Kerala H.C : The sale by the company to the firm was only a sham and, therefore, the ITO was correct in assessing the income in the hands of the assessee itself, is vitiated in law, in as much as it was based on facts and circumstances not apparent from the records and on suspicions, surmises and irrelevant evidence

Counsel Appeared

Dr. Pal, for the Assessee : P.K. Ravindranatha Menon & N.R.K. Nair, for the Revenue

K. S. PARIPOORNAN, J.:

These two cases were heard along with IT Ref. Nos. 214 to 217 of 1985, 316 and 317 of 1980, 207 and 208 of 1980, 89 of 1986 and O. P. No. 5842 of 1981. All these are connected cases. The main point that arises for consideration in these cases is the same. viz., whether certain business transactions which the assessee- company, Padinjarekara Agencies (P) Ltd., had with Padinjarekara Corporation, a firm, are sham and the income arising from such transaction is to be assessed in the company’s hands. The Tribunal held so, for the asst. yrs. 1970-71 and 1971-72. IT Ref. Nos. 32 and 33 of 1981 relate to the asst. yrs. 1970-71 and 1971- 72. The said references are at the instance of the assessee. IT Ref. Nos. 214 to 217 of 1985 are at the instance of the Revenue for the asst. yrs. 1972-73, 1973-74, 1974-75 and 1977-78, since for these years the Tribunal which heard the appeals for these years, by order dt. 31st March, 1983 and by order dt. May, 1983, decided the matter in favour of the assessee and against the Revenue and held that the ITO has not established that the sales by the company to the firm are sham and that it cannot be held that the profits earned by the firm constituted the income of the assessee-company. IT Ref. Nos. 316 and 317 of 1980 relate to the asst. yrs. 1970-71 and 1971-72 and relate to the levy of penalty and the references are at the instance of the Revenue. It was held by the Tribunal that no penalty is exigible. IT Ref. Nos. 207 and 208 of 1980 relate to the asst. yrs. 1965-66 and 1966-67 and are at the instance of the Revenue, since it was held by the Tribunal that the reassessments made under s. 147(a) of the Act for the asst. yrs. 1965-66 and 1966-67 were invalid. Similarly, IT Ref. No. 89 of 1986 is at the instance of the Revenue for the asst. yr. 1964-65, wherein the Tribunal held that the reassessment is invalid. O. P. No. 5842 of 1981 relates to the asst. yr. 1975-76, filed by the Revenue to direct the Tribunal to refer certain questions of law.

2. Padinjarekara Agencies (P) Ltd. is the applicant in both the cases. In pursuance of the directions of this Court, the Tribunal , Cochin Bench, has referred the following questions of law, in the above two cases, for the opinion of this Court :

IT Ref. No. 32 of 1981

“1. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that the sale by the company to the firm was only a sham and, therefore, the ITO was correct in assessing the income in the hands of the assessee itself, is vitiated in law, in as much as it was based on facts and circumstances not apparent from the records and on suspicions, surmises and irrelevant evidence ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the addition of Rs. 2,70,415 being the income admittedly earned by the firm, Padiniarekara Corporation, and duly assessed in its hands as the income of the applicant even after holding that the said firm was a genuine firm and without a finding that the sales by the said firm were in fact sales by the applicant ?

Whether, on the facts and in the circumstances of the case, there was any material on records to show, much less to prove, that the sales prima facie made by the firm were in fact sales made by the applicant to outsiders and that the profit of Rs. 2,70,415 accruing or arising therefrom is profit assessable in the hands of the applicant ?

IT Ref. No. 33 of 1981 :

“1. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that the sale by the company to the firm was only a sham and, therefore, the ITO was correct in assessing the income in the hands of the assessee itself is vitiated in law, inasmuch as it was based on the facts and circumstances not apparent from the records and on suspicions and surmises and irrelevant evidence ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the addition of Rs. 1,21,813 being the income admittedly earned by the firm, Padinjarekara Corporation, and duly assessed in its hands as the income of the applicant even after holding that the said firm was a genuine firm and without a finding that the sales by the said firm were in fact sales by the applicant ?

Whether, on the facts and in the circumstances of the case, there was any material on record to show, much less to prove, that the sales prima facie made by the firm were in fact sales made by the applicant to outsiders and that the profit Rs. 1,27,813 accruing or arising therefrom is profit assessable in the hands of the applicant ?”

