Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the applicant has derived benefit equal to 50 per cent of the value of customs clearance permits in regard to the transactions with Shri Naidu?

High Court Of Madras

Traders And Traders vs. CIT

Sections 4, 68

Asst. Year 1966-67, 1967-68

N.V. Balasubramanian & P. Thangavel, JJ.

TC Nos. 292 & 293 of 1983 & 1374 of 1982

25th March, 1998

Counsel Appeared

V. Ramachandran for K. Mani & Mallika Srinivasan, for the Applicant : J. Jayaraman for C.V. Rajan, for the Respondent

JUDGMENT

N.V. BALASUBRAMANIAN, J. :

The assessee is a registered firm having branches at various places, one of which is Lala Gopikrishna Gokuldas Agencies, Bombay. The ITO, for the asst. yr. 1966-67 made an addition of Rs. 1,50,000 treating the assessee as a beneficiary of the customs clearance permits issued in the name of M/s French India Traders.

The said French India Traders, Pondicherry were issued customs clearance permits with c.i.f. value of Rs. 21,70,678. According to the ITO, a syndicate was formed consisting of Madhusudhan Gordhandas & Co., Narindas Gohimal, Sohanlal Sharma and Balwant Singh Bawa and the said syndicate had paid to the said French India Traders a sum of Rs. 1,50,000 by cash in July, 1965, Rs. 7,50,000 by way of cheques issued by M/s Babubhai & Sons, Bombay in April and June, 1966 and Rs. 2,18,750 by way of consignment of thin-walled bearings. As regards the first item of Rs. 1,50,000, the assessee showed receipts of Rs. 20,000 dt. 21st July, 1965 by drafts on Bank of India and Rs. 80,000 dt. 14th July, 1965 by cash through Balwant Singh Bawa. The accounts showed that the amounts were originally credited to M/s Madhusudhan Gordhandas & Co. and later transferred to the accounts of French India Traders in the assessee’s book of accounts. As regards the balance of Rs. 50,000, the amount was alleged to have been paid by Madhusudhan Gordhandas & Co., Bombay to the assessee directly. As regards cheques, the assessee’s books showed the following entries :

According to the ITO, the balance of Rs. 1,00,000 was received by the assessee directly from Madhusudhan Gordhandas & Co., by cash and there was no mention in the books of the assessee that thin-walled bearings had been handed over to the customs clearance permit holders. The ITO, therefore, came to the conclusion that the profits on account of customs clearance permits of French India Traders were assessable in the hands of the assessee. He arrived at the above conclusion on the basis of the statement of one D.B. Gandhi, partner of M/s Babubhai & Sons before the ITO, Bombay that Mr. G.L. Pathy, Proprietor of French India Traders had negotiations with them and that French India Traders was a dummy concern of Lala Gopikrishna Gokuldas Agencies, Bombay and Madras, which was one of the activities of the assessee. Secondly, he relied upon a statement of one T.K. Katakia of M/s Madhusudhan Gordhandas & Co. and according to the Officer, he was having intimate knowledge of the transactions relating to the customs clearance permits and though G.L. Pathy was shown as proprietor of French India Traders, actually the beneficiary was Lala Gopikrishna Gokuldas Agencies with whom the syndicate dealt with in respect of licences to French India Traders and the payments were made to the persons incharge of Bombay office of Lala Gopikrishna Gokuldas Agencies. The statement of Katakia was corroborated by entries in the books of accounts of the firm M/s Madhusudhan Gordhandas & Co. as regards the payments on account of customs clearance permits and it was further corroborated by the correspondence the firm had with various other concerns. The ITO found that the assessee’s accounts showed the receipt of cheques and amounts either from the members of the syndicate or from M/s Babubhai & Sons who issued the cheques on behalf of the syndicate. Hence, he made an addition of Rs. 1,50,000 for the asst. yr. 1966-67. For the asst. yr. 1967-68 also, the ITO made an addition of Rs. 9,68,750 in regard to the above transactions comprising of two items; one, payment to Babubhai & Sons of Rs. 7,50,000 and another Rs. 2,18,750, being the cost of 625 sets of thin-walled bearings at Rs. 350 per set. The assessee challenged the additions before the AAC for both the assessment years.

