foregoing part of its own
profits and at the same time enabling its subsidiary to earn
some profits, such a course is not impermissible under law.
Mr. Manchanda contented that a person should not be allowed
to adopt a device by which he gives up something through the
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tight hand and receives the same through the left hand.
According to him there is no difference between the assessee
and its subsidiary and, therefore, when the assessee tries
to make profits through its subsidiary, we must presume that
the profits were made by the assessee itself. In support of
that contention he sought to place reliance on the decision
of the House of Lords in Sharkey (Inspector of Taxes) v.
Wernher(1). Therein, the assessee was a breeder of horses.
She also had racing stables. She transferred. some horses
from her stud to
(1) [1956] Appeal Cases 58.
958
the stables. In so doing she debited in her accounts only
the cost of breeding the horses and not their market price.
The question arose, whether in computing her income the
market price of those horses or merely the cost of breeding
them should be taken into consideration. The House of Lords
upheld the contention of the Revenue by majority that in
computing the profits of the assessee the market price of
those horses should be taken into consideration. The ratio
of this decision is similar to the ratio of the decision of
this Court in Dooar’s Tea Co. Ltd. v. Commissioner of
Agricultural Income-tax, West Bengal(1). Therein, a tea
garden owner raised in his own garden bamboo, thatch and
some other agricultural produce. He utilised those products
for the purpose of its tea business. The question arose
whether while assessing the tea garden owner under the
Bengal Agricultural Income-tax,. Act the cost of raising
bamboo, thatch, etc., should be taken into consideration or
their market price should be taken into consideration.
’This Court upheld the contention of the Revenue that the
market price of those products should be taken into
consideration in computing the agricultural income of the
assessee. The ratio of the decision in Warnher’s as well,
as in Dooar’s Tea Co.’s case does not bear. upon the
question of law arising for decision in this case. Therein
what the courts had to consider was where a person carrying
on a trade disposes of a part of his goods not by way. of
sale in the course of trade but for his own use, whether the
production cost of such goods or the market price of those
goods should. be taken into consideration. But, in the
present case we are called upon to consider the question
whether when one trader transfers his goods to another
trader at a price less than the market price, the taxing
authority can take into consideration the market price of
those goods, ignoring the real price fetched. As mentioned
earlier the latter question is no more res Integra. It is
concluded by the decision of this Court in A Raman and Co.’s
Case (supra).
For the reasons mentioned above we are of the opinion that
the conclusion reached by the Appellate Assistant
Commissioner is in accordance with law and it would be an
exercise in futility to answer the third question set out
above in favour of the Revenue and remit the case back to
the Tribunal. In this view of the matter we do not’ propose
to answer that question.
In the result this appeal fails and the same is dismissed
with no order as to costs.
P.V.S.
Appeal dismissed.
(1) 44 1 T. R. 6.
959