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P.C Sharma & Sons v. Commissioner Of Income-Tax, West Bengal-I
Factual and Procedural Background
The opinion concerns a reference under the Income-tax Act, 1961 arising from the assessment year 1964–65 of the assessee M/s. P.C. Sharma & Sons (previous year ended 31 March 1964). During assessment a cash credit of Rs. 35,000 appearing in the assessee's books in the name of one G.L. (Ganeshilal) Sharma was disallowed by the Income-tax Officer (ITO) who treated it as income from undisclosed sources, rejecting the assessee's contention that it was a genuine loan. The Appellate Assistant Commissioner (AAC) and the Tribunal confirmed the ITO's order.
The assessee applied under s. 256(1) of the Income-tax Act, 1961, seeking that three questions be referred to the High Court (these questions related to the validity of reassessment under s.148, the genuineness of the Rs. 35,000 loan, and the shifting of burden after the assessee discharged initial onus). The Tribunal held that those questions did not arise from its order and dismissed the application. The assessee then applied under s. 256(2), reiterating the earlier questions and asking the High Court to direct the Tribunal to draw up a statement of case. The High Court directed the Tribunal to state a case on a narrower question framed by the Court: whether the Tribunal's finding that the Rs. 35,000 loan by Shri G.L. Sharma is not genuine is perverse.
Legal Issues Presented
- Whether, on the facts and in the circumstances, the reassessment proceedings under s. 148 of the Income-tax Act, 1961, were in accordance with law? (As posed by the assessee in its application under s. 256(1)).
- Whether the Tribunal was right in holding that the loan of Rs. 35,000 by Shri G.L. Sharma, who purportedly confirmed the loan and explained the source thereof, was not a genuine one? (As posed by the assessee in its application under s. 256(1)).
- Whether the Tribunal was right in not considering that, having discharged the initial onus, the burden shifted to the department? (As posed by the assessee in its application under s. 256(1)).
- Whether, on the facts and circumstances of the case, the finding of the Tribunal that the loan of Rs. 35,000 by Shri G.L. Sharma is not genuine, is perverse? (Question as framed by the High Court for the statement of case).
Arguments of the Parties
Revenue's Arguments (Mr. Ajit Sengupta)
- Raised a preliminary objection that the High Court should not answer the question it had framed because the assessee had not asked for that specific question either before the Tribunal in its s. 256(1) application or before the High Court in its s. 256(2) application.
- Supported this objection by citing multiple Supreme Court authorities (listed below) establishing that the High Court must accept the Tribunal's findings of fact and that a party who desires to challenge a finding of fact must specifically seek reference of that question in the proper procedure; otherwise the party cannot urge before the High Court that the finding is vitiated.
Assessee's Arguments (Dr. Debi Pal)
- Primary contention: the assessee had in fact raised the dispute covered by the Court-framed question (i.e., genuineness/perversity of the finding) even though the questions as originally drafted did not clearly express it; therefore, the Court properly reframed the question to focus on the actual dispute between the parties.