It was submitted on behalf of the assessee that the ITO was not correct in holding that the assessee was not the real beneficiary of the customs clearance permits. According to the assessee, the permits were issued in the name of various parties and the officer was wrong in placing reliance on uncorroborated testimony of G.L. Pathy in coming to the conclusion that the assessee was the beneficiary of the transactions. The AAC considered the matter in detail. He referred to the statement of G.L. Pathy, the power of attorney of Kailash Chand Bhaiya, an employee of the assessee-firm, the power of attorney deed executed by Pathy in favour of Kailash Chand Bhaiya, certain correspondence and also statement given by the said Pathy at the time of examination by the ITO. After exhaustively considering the matter, he came to the conclusion that the profit accounts of the customs clearance permits of French India Traders were exploited by the assessee and the entire amount received as a result of such exploitation was utilised by the assessee for its benefit. He, therefore, held that the ITO was justified in making the additions admitting all customs clearance permits in the hands of the assessee for both the assessment years.

The assessee carried the matter on appeal before the Tribunal. In the appeal before the Tribunal, the assessee challenged also the addition of Rs. 60,000 being the credit in the name of one Damodardas Ramandas. It was an un-disbursed income and the credits in the name of Damodardas Ramandas of Rs. 30,000 each were made on 6th Nov., 1964 and 7th Nov., 1964. The ITO confronted the assessee with the statement of the creditor and the creditor had confessed before the ITO that they were bogus. He also produced a copy of the books of accounts and stated that all the transactions were hawalas and no loan was actually advanced or received back as shown in the copy of the accounts. The ITO made an addition of Rs. 60,000 and also disallowed the interest of Rs. 3,500. The AAC, on appeal, also confirmed the addition and the Tribunal came to the conclusion that the admission of the creditor makes it clear that the transaction with the assessee was bogus and the Tribunal upheld the addition of Rs. 60,000 with the interest thereon.

The Tribunal then took up for consideration the addition of Rs. 9,68,750 for the asst. yrs. 196667 and 1967-68. The Tribunal went into the materials and found that while answering relevant questions put to him, G.L. Pathy was contradicting his statement. The Tribunal then referred to another statement taken on 28th Nov., 1970. After noticing the statement as well as certain letters, the Tribunal found that G.L. Pathy had no knowledge or control over the receipts that were coming from Balwant Singh through M.G. & Co. contrary to his statement that he had deposited the amount with L.G. Agencies. The Tribunal also went into the accounts. The Tribunal recorded a finding that the statements of the officer were not only vague but also contradictory. It found several instances where Pathy was contradicting himself and Pathy had adopted an evasive approach while he was questioned. The Tribunal also held that it was unbelievable that a sum of Rs. 3,00,000 was said to have been given to Zip Industries as compensation for non-delivery of goods, i.e., thin-walled bearings admittedly at the instance of G.L. Naidu in the contract of business. The Tribunal found that Zip Industries had never contracted earlier, nor connected with thin-walled bearings, who suddenly had the benefit of the contract of G.L. Naidu. Though there was assessment in the name of Zip Industries for the sum of Rs. 3 lakhs, the total income that was assessed was Rs. 18,954 and for the sake of convenience, the assessment was obtained in the name of Zip Industries. The Tribunal, therefore, came to the conclusion that the receipts credited in the name and account of G.L. Pathy in respect of customs clearance permits were all disbursed in the manner in which they were said to have been disbursed. The Tribunal, therefore, held that Pathy did not play any role though permits stood in his name. According to the Tribunal, L.G. Agencies which is apart of the assessee had taken a greater and real interest. The mere fact that employees of Bombay office and Delhi office were associated with G.L. Pathy and receipts were recorded in the books of L.G. Agencies is a significant one which can be attributable to L.G. Agencies. The Tribunal, on the basis of the materials and evidence came to the conclusion that the benefits relating to the exploitation of customs clearance permits reached the assessee and where surrounding circumstances and probabilities of the case indicate that it was difficult to evaluate the benefits, then greater share should have gone in favour of the assessee. The Tribunal, therefore, estimated that out of total receipts, i.e., Rs. 12 lakhs, 50 per cent should be taken as assessee’s share and directed the ITO to take Rs. 6 lakhs as the income attributable to the transactions of the assessee-firm. The Tribunal further held that on the basis of the statement of Madhusudhan Gordhandas and Balwant Singh and the letter dt. 28th Aug., 1965, a sum of Rs. 1,50,000 should be assessed as income in the assessment for the asst. yr. 1966-67 and the balance of Rs. 4.5 lakhs should be assessed in the assessment for asst. yr. 1967-68. The Tribunal also found that in the books of L.G.G. Agencies, Bombay two amounts were found, viz., Rs. 3 lakhs and Rs. 2,99,887 and Pathy made a statement only with reference to two figures, of which one is relating to the payment of compensation to Zip Industries. The Tribunal, therefore, held that Rs. 3 lakhs should be considered as income flowing from the exploitation of the customs clearance permits through the assessee, though it was assessed in the hands of Zip Industries. As regards other sum of Rs. 2,99,887 there was no evidence to show that Balwant Singh had taken money and the said two major items viz., Rs. 3 lakhs and Rs. 2,99,887, if put together, would work out to Rs. 6 lakhs and the additions be sustained to the extent of Rs.

