T.V.R Tatachari, C.J:— These two references under s. 66(1) of the Indian I.T Act, 1922 (hereinafter referred to as “the Act”), have been heard together and can be disposed of by a common judgment.

2. The facts which have given rise to these references are the following: In I.T.R No. 9- of 1969, the Income-tax Appellate Tribunal, Delhi Bench “C. has referred four questions stated to arise out of an order of the Tribunal, dated 6th August, 1965, in Income-tax Appeal No. 10235 of 1963-64, relating to the assessment year 1952-53, the assessee being the Raza Sugar Co. Ltd., Rampur. In I.T.R No. 31 of 1969, the Income-tax Appellate Tribunal, Delhi Bench “C”, has referred five questions stated to arise out of an order of the Tribunal, dated 17th August, 1966, relating to the same assessment year 1952-53, in Income-tax Appeal No. 10236 of- 1963-64, the assessee being the Buland Sugar Co. Ltd., Rampur.

3. Each of the assessees carried on the business of manufacture of sugar and sale thereof. During the accounting year under consideration, the Govt, of India controlled the sale of sugar and a quantity of 11, 809 bags of sugar was released to be sold as free sale quota by the two assessee-companies which had a pooling arrangement for the sale of sugar. During the assessment proceedings, the ITO found from the accounts that the full sale price of the sugar had not been recorded in the accounts of the assessees. After examining certain transactions, he refused to accept the explanation of the assessees that the sugar was sold through their sole selling agent, M/s. Beopar Sahayak Ltd., and that so far as the assessee-companies were concerned, the price realised was shown correctly in the books. He found that the sole selling agent of the’ assessee-companies was a private limited company, which was controlled’ by’ the common managing agent of the assessee-companies, and that in certain instances the assessee-companies had issued sale memos at amounts between Rs. 60 and Rs. 61 per maund while actually, according to the purchasers, the sugar was purchased by the said purchasers at Rs. 68 and Rs., 69’per maund through the selling agent. He examined some: of the parties and they stated that according to the arrangement between the purchasers and the selling agent; the difference in the price Was to be paid to the company. The ITO, therefore, came to the conclusion that’ in fact, the difference in the price went to the assessee-companies, and that on an average there was under-recording of sale price by about Rs. 6-8-0 per maund. He, accordingly, estimated the average sale rate at Rs. 66-8-0 per maund as against Rs. 60 or so shown by the assessee/and he estimated such profit at Rs. 1,50,000. As the two assessee-companies had a pooling arrangement in regard to such sales, he made an addition of Rs: 75,000 on the aforesaid account in the assessment of each of the two companies.

4. The ITO made also certain other additions and disallowances in the assessment of the two companies. The first was in respect of a claim of depreciation. Each of the assessee-companies owned a factory for manufacturing sugar. As the manufacture of sugar was a seasonal one, the respective factories worked triple shifts during the season. The assessee-companies claimed full allowance for the extra shifts. But, the ITO allowed extra shift allowance proportionate to the actual number of days during which the extra shifts were worked in accordance with r. 8 of the Indian I.T Rules, 1922.

5. The second was in respect of claim of loss in an unregistered firm known as M/s. Agricultural Co. in which each of: the assessee-companies was a partner.

6. The third was a disallowance of medical expenses claimed by the assessee-companies. The contention of the assessees was that the medical expenses on their hospitals was incurred for the benefit of the respective assessees and their employees and workmen only.

7. The fourth was a disallowance of legal expenses-claimed to have been incurred by each of the assessees in connection with investment and agricultural income-tax cases.

8. Each of the assessee-companies preferred appeals against their respective assessment orders before the AAC who called for a remand report, from the ITO on the first of the points mentioned above (difference in prices) and, after considering, the evidence produced, dismissed the appeals of the assessees and upheld the findings of the ITO on all the points. The assessee-companies then preferred appeals to the Income-tax Appellate Tribunal. The Tribunal, by the respective impugned orders, agreed with the views taken by the ITO and the AAC, and dismissed the appeals.