- Alternative contention: if the Court finds the referred question does not reflect the dispute, the Court may correct or reframe the question even at the hearing of the reference. To support this, the assessee cited several decisions (Bombay High Court and Supreme Court authorities) where courts reframed questions to clarify the controversy or, in one instance, the Supreme Court itself modified questions to reflect the real controversy between parties.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| India Cements Ltd. v. Commissioner Of Income Tax, Madras, [1966] 60 ITR 52 (SC) | That in a reference the High Court must accept findings of fact made by the Appellate Tribunal and a party must first challenge those findings by making an application under the statutory provision (section 66(1) in the earlier Act); failure to do so prevents raising such challenge before the High Court. | The Court relied on this principle to support the objection that the assessee could not challenge the Tribunal's factual finding as vitiated when the specific question challenging that finding had not been sought in the proper form. This authority reinforced the Court's conclusion to decline answering the referred question. |
| Commissioner Of Income Tax West Bengal, Calcutta v. Smt Anusuya Devi, [1968] 68 ITR 750 (SC) | That the High Court may only answer questions referred to it by the Tribunal and is not bound to answer a question merely because it is raised; while the High Court may reframe questions to clarify obscurities or pinpoint the real issue, it cannot reframe so as to reopen an enquiry on questions of fact or law closed by the Tribunal. | The Court applied this principle to conclude that it should not answer a question which had not been properly raised before the Tribunal, and it limited the scope for reframing in the present case because reframing would amount to reopening a question of fact already decided by the Tribunal. |
| Lakshmiratan Cotton Mills Co. Ltd. v. CIT, [1969] 73 ITR 634 (SC) | That the High Court may decline to answer a question referred if it did not arise out of the order of the Tribunal, or if it is a question of fact, academic, or could not have been raised because it was not included in the application under the relevant provision. | The Court used this authority to justify declining to answer the perverse-finding question because it was not the question the assessee had specifically sought to have referred and, in any event, was a question of fact. |
| CIT v. Imperial Chemical Industries (India) (P.) Ltd., [1969] 74 ITR 17 (SC) | That a finding of fact is defective in law if unsupported by evidence or if perverse, but in a reference the party cannot challenge a finding of fact unless it has applied for reference of the specific question under the statutory provision (section 66(1) in the earlier Act). | The Court acknowledged that perversity is a ground to set aside a finding, but held that the procedural requirement to have specifically sought reference of such a question had not been satisfied by the assessee; this supported declining to answer the Court-framed question. |
| CIT v. Kamal Singh Rampuria, [1970] 75 ITR 157 (SC) | That in a reference it is not open to the assessee to challenge a finding of fact unless he has applied for reference of the specific question in the prescribed manner. | The Court cited this case to reinforce the procedural bar to attacking factual findings on reference unless the precise question has been properly framed and sought before the Tribunal. |
| CIT v. Kotrika Venkataswamy and Sons, [1971] 79 ITR 499 (SC) | Under the relevant provision (section 66(2) previously), the High Court may call for a statement of case if not satisfied with the Tribunal's refusal to state a case; however the High Court cannot be satisfied that the Tribunal was incorrect in not submitting a statement on a question that the Tribunal was never asked to consider. | The Court relied on this to hold that it could not properly require the Tribunal to state a case on a question which the Tribunal had not been asked to decide and which the assessee had not requested in the proper application. |
| Caltex (India), Ltd. v. The Commissioner Of Income-Tax, Bombay City, [1952] 21 ITR 278 (Bom) | An example where the High Court reframed the question referred because the original framing did not bring out the controversy clearly; the Court added words to clarify the dispute and answered accordingly. | The Court noted this authority as an example where reframing was used to clarify an obscurity, but distinguished the present case on the basis that the question framed here would either be answered against the assessee on the facts found or be academic; thus reframing was not appropriate. |
| Shivrajpur Syndicate Ltd. v. Commissioner Of Income-Tax, Bombay, [1962] 46 ITR 1205 (Bom) | An instance where the High Court, finding the Tribunal's phrasing unsatisfactory, reframed the questions to reflect the real controversy between the assessee and the revenue and answered accordingly. | The Court acknowledged this as another instance of permissible reframing for clarification but found the present circumstances materially different and insufficient to justify reframing in favour of the assessee. |
| Oriental Investment Co. Ltd. v. Commissioner Of Income Tax, Bombay, [1969] 72 ITR 408 (SC) | A Supreme Court decision where the Court modified the questions to reflect the real controversy and directed the proper questions (including restoring those originally suggested by the assessee) to be referred and answered. | The Court considered this authority (showing that in some cases questions may be modified to reflect the true dispute) but concluded that those principles did not warrant reframing in the present case because the specific procedural requisites were not met and the Court-framed question did not reflect a question the assessee had properly sought to have referred. |
| CIT v. S.P. Jain, [1973] 87 ITR 370 (SC) | An example where the Supreme Court considered whether a Tribunal's finding was perverse and answered the perversity question after noting that the revenue had specifically asked for that question in its application. | The Court cited this to show that perversity can be the subject of a reference when specifically sought; in contrast, in the present case the court-framed perversity question had not been specifically sought by the assessee before the Tribunal. |
Court's Reasoning and Analysis
The Court proceeded by focusing on procedural propriety and the scope of a High Court's powers when disposing of a reference arising from a Tribunal's order. The step-by-step analysis in the opinion is as follows:
- The Court reviewed the questions the assessee had asked to be referred under s. 256(1) and repeated under s. 256(2). It observed that the questions as posed by the assessee did not, on their face, raise a controversy as to whether the Tribunal's order was perverse.
