Concessional sales by a company to its managing agents or directors do not result in taxable income for the company.

In compliance with the order of the High Court of Judicature at Madras, in C. M. P. Nos. 14053 of 1950 and 14056 of 1050 dated the 25th September, 1951, under section 66(2) of the Indian Income-tax Act, we hereby draw up a statement of the case, agreed to by both the parties, and refer the question of law set out in that order. The Excess Profits Tax reference is consequential.

2. The assessee is a public limited company carrying on the business in the manufacture and sale of yarn. The directors thereof hold 2350 out of 4782 shares and it is a director controlled company. The assessee buys cotton and from it manufactures 40 counts yarn. Its managing agents are Messrs. Kulli Chetti & Bros, . a firm.

3. In respect of 1944-45 assessment year for the previous year ended 31st December, 1943, the books of accounts of the company disclosed a turnover in yarn of Rs. 41, 50, 209. On a scrutiny of the sale transactions, it was found that sales thereof to the extent of Rs. 17, 90, 624 were effected to the following three parties :-

(a) S. Kulli Chettiar and Bros., (managing agency

firm) Rs. 9, 98, 364

(b) M. Arulappa Chettiar (one of the directors) " 4, 87, 864

(c) S. Gopalaswami Chettiar & Bros., (wherein

Muthuswami Chettiar, one of the directors,

is a partner) " 3, 04, 400

17, 90, 624

The rates of sales at which the majority of these were effected were much lower than the rates ruling on the dates delivery. Such differences amounted to Rs. 1, 46, 000 as determined by the Income-tax Officer and this computation is not in dispute.

4. The explanation for the aforesaid transactions was furnished by the assessee's auditors in their letter dated 27th August, 1944, which reads as follows :-"In respect of sales of yarn to Messrs. Kulli Chettiar & Bros. the company did not get the usual contracts signed except from November, 1943.

There are four letters written by Messrs. S. Kulli Chettiar & Bros., addressed to the company about contracts of yarn; the letters are dated 22nd January, 1943, 25th January, 1943, 18th February, 1943, and 19th February, 1943. These letters mention the number of bales contracted and the rate per bundle and the month of delivery.

In respect of the sales in 1943, there is only one contract obtained in the usual manner. The date of the contract is 19th November, 1943. The number of bales contracted is 25 bales and the rate is Rs. 21-12-0.

There is no other evidence about the formation of prices. It is explained that the managing partner, the late S. Mookkan Chettiar of the managing agency firm used to fix the prices. No regular account or record is kept in respect of such fixation of prices. This is explained to be the practice.

All the sales to the managing agency firm and those to directors of the company have been from time to time placed before the board of directors of the company and the board have been duly appraised of the sales.

In the inner portion of the cover of the contract register there are certain notes scribbled which are said to be jottings of the contracts made on the respective dates noted therein. These notes support the sales if properly related.

In the inner portion of the cover of the contract counterfoil book there are certain notes scribbled and these are also said to denote the notes jotted down as and when the managing agents informed the office about the conclusion of the contracts for the sale of yarn."

"In respect of the sale of yarns to Sri S. A. Arulappa Chettiar there are no contracts as is usually obtained. It is explained that the contracts were only oral. In the case of sale to third party, who is a director of the company, the sales were placed before the Board of Directors and they have been appraised of the rates and sales." *

5. The Income-tax Officer found that the letter relied upon by the auditors did not bear the date stamp of the assessee company; they speak only of 137 bales as against 924 bales supplies to Messrs. Kulli Chettiar & Bros., and even though the assessee company had m