Commissioner of Income-tax, West Bengal Calcutta v. Calcutta Discount CO., Ltd.

HEGDE, J.-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 que.-stions are .-- 0) 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 applicatioll 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 th~ affirmative, whether on the facts and in the circum .. stances 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 antL in the circumstances of lhe case, the Tribunal erred in dismissing the appeal summarily on the grounds stated in its appdlate 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 unneces~ary to amwer the remaining two questions. Mr. Manchanda. learned coumel 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 follow~ Herein we are concerned with the assessment of the assessee H for the assessment year 194 7-48, relevant accounting year being the financial year 1946-4 7. The assessee company floated a sub­ sidiary company named Messrs. Clive Row Investment ~H0ld· 13-L797Sup.Cll73 954 SUPREME COUllT REPORTS [1973] 3 s.c.R. ing) Co., Ltd., quring the relevant previous year and transferred to that subsidiary company various shares held 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 assessee company to its subsidiary was Rs. 1,66,69,391/~. Thu~ 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 trans­ ferred b(y the assessee company to its: subsidiary at the market rate nnd on that basis came to the conclusion that the assessee com­ pany must be deemed t~ 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, accord­ ing to the Income Tax Officer even though the assessee company had not nl.ade any profits ]n fact, it must be deemed o have made a profit 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 [t~sessce went up in appeal to the Appellate Assistant Commis~ sioner. 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 Offi~r for finding out whether tbe assessee had really made any profits in the transaction in ques~ion . As al!ainst 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 citcumstau" ces of the case the learned Appellate Assistant Com­ missioner of Income-tax should have held that the shares transferred by the assessee company to its subsi­ diary 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 Com­ missioner of Income~tax misappreciated the facts of the present case and wrongly applied the decision of the Madras High Court .in 28 I.T.R. 952. (3) For that the· learned Appellate Assistant Com­ missioner ignored the principle that the cases of the pre­ &ent type the sum to be taken for the disposal of the stock-in trade of the assessee is not what the assessee '.E .F C.I,T. V, CALCUTTA DISCOUNT CO. (Hegde, /,) 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 not plead that the order of the Appellate Assistant Com­ missioner was incorrect· in law and therefore, should be set aside. It appears thao 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 se~ ttside, the Tribunal could not gra.Qt the relief asked for by the Income Tax Officer. At that stage, as seen from the records, the Income Tax 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 somewhat 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 neces­ sary 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 Tri­ bunal to reconsider the matter. But, in the view that we are taking the answers to those questions would become purdy academic. · The Appellate Assistant Commissioner came to the conclu­ sion 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. As seen earli~r 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 ac­ cordance with law. The question ~hat when an assessee transfers some of h!~ 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 his stock-in trade not at the market price but at a lesser price, came up for consideration blefore the High Court of Madras in Sri Ramalinga Choodambikai Mills Ltd. v Commissioner of lncome~tax, Mad­ rasC). The facts of that case as set out in the head-note are : a .limited company sold certain goods shu·,v:::d in its stock-in t-rade 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 ~erein after computing the profits earned by that finn 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 up­ he!J the contention of ~he assessee. It came to the conclusion that the assessee had, in reality, made no profits at all. The High C( urt agreed with the conclusion reached ·by the Tribunal. It opin::d tlut in the absence of any evidence to show either that the sales were sham transactions or that the market prices were in fact p~tiJ by the purchasers, the mere fact that the goods were sold at a ccucessional rate to benefit the purchasers at the expense of the company would not entitle the Income-tax department L~ assess the difference between the mark'et price and the price paid by the purchasers, as ·profits of the companj'. A somewhat similar question came up for consideration before this Court in Commissioner of Income Tax, Gujarat v. A. Rcmwn a11d Co. e) It js 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 w~s), speaking for the Court stated the law at page 17 of the Report thu:; :-· "1lte ·plea raised by the Income-4ax Officer is that income which could haYc be:::n earned by the a3sessees v.Js not earned, and a part of that income was earned by the Hindu undivided families. That according to th~ Income-tax Officer was brought about by 'a subterfuge (I) 281. T. R. 952. (2J 671. T. R. II. J! 8 II ~ C.l.T. V. CALCUTTA DISCOUNT CO. (Hegde, J.) 957 or contrivance. Counsel for the . Commissioner COll· tended 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 Pfficer 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 tradin~ transactions. Income which accrues to a trader 1s taxable in his. hands : income which he could have, but has not earn~. )s 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 lhe ass.essee, and if the income has escaped tax in a pre­ vious asse~sment 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 prohibit­ ed.. A tax payer may resort to a device to divert the income before it accrueS! or arises to him. Effectiveness of the device depends not upon considerations of mora1ity, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, ex­ cept on peril of penalty, be violated, but it may law­ fully 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 asse!>See in this case has arranged his affairs in such a manner as to reduce his uix liability by star~ing 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 contended that a person should not be allowed to adopt a device by which he gives up something through the right hand and receives ·the same through the left hand. Ac~ording 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 Lon!s in Sharkey (Inspector of Taxes) v. Wernher(1). Therein, the assessee was a breeder of hors.es. She also had racing stables. She transferred some horses from her s~ud to (1) [1956] Appeal Cases 58. 958 SUPRBMB COURT REPORTS [1973] 3 s.c.R. the stables. In so doing she debited in her accounts only the cost of breeding the ho!ses 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 con­ tention of the Revenue by majority that in computing the profits of the assessee the market price of those horses should be taken jnto consideration. The ratio of this decision is similar to the ratio of the decision of this Court in Dooar's Tea Co. Ltd. v. Cof!!.missioner of Agricu]!ural lncome.tax, West Bengal(l). Therein, a tea garden owner raised in his own garden bamboo, thatch and som,e other agricul~ural produce. He utilised those products for the purpose of its tea business. The question arose whether while assessing the tea garden 0wr1er under the Bengal Agricultural Income-tax_ Act the cost of £:\ising bamboo, thatch, etc., should be taken into consideration or their market ·price should be taken into consideration. This Court upheld the con­ tention of the Revenue that the market price of those produc_ts should be taken into consideration in computing the agricultural income of the assessee. The ratio of the decision in W arnher' s D 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 bu~ 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 in!o consideration the market price of those goods, ignoring the real price fetched. As men­ tioned 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 ex~rcise 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 rna tter 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. (I) 44 I .T. R. 6.