- In particular, Question No. 2 (about the genuineness of the Rs. 35,000 loan) was noted to presuppose that the alleged creditor, G.L. Sharma, had confirmed the loan and had explained the source of the funds. The Court observed that if such confirmations and explanations had been established as facts, the question would have only one answer favourable to the assessee. However, because the Tribunal's factual finding was otherwise, the question either had to be answered against the assessee or would be academic.
- The Court observed that when the High Court directed the Tribunal to draw up a statement of case, it framed a new question (the perversity question) which had not been asked by the assessee at any earlier stage. The Court identified a procedural principle: where a party does not choose to raise a particular question before the Tribunal and before the High Court, the High Court is not bound and ought not to answer such a question if it is referred either suo motu by the Tribunal or pursuant to High Court directions.
- The Court considered the authorities cited by both sides. It accepted the legal propositions extracted from the cited precedents: that the High Court generally must accept the Tribunal's findings of fact unless the specific question challenging those findings has been properly and specifically sought; that the High Court's power to reframe questions is limited to clarifying obscurities and pin-pointing real issues and cannot be exercised to reopen factual enquiries that the Tribunal has concluded; and that perversity is a recognized ground to set aside a factual finding but must be invoked by the party in the correct procedural manner.
- Applying these principles to the instant case, the Court concluded that the preliminary objection raised by the revenue (that the assessee had not asked for the Court-framed perversity question before the Tribunal or the High Court) succeeded. The Court found that the assessee had not made the necessary specific request to refer the question of perversity in accordance with the established procedure and authorities.
- Consequently, the Court declined to answer the question as referred by it and also declined to reframe the question as the assessee had suggested, because in the Court's view the originally suggested Question No. 2 would either be answered against the assessee on the facts found or be an academic or purely factual question not properly before the Court.
Holding and Implications
Core Ruling: The Court sustained the revenue's preliminary objection and declined to answer the question referred (i.e., whether the Tribunal's finding that the Rs. 35,000 loan by G.L. Sharma was not genuine is perverse). The Court also declined to reframe the question as suggested by the assessee. The reference was disposed of accordingly and there was no order as to costs.
Implications:
- Direct effect: The reference was dismissed; the High Court did not examine or overturn the Tribunal's factual finding concerning the genuineness of the Rs. 35,000 loan.
- Procedural implication drawn by the Court: A party must specifically seek the referral of a question challenging a Tribunal's finding of fact in the proper statutory manner; absent such a specific request, the High Court should not answer a question (including a perversity question) that was not properly raised before the Tribunal or the Court.
- The opinion does not purport to set out a novel legal principle; it applies and follows previously stated authorities and accordingly does not announce a new precedent beyond reinforcing the settled procedural law described in the cited authorities.
The Judgment of the Court was delivered by
Dipak Kumar Sen, J.:— This reference under the Income-tax Act, 1961, arises from the income-tax assessment of M/s. P.C Sharma & Sons, the assessee, in the assessment year 1964–65, the previous accounting year having ended on the 31st March, 1964. At such assessment a cash credit of Rs. 35,000 was found in the name of one Ganeshilal Sharma in the books of the assessee. The ITO rejected the assessee's contention that it was a genuine loan and added back the said sum as income of the assessee from undisclosed sources. The AAC and the Tribunal both confirmed the order of the ITO.
