RAMASWAMI, - (1.) THE following Judgment of the court was delivered by :
(2.) THESE appeals are brought, by special leave, from the judgment of the High court of Madras dated 8/01/1963 in Tax Case No. 108 of 1960. All the three respondents (hereinafter called the aassessee- companies') are public limited companies engaged in the manufacture and sale of yam at Madurai. Each of the assessee-companies had a branch at Pudukottai engaged in the production and sale of cotton yarn. The sale-proceeds of the branches were periodically deposited in the branch of Madurai Bank Ltd. (hereinafter referred to as the 'Bank') at Pudukottai a former native State either in the current accounts or fixed deposits which earned interest for the various assessment years as follows: JUDGEMENT_819_AIR(SC)_1967Html1.htm The Bank aforesaid was incorporated on 8/02/1943 with Thyagaraja Chettiar as founder Director, the head office being at Madurai. Out of 15,000.00 shares of this bank issued 14,766 were held by Thyagaraja Chettiar, his two sons and the three assessee-companies as shown below: JUDGEMENT_819_AIR(SC)_1967Html2.htm All the three assessee companies borrowed moneys from the Madurai branch of the bank and on the security of the fixed deposits made by their branches with the Pudukottai branch of the Bank. It is the admitted case that the loans granted to the assessee-companies were far in excess of the available profits at Pudukottai. In the assessment proceedings of the assessee-companies for the various years under dispute, the Income-tax Officer was of the view that the borrowings in British India on the security of the fixed deposits made at Pudukottai amounted to constructive remittances of the profits by the branches of the assessee- companies to their head offices in India within the meaning of s. 4 of the Indian Income-tax Act, 1922 (hereinafter called the 'Act'). Accordingly he included the entire profits of the assessee-companies including the interest receipts from the Pudukottai branches in the assessment of the assessee-companies, since the overdrafts availed of by the assessee-companies in British India far exceeded the available profits. The assessee-companies appealed to the Appellate Assistant Commissioner of Income-tax. After examining the constitution of the assessee-companies and the Bank and the figures of deposits and overdrafts, the Appellate Assistant Commissioner found that the deposits made by the assessee- companies and other companies closely allied to them formed a substantial part of the total deposits received by the Bank. He was also of the view that the Pudukottai branch of the Bank had transmitted the funds so deposited for enabling the Madurai branch to advance loans at interest to the assessee-companies and that the transmissions of the funds were made with the knowledge of the assessee-companies who were major shareholders of the Bank. The Appellate Assistant Commissioner also considered that the Pudukottai branch of the Bank had no other appreciable transactions except the collection of funds and on the facts found S. 42(1) of the Act applied to the case. The assessee- companies took the matter in appeal to the appellate tribunal -which took note of the position that the head office and the branch-whether of the assessee-companies or of the Bank-constituted only one unit and that Thyagraja Chettiar occupied a special position in both the concerns and the establishment of the branch of the Bank at Pudukottai was intended to help the financial operations of Thyagaraja Chettiar in the concerns in which he was interested. After detailed consideration of the deposits and overdrafts and the inter-branch transactions of the Bank the appellate tribunal held that s. 42(1) of the Act was applicable to the facts of the case and that the assessee- companies must be attributed with the knowledge of the activity of their branches at Pudukottai and of the remittances made by the Pudukottai branch of the Bank to Madurai head office, and that the entire transactions formed part of an arrangement or scheme.
(3.) IN the course of its judgment, the appellate tribunal observed as follows: `Even so, it seems to us, we cannot escape the fact that Thyagaraja Chettiar, his two sons and the three Mills had a preponderant, if not the whole, voice in the creation, running and management of the Bank. We cannot also forget that Pudukottai is neither a cotton producing area nor has a market for cotton; except that it was a non-taxable territory, there was nothing else to recommend the carrying on of the business in cotton spinning or weaving there. There is yet another aspect to which our attention was drawn by the learned counsel for the assessee. That being, a non-taxable area, there were many very rich men there with an influx of funds to invest in banks and industries. By the same token, it appears to us it was not necessary for the Madurai Bank which was after all a creation of certain people which started with a small capital of Rs. 32,800.00 to have gone to Pudukottai for opening a branch. If there was an influx of money in Pudukottai because of the finances, nobody would have agreed to borrow money from it. At any rate, it is clear it would have had no field for investment in Pudukottai the only source of investment being outside Pudukottai.` The appellate tribunal further stated: `But having regard to the special position of Thyagaraja Chettiar and the balance sheets of the bank referred to above and the lack of investments in Pudukottai itself of' the moneys borrowed there, it seems more reasonable to conclude that the bank itself was started at Madurai and a branch of it was opened at Pudukottai only with a view to help the financial operations of Thyagaraja Chettiar and the mills in which he was vitally interested.` At the instance of the assessee-companies the appellate tribunal referred the following question of law for the determination of the High court: `Whether on the facts and in the circumstances of the case, the taxing of the entire interest earned on the fixed deposits made out of the profits earned in Pudukottai by the assessee's branches in the Pudukottai branch of the Bank of Madurai is correct?` The High court answered the question in favour of the assessee-companies holding that it was not established that there was any arrangement between the assessee-companies and the Bank whether at Pudukottai or at Madurai for transference of moneys from Pudukottai branch to Madurai and the facts on record did not establish that there was any transfer of funds between Pudukottai and Madurai for the purpose of advancing moneys to the assessee-companies. The High court further took the view that the transactions represented ordinary banking transactions and there was nothing to show that the amounts placed in fixed deposits in the branch were intended to, and were in fact transferred to head office for the purpose of lending them out to the depositor himself. On behalf of the appellant Mr. Sen submitted at the outset that the High court was not legally justified in interfering with the findings of fact reached by the appellate tribunal and in concluding that there was no arrangement or scheme between the lender and the borrower for the transference of funds from Pudukottai to Madurai. In our opinion, there is justification for the argument put forward on behalf of the appellant and the High court erred in law in interfering with the findings of the appellate tribunal in this case. In India Cements Ltd., v. Commissioner of Income-tax, Madras(1) it was pointed out by this court that in a reference the High court must accept the findings of fact reached by the appellate tribunal and it is for the party who. applied for a reference to challenge those findings of fact first by an application under s. 66(1). If the party concerned has failed to file an application under s. 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High court that the findings are vitiated for any reason. We therefore proceed to decide the question of law raised in these appeals upon the findings of fact reached by the appellate tribunal.;