3. The assessee-company (hereinafter referred to as “the company”) is deriving income mainly from the sale of centrifuged latex. For this purpose latex is purchased from various estates and subjected to the centrifugal process in their factory at Kottayam. In the asst. yr. 1970-71, the assessee-company received a total amount of Rs. 18,36,915 from the Padinjarekara Corporation, a firm (hereinafter referred to as “the firm”) and similarly in the asst. yr. 1971-72, it received a sum of Rs. 12,64,008. The difference of the total price realised as per the invoices issued by the firm, and the total price as per the invoices issued by the company to the firm was Rs. 2,70,415, for the year 1970-71, and Rs. 1,46,124, for the year 1971-72. These sums were added as the income of the company and brought to tax by the ITO . For both the years, the ITO held that the sale by the company to the firm was sham. In appeals, the AAC held, for both the years, that the transaction between the company and the firm is real and that there is no material to show that the firm is a benami for the assessee-company. The additions made for both the years, on the basis that the transactions between the company and the firm were sham, were directed to be deleted. The Revenue carried the matter, by way of appeals before the Tribunal . The Tribunal held that the ITO has established that the sale by the company to the firm was only sham and so the transactions made by the assessee- company on that basis is correct. The assessee-company filed applications, under s. 256(1) of the IT Act , to refer certain questions of law for the decision of this Court . They were rejected. Thereafter, the assessee-company moved this Court , by way of Original Petitions Nos. 821 and 822 of 1977, and this Court directed the Tribunal to refer the above questions of law (extracted hereinabove in para. (2) for the decision of this Court.

We heard Dr. Pal, Senior Advocate, who appeared for the assessee-company, as also the senior counsel for the Revenue, Mr. P. K. R. Menon. The following facts are not in dispute. The assesseecompany is selling latex which is subjected to the centrifugal process in their factory at Kottayam. It sold substantial quantity of “skim crepe” to the “firm” during these two years. The firm, Padinjarekara Corporation, came into existence on 6th Jan., 1959. It has immovable properties. It filed an application to the Rubber Board for permission to produce latex. It was refused. Till 28th Feb., 1963, the income of the firm was only from immovable properties. The Rubber Board gave a certificate to the firm to market “skim crepe”. From the asst. yr. 1964-65 onwards, the firm is an assessee to income-tax. The ITO allowed registration to the firm. From 1964- 65 onwards, there were substantial sales of skim crepe by the company to the firm. The income from the sales of skim crepe was assessed in the firm’s hands from 1964-65 to 1969-70. It was only while framing the assessment for the year 1970-71, for the first time, the Revenue took the stand that the firm is only an intermediary interposed by the company to syphon off sizable profits of the company and the transaction between the company and the firm, in this regard, is sham. The shareholders in the company were P. I. Punnen, P. I. Philipose, P. I. Kurien, P. C. Kurien, P. C. Cherian and P. C. Abraham. They had equal shares. The partners of the firm were the wives of the directors of the company and their investment in the firm was equal. The partners had their own capital and the profits were enjoyed by them. The firm was accepted as genuine and the Department granted registration. All the receipts for payments are signed by the partners. They are attending to the firm’s business. While making the assessment of the company for the year 1970-71, by order dt. 22nd March, 1973, the ITO held that almost all the quantities of skim crepe were transferred to the firm, that the only business of the firm was to receive skim crepe from the company and then make sales on the same day to the customers, that the selling price of the firm is much higher than the selling price of the company, that all the shareholders of the company are directors therein, that the partners of the firm are the wives of the directors of the company, that the directors of the company and their wives as partners of the firm are all having equal shares in the respective businesses, that the ultimate buyers are the usual customers of the company and the firm has only been interposed between the assessee and the ultimate buyers and that the modus operandi adopted by the assessee was to give to the transaction the colour of sale to the firm and then sale by the firm to the customers. There was no transfer of goods to the firm, the alleged transfer is only sham and so the excess price realised by the firm on these transactions should be added to the total income of the company. Similarly, while passing the assessment order dt. 21st March, 1974, for the year 1971-72 the ITO held that the offices of the company and the firm are housed in the same building and that almost all the sales of skim crepe was by the company to the firm, that the firm had sold skim crepe to the various constituents the identical quantity purchased from the company on each occasion on the same day or the next day charging a very high margin of profit, that the firm had only three employees and that in the circumstances it has to be held that the company had actually sold skim crepe direct to various parties and that the firm was brought in as an intermediary in order to sidetrack the profit it had earned on the sales.