6 lakhs spread over for a period of two years. In this view of the matter, the Tribunal partly allowed the appeal for both the assessment years.

5. The Revenue as well as the assessee sought for reference and on the basis of the directions of this Court, the following questions of law have been referred to both at the instance of the Revenue and the assessee: T.C. Nos.

292 and 293 of 1983: (at the instance of the assessee).

For the asst. yr. 1966-67:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the applicant has derived benefit equal to 50 per cent of the value of customs clearance permits in regard to the transactions with Shri Naidu?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the applicant had any interest or derived any benefit in respect of customs clearance permits transactions?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the transaction with the Zip Industries is not a genuine transaction?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that though the customs clearance permits stood in the name of Shri Naidu, the applicant should be deemed to have derived 50 per cent benefit?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that even assuming any profit has been received by the applicant in regard to the customs clearance permit transaction whether the same is assessable as income liable to tax?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in ignoring the fact that the applicant was not carrying on business of dealing in or exploiting customs clearance permits and as such even assuming without conceding any profit had been derived the same is not income but a casual receipt?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in its finding that Shri Naidu did not play any role worthwhile especially in view of the clear finding that the customs clearance permits really belonged to him?

Whether, on the facts and in the circumstances of the case, the Tribunal is correct in its finding that Lala Gopikrishna Gokuldas Agencies appears to have taken greater and real interest and concern than Shri Naidu?

Whether, on the facts and in the circumstances of the case, there is any justification for the Tribunal to adopt 50 per cent value of the customs clearance permits as the benefit derived by the applicant?

Whether, the Tribunal has exceeded its jurisdiction and/or acted without any evidence in holding that the applicant had 50 per cent share in the income attributable to the transaction when it was not even the Department’s case that there was any such profits sharing arrangement?

Whether there was any material on record for holding that: (i) applicant’s share in the income attributable to the transactions was 50 per cent? (ii) Rs. 1,50,000 assessable as income from such transactions in the asst. yr. 1966-67?

12. Whether the finding of the Tribunal that the applicant had 50 per cent share in the income from thetransactions is based on suspicion and surmises and is inconsistent with the evidence on record, and therefore, vitiated in law?” For the asst. yr. 1967-68:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the addition of the sum of Rs. 60,000 being the credit in the name of Damodardas Ramandas is the income of the petitioner?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the applicant has derived benefit equal to 50 per cent of the value of customs clearance permits is regard to the transactions with Shri Naidu?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the applicant had any interest or derived any benefit in respect of customs clearance permits transaction?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the transaction with Zip Industries is not a genuine transaction?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that though the customs clearance permits stood in the name of Shri Naidu the applicant be deemed to have derived 50 per cent benefit?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that even assuming any profit has been received by the applicant in regard to the customs clearance permit transaction, whether the same is assessable as income liable to tax?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in ignoring the fact that the applicant was not carrying on business of dealing in or exploiting customs clearance permits and as such even assuming without conceding any profit had been derived the same is not income but a casual receipt?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in its finding that Shri Naidu did not play any role worthwhile especially in view of the clear finding that the customs clearance permits really belonged to him?

Whether on the facts and in the circumstances of the case, the Tribunal is correct in its finding that Lala Gopikrishna Gokuldas Agencies appears to have taken greater and real interest and concern than Shri Naidu?

Whether, on the facts and in the circumstances of the case, there is any justification for the Tribunal to adopt 50 per cent of the value of the customs clearance permits as benefit derived by the applicant?

Whether the Tribunal has exceeded its jurisdiction and/or acted without any evidence in holding that the applicant had 50 per cent share in the income attributable to the transaction, when it was not even the Department’s case that there was any such profit sharing arrangement?

Whether there was any material on record for holding that: (i) Applicant’s share in the income attributable to the transactions was 50 per cent? (ii) Rs. 4,50,000 were assessable as income from such transactions in the asst. yr. 1967-68?