9. The assessees thereupon filed applications before the Tribunal under s. 66(1) of the Indian I.T Act, 1922, praying that the questions proposed by them may be referred to this court. In the case of Raza Sugar Co. Ltd. (I.T.R No. 9 of 1969), the Tribunal referred the following four questions to this High Court:

“(i) Whether, on the facts and in the circumstances of the case, the computation of depreciation in regard to extra shift allowance has properly been made?

(ii) Whether, on the facts and in the circumstances of the Case, the estimated addition of Rs. 75,000 is justified?

(iii) Whether, on the facts and in the circumstances of the case, disallowance of Rs. 2,000 out of medical expenses pertaining to the affairs of M/s. Agricultural Compay is valid? and

(iv) Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 18,330 out of legal expenses is valid in law?”

10. In the case of Buland Sugar Co. Ltd. (I.T.R No. 31 of 1969), the Tribunal referred the following five questions to this court:

“(i) Whether, on the facts and in the circumstances of the case, the estimated addition of Rs. 75,000 is justified?

(ii) Whether, on the facts and in the circumstances of the case, the computation of depreciation in regard to extra shift allowance has properly been made?

(iii) Whether, on the facts and in the circumstances of the case, ‘the assessee-company is entitled to the claim of share of loss from an ???unregistered firm in which it was a partner to be set off against other business income of the assessee?

(iv) Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 2,000 out of medical expenses pertaining to the affairs of M/s. Agricultural Company is valid? and

(v) Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 24,374 out of legal expenses is valid in law?”

Question (i) in I.T.R No. 9 of 1969 and question (ii) in I.T.R No. 31 of 1969.

11. These questions are similar and relate to the computation of - extra shift allowance. This point came up for consideration before the Appellate Tribunal in the appeal of Raza Sugar Co. Ltd. in I.T.A No. 12778 of 1958-59 in respect of the assessment year 1949-50 and was decided by the. Tribunal against the assessee-company for the reasons given by it in its order, dated 8th August, 1966, in that appeal. For the same reasons, the Tribunal rejected the contention of the assessee-companies on this point in the present assessment year 1952-53 also.

12. The assessee-companies are seasonal factories and worked three shifts. Therefore, in accordance with the provisions in’ r. 8 of the Indian I.T Rules, 1922, the ITO allowed normal depreciation for the first shift as if the factory worked for the full year. However, as the factories worked three shifts, the ITO computed the allowance for the second and the third shifts in accordance with the “provisions in col. 3 of the statement of rates in r. 8 at which depreciation was admissible under the said provisions. The contention of the assessees was that in the case-of a seasonal factory, the depreciation allowance for the second and third shifts should be exactly 50% of the normal depreciation, provided the factory runs second and third shifts throughout the season. It was submitted that under r. 8, depreciation has to be allowed as if the machinery and plant had been in use throughout the period even when, in fact, the factory did not work for the entire year, and that on the same analogy the extra shift allowance should also be computed in the same proportion. -This contention is without any force…

13. Rule 8 of the Indian I.T Rules, 1922, provides as under:

“the allowance under s. 10(2)(vi) of the Act in respect of depreciation of buildings, machinery, plant or furniture shall be at percentage of the written down value or original cost, as the case may be, equal to one-twelfth the number shown in the corresponding entry in the second column of the following statement:

Provided that if the buildings, machinery, plant or furniture have been used by the assessee in his business for not less than two months during the previous year, the percentage shall be increased proportionately according to the number of complete months of use by the assessee:

Provided further that in the case of a seasonal factory worked by the assessee during all the working seasons of the previous year, the percentage shall be increased as if the buildings, machinery, plant or furniture had been in use throughput the period the assessee was the owner thereof during the previous year……