2. The assessee made an application under s. 256(1) of the I.T Act, 1961, asking that the following questions be referred to this court:
“1. Whether, on the facts and in the circumstances, the reassessment proceedings under s. 148 of the I.T Act, 1961, was in accordance with law?
2. Whether the Tribunal was right in holding that the loan of Rs. 35,000 by Sri G.L Sharma, who confirmed the loan and explained the source thereof, was not a genuine one?
3. Whether the Tribunal was right in not considering the fact that the assessee having discharged the initial onus, the burden shifted on to the department?”
3. The Tribunal held that the said questions did not arise from the order of the Tribunal and dismissed the application of the assessee. Thereupon, the assessee made a further application under s. 256(2) to this court. It appears from the records that the assessee invited this court to direct the Tribunal to draw up a statement of case and refer the very same questions which it had raised before the Tribunal in its application under s. 256(1) of the Act set out hereinabove. This court, however, directed the Tribunal to draw up a statement of case in respect of the following question:
“Whether, on the facts and circumstances of the case, the finding of the Tribunal that the loan of Rs. 35,000 (rupees thirty-five thousand only) by Shri G.L Sharma is not genuine, is perverse?”
4. At the hearing Mr. Ajit Sengupta, learned counsel for the revenue, raised a preliminary point to the effect that the assessee not having asked for the question which has been referred either before the Tribunal in its application under s. 256(1) of the Act or before this court in its application under s. 256(2) thereof, this court should not answer the same. In support of his contentions Mr. Sengupta has cited the following as authority:
(a) India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC). This decision was cited for the following observations of the Supreme Court (p. 64):
“……in a reference, the High Court must accept the findings of fac made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application under section 66(1). If he has failed to file an application under section 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 one reason or the other.”
(b) Commissioner Of Income Tax West Bengal,Calcutta v. Smt Anusuya Devi, [1968] 68 ITR 750 (SC). This decision was cited for the following observations of the Supreme Court (pp. 756, 757):
“The High Court may only answer a question referred to it by the Tribunal: the High Court is however not bound to answer a question merely because it is raised and referred……… If the power of the High Court to refuse to answer questions other than those which are questions of law directly related to the dispute between the taxpayer and the department, and which, when answered, would determine qua that question the dispute, be granted, we fail to see any ground for restricting that power when by an erroneous order the High Court has directed the Tribunal to state a case on a question which did not arise out of the order of the Tribunal…… power to reframe a question may be exercised to clarify some obscurity in the question referred, or to pinpoint the real issue between the taxpayer and the department or for similar other reasons; it cannot be exercised for reopening an enquiry on questions of fact or law which is closed by the order of the Tribunal.”
(c) Lakshmiratan Cotton Mills Co. Ltd. v. CIT, [1969] 73 ITR 634 (SC). This decision was cited for the following observations of the Supreme Court (p. 647):
“Correctness of an order of the High Court calling for a statement of case may be challenged at the hearing of the reference and the court may decline to answer the question referred pursuant to the direction of the High Court, if it did not arise out of the order of the Tribunal, or is a question of fact or is academic or could not have been raised because it was not incorporated in the application under section 66(1).”
(d) CIT v. Imperial Chemical Industries (India) (P.) Ltd., [1969] 74 ITR 17 (SC). This decision was cited for the following observations of the Supreme Court (p. 23):
“It is true that the finding of fact will be defective in law if there is no evidence to support it or if the finding is perverse. But in the hearing of a reference under section 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for the reference of the specific question under section 66(1). In India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC), it was held 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 section 66(1). If the party concerned has failed to file an application under section 66(1) expressly raising the question about the validity of the finding of fact, he is not entitled to urge before the High Court that the finding is vitiated for any reason.”
(e) CIT v. Kamal Singh Rampuria, [1970] 75 ITR 157 (SC). This decision was cited for the following observations of the Supreme Court (pp. 161, 162):
“But in the hearing of a reference under section 66 of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of the specific question under section 66(1). In India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 (SC), 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 section 66(1). If the party concerned has failed to file an application under section 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 finding was vitiated for any reason. The same view has been expressed by this court in a later case in Commissioner of Income-tax v. Sri Meenakshi Mills Ltd., [1967] 63 ITR 609 (SC).”
