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Commissioner Of Income-Tax v. Dhawan Investment And Trading Co. Ltd.
Factual and Procedural Background
This is a reference application in which the Tribunal referred two questions to this Court. The assessee is an investment company deriving income from interest and dividends and engaged in purchase and sale of shares. The assessee claimed a deduction of Rs. 36,000 per year as rent for Flat No. 84, 6C Middleton Street, Calcutta, payments being made to Nitin Dhawan (a director until 16-2-1981 and thereafter an employee). A registered agreement stated an advance of Rs. 1,08,000 to be adjusted against future rent at Rs. 36,000 per year. The Income-tax Officer disallowed the rent deduction after an adverse inspector's report concerning use/signage of the premises. The Commissioner of Income-tax (Appeals) allowed the rent. The Tribunal affirmed the appellate finding. Separately, the assessee claimed a loss of Rs. 49,210 from share dealings; the Income-tax Officer disallowed it for inadequate records and reliance on a reported practice of bogus share claims (referring to McDowell and Co. Ltd. v. Commercial Tax Officer). The Commissioner of Income-tax (Appeals) sustained disallowance; the Tribunal examined records (including stock-exchange quotations and broker transactions), found the transactions genuine and allowed the loss. The Tribunal referred the two questions to this Court for opinion.
Legal Issues Presented
- Whether, the finding of the Tribunal relating to the allowance of deduction of business expenditure of Rs. 36,000 as and by way of payment of alleged rent is based on any relevant evidence or otherwise perverse?
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the share loss of Rs. 49,210 in the purchase and sale of share?
Arguments of the Parties
Revenue's Arguments
- For the rent deduction: the Income-tax Officer relied on an inspector's adverse report (noting absence of signboard and non-use for business) and disallowed the rent.
- For the share loss: the Income-tax Officer disallowed the loss due to inadequate/insufficient records and reliance on perceived prevalent practice of bogus share claims; the ITO cited McDowell and Co. Ltd. v. Commercial Tax Officer.
- The Commissioner of Income-tax (Appeals) agreed with the ITO in respect of the share-loss disallowance, considering the dealings possibly bogus and noting an alleged deliberate sale at lower rates to create loss.
Assessee's Arguments
- For the rent deduction: payment of rent was made to Dhawan; there was a registered agreement showing an advance of Rs. 1,08,000 to be adjusted against rent; local practice in Calcutta includes hiring premises and giving them to employees/directors; staff were accommodated to work at the premises.
- For the share loss: share transactions were effected through registered share brokers; stock-exchange quotations and recorded rates (shown in the paper book) corroborated the transactions and prices; the loss claim was supported by documentary material and should not be rejected on conjecture about bogus practices.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| McDowell and Co. Ltd. v. Commercial Tax Officer, [1985] 154 ITR 148 (SC) | Relied upon by the Income-tax Officer to support disallowance of share-loss claims on grounds of bogus transactions. | The decision was relied upon by the ITO, but the Tribunal's factual examination (registered brokers, stock-exchange quotations, paper-book evidence) led the Court to affirm the Tribunal's contrary factual conclusion; the Court did not uphold the ITO's reliance in this case. |
Court's Reasoning and Analysis
Rent deduction: The Commissioner (Appeals) accepted local practice and the registered agreement showing an advance adjustable against rent and allowed the deduction. The Tribunal held that the absence of a signboard was immaterial, staff were accommodated at the premises, the advance constituted payment towards rent, and the caretaker's adverse statement (used by the ITO) was recorded without opportunity for cross-examination and may be unreliable. The Tribunal treated the payment as rent used for business purposes; these concurrent factual findings were supported by materials on record and not perverse.
Share-loss: The ITO and the Commissioner doubted genuineness of the transactions and pointed to inadequate record and alleged practices of bogus claims. The Tribunal examined stock-exchange quotations, broker-mediated transactions and paper-book pages cited in the record, found the quotations and rates correct and transactions recorded, and concluded the loss was genuinely incurred. The Tribunal rejected disallowance based on conjecture. The Court affirmed that the Tribunal, as final fact-finder, had materials supporting its findings and that those findings were not perverse.
Holding and Implications
The application is disposed of; both reference questions are answered in favour of the assessee and against the Revenue.
Implications: The Tribunal's allowance of the rent deduction of Rs. 36,000 and the share-loss claim of Rs. 49,210 is upheld. The decision affirms the Tribunal's factual findings on the records before it; no broader precedent or novel principle was announced in the opinion beyond the Court's endorsement of the Tribunal's fact-based conclusions.
Y.R Meena, J.:— In this reference application, the Tribunal was directed to refer the following questions for the opinion of this court:
“1. Whether, the finding of the Tribunal relating to the allowance of deduction of business expenditure of Rs. 36,000 as and by way of payment of alleged rent is based on any relevant evidence or otherwise perverse?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the share loss of Rs. 49,210 in the purchase and sale of share?”