Class of asset Rate Number on the basis of which the percentage is to be calculated on the written down value except where otherwise indicated in the case of ocean-going steamers Remarks I ………. II ……. III. Machinery and plant (1) General rate 7 An extra allowance up to a maximum of 50 per cent, of the normal allowance will be allowed by the Income-tax Officer where a concern claims such allowance on account of double shift working and satisfies the Income-tax Officer that the concern has actually worked double shift. An extra allowance up to a maximum of 100 per cent, of the normal allowance instead of 50 per cent, will be allowed in the assessments for five years commencing with the assessment for the year 1949-50, where a concern proves that there has been triple shift working. The calculations of the extra allowances for double shift and for triple shift shall be made separately, propor-tionate to the number of days during which there was only double shift working

and during which there was triple shift working. For the purpose of granting this extra allowance the normal number of working days throughout the year will be taken as 300 and if, for example, a concern has worked only double shift for 100 days and triple shift for another 100 days the extra allowance for double shift will be ⅓ of 50 per cent. of the normal allowance for the whole year and that for triple shift will be J of 100 per cent, of the normal allowance for the whole year. This Applies to all concerns whether the general rate or any special rate applies to them, but does not apply to an item of machinery or plant specifically excepted by the letters ‘N.E.S.A’* being shown against it. Explanation.— For this purpose the normal allowance means the amount of depreciation allowance for the year calculated in accordance with rule 8, but excluding the extra depreciation allowance for multiple shift working or for new plant and machinery.”

14. The effect of the above provisions was considered by a Division Bench of the High Court of Allahabad in Raza Sugar Co. v. CIT, [1970] 76 ITR 541. The learned judges explained at page 550 as follows:

“The rule read along with what is stated in the remarks column in the statement leads to the conclusion that for purposes of granting the extra allowance for the double shift, the normal number of working ‘days throughout the year will be taken as 300 days. As for example if a concern has worked only double shift for 100 days, the extra allowance for double shift will be ⅓rd of 50 per cent, of the normal allowance for the whole year. The rule and the statement do not support the claim of the assessee that it is entitled to just 50 per cent, of the normal depreciation for the second shift.”

15. This view was reiterated by another Division Bench of the same High Court in Kundan Sugar Mills v. CIT, [1977] 106 ITR 704. We respectfully agree with the above view of the Division Bench. It is quite clear from the provisions in the remarks column that the assessee-companies were entitled to 50 per cent, of the normal allowance on account of double shift working and up to a maximum of 100 per cent, of the instead of 50 per cent, on account of triple shift allowance, but only proportionately for the actual number of days worked. The contention on behalf of the assessee-companies is thus untenable, and the computation of depreciation in regard to extra shift allowance was properly made by the income-tax authorities. The questions under consideration are, accordingly, answered in the affirmative.

Question (ii) in I.T.R No. 9 of 1969 and Question (i) in I.T.R No. 31 of 1969.

16. These questions relate to the addition of Rs. 75,000 to the income of each of the assessee-companies by the ITO. It is stated by the ITO. that the Raza Sugar Co. Ltd. and Buland Sugar Co. Ltd. are situated close to each other. They are under the same managing agents and arrangements up to the stage of cane consumption are common: The companies, therefore, entered into a pool arrangement as soon as it is found that the full feeding of cane is not forthcoming and it may be uneconomical to run both the factories with depleted supply of cane. Only one sugar factory, therefore, worked during the pool period but the profits for such period are calculated separately and are shared by both half and half. It was stated before the ITO that the crushing up to 6th March, 1951, was the normal crushing for both the companies, and that Buland Sugar Co. Ltd. stopped its crushing from 6th March, 1951, and the Raza Sugar Co. Ltd. continued the crushing from 7th March, 1951, for the pool arrangement. The said crushing was stopped on 29th March, 1951. The ITO looked into the figures of production during the said period and, found that out of a total production of 49, 652 maunds, free sale quota production came to 32, 474 maunds. The total sale price credited in the account was Rs. 24,28,450 against which a debit of Rs. 13,70,506 was claimed for cost of cane, proportionate purchase expenses, wages and consumption of materials, etc. The excise duty on the entire sale together with the commission of the selling agents was taken into account, and out of the total sale price of Rs. 24,28,450, the free sale quota sales were shown at Rs. 18,79,541 for 31, 924 maunds. The average sale rate thus came to Rs. 59 per maund. The ITO, however, following the strict principles of accounting on the mercantile system, took into account only those sales which were duly effected during the period of accounting under consideration and found that only 23, 873 maunds of the free sale sugar was sold up to October, 1951. The sale price realised stood on that basis at Rs. 14,38,459 which gave the average rate of Rs. 60’2 per maund. The ITO also found that the sugar of Raza Sugar Co. Ltd. and Buland Sugar Co. Ltd. was much superior to the best sugar available in the market, and its selling rate in the market was always much higher than the normal rates in the market. He further found that in four instances the company had not recorded the full sale price in its books inasmuch as the company had shown the sales at rates lower than those at which its sugar was saleable in the market and in fact was sold in the market. Thus, in the case of a transaction with Vrij Lal R. Shah of Kanpur, the actual sale rate of sugar shown as sold at Rs. 65 was in fact Rs. 68-4-0. In the case of a transaction with Ramanlal Baldeo Dass of Kanpur, the actual sale rate was Rs. 66-8-0 though the bill was prepared only at Rs. 62 per maund. In the case of a transaction covered by Bill No. 782, dated 11th June, 1951, the mill had charged the sale price of 200 bags at Rs. 61 per maund though the sugar was purchased by Lunaji Narain of Ratlam at Rs. 69 per maund. In the case of a transaction with Sadasukh Lakshmi Narain of Kanpur, it was found that Rampur Sugar rate was Rs. 71-8-0 per maund while the average sale rate at which sugar had been shown to have been sold by the mill during the month of June came to Rs. 62’10 only, thus confirming that the sale rate shown by the company was lower by Rs. 9 per maund from the actual sale rate prevailing in the market. The ITO also found that in a letter, dated 4th October, 1951, which the assessee-company had written to M/s. Beopar Sahayak Ltd., its sole selling agent, it was stated:

“We presume the party is to be billed at Rs. 59 per maund.”

17. The ITO drew the inference from the said words that the sale rate was not straightaway confirmed by the selling agents, and that the company had to be advised later on (after effecting settlement for the difference) as to the rate at which the bill was to be prepared, and he observed that the reason why this practice was followed was obvious. He further found that M/s. Beopar Sahayak Ltd., the sole selling’ agent of the company, had written to Raza Sugar Co. Ltd. a letter dated 1st October, 1951, in which it was stated as under:

“Please refer to our letter ND/BLS 4817 dated 25th September, 1951, advising you to despatch 100 bags to Patiala by cheapest route under R/R and documents to be presented to Ronak Ram Tara Chand, Katra, Patiala, @ Rs. 70 per maund ex factory. Kindly bill this consignment @ R: s. 60’ 10 and not @ Rs. 70 as advised on 25th September, 1951. The difference we will realise here from Bhartia Bros, on hearing from you about the despatch.”

18. He drew the inference from the aforesaid words that the sugar of Raza Sugar Co. was saleable in the month of September at Rs. 70 per maund but the company through an arrangement with the selling agents recorded the sales at much lower rates. The ITO pointed out that M/s. Beopar Sahayak Ltd. was a private limited company, rather one-man company of Shri V.H Dalmia who was managing director of Govan Bros. (Rampur) Ltd., the managing agents of the two sugar companies, that the person who was running Bharat Traders at Kanpur was an employee of the Dalmia group earlier to this business at Kanpur as well as the area selling agents, and that it was, therefore, evident that the company, the managing agents, and the selling agents at Kanpur, were all one. He observed that taking advantage of this position, the sales were arranged in such a manner that the company should record the sales at rates lower than those at which sugar was sold, the difference having been realised over and above the recorded sale rates, and that he was, therefore, convinced, that the sale rates shown by the company for the free sale sugar was much lower than those which were actually prevailing in the market and at which sugar was actually sold. He called upon the company to prove the sales and explain why the sales by them be not enhanced to figures which would correspond to the actual sale price realised. But the company failed to give any satisfactory explanation. The ITO, therefore, felt satisfied that the company had not recorded the full sale price of the sales of sugar, and that the sales shown should be increased to a figure which would correspond to the normal selling rates in the market. As the instances mentioned above showed that under-recording of sales was in many instances by Rs. 8 and Rs. 9 per maund, he, after giving all possible margins to the assessees, added a sum of Rs. 1,50,000 to the sale of price of 23, 873 maunds. The sale value then stood at Rs. 15,88,459, and that gave the average sale rate at Rs. 66-8-0 against Rs. 60 shown by the assessee. As stated earlier, he divided the sum of Rs. 1,50,000 between the two assessee-companies and thus added Rs. 75,000 to the income of each of the said companies.