(f) CIT v. Kotrika Venkataswamy and Sons, [1971] 79 ITR 499 (SC). This decision was cited for the following observations of the Supreme Court (p. 501):
“Under section 66(2) of the Act, the High Court may call for a state ment of case if the High Court is not satisfied about the correctness of the decision of the Tribunal refusing to state a case to the High. Court. The High Court cannot obviously be satisfied that the decision of the Tribunal in not submitting a statement on a question is incorrect when the Tribunal was never asked to submit a statement of case on that question.”
5. Dr. Debi Pal, learned counsel for the assessee, in reply contended, firstly, that the assessee had in fact raised the dispute which was covered by the question referred though the questions suggested by the assessee did not clearly bring out the same and, therefore, the High Court rightly reframed the question to bring into focus the actual dispute between the parties.
6. Dr. Pal contended in the alternative that if it be held that the dispute between the parties cannot be found in the question as referred, the same can be corrected or reframed by the court even at the hearing of the reference. In support of his contentions, Dr. Pal cited the following decisions:
(a) Caltex (India), Ltd.…Applicant; v. The Commissioner Of Income-Tax, Bombay City….*, [1952] 21 ITR 278 (Bom). In this case one of the questions which was referred by the Tribunal to the Bombay High Court was as follows:
“Whether the dividend income can be deemed under section 42 of the Act to accrue to the assessee-company in British India? At the hearing of the reference, the Bombay High Court held that the question raised by the Tribunal did not bring out clearly the controversy between the parties and the question was reframed by adding the words “as agents” after the words “assessee-company”, and was answered accordingly.
(b) Shivrajpur Syndicate Ltd. v. Commissioner Of Income-Tax, Bombay., [1962] 46 ITR 1205 (Bom). In this case on application of the assessee under s. 66(2) of the Indian I.T Act, 1922, the Bombay High Court directed the Tribunal to refer the following questions:
“(1) Whether, on general principles, the Tribunal was justified in upholding the addition of a proportionate part of the bonus for the earlier years paid in the accounting year to the cost of the stock on hand for the purpose of valuation?.
(2) Whether such addition was in any event unjustified having regard to the petitioner's regular method of accounting?
(3) In the event of the above questions being answered against the petitioners, whether the Tribunal was justified in revaluing the closing stock for the assessment year 1953–54, by adding a proportionate part of the amount of bonus and in refusing to revalue the opening stock in the same manner and on the same basis?”
The Bombay High Court held that the questions, though framed on the requisition by the court, had not been happily worded and did not bring out the real controversy between the assessee and the revenue, which was as follows:
“Whether the Tribunal was justified in law in holding that the proportionate amount of bonus paid by the assessee to its employees can be taken into account in determining the cost price of the closing stock? “The above question as framed by the court was substituted for question No. 1 as referred and was answered.
(c) Oriental Investment Co. Ltd. v. Commissioner Of Income Tax, Bombay, [1969] 72 ITR 408 (SC). In that case, the assessee applied to the Tribunal under s. 66(1) of the Act of 1922 for the following questions to be referred for the opinion of the High Court:
“(1) Whether, on the facts and in the circumstances of the case, the assessee-company can rightly be treated as a dealer in investments and properties?
(2) Whether the profits and losses arising from the sale of the shares, securities and immovable properties of the assessee-company can be taxed as business profits?”
The application of the assessee having been rejected by the Tribunal, the assessee made a further application under s. 66(2) of the said Act to the Bombay High Court, which was dismissed. Thereafter, the assessee obtained a special leave to appeal to the Supreme Court. The Supreme Court allowed the appeal and formulated the following two questions:
“(1) Whether there are any materials on the record to support the finding of the Income-tax Officer that the assessee-company was a dealer in shares, securities and immovable property during the assessment year in question?
