Rajendra Nath Mittal, J. - (1.) THIS order will dispose of Income-tax References Nos. 23 and 24 of 1973.
(2.) THE facts are that M/s. Patiala Biscuit Manufacturers Private Ltd. (now known as "Dalmia Biscuit Private Ltd.") (hereinafter referred to as "the Patiala Biscuit Company") derives income from the manufacture and sate of biscuits, confectionary and bread. THE assessment year involved is 1967-68, for which the accounting period is the year ending December 31, 1966. A meeting of the board of directors took place on December 29, 1965, in which Mr. P.S. Narayanaswamy informed the board that several new biscuit factories had been established in the country and, as a result thereof, there was every likelihood of unhealthy competition between the manufacturers. He had discussed the matter with Mr. Ram Krishna Dalmia of New Delhi, who was agreeable to purchase the entire products of the company as its principal purchaser. He would dispose of the products at the rates fixed by the company from time to time. THE work would be carried out by him as a sole trustee of the trust known as "Durga Devi Fund" which had been created by Shrimati Krishna Devi Dalmia, wife of Seth Jai Dayal Dalmia, for the benefit of the children of Mr. Ram Krishna Dalmia in the name of Rajpura Biscuit Company (hereinafter referred to as "the Rajpura Company"). He also placed a copy of the draft agreement embodying the terms and conditions, discussed and settled between him and Mr. Ram Krishna Dalmia. THE board formed the opinion that it would be in the interest of the company to make the agreement. It was resolved that the agreement between the Patiala Biscuit Company and the Durga Devi Fund, by its sole trustee, Mr. Ram Krishna Dalmia, be made for the disposal of the production of the company as per draft agreement signed by the chairman of the meeting. It was also resolved that Mr. G.P. Mittal, secretary of the Patiala Biscuit Company, be authorized to execute the aforesaid agreement and sign the same on behalf of Patiala Biscuit Company. THE trust was started by Shrimati Krishna Devi with a corpus of Rs. 5,000. THE sole trustee of that trust was Mr. Rajn Krishna Dalmia and the beneficiaries were his minor children, seventeen in number. According to the terms of the trust deed, Mr. Ram Krishna Dalmia was competent to co-opt other trustees. In the event of such trustees being co-opted and Mr. Dalmia passing away, the remaining trustees would continue to act as trustees of the trust. In case Mr. Dalmia did not co-opt any trustees, three trustees were to be nominated by such person as was authorized by him (Mr. Dalmia) in writing during his lifetime and such person was competent to fill in subsequent vacancies also to make the total number of three trustees. On December 31, 1965, an agreement was entered into between Durga Devi Fund and Patiaia Biscuit Company by which Durga Devi Fund was appointed as the sole selling agents of the assessee-company. According to the agreement, the Rajpura Company was to purchase the entire production of the Patiala Biscuit Company as principal to principal and dispose of the same at the f.o.r. destination rates fixed by the Patiala Biscuit Company from time to time and, in case of default, would be responsible to make good the loss suffered by the Patiala Biscuit Company. THE Patiala Biscuit Company was also given the right to sell and supply its products direct to the Government and to its own depot at Saharanpur or at any other depots which were to be opened in other places in future. THE Rajpura Company had to take over the stockists, dealers and distributors and the pending orders as on December 31, 1965, of the Patiala Biscuit Company. THE Rajpura Company was to bear the expenses of the organization and the Patiala Biscuit Company was to give the Rajpura Company an overall rebate of 15 per cent. on the goods purchased by it and a rebate of 2 per cent. on sales made by the Patiala Biscuit Company to the Government and its own depots. THE rates of rebate were reduced to 10 per cent. on confectionary and bread subsequently. The Rajpura Company was allowed a total rebate of Rs. 22,49,838 by the Patiala Biscuit Company. The Income-tax Officer, while making the assessment of the Patiala Biscuit Company on April 30, 1968, disallowed Rs. 4,03,938 which was earned as profit by the Rajpura Company from January 1, 1966, to December 31, 1966, on the ground that the agreement was a dubious document and was a device by Mr. Ram Krishna Dalmia to appropriate the income of the assessee-company in favour of his relatives-beneficiaries. He also held that there was no necessity for appointment of sole selling agents, as there was no fear of competition and the products of the company were such that they need no canvassing for being sold. He also gave a finding that, if the assessee