2. The assessee is an investment company. It derives income from interest and dividend. It is also engaged in purchase and sale of shares. Before the Assessing Officer, the assessee, inter alia, claimed deduction of Rs. 36,000 being rent in respect of the premises at Flat No. 84, at 6C, Middleton Street, Calcutta. The payment was made to one Nitin Dhawan, who is stated to be one of the directors of the assessee-company, up to February 16, 1981. Thereafter he became an employee of the assessee-company. The company has hired the premises on rent from June 1, 1981, in terms of a registered agreement to the effect that the assessee had given an advance of Rs. 1,08,000 to the said Dhawan and that amount was to be adjusted against the rent, that is, Rs. 36,000 per year. The Income-tax Officer has disallowed the rent on the ground that he has deputed an inspector to enquire as to whether any sign board of the assessee-company was there and whether the premises are being used by the assessee for its business purposes. The report of the inspector was adverse to the case made out by the assessee. Therefore, the claim of rent of Rs. 36,000 paid each year was disallowed.
3. In appeal, the Commissioner of Income-tax (Appeals) has pointed out that the Income-tax Officer is not familiar with the facts and practice prevailing in Calcutta and in Calcutta it is very common to take the premises on hire and giving it to its employee or director. Rent payable can be adjusted against the amount advanced to the landlord. Thus, he allowed the claim of the assessee and deleted the addition made by the Income-tax Officer on this count.
4. In appeal before the Tribunal, the Tribunal has pointed out that putting a sign board on the premises is not a material point. The material point is that the assessee-company's staff was accommodated to work for the assessee-company. The advance payment was made towards the rent to adjust the same towards future rent. The statement of the caretaker which was based for disallowance was recorded behind the back of the assessee. No opportunity was given to cross-examine him and even the caretaker may not be aware of the full details regarding the occupation of the premises. Payment of rent by the assessee has not been denied. Whether any business is being carried on by the assessee-company or it was taken for the purpose of residence of one of its employees or directors, that is immaterial. In both the cases the premises has been taken on rent, that is, for the purpose of business. The Tribunal finally concurred with the facts found by the Commissioner of Income-tax (Appeals). Thus whether the premises were taken on rent for the purpose of business or not, the concurrent finding is that it was taken for the purpose of business. Therefore, the questions raised on the finding of facts, findings cannot be said to be perverse on the materials discussed by the Commissioner of Income-tax (Appeals) and the Tribunal.
5. The next question is with regard to allowance of loss of Rs. 49,210 in purchase and sale of shares. The assessee-company's claim before the Income-tax Officer is that the assessee-company suffered loss to the tune of Rs. 49,210 in share dealings. The Income-tax Officer has disallowed the loss from share business on the ground that the record was inadequate which is maintained in respect of share dealings. The Income-tax Officer mainly referred to the prevalent practice that there are bogus claims regarding share dealings. He placed reliance on the decision of McDowell and Co. Ltd. v. Commercial Tax Officer, [1985] 154 ITR 148 (SC).
6. In appeal the Commissioner of Income-tax (Appeals) has also agreed with the action adopted by the Income-tax Officer. According to the Commissioner of Income-tax (Appeals) it appears that dealings in shares are bogus. He pointed out that the assessee has deliberately sold, 7,000 shares at a lower rate to incur the loss.
7. In appeal before the Tribunal, the Tribunal on examination of the facts found that the findings arrived at by the Income-tax Officer and the Commissioner of Income-tax (Appeals) do not appear to be correct. The transactions effected are doubtless and it is apparent that a lot of evidence requires to be considered. The transactions were made through registered share brokers. The rates quoted of the said shares were found to be correct from pages 48 to 82 of the paper book. The transactions are also found place in the said quotations.
8. When the share transaction was made through the registered broker of stock exchange, the quotations of shares were found correct as per the record of the stock exchange. Whether the assessee sold 7,000 or 70,000 shares does not make any difference. It is the assessee's concern how to run the business. The claim of loss should not be disallowed on conjectures and surmises such as that there is a practice in Calcutta to claim bogus loss in share dealings. The Tribunal being the final fact-finding body had found the fact on the basis of the materials on record that the assessee has suffered the loss in share dealing to the tune of Rs. 49,210. These findings cannot be said to be perverse on the basis of the materials considered and discussed in the order of the Tribunal. In the result so far as the question relates as to whether the finding of the Tribunal is based on materials on record we answer it in the affirmative, that is, in favour of the assessee and against the Revenue. So far as the question raised as to whether the finding is perverse, we answer it in the negative, that is in favour of the assessee and against the Revenue. Similarly, we answer question No. 2 relating to share loss of Rs. 49,210 in the affirmative, that is, in favour of the assessee and against the Revenue.
9. The application is disposed of.
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