13. Whether the finding of the Tribunal that applicant had 50 per cent share in the income from the transactions is based on suspicion and surmises and is inconsistent with the evidence on record and therefore, vitiated in law?” T.C. No. 1374 of 1982: (at the instance of the Revenue) For the asst. yr. 1967-68:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in sustaining only a sum of Rs. 4.5 lakhs against Rs. 9,68,750 being the profits on the exploitation of customs clearance permits?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding and had valid materials to hold that only out of 50 per cent the total receipts on the exploitation of customs clearance permits could be attributable to the assessee?”

6. The Department’s contention is that the Tribunal was not right in sustaining only a sum of Rs. 4.5 lakhs out of Rs. 9,68,750, being the profit on the exploitation of customs clearance permits. The main contention of the Department is that the Tribunal have no material at all to hold that only Rs. 6 lakhs was the income arising on the exploitation of the customs clearance permits and therefore, the Tribunal was not correct in holding that only 50 per cent of the profit should be attributable to the assessee. The assessee’s case is that no amount is taxable in the hands of the assessee. The case of the assessee is that the amount was already assessed in the hands of the Zip Industries and it is a genuine transaction and no part of the amount is assessable in the hands of the assessee. The case of the assessee is that it was not carrying on the business of exploitation of the customs clearance permits and on the basis of the mere statements of witnesses, the Tribunal was not correct in holding that the assessee’s share should be attributable to 50 per cent of the profit. The assessee also questioned the addition made towards the unexplained credit entries amounting to Rs. 60,000.

We have carefully considered the case of the Department as well as the Revenue (sic-assessee) We are of the opinion that the Tribunal has arrived at a finding that there was an exploitation of customs clearance permits. The Tribunal took into account the statement of Ramnarayan, one of the partners of the assessee-firm, and the statements of G.L. Pathy, Balwant Singh and Bhaiya. It also took into account the correspondence between Madhusudhan Gordhandas and Ramnarayan and clearly recorded its finding that G.L. Pathy did not play and role though the permits were standing in his name. The Tribunal also from the evidence came to the conclusion that L.G. Agencies which is a partner of the assessee had taken a greater role and real interest. Though the assessee had pleaded lack of interest and anxiety relating to the exploitation of the customs clearance permits, the Tribunal also found that the employees of the assessee in Bombay and Delhi had been associated with G.L. Pathy and all the receipts had been recorded in the books of L.G. Agencies and there was positive evidence in the form of letters in the name of Pathy supplying details of happenings of the permits. These significant factors were taken intoaccount and on that basis, the Tribunal came to the conclusion that there was a connection of L.G. Agencies in the exploitation of customs clearance permits. The Tribunal, in our view, came to the conclusion on the basis of the materials and evidence on record that the assessee was a beneficiary and the further question that was posed before the Tribunal was how much of the benefits could be attributable to the assessee. It rejected the plea that various records of debits and credits in the account of G.L. Pathy should be allowed to be treated as merely accommodating account and no consideration can be involved in the entries. The Tribunal found that the exploitation took place amounting to Rs. 20 lakhs and it took note of general practice that no one would like to openly associate with the exploitation as the exploitation by any other person other than the owner of the permits would be considered as an infringement of the permits. Therefore, the Tribunal came to the conclusion that in the nature of the exploitation, certain amount of secrecy should be surrounding the transactions and taking into account all other factors, particularly, the interest of the assessee and the fact that the permits were not standing in the name of the assessee, the Tribunal estimated that out of total receipts of Rs. 12 lakhs, 50 per cent can be attributable to the assessee. The estimate is also supported the entries in the accounts of L.G. Agencies, Bombay, wherein two major amounts had been found and the Tribunal, therefore, came to the conclusion, when two amounts were taken into account, the profit of exploitation of customs clearance permits can roughly be estimated to Rs. 6 lakhs and on the basis of its own estimate arrived at on the materials on record, the Tribunal held that Rs1,50,000 should be assessed for the asst. yr. 1966-67 the balance of Rs. 4.5 lakhs should be assessed for the asst. yr. 1967-We are, therefore, of the view that the finding arrived at by the Tribunal is based on materials. The Tribunal also noticed the fact that the amount assessed in the hands of Zip Industries would not in any way affect the assessment of the said amount in the hands of the assessee. The Tribunal found that the Zip Industries have not entered into any such contract earlier and it was in no way connected with thin-walled bearings. Though there was assessment in the hands of Zip Industries for the sum of Rs. 3 lakhs, the total income assessed was Rs. 18,954. Even there was a controversy about the receipt of articles between Pathy and Balwant Singh and the contract in respect of articles entered into with Zip Industries which had never dealt with those articles would appear to be a make-belief contract. Therefore, the Tribunal, after taking into account the fact that the amounts were credited in the accounts of G.L. Pathy and the ITO assessed Zip Industries in respect of receipts when Zip Industries offered the same for assessment, came to the conclusion that a part of the profit was attributable to the assessee. Therefore, it cannot be stated that the Tribunal has omitted to take into account any relevant consideration or taken into account some irrelevant consideration in holding that a part of the profit arising on the exploitation of customs clearance permits found its way with the assessee. We are, therefore, of the opinion that the finding arrived at by the Tribunal is a finding of fact and this Court, sitting in reference jurisdiction, as it is well settled, has no jurisdiction to go into the question of fact. The finding of the Tribunal, in our opinion, was arrived at on the basis of the evidence of Pathy and the correspondence between Jhaver and R.N. Bhattad. The Tribunal took into account the modus operandi involved in exploiting the customs clearance permits and there was a telling evidence of Pathy being ignorant of even the basic nature of the transaction. The Tribunal found that the profits on the exploitation were deposited in the books of L.G.G. Company, Bombay and transferred to L.G.G. Company, Madras and Pathy was ignorant of knowing in which bank he had opened account in Bombay and why he had not transferred the money in his own bank account at Madras or Pondicherry. The Tribunal also took into account the statements of Katakia and Gandhi. The facts clearly reveal that Pathy was ignorant and the details relating to the transactions amounting to several lakhs of rupees, and the Tribunal, therefore, came to the correct conclusion that Pathy could not be the real beneficiary of exploitation of the customs clearance permits.