19. The matter was taken up in appeal to the AAC who remanded the case for further report with certain observations about the instances relied upon by the ITO and requiring the latter to give fresh opportunity to the assessee-company to cross-examine some of the persons connected with the instances. The ITO then gave the necessary opportunity and recorded the statements of persons who were cross-examined by the representative of the assessee-company. In the course of the said statements, two of the persons stated that the difference between the price mentioned in the bill issued by the company and the actual price at which the selling agent sold the sugar, referred to as “on money”, was to be paid to the mill. On a consideration of the fresh material before him, the ITO again came to the same conclusion that the company had not recorded the full sale price in its books, that it had shown the sales at rates lower than those at which sugar was saleable in the market and in fact was sold in the market-, and that the difference between the two, known as “on money”, ultimately went to the assessee-company. He submitted a report accordingly.

20. The AAC, on a consideration of the aforesaid, report and the various facts and circumstances of the case, agreed with the view taken by the ITO.

21. On further appeals by the assessees, the Appellate Tribunal agreed with the aforesaid view taken by the ITO and the AAC for the reasons set out in its order.

22. The learned counsel for the assessee-companies sought to argue, as it was done before the Tribunal, that there was nothing to show that the assessee-companies ever realised any “on money” on the various transactions, and that the material before the ITO was not at all conclusive inasmuch as it did not show, that actually the difference between the price recorded by the mill and actually paid by the purchaser ever went to the assessee-companies. As pointed out by the Tribunal, the nature of the business being what it was, it was not possible to expect any direct evidence regarding such “on money” and to prove conclusively that any such “on money” went to the assessee-companies. The view taken by the income-tax authorities and the Tribunal was not a mere conjecture, but was an inference drawn from the facts and circumstances of the case. It was pointed out by the Tribunal that both the selling agents of the assessee-companies, M/s. Beopar Sahayak Ltd. and Bharat Traders, were private limited companies which were managed and controlled by the managing agents of the assessee-companies, and that the shareholders were closely related to them. The Tribunal also pointed out that in the case of the chief selling agent, M/s. Beopar Sahayak Ltd., the directors were employees of Dalmias having nominal shareholding and, in fact, most of the shares were subsequently transferred to this very group. The instances relied upon by the I.T authorities did show that the rates at which the sales were stated to have been made in its accounts by the mill were very much lower than those at which the sugar was saleable in the ‘market and in fact was sold in the market. The Tribunal was justified in taking the view that it was inconceivable that the company would have sold sugar at such low rates when, in fact, the sugar was sold at “a higher price by its selling agents. It is true that the fact that the sugar was ultimately sold at a higher rate does not by itself show that the excess was received by the assessee-companies. But, so far as that aspect is concerned, there were statements made before the ITO that the said excess or “on money” was to be paid to the companies. Further, the ITO has not added the entire difference in prices but only a part of it. Taking all the facts and circumstances into consideration, the Tribunal has given a finding that some “on money” on free sale of sugar was realised by the assessee-companies, and that the amount added by the ITO could not be said to be excessive. This is a finding of fact, and, in our opinion, the facts and circumstances of the case justify the finding. We, therefore, answer the questions under consideration in the affirmative.

Question (iii) in I.T.R No. 31 of 1969.