(2) Whether the profits and losses arising from the sale of shares, securities and immovable properties of the assessee-company can be taxed as business profits?”
The High Court, thereafter, directed the Tribunal to state a case on the question as formulated by the Supreme Court and ultimately disposed of the reference in favour of the revenue. Against this decision there was a further appeal to the Supreme Court. The Supreme Court held that the questions which had actually been framed by the Supreme Court itself were not appropriate and did not reflect the real controversy between the parties, and therefore, it was in the interests of justice that the questions should be again modified and the questions as originally suggested by the assessee in its application under s. 66(1) of the said Act were held to be the proper questions. The Supreme Court set aside the judgment of the High Court and directed the Tribunal to draw up a statement of case on the said question and the High Court to dispose of the reference in accordance with law.
(d) CIT v. S.P Jain, [1973] 87 ITR 370 (SC). In this case, the following questions were referred to the High Court at the instance of the revenue:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in declining to consider the documents which were already on record and which the department wanted to adduce as evidence?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the purchase of the shares by the Rana was not a benami transaction was legally valid?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 10,80,000 from the total income of the assessee by holding that the Rana was not the benamidar of of the assessee?”
7. In the reference, the High Court sustained the order of the Tribunal. Thereafter, on a further appeal to the Supreme Court, it was held that in its application under s. 66(1) of the Indian I.T Act, 1922, the revenue had specifically asked for a reference on the following question:
“Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that a sum of Rs. 10,80,000 paid for the purchase of shares was not the assessee's own income was a perverse finding having regard to the evidence on record?”
8. The same question had been repeated in the application of the assessee under s. 66(2) of the Act. The Supreme Court held that perhaps the High Court thought that the questions Nos. 2 and 3, on which it had directed the Tribunal to state a case would cover within its ambit of the said question on perversity on which the revenue had asked for reference. Thereafter, the Supreme Court went on to consider the question of perversity and ultimately held that the findings of the Tribunal were wholly vitiated and no judicial tribunal could have arrived at such findings. The Supreme Court ignored the said findings of the Tribunal and answered the questions Nos. 2 and 3 referred to the High Court in the negative and in favour of the revenue.
9. In the instant case, the questions which were suggested by the assessee in its application under s. 256(1) and which were reiterated in its application under s. 256(2) of the said Act, do not ex facie raise a controversy as to whether the order of the Tribunal was perverse. Question No. 2 which comes nearest to the question referred is that whether the Tribunal was right in holding that the loan of Rs. 35,000 by Sri J.L Sharma who confirmed the loan and explained the source thereof, was not a genuine one. The said question appears to assume that it has been found or established that the alleged creditor, G.L Sharma, has confirmed the loan and has explained the source thereof in his hands. If it had been so found, then that question could have only one answer, i.e, an answer in favour of the assessee. The finding of the Tribunal being otherwise, the question has to be answered against the assessee or need not be answered as being academic. But on a question of fact it cannot be said that the assessee challenged the conclusion of the Tribunal on admitted or undisputed or settled facts as perverse. When this court directed the Tribunal to draw up a statement of case and refer the questions, which are now before us, it appears to have framed a new question which had not been asked for by the assessee up to that stage.
10. The law on the point, appears to be well settled. If a party does not choose to raise a particular question before the Tribunal and before the High Court, then even if such a question is referred either by the Tribunal suo motu or pursuant to the directions of the High Court, the High Court, while disposing of the reference, is not bound and ought not to answer the same.
11. The alternative contention of Dr. Pal that we should again reframe the question in the form in which it was originally asked for by the assessee also does not stand scrutiny. We have already indicated that the question No. 2 as originally suggested by the assessee has to be, (a) answered against the assessee on the facts found; or (b) need not be answered as being a question of fact or an academic question.
12. For the reasons as stated above, the preliminary objection raised by Mr. Sengupta succeeds. We decline to answer the question as referred. We also decline to reframe the said question as suggested on behalf of the assessee. The reference is disposed of accordingly. There will be no order as to costs.
Bimal Chandra Basak, J.:— I agree.
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