The AAC , while disposing of the appeal for the year 1970-71, by order dt. 25th Sept., 1973, after adverting to the facts and circumstances of the case, held that the wives of the shareholders and directors of the company are not debarred from doing any business, that they are persons with independent means, though they did not have experience they could engage sufficient experienced assistants to conduct the business, that there is no continuous market for skim crepe and there is no quotation for it, that both the entities have conducted the business in the same building, that the building is owned by the firm, that there is no daily and continuous market for skim crepe rubber at Kottayam, that the managing director of the firm stated that they are having customers contacting them directly for purchase of skim crepe and that their biggest customer is Indian Trading Corporation and this plea was verified by the ITO . Though the factors brought out by the ITO raise a strong suspicion that the firm is a benami for the company, the presumption is overwhelmingly in favour of the ostensible owner, the partners of the firm are persons of independent means and the profits earned by them were credited to their accounts and it has not been shown that any portion of these profits have gone to the shareholders of the company. In view of these factors, the plea of the ITO that the transaction between the company and the firm is a sham one, cannot be accepted and the addition made on that ground should be deleted. Similarly, the AAC , while disposing of the appeal for the year 1971-72 by order dt. 24th Feb., 1975, held that on consideration of the facts and circumstances of the case, there is no material for holding that the firm is a benami for the assessee-company. He held that it cannot be said that the firm is not doing any business at all, that one of the witnesses examined by the ITO stated that he is doing business only with the firm and has negotiated purchase prices, etc., with its partners, that another witness examined by the ITO stated that he purchased skim crepe only from the firm, whereas there may be acts of questionable integrity on the part of the directors in that they allowed their wives to use the assets of the company. The said evidence, either singly or in conjunction with the other material, is not sufficient to hold that the firm is a benami of the company or that the transactions recorded regarding sale by the company to the firm are not genuine. He held that there is no evidence to hold that the company had actually sold skim crepe direct to various parties and not to the firm and so the addition made on this account should be deleted.

The appeals filed by the Revenue from the aforesaid two appellate orders, for the years 1970-71 and 1971-72, were heard together by the Tribunal and a common order dt. 17th April , 1976 was passed. The Tribunal referred to the decision of the Supreme Court in Sree Meenakshi Mills Ltd. vs. CIT (1957) 31 ITR 28 (SC) : TC54R.211 and the observations contained therein. It posed the question like this : We have to consider only one issue, “Has the ITO succeeded in establishing the transactions of the firm as sham ? ” It held that the firm appears to exist only to take the margin off and not for doing any business. After referring to details, the Tribunal stated that the sale by the company to the firm and sale by the firm, were being made on the same date probably simultaneously and that the company was selling to the firm at less than the prevailing market price. The firm does not have any staff for selling, it has no godown, there were hardly half a dozen letters of the firm to their customers and in almost all of them the hands of the company’s officers are seen. The assessee is a private limited company with six persons holding equal shares and their respective wives are the six partners holding equal shares in the firm and the legitimate profits in the transactions got split up into two, one part going to the husbands and the other to the wives. The firm had no telephone, the statement of one of the purchasers of the firm does not tilt the balance in favour of the assessee and there is a lot of similarity between the facts here and the facts of Meenakshi Mills’ case (supra), that except on one or two points, there is total similarity with the assessee’s case and the points of dissimilarity are not of such gravity as to call for a different conclusion and, looking at the evidence cumulatively, the inference of the ITO was the only inference possible. In this view of the matter, the Tribunal held that the ITO has established that the sale by the company to the firm was only a sham and, therefore, he was correct in assessing the income of the firm in the hands of the assessee itself. From this appellate order of the Tribunal dt. 17th April, 1976, the questions of law, specified hereinabove, have been referred to this Court for our opinion.

