Kasliwal, J. - (1.) THE above five applications under Section 256(2) of the I.T. Act, 1961 (hereinafter referred to as "the Act "), are being disposed of by one common order as common questions of fact and law are involved in all the above five cases except that they relate to five different assessment years, i.e., 1965-66, 1966-67, 1967-68, 1969-70 and 1970-71.
(2.) WE shall only mention the facts relevant for the purpose of disposal of these applications. M/s. Golcha Properties (P.) Ltd. (in liquidation) (hereinafter referred to as "the assessee") went into creditors' voluntary liquidation on 4th July, 1966, and, during the pendency of the winding-up proceedings, is being looked after by the official liquidator with effect from 10th May, 1968. The assessee entered into certain contracts with M/s. Dhartidhan Pvt. Ltd. and M/s. Madan's, Bombay, whereby it gave rights to exhibit films at Golcha Cinema, Delhi and Maratha Mandir at Bombay in exchange for fixed weekly rentals. The cinema at Bombay was let out on a weekly rent of Rs. 13,000 to Madan's Bombay and the cinema at Delhi was let out on weekly rental of Rs. 9,500 to M/s. Dhartidhan Pvt. Ltd. The ITO, Central Circle I, Jaipur, held that the above contracts were not genuine and both Dhartidhan and Madans were contractors created on paper by the assessee, otherwise none of them had any role to play as contractors and cinemas in fact were managed and run by the assessee itself and the profits flowing from the exhibition of films at those two cinemas rightly belonged to the assessee. Aggrieved % the order of the ITO, the assessee went in appeal before the AAC. The AAC also came to the conclusion that these contracts were not genuine business contracts. On a further appeal by the assessee, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by its order dated 29th June, 1976, while dealing with the assessment year 1965-66, upheld the contention of the assessee and came to the conclusion that on the basis of the evidence on record the department had not been able to make out the case that the contracts in question did not bring into existence the real relationship as contemplated by them and that the said relationship has not been maintained all along by the two sides. It further held that the income of the two concerns had not flown back to the assessee-company and in fact there was hardly any evidence on the basis of which it may be held that the contracts were benami. The Tribunal thus held that the clubbing of the income in the circumstances appeared to be totally unjustified and deleted the additions made on this account in the income of the assessee. The detailed reasons were given by the Tribunal in its order dated 29th June, 1976, while dealing with the matter for the assessment year 1965-66, and for subsequent years of assessment, the Tribunal followed this order. The CIT, Rajasthan, Jaipur, submitted an application under Section 256(1) of the Act for making a reference of the following question to the Hon'ble High Court : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the contracts of the assessee-company with M/s. Dhartidhan Pvt. Ltd. and M/s. Madan's, Bombay, for leasing out exhibition rights of the two cinema houses belonging to the assessee were real and genuine and the income arising therefrom did not belong to the assessee-company?" The Tribunal took the view that the above question was a pure question of fact and as such did not see any ground to make a reference to the Hon'ble High Court and dismissed the application. In view of the above circumstances, the revenue has submitted the present applications under Section 256(2) of the Act praying that the Income-tax Appellate Tribunal be directed to state the case and refer the following questions of law to this court arising out of the Tribunal's order : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the contracts of the assessee-company with M/s. Dhartidhan (P,) Ltd., Bombay, and M/s. Madan's, Bombay, for leasing out of exhibition rights [of the two cinema houses belonging to the assessee were real and genuine and the income arising therefrom did not belong to the assessee-company ? 