Jiyajeerao Cotton Mills Ltd. vs Commissioner Of Income-Tax And Excess
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Not extracted
Decision Date: 21 May, 1958
Coram: A.K. Sarkar, P.B. Gajendragadkar, Venkatarama Aiyar
In this case the matter was styled Jiyajeerao Cotton Mills Ltd. versus Commissioner of Income‑Tax and Excess and was decided on 21 May 1958. The judgment was delivered by Justice Venkatarama Aiyar and the bench comprised Justices A.K. Sarkar and P.B. Gajendragadkar. The two appeals before the Court arose from proceedings instituted under section 34 of the Indian Income‑Tax Act, 1922 (hereinafter referred to as “the Act”) for the purpose of assessing a sum of Rs 27,30,094 that the appellant had received in the accounting year 1942‑1943. Jiyajeerao Cotton Mills Ltd. was incorporated as a public limited company in 1921 under the Gwalior Companies Act, at a time when Gwalior was an independent state. The company engaged in the manufacture and sale of textiles, maintained its registered office at Gwalior and, for the purposes of the Act, was characterised as a non‑resident entity. Its managing agents were Birla Brothers Ltd., a private limited company registered in British India. The central issue before the Court was whether the amount of Rs 27,30,094, which the appellant received during the 1942‑1943 year, fell within the scope of tax liability under the Act. The appellant acknowledged receipt of the amount and admitted that it represented profits derived from certain forward contracts in Jarilla cotton. However, the appellant argued