Ramaswami, J. - (1.) This appeal is brought, by special leave, from the judgment of the Allahabad High Court dated April 4, 1963, in Misc. I. T. Application No. 453 of 1960, holding that no question of law arises out of the order of the Income-tax Tribunal and dismissing the application of the appellant under section 66(2) of the Income Tax Act, 1922 (hereinafter called the "Act").
(2.) The respondent is a private limited company carrying on the business of manufacture and export of carpets having their head office at Bhadohi which was formerly in the State of Banaras. The respondent used to obtain yarn from a firm known as Allahabad Woollen Mills At Allahabad for the purpose of its business, viz., the manufacture and export of carpets. The Allahabad Woollen Mills supplied yarn to the respondent for three years ending March 31, 1947, March 31, 1948, and March 31, 1949. While making the assessment of the Allahabad Woollen Mills for the assessment years 1947-48, 1948-49 and 1949-50, the Income-tax Officer held that the goods were supplied by the Allahabad Woollen Mills to the respondent at a lower rate and profit, to that extent, had been diverted. In making the assessments of the Allahabad Woollen Mills the Income-tax Officer, therefore made an addition of Rs. 30,577 for the assessment year 1948-49 and a sum of Rs. 32,213 for the assessment year 1949-50. These additions were made under section 42(2) of the Act as the Income-tax Officer found that the shareholders of the respondent-company were partners in the Allahabad Woollen Mills which functioned as a firm till March 31, 1948, and thereafter converted itself into a limited company of the same name in which also the said partners were the main shareholders. The respondent was then a non-resident company as it was carrying on business at Bhadohi in the State of Banaras. The Allahabad Woollen Mills Ltd. thereafter sent to the respondent-company a debit note for a sum of Rs. 46,582, on August 22, 1953, and another debit note for a sum of Rs. 32,213, on March 23, 1954. These amounts were claimed by the Allahabad Woollen Mills as extra price of mill yarn supplied by them to the respondent for the accounting period from April 1, 1946, to March 31, 1949. The respondent admitted the liability and after amending its profit and loss account for 1949-50, the respondent claimed a sum of Rs. 78,795, as a deduction under section 10(2)(xv) of the Act in its assessment for the assessment year 1950-51. The claim was finally rejected by the Appellate Tribunal on the ground that the liability was accepted by the respondent long after the previous year relevant to the assessment year 1950-51. The Tribunal, however, adde : "We do not express any opinion whether the claim is maintainable in the subsequent years." The respondent thereafter amended its profit and loss account for the accounting years 1952-53 and 1953-54 corresponding to the assessment years 1954-55 and 1955-56 and claimed the sum of Rs. 46,582, as a deduction in the assessment year 1954-55. The claim was disallowed by the Income-tax Officer by his order dated December 30, 1957, and it was held that the alleged payment was an ex gratia payment and could not be considered to be a payment arising out of the business transaction with the Allahabad Woollen Mills. The Income-tax Officer, therefore, disallowed the amount of Rs. 46,582 in computing the profits of the respondent. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer on this point and held that it was not a bona fide business transaction prompted by commercial expediency. The respondent preferred a further appeal to the Income-tax Appellate Tribunal which allowed the appeal and held that the debit note was accepted for reasons of commercial expediency. In the course of its order the Tribunal stated as follows :
(3.) "The claim was disallowed by the Income-tax Officer as an ex gratia payment made by the appellant to the Allahabad Woollen Mills Ltd., and the Appellate Assistant Commissioner was of the opinion that passing of the debit note was not a bona fide business transaction prompted by commercial expediency. We are unable to concur. We see nothing to warrant the conclusion that the acceptance of the debit note issued by the Allahabad Woollen Mills Ltd. was not prompted by considerations of commercial expediency. It may be true that the Allahabad Woollen Mills Ltd. had supplied woollen yarn to the appellant-company at less than market price with the object of reducing the tax burden but when, eventually, it was found that the tax had to be paid, the latter presented the debit note to the appellant-company. It does not appear to us to be a transaction done mala fide. There is also nothing unnatural on the part of the appellant-company in the acceptance of the debit notes in view of the fact that the two companies had business dealings with each other for a long time and were closely connected. In our opinion the debit notes were accepted for reasons of commercial expediency. The claim should be allowed.";