2. Whether the finding arrived at by the Appellate Tribunal is vitiated because of the non-consideration of the material evidence on record and the finding is inconsistent with the evidence on record and the Tribunal has given the finding upon its own imagination ?" As regards the question No. 2 mentioned above, Mr. Ranka, learned counsel for the assessee, raised an objection that this question was not formulated in the application under Section 256(1) of the Act submitted before the Tribunal and as such it cannot be called for under Section 256(2) of the Act. - It is submitted that while dealing with a reference application, the High Court is bound to accept the findings of fact arrived at by the Appellate Tribunal and if a person wants to challenge such findings, he must do so by first moving an application under Section 256(1) and if he has failed to file an application under Section 256(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 one reason or another. It is submitted that in a reference under Section 256 the High Court exercises advisory jurisdiction and does not function as a court of appeal. If a party accepted the Tribunal's conclusion on a question or in any event did not apply under Sub-section (1) of Section 256 to the Tribunal to refer that particular question to the court and consequently there has been no refusal by the Tribunal to refer that question, the High Court cannot raise and decide that question nor can it issue a direction to the Tribunal under Sub-section (2) to state and refer a case upon that question. Reliance in this connection is placed on CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC)., CIT v. Smt. Anusuya Devi [1968] 68 ITR 750 (SC), Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 (SC) and CIT v. Kotrika Venkataswamy and Sons [1971] 79 ITR 499 (SC). Mr. Mehta, learned counsel for the revenue, could not cite any authority taking a contrary view. In view of the above circumstances we hold that as question No. 2 stated above was not mentioned in the application submitted under Sub-section (1) of Section 256 of the Act and consequently there has been no refusal by the Tribunal to refer that question, we cannot issue a direction to the Tribunal under Sub-section (2) to state and refer a case upon that question. The applications, therefore, as regards question No. 2, are dismissed. On question No, 1, Mr. Mehta, learned counsel for the revenue, has contended that the ITO had given detailed reasons to hold that the contracts entered into between the assessee and M/s. Dhartidhan Pvt. Ltd., and M/s. Madan's, Bombay, were not genuine transactions and were made merely in order to evade taxation, but the learned Tribunal set aside those findings without substantial reason and overlooked the material evidence placed on record in this regard. The question whether certain contracts were genuine or not may be an initial question of fact. But whether there was evidence or material to prove that such contracts were genuine was a question of law. It is submitted that the Tribunal committed a clear error in deciding the matter on an abstract burden of proof and in taking the view that the department had failed to prove by any positive evidence to make out a case of benami. It is submitted that in the facts and circumstances of this case, the department could not have led any positive evidence to prove that the contracts were not genuine or were benami. The department was entitled to prove from the attending facts and circumstances that these contracts were not genuine and in the present case there were several circumstances admittedly proved on record from which there was no other conclusion than to hold that these contracts were not genuine. The ITO and the AAC, in their respective orders, had clearly brought out such circumstances and the Tribunal failed to make a mention of those circumstances and as such the Tribunal committed an error of law and a question of law arises out of the Tribunal's order. Reliance is placed on the following observations in Sir Sunder Singh Majithia v. CIT [1942] 10 ITR 457 (PC) at p. 461. "When a document purporting to be an instrument of partnership is tendered under Section 26A on behalf of a firm and application is made for registration of the firm as constituted under such instrument, a question may arise whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the parties as between themselves. To decide that an instrument is in this sense not genuine is to come to a finding of fact: whether there was evidence upon which it was open to the income-tax authority to come to such a decision is a question of law." Reliance was placed on Krishna Flour Mills v. CIT [1962] 44 ITR 501, in which their Lordships of the Supreme Court were considering an application moved under Section 66(2) of the Indian I.T. Act, 1922, before the High Court for directing the Tribunal to state a case on the following question of law : "Whether, on the facts and in the circumstances of the case, the decision of the Tribunal that the firm is not genuine and not registrable under Section 26A of the Indian Income-tax Act is right in law ?" The Hon'ble Supreme Court granted special leave and held that a question of law arose out of the order of Tribunal: "whether, in the facts and circumstances found by the Tribunal, there was material to come to the conclusion that the partnership firm constituted by the deed of partnership dated November 16, 1949, was not genuine?" The order of the High Court was set aside and the Tribunal was required to state a case on the question indicated above.