In so far as the assessment made on Zip Industries is concerned, the Tribunal also recorded a clear finding that the real beneficiary could not be Zip Industries, though the assessment was made. The final picture that emerges from the overall reading of the order of the Tribunal is that the assessee was the real beneficiary of the exploitation of the customs clearance permits and Pathy was the man of straw and syndicate was formed to exploit the customs clearance certificates. The finding of the Tribunal, as already stated, was arrived at on the basis of the materials on record. Further, the question that arises is whether the entire sum of Rs. 1.5 lakhs and Rs. 9,68,750 would be assessable in the hands of the assessee. The Tribunal, in our opinion, has estimated that in so far as Rs. 1,50,000 is concerned, the amount was received by the assessee-firm from Madhusudhan Gordhandas and in the light of receipts and the letter dt. 28th Aug., 1965 from Balwant Singh, the sum of Rs. 1.5 lakhs should be assessed for the asst. yr. 1966-67. The Tribunal, on an overall consideration came to the conclusion that out of a sum of Rs. 6lakhs, Rs. 1,50,000 should be assessed for the asst. yr. 1966-67 and the balance of Rs. 4.5 lakhs should be assessed during the next assessment year. The Tribunal estimated the profit attributable to the transaction and arrived at the figure of Rs. 6 lakhs. Therefore, the estimate made by the Tribunal on the basis of materials cannot be disturbed by this Court while sitting in reference jurisdiction. Once it is found that the assessee was not entitled to the entire benefits, the further question that remains is only the question of estimation and the Tribunal estimated the profit at Rs. 6 lakhs and directed for the apportionment of the same into two years under consideration. Therefore, we are of the view that the estimate made by the Tribunal on the basis of the materials cannot be disturbed by this Court.

In so far as the sum of Rs. 60,000 is concerned, the Tribunal found that there was an admission by the creditors that the transaction was bogus. The creditors not only denied the transaction, but also filed an affidavit to the effect that the transaction was not a genuine one. Thus, on the face of the denial by the creditors, the burden was cast on the assessee to prove that the transaction was a genuine one and in the absence of any convincing explanation from the assessee, the Tribunal, in our view, rightly came to the conclusion that the sum of Rs. 60,000 with interest thereon should be added to the income of the assessee. The finding of the Tribunal on that aspect also is purely a finding of fact and no question of law arises out of the order of the Tribunal on that finding and in this view we have taken, we are of the view, the questions of law referred both at the instance of the Department and at the instance of the assessee should be answered against both the parties and the order of the Tribunal as a whole does not call for any interference.

11. Accordingly, we answer the various questions of law referred at the instance of the assessee against the assessee and we also answer the questions of law referred at the instance of the Department against the Department. The effect of the judgment is the order of the Tribunal is upheld in toto. The assessee is entitled to costs of Rs. 5,000 in its reference in one set and the Revenue is entitled to costs of Rs. 5,000 in its reference in one set.

[Citation: 236 ITR 269]

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