23. This question was referred only in the case of Buland Sugar Co. Ltd. The said company and the Raza Sugar Co. Ltd. were partners in a partnership firm, known as M/s. Agricultural Company, which was an unregistered firm. The contention of Buland Sugar Co. Ltd. was that the share of loss in the said partnership firm should be set off against the profits of the company from its sugar business. It was claimed that an agricultural farm was jointly owned by Buland Sugar Co. Ltd., and Raza Sugar Co. Ltd. The agricultural farm was known as the Matkhera farm and in fact was owned by the Agricultural Company. It was contended that the Agricultural Company was not an independent partnership undertaking, and that the Agricultural Company which included the Matkhera farm was only a joint department of the two sugar companies, namely, Buland Sugar Co. Ltd. and Raza Sugar Co. Ltd. The Agricultural Company came into being by virtue of an agreement, dated 5th May, 1935. The ITO held that the terms of the said agreement clearly show that the Agricultural Company was an independent partnership concern constituted by Buland Sugar Co. Ltd. and Raza Sugar Co. Ltd., and that it was not merely a joint department of the two companies as claimed. In that view, the ITO disallowed the share of loss from the Matkhera farm as the said share of loss was from an unregistered firm. On appeal by the assessee, the AAC agreed with the view taken by the ITO. On further appeal, the Income-tax Appellate Tribunal also agreed with the aforesaid view. In doing so, the Tribunal relied upon its order in Income-tax Appeal No. 7682 of 1958-59, in the case of this very assessee, namely, Buland Sugar Co. Ltd. The question considered in that decision was whether a share of loss from an unregistered firm could be allowed as a deduction in the case of a partner of that unregistered firm. Following the decisions in Cit, Bombay City Ii, Bombay v. Jadavji Narsidas & Co. , [1963] 48 ITR (SC) 41 and CIT v. Gangadhar Nathmal, [1966] 60 ITR 790 (Pat), the Tribunal held that the loss incurred by an unregistered firm could be set off only against the income, profits and gains of that unregistered firm and not against the income, profits and gains of any of the partners of that firm. The question thus stands answered by the aforesaid decisions. We, therefore, answer the question under consideration in the negative.

Question (iii) in I.T.R No. 9 of 1969 and question (iv) in I.T.R No. 31 of 1969.

24. The two assessee-companies maintained a hospital jointly. The total expenses incurred over the maintenance of the hospital in the relevant accounting year amounted to Rs. 57,854, out of which 42 per cent, was allocated to each of the companies. Out of the share of expenses of each of the companies, the expenses relating to the staff on the Matkhera farm were estimated at Rs. 2,000 and disallowed in the hands of the two companies. This view was affirmed’ by the AAC and the Appellate Tribunal. As the Matkhera farm was a different entity, the maintenance expenses relating to it were rightly disallowed. The questions under consideration are answered in the affirmative.

Question (iv) in I.T.R No. 9 of 1969 and question (v) in I.T.R No. 31 of 1969.

25. These questions relate to the disallowance of the two amounts of Rs. 18,330 and Rs. 24,374 claimed by the two companies, respectively, towards legal expenses.

26. In the case of Raza Sugar Co. Ltd., the ITO disallowed a sum of Rs. 3,330 claimed as legal expenses for sale of shares, agricultural income-tax, and registration of sale deed of Aish Bhavan, and a sum of Rs. 15,000 claimed as legal expenses for investment, in all Rs. 18,330, on the ground that they did not constitute business expenditure. On appeal, the AAC upheld the disallowance observing that the said expenses were incurred for the sale of shares, agricultural income-tax and registration of sale deed of Aish Bhavan as well as for investment purposes, and that the same were of capital nature. On further appeal, the Appellate Tribunal confirmed the disallowance. The Tribunal observed that part of the expenses were on account of investments and purchase of shares and the same could not be considered as business expenses since the assessee-company was not an investment company, nor was it dealing in shares, and that the other part of the expenses claimed were in respect of the assessee's agricultural income-tax case. We agree with the view taken by the Tribunal.

27. In the case of the Buland Sugar Co. Ltd., the ITO disallowed a sum of Rs. 24,374 claimed as legal expenses on the ground that the expenses were in connection with the acquisition of investment, i.e, shares, etc., and were, therefore, capital expenses.

28. On appeal, the AAC, for some reason which is not apparent, did not deal with this item. However, on further appeal, the Income-tax Appellate Tribunal upheld the disallowance observing that the disallowance was regarding expenses on investments, that it was submitted by the learned counsel that the assessee-company was a dealer in shares and, as such, expenses on investments and shares should have been allowed as revenue expenses, that the assessee, however, was unable to produce any evidence to show that it was a dealer in shares, and that there was nothing to establish that the assessee-company was dealing in shares and as such the disallowance was fully justified. We agree with the view taken by the Tribunal. For the foregoing reasons, we answer the questions under consideration in the affirmative.

29. In the circumstances of the case, we make no order as to costs.