Judgement

VENKATARAMA AYYAR J. - These appeals arise out of orders of assessment made on the appellant by the Appellate Tribunal, Madras Bench, for the years of account 1941-42, 1942-43 and 1943-44. The appellant applied under S.66 (1) of the Indian Income-tax Act (hereinafter referred to as the Act) to refer to the H. C. certain question which according to it arose out of the orders; but the Tribunal rejected the applications. The appellant then moved the H. C. under S.66 (2) of the Act for an order requiring the Tribunal to refer those question to the court, but the learned Judges held that the question on which reference was sought by the appellant were pure question of fact, and dismissed the applications. The matter now comes before us by way of special appeal.

2. The facts material for the purpose of these appeals may shortly be stated. The assessee is a public company registered under the Indian Companies Act, and its Managing Agents are the firm of Messrs. K. R. Thyagaraja Chettiar and Co., 52 whose partners are, Mr. Thyagaraja Chettiar and his two sons. The Company is resident and ordinarily resident in British India, its head office being at Madurai in the Madras State. It carries on business in the manufacture and sale of yarn, and for the purpose of that business it purchases cotton and occasionally sells it. Its profits arise for the most part from the sale of yarn and to some extent from the re-sale of cotton. According to the account books of the company, its profits from the business for the account year 1941-42 were Rs. 9,25,364, for 1942-43 Rs. 24,09,832, and for 1943-44 Rs. 29,13,881. In its returns, the appellant showed these amounts as its income chargeable to tax for the respective years. The Department did not accept the correctness of the figures as shown in the accounts. It contended that the company had earned more profits than were disclosed in its accounts, and that it had contrived to suppress them by resort to certain devices. According to the Department, the scheme evolved by the appellant for this purpose was this: Suppose the Company sold 25 bales of yarn to X for Rs. 50,000 at the then market rate and received the full amount of the price. The books of the company would show neither the sale to X nor its receipt of Rs. 50,000. Instead, there will be an entry in its books showing the sale of these very bales to A for Rs. 20,000 which will be about the cost price and in the books of A these goods will be shown as sold by it to X for Rs. 50,000. If the sale by the company to A and the connected sale by A to X were genuine, the Company would have made no profit on the sale, whereas A would have made a profit of Rs. 30,000 on it. But, in fact, both these sales were sham transactions; the only sale that took place was that by the Company to X and the price actually received by it was not Rs. 20,000 but Rs. 50,000. As a result of these paper transactions and manipulations, the profit of Rs. 30,000 made by the company was suppressed. This process was reversed when the company purchased cotton. The appellant purchased, let us say, 100 bales of cotton from X for a price of Rs. 5,000 and paid that amount to X. Neither this purchase from X nor the payment of Rs. 5,000 to him would appear in the books of the Company. Instead, the books of A will show these goods as purchased by it from X for Rs. 5,000 and the books of the appellant will show a purchase from A of those very goods for Rs. 8,000. Both these sales were fictitious, the only real transaction was the sale by X to the Company and the price actually paid therefore by the Company was only Rs. 5,000. By the device of sale by X to A and by A to the Company, the cost price had been inflated by Rs. 3,000 and the real profit had been concealed to the extent. The accounts of the company, therefore, did not reflect the true position as to the profits actually made by the appellant. The names of the intermediaries who according to the Department played the ro