(3.) IN Venkateswara District Motor Service v. CIT [1965] 55 ITR 597 a Bench of the Mysore High Court observed as under (p. 601): " It is clear from a long line of decisions both of the Privy Council and of the Supreme Court that when a question arises whether a partnership whose registration is sought is a genuine partnership, although a finding that it is not a genuine partnership is a finding on a question of fact, the question whether there was material on which it was possible to reach that conclusion is however a question of law. That was the elucidation made in Sundar Singh's case [1942] 10 ITR 457 (PC). While in Jiyajeerao Cotton Mills Ltd. v. Commissioner of INcome-tax [1958] 34 ITR 888 (SC) it was explained that if there was no evidence to sustain the finding recorded by the Tribunal or if its finding is a perverse finding, the finding would be open to investigation in appeal, in Krishna Flour Mills v. Commissioner of INcome-tax [1962] 44 ITR 501 (SC), the enunciation made was that a question of law arises out of the order of the Tribunal if its inference that there is a bogus partnership is unreasonable and not justified either by partnership law or common human experience. That a similar consequence ensues when the conclusion is influenced by the application of wrong principles is what appears from Champaran Cane Concern v. State of Bihar [1963] 49 ITR (SC) 152." In V. D. Dhanwatey v. CIT [1968] 68 ITR 365, their Lordships of the Supreme Court held as under (p. 375): "It was finally contended on behalf of the appellant that the Appellate Tribunal had found that Shri V. D. Dhanwatey had earned the remuneration without any detriment to the family funds and the finding of the Appellate Tribunal on this point was a finding on a question of pure fact and the High Court could not, in a reference under Section 66(1) of the Indian Income-tax Act, 1922, question the correctness or the validity of that finding. We are unable to accept the argument put forward on behalf of the appellant. It is true that the jurisdiction conferred on the High Court by Section 66(1) of the Income-tax Act is limited to entertaining references on questions of law. In the present case, however, the conclusion reached by the Tribunal is not a conclusion on a question of pure fact but it is a conclusion on a mixed question of law and fact. In other words, though the conclusion of the Tribunal is no doubt based upon primary evidentiary facts, its ultimate form is determined by the application of the relevant legal principle of Hindu law which has been discussed in the course of this judgment. In dealing with findings on questions of mixed law and fact the High Court must no doubt accept the findings of the Tribunal on the primary question of fact ; but it is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not in reaching its final conclusion; and, in that sense, the scope of inquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law. For example, in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax [1959] 35 ITR 594 (SC), it was pointed out by this court that where the question is whether a transaction is in the nature of trade, even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of a fact, in arriving at its final conclusion on facts proved, the Tribunal has necessarily to address itself to the legal requirements associated with the concept of trade or business. The final conclusion of the Tribunal can, therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point; and such a challenge is open under Section 66(1) because it is a challenge on a ground of law." In G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594, their Lordships of the Supreme Court observed as under (p. 604) : "Before we refer to the said decision it may be relevant to observe that there are two ways in which the question may be approached. Even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, it cannot be ignored that, in arriving at its final conclusion on facts proved, the Tribunal has undoubtedly to address itself to the legal requirements associated with the concept of trade or business. Without taking into account such relevant legal principles it would not be possible to decide whether the transaction in question is or is not in the nature of trade. If that be so, the final conclusion of the Tribunal can be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point; and such a challenge would be open under Section 66(1) because it is a challenge on a ground of law. The same result is achieved from another point of view and that is to treat the final conclusion as one on a mixed question of law and fact. On this view the conclusion is not treated as one on a pure question of fact, and its validity is allowed to be impeached on the ground that it has been based on a misapplication of the true legal principles. It would thus be seen that whether we call the conclusion in question as one of fact or as one on a question of mixed law and fact, the application of legal principles which is an essential part in the process of reaching the said conclusion is undoubtedly a matter of law and if there has been an error in the application of the said principles it can be challenged as an error of law. The difference then is merely one of form and not substance; and on the whole it is more convenient to describe the question involved as a mixed question of law and fact. That is the view expressed by this court in the case of Sree Meenakshi Mills [1957] 31 ITR 28 (SC), and in our opinion, it avoids any confusion of . thought and simplifies the position by treating such questions as analogous to those falling under the category of question of law." In Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151, their Lordships of the Supreme Court held thus (p. 170) : "We are aware that the Income-tax Appellate Tribunal is a fact-finding Tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before it this court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the findings reached on the evidence on record before it. The conclusions reached by the Tribunal should riot be coloured by any irrelevant considerations or matters of prejudice and if there are any circumstances which required to be explained by the asses-see, the assessee should be given an opportunity of doing so. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures and surmises and if it does anything of the sort, its findings, even though on questions of fact, will be liable to be set aside by this court." ;