had not appointed the Rajpura Company as its agents, the profits that it earned would have been earned by the Patiala Biscuit Company. The assessee went up in appeal before the Appellate Assistant Commissioner. He held that the Income-tax Officer could not be the judge of the necessity or otherwise for the appointment of the sole selling agent and that there was no material to hold that the sole selling agents were the benamidar of the Patiala Biscuit Company. He therefore, held that the Income-tax Officer could not make an addition of Rs. 4,03,938 on hypothetical considerations. He, consequently, accepted the appeal. The department having felt aggrieved by the order of the Appellate Assistant Commissioner went up in appeal before the Appellate Tribunal on the following grounds : "(1) The Appellate Assistant Commissioner erred in deleting the addition of Rs. 4,03,938 without any adequate material. "(2) It is prayed that the order of the Appellate Assistant Commissioner be set aside and that of the Income-tax Officer restored. (3) The appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed of." The Appellate Tribunal held that the arrangement between the Patiala Biscuit Company and the Rajpura Company was a clear device by Mr. Ram Krishna Dalmia to divert or appropriate the income of the company for his relatives who are beneficiaries and to avoid proper incidence of tax. It further held that the payment of commission as stipulated under the agreement had an element of excessiveness in it and such element of excessiveness had to be quantified. According to it, the amount of Rs. 4,03,938 represented the amount of excessive expenditure which had resulted in a benefit to the relations of a person who had a substantial interest in the company. Consequently, it reversed the findings of the Appellate Assistant Commissioner on January 12, 1972, and restored that of the Income-tax Officer. The Patiala Biscuit Company, the assessee, made an application requiring the Tribunal to refer certain questions of law to the High Court which arose out of its order dated January 12, 1972. The Tribunal, in Reference No. 23 of 1970, referred the following question for opinion of this court : "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amount of Rs. 4,03,938 was disallowable under Section 40(c) of the Income-tax Act, 1961, when the Income-tax Officer had not specifically referred to those provisions and the Appellate Assistant Commissioner had not considered the case with reference to these provisions ? (2) Whether, on the facts and in the circumstances of the case, the finding of the Appellate Tribunal regarding the disallowance of Rs. 4,03,938 out of the remuneration paid to the sole selling agents is based on relevant material and is sustainable in law ? "
(3.) THE assessee preferred a miscellaneous application on June 6, 1972, under Section 254(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), seeking rectification of the order of the Tribunal on the ground that the Tribunal fell into error in not construing the agreement between the assessee and its sole selling agents, Rajpura Company, and other evidence on record properly. It was held by the Tribunal that there were no sufficient grounds for rectification of its order, dated January 12, 1972. It consequently dismissed the application. THE assessee also made an application under Section 256(1) of the Act for making a reference of certain questions of law to this court. On the application, the Tribunal in Reference No. 24 of 1973, referred the following question of law to this court: "Whether, on the facts and the circumstances of the case, the Tribunal was justified in law in holding that there was no mistake apparent from the record in its order dated January 12, 1972, which could be rectified under Section 254(2) of the Income-tax Act 1961 ?" It is contended by the learned counsel for the assessee that the Income-tax Officer while deciding the case did not place reliance on Section 40(c) of the Act and, therefore, the Tribunal could not place reliance on that section and hold that the amount of Rs. 4,03,938 represents the amount of excessive expenditure. He further submits that the opinion has to be formed in the first instance by the Income-tax Officer according to that section and in case he does not do so, then the Tribunal cannot form an opinion for the first time in the appeal before it. In order to decide this question, it is necessary to read the relevant clauses of Section 40 of the Act, which are as under : "40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession ',--... (c) in the case of any company- (i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, (ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in Sub-clause (i) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom;........." ;