Dr. Pal attacked the approach, reasoning and conclusion of the Tribunal . Counsel submitted that the Tribunal misunderstood and misapplied the decision of the Supreme Court in Meenakashi Mills’ case (supra). The Tribunal misdirected itself and omitted to consider the salient facts in this case; material aspects on record were overlooked and proper weight was not given to admitted facts and circumstances; and that the conclusion of the Tribunal is perverse and the conclusion it has come to is such that no reasonable person would come to; the Tribunal erred in law in holding that the facts of this case are similar to those in Meenakshi Mill’s case (supra), and that it was established that the sale by the company to the firm was sham. On the other hand, counsel for the Revenue submitted that the major sale of the products was by the company to the firm, the sale was at a lower rate, that the approach made by the Tribunal on the totality of the facts is justified, the only question is whether the view of the Tribunal is a reasonably possible view, that the finding of the Tribunal , on the total facts, that the transaction between the company and the firm is a sham, is only a finding of fact, which is binding on this Court , and so no question of law can be said to arise out of the order of the Tribunal .

9. Before adjudicating on the rival contentions of the parties, it is useful to remember the nature and jurisdiction of this Court , under the IT Act, in answering the questions referred to it by the Tribunal . The jurisdiction exercised by this Court , in dealing with IT references, is only an advisory one. The reference lies to this Court only on questions of law. As a final fact finding authority, it is the duty of the Tribunal to consider every relevant fact for and against the assessee with due care and it should not act on irrelevant material or on conjectures or surmises. Even a pure finding of fact entered by the Tribunal may be set aside by this Court , if it is established that the Tribunal acted without any evidence or upon a view of the facts which could not reasonably be entertained or is otherwise perverse. The Court may also set aside the finding of the Tribunal if it appears that the facts found are such that no person acting judicially and properly instructed as to the relevant law would have come to the determination under appeal. A finding of fact, based upon a misconstruction of a statute or misunderstanding of a material document or if the Tribunal misdirected itself in law in arriving at the finding or if the Tribunal has overlooked or ignored a crucial fact or document, the finding will be vitiated. So also, if the finding of the Tribunal is based upon a misapplication of the provisions of a statute or misconstruction of the ratio of a particular Supreme Court decision, it raises a mixed question of fact and law. These propositions of law are well-settled by the decisions of Courts.—Edwards (Inspector of Taxes) vs. Bairstow (1955) 28 ITR 579 (HL) : (1955) 3 All ER 48 : TC54R.739, Sree Meenakshi Mills Limited vs. CIT (1957) 31 ITR 28 (SC) : TC54R.211, Mehta Parikh & Co. vs. CIT(1956) 30 ITR 181 (SC) : TC54R.300, CIT vs. Radha Kishan Nandlal (1975) 99 ITR 143 (SC) : TC55R.908, CIT vs. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC) : TC54R.301, CIT vs. S. P. Jain (1974) 97 ITR 370 (SC) : TC54R.321 and Shankerlal H. Dave vs. CIT (1980) 124 ITR 733 (Guj) : TC55R.619. Mixed questions of fact and law, misconstruction of the ratio of the decision of the Supreme Court : Where it is apparent that misconception in law by the Tribunal is the reason for having arrived at a finding of fact, this Court will have jurisdiction, under s. 256 of the IT Act , to set aside the finding. [See Farmer vs. Cotton’s Trustees (1951) AC 922 at p. 932and Edwards vs. Bairstow(supra). So also, if any inference from facts made by the Tribunal does not logically accord with and follow from them, then, one must say that there is no evidence to support it. To come to a conclusion for which there is no evidence to support, is to make an error in law. See J. H. Bean vs. Doncaster Amalgamated Collieries Ltd. (1944) 2 All ER 279—Du Parcq L. J., Affirmed—(1946) 1 All ER 642 HL]. Whiteman and Wheatcroft on Income Tax, Second Edn. (1976 Edn.), at page 1016, state as follows : “The Commissioners are the sole judges of fact but every tax case involves problems of law as well as of fact. The first problem is what is the true meaning of the relevant statutory provisions in relation to the type of facts arising in the case. This is a question of law. Having determined this, a second problem arises in determining whether the evidence in the case justifies, or does not justify, a finding of facts which fall within the statutory provisions. This second problem always involves some finding of fact, but may also involve a question of law; findings of fact may be classified into findings of primary fact and of secondary fact, which latter are conclusions of fact drawn or inferred from the primary facts; the problem whether the Commissioners can properly, on certain findings of primary fact, draw or infer those conclusions may raise a question of law.”

10. In Mehta Parikh & Company’s case (1956) 30 ITR 181 (SC) : TC54R.300, the Supreme Court observed at page 189 as follows : “It follows, therefore, that facts proved or admitted may provide evidence to support further conclusions to be deduced from them, which conclusions may themselves be conclusions of fact and such inferences from facts proved or admitted-could be matters of law. The Court would be entitled to intervene if it appears that the fact-finding authority has acted without any evidence or upon a view of the facts, which could not reasonably be entertained or the facts found arc such that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question.” In Sree Meenakshi Mills Ltd.’s case (supra), summing up the discussion, the Supreme Court states the law at page 50, to the following effect : ” (1) When the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the Tribunal is open to reference to the Court under s. 6 6(1). (2) When the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the Court . (3) A finding on a question of fact is open to attack under s. 66(1) as erroneous in law when there is no evidence to support it or if it is perverse. (4) When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact.”

In CIT vs. Daulat Ram Rawatmull (supra), the Supreme Court, at page 357, held as follows : “Findings on questions of pure fact arrived at by the Tribunal are not to be disturbed by the High Court on a reference unless it appears that there was no evidence before the Tribunal upon which they, as reasonable men, could come to the conclusion to which they have come; and this is so, even though the High Court would, on the evidence, have come to a conclusion entirely different from that of the Tribunal. In other words, such a finding can be reviewed only on the ground that there is no evidence to support it or that it is perverse. Further, when a conclusion has been reached on an appreciation of a number of facts, whether that is sound or not must be determined, not by considering the weight to be attached to each single fact in isolation, but by assessing the cumulative effect of all the facts in their setting as a whole. When a Court of fact acts on material partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the Court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. Likewise, if the Court of fact bases its decision partly on conjectures, surmises and suspicions and partly on evidence, in such a situation an issue of law arises.” Again in CIT vs. S. P. Jain (supra) , at page 381, the Supreme Court observed thus : “In our view, the High Court and this Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases, the findings arrived at are vitiated.”

11. In order to find out whether the Tribunal has misdirected itself in law or has committed any legal error in its approach. or reasoning or conclusion, one should read the order of the Tribunal as a whole. We did so. The conclusion is inescapable that the Tribunal was swayed by the decision of the Supreme Court in Meenakshi Mill’scase (supra) and assumed, without proper analysis, that there is a lot of similarity of facts between the facts in this case and the facts in Meenakshi Mill’scase (supra). The Tribunal also held that except one or two points, there is total similarity with the assessee’s case and the points of dissimilarity are not of such gravity as to call for a different conclusion. It is true that the Tribunal is the sole judge of fact. In this case, the Tribunal posed the question with regard to the relevant or proper law relating to the facts arising in the case and without any analysis, surmised that the instant case is fully governed by the decision of the Supreme Court in Meenakshi Mill’s case (supra). We are afraid that the Tribunal has totally misunderstood and misapplied the decision of the Supreme Court in Meenakshi Mill’s case (supra). In Meenakshi Mill’s case, the issues which arose for determination were whether the sales entered in the books of the appellant (Sree Meenakshi Mills Ltd.) in the names of intermediaries were genuine and if not, to whom the goods were sold and for what price. The appellant/company (Sree Meenakshi Mills Ltd.) was managed by managing agents. The Revenue did not accept the correctness of the figures as shown in the accounts. In its view, 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” The “device” was by purported sale of the goods to intermediaries. The Revenue took the stand that the sales to intermediaries were sham transactions and the only real and genuine transaction was between the company and the ultimate purchaser. The amounts shown as profits made by the intermediaries really represented the profits of the company. As many as 12 crucial facts were established by the fact -finding authority (pages 33 to 35). They are : (1) The sale to the intermediaries was below the market rate, quite unusual when the commodity sold was one which had a seller’s market and so the sale was not bona fide. (2) The “intermediaries” were all newly started ones -for the first time. The partners of the intermediary firm were men of no means, and were all relations of Thyagaraja Chettiar, the chief partner of the managing agents firm and a dominant figure in charge of the company’s affairs. (3) In the later year, intermediary firms were closed and their place was taken by two private limited companies, who declared no dividends, even though they made considerable profits and the shareholders received no dividends nor even statements of accounts and they had no beneficial interest in the concerns. (4) It was found that the business of the intermediaries was, in fact, only a part of the business carried on by the appellant-company. (5) Though there were large-scale sales to intermediaries, no securities were taken from the intermediaries for the transactions and the capital of the intermediaries was negligible. (6) The intermediaries had no offices of their own, the concerns had no godowns and had only a meagre staff and they merely signed the contracts. (7) The profits earned by the firms were shown in their books as cash in their possession, but on a surprise raid, the authorities were unable to discover any cash with them. The amount shown as profits in their accounts was, in fact, in the possession of the appellant-company. (8) The intermediaries never paid for the goods, but sold the goods purchased from the appellant-company to its old customers, who paid for the same. (9) The goods were despatched directly by the appellant-company to the customers and delivered to them without even a delivery order by the intermediary. (10) The customers to whom the goods were delivered by the appellant-company paid the full price directly to the company which they purchased from the intermediary firms. The amounts were not paid to the intermediaries with whom alone they had privity of contract, but to the appellant direct. (11) The intermediaries took no part in the ultimate payment of the price by the purchasers. (12) Some of the intermediaries were formed in Pudukottah, which was then a foreign territory which was not a cotton-producing area, nor was there a market for cotton in that area, with a view to screen portions of the profit earned by the appellant-company.

On the above (telling) facts, the Tribunal found that the intermediaries were “dummies” brought into existence by the appellant-company for concealing its profits, that the sales standing in their names were “sham” and “fictitious” and that the profits ostensibly earned by them on those transactions were, in fact, earned by the appellant/company. It should also be noticed that the aforesaid findings entered by the Tribunal were not disputed before the Court (page 37). Indeed, on behalf of the appellant, it was (impliedly) conceded that the facts found did point to the fact that the intermediaries were dummies (page 38.) The entire arguments centered round the question whether the intermediaries could be held to be benamidars for the appellant-company. The Supreme Court observed that the word “benami” did not find a place anywhere in the order (page 53) and the only question which arose for consideration was, whether the transfer was genuine or sham and the further question was whether any consideration was paid at all. The point which arose was a question of benami, in the sense that the transferor continued to retain the title, notwithstanding the transfer and the Tribunal had only to find whether any price was paid at all by the intermediaries for the sale and not who paid the price for them. On the basis of the 12 crucial factors found by the Tribunal , the conclusion was inescapable that the intermediaries were “dummies” brought into existence by the appellant-company to conceal its profits and so the sales standing in their names were sham and fictitious. No question arose as to the constitution or status of the intemediaries and the attack regarding the order of the Tribunal , that intermediaries were held to be benamidars of the appellant, was found to be without substance.

It will be useful to note that the question which loomed large in Meenakshi Mill’s case (supra) was whether the intermediaries were “dummies”. It was found to be so. The idea conveyed by the word “dummy” has great significance in the context of the facts in the said case. Webster’s New World Dictionary at page 449 contains the following shades of meaning among others for “dummy” : ” (a) an imitation; sham (b) secretly controlled by, or acting as the tool of another, as a dummy corporation; (c) tool of another. In Webster’s Third New International Dictionary, amongst others, the following shades of meaning are given for “dummy” (page 701, Vol. I) : (a) a sham package or one that does not contain what its exterior indicates; (b) one that is habitually silent; (c) one although seeming to act for itself is in reality acting for another usually with little or no freedom of action or with fraudulent intent.”

The Supreme Court also observed that the plea of the appellant’s counsel was quite frank about it, that the facts found by the Tribunal did point to the fact that the intermediaries were “dummies” (page 38). Once it is found that the intermediaries were “dummies” and they were brought into existence by the company, the conclusion is irresistible that the sales standing in their names could only be “sham” and “fictitious”. The crucial facts found by the Tribunal unambiguously demonstrated that sales to the intermediaries were not bona fide, the intermediaries were only started for the first time, they had no beneficial interest in the concerns, the intermediaries had no offices of their own, the profits shown as cash in their books was not found, but was found in the possession of the appellant-company, that for the sale effected by the appellant-company through the intermediaries, the price was paid by the customers themselves directly to the company and the amounts were not paid to the intermediaries with whom alone they had privity of contract, and they took no part in the ultimate payment of the price by the

purchasers.

On the facts of this case, all the authorities proceeded only on the basis that there was sale of skim crepe by the company (the assessee) to the firm and there was a further sale by the firm to its various customers. There was a transfer of property to the firm. The firm sold the goods to the various customers. This was never disputed by any of the authorities. There was no payment by any of the customers directly to the assessee-company. On pages, 6, 8, 19 and 20 of the paper book, the assessment orders proceed only on the basis that there was a sale by the company to the firm and by the firm to the customers and that the payment by the ultimate customers was made only to the firm. The orders passed by the AAC and the Tribunal also proceed only on this basis. The Tribunal , in paragraph 14 of its order, states that the firm buys the goods from the company and sells it to the ultimate buyer and that the company does not sell goods to anyone other than the firm. So also, in para. 15 of the order, the Tribunal states that the assessee company sold the goods to the firm below market rates and the sale by the company to the firm and by the firm, were being made on the same date simultaneously and the company was selling at less than the prevailing market rate. The Tribunal also states that the legitimate profits in the transactions got split up into two, one part going to the husbands and the other to the wives. The Tribunal also referred to the statement of one Dingra who regularly bought goods from the firm, that he was taking the goods from the godown (para. 18 of the order). It is also evident that Dingra, a major purchaser of the firm, categorically stated that he took delivery of the goods at Kottayam from Padinjarekara Corporation (the firm) -page 77 of the paper book. This is in accord with what the managing partner of the firm stated, i.e., that the customers took delivery of the goods from the firm’s godown (page 82 of the paper book), corroborated by another managing partner, available at page 89 of the paper book.

The firm had its own capital, its profits were assessed in its hands and it was granted registration by the

Department. These are admitted facts.

The above facts will unmistakably show that unlike in Meenakshi Mill’scase (supra), the firm existed here as a fact, and it was a “reality” and not a “dummy”. There is no case or finding or proof or even a suggestion that the firm was a “dummy”. On the other hand, the entire reasoning and approach were only on the basis that there was, in fact, “a firm” a reality. There was a sale by the company to the firm. The firm sold the goods to various customers.

The payments were made by the customers to the firm and never directly to the company. There was a transfer of title to the goods by the company to the firm and by the firm to various customers. At least one of the major customers of the firm, Dingra, categorically deposed that he purchased the goods from the firm and delivery was taken from its godown. The firm was granted registration. The profits were assessed in its hands. Consideration did pass from the firm to the company for the purchases. All the receipts for payments were signed by the partners. It should also be remembered that the firm, in the instant case, was started as early as 1959, it owned immovable properties and it was carrying on business till 1963. It is only from the year 1964-65 that the firm began to buy goods from the company. The sales by the company to the firm were found to be genuine. It is only, for the first time, during the asst. yr. 1970-71 that a different view was taken. While making the assessment for the year 1971-72, the ITO also allowed salary and allowances to the personnel of the firm as also P. F. contributions of its employees in the assessment of the firm and unless such persons were factually employed, it is beyond comprehension as to how this deduction could be allowed at all. None of the crucial facts found in Meenakshi

Mill’s case (supra), were found to exist in the instant case. The highlights in Meenakshi Mill’s case (supra) that the sales to the intermediaries were not bona fide, that the intermediaries were started for the first time prior to the impugned transactions between the company and the intermediaries, that the substituted intermediaries had no beneficial interest in the concern, that the intermediaries had no office or staff of their own, that even the profits earned by the intermediaries shown as cash was not found but it was found in the possession of the appellant-company, that the intermediaries never paid for their purchases to the appellant-company, but on the other hand, it was paid by the ultimate purchasers, that goods were directly despatched by the company to the ultimate customers, that the customers paid the full price not to the intermediaries with whom alone they had privity of contract, but to the company direct, and that the intermediaries took no part in the ultimate payment of the price by the purchasers -are totally absent in the instant case. So, we are of the view that the Tribunal totally erred in holding that “there is a lot of similarity between the facts in the instant case and the facts of Meenakshi Mill’s case.

” There is also no finding in the instant case that the firm was a “dummy” or that it was brought into existence by the appellant-company for concealing its profits. Indeed, the firm existed ever since 1959, it was an assessee to income-tax, registration was granted and there were transactions between the company and the firm ever since 1964-65. The Tribunal was also wholly in error in its observation that except on one or two points, there is total similarity with the assessee’s case and the points of dissimilarity are not of such gravity as to call for a different conclusion. We have dealt with the facts in Meenakshi Mill’s case (supra) and the 12 crucial factors given by the Tribunal therein to hold that the intermediary was only a “dummy” brought out by the appellant-company to conceal its profits. Those crucial facts are absent in this case. In this view of the matter, we hold that the Tribunal was in error in holding, on the basis of Meenakshi Mill’s case (supra) that the ITO has established that the sale by the company to the firm was only sham. We are of the view that the facts in this case do not at all justify the

finding of facts which fell within the ratio laid down in Meenakshi Mill’s case (supra). The Tribunal , in paragraphs 2 and 3 of the order, proceeds on the basis that the business of the company was in latex and that the price charged from the customers was Rs. 40 to 60 per kg. Both these are apparent mistakes. The sale was of “skim crepe”. The price charged was not Rs. 40 to 60 per kg. The Tribunal also proceeded on non-existing or incorrect facts. While making the assessment for the year 1971-72, the ITO himself conceded and allowed the salary and allowances, excluding the allowance to two partners, and P. F. contribution of employees. But, the Tribunal , in paragraph 17 of its order, proceeds on a misconception that the firm does not have any staff for selling. So also, the Tribunal has totally ignored the uncontradicted statement of one of the major purchasers of the firm, Dingra, who categorically stated that he has taken delivery of goods at Kottayam from Padinjarekara Corporation (the firm). This statement is also substantiated in the sworn statement of the managing partner (Sarah Cherian) in answer to questions Nos. 60 and 64 and also in the sworn statement of Anna Abraham, another managing partner, in answer to question No. 64. The Tribunal also proceeded on a misconception that there is a daily market for “skim crepe”. On the other hand, the AAC , in his order for the year 1970-71, at page 35 of the paper book, states that there is no continuous market for skim crepe since there is no quotation for it. Again it is so stated at pages 36 and 38 of the paper book.

One aspect deserves mention. The firm was started in 1959. It had immovable properties. The transaction between the company and the firm started in the year 1964-65. Till the asst. yr. 197071, the transactions between the company and the firm were never questioned. The fact that the firm was treated as a distinct and separate entity ever since 1959, that the Department itself granted registration to the firm and that the firm was assessed as a distinct entity on its profits, that the transactions between the company and the firm were treated as genuine and not at all questioned from the year 1964-65 to 1969-70 and the Tribunal had all these facts before it (paragraphs 2 and 14 of its order) – all these facts and circumstances will only go to show that the Revenue itself found that the firm is a reality and that the transactions between the company and the firm were real and bona fide. These facts and circumstances, as questions of fact, will be good and cogent evidence for the subsequent years, when the same question falls to be determined. These facts and circumstances and the conduct of the Department may be good and cogent evidence for subsequent years also and unless there is compelling reason, it cannot be departed from. No such compelling or cogent reason exists nor was demonstrated before us as to why a different view is warranted to be taken from the year 1970-71. (Later reopened assessments for the years 1964-65 to 1966-67, just before finalising the assessment for the year 1970-71, were cancelled by the Tribunal and upheld by us in IT Ref. No. 89 of 1986 and IT Ref. Nos. 207 and 208 of 1980).

In conclusion. we are of the view that the Tribunal failed to view the entire matter in a proper perspective, and it failed to give proper weight to the distinct features present in the instant case which were not present in Meenakshi Mill’s case (supra). Essential matters which are on record were overlooked. What is more, the decision of the Supreme Court in Meenakshi Mill’s case (supra) was misunderstood and misapplied. On these premises, we have to hold that the finding and conclusion of the Tribunal to the effect that the ITO has established that the sale by the company was only a sham cannot be reasonably entertained, and on the basis of facts proved in this case, no person acting judicially and properly instructed with regard to the relevant law could come to the determination as the Tribunal did. We are of the view that the reasoning and conclusion of the Tribunal are perverse. The conclusion does not logically accord with the facts and circumstances or the finding stated by the Tribunal. The Tribunal has proceeded on non-existing facts. There is total misdirection in its entire approach. The finding arrived at by the Tribunal is totally inconsistent with the evidence on record and also with admitted or proved facts.

In these circumstances, we hold that the decision of the Tribunal is perverse and is so unreasonable that no reasonable man could arrive at such a conclusion.

In the light of the above, we answer the questions referred to us in both the cases as follows : Question No. 1 : We answer question No. 1 in the affirmative, against the Revenue and in favour of the assessee. Question No. 2 : We answer question No. 2 in the negative, against the Revenue and in favour of the assessee. Question No. 3 : We answer question No. 3 in the negative, against the Revenue and in favour of the assessee.

[Citation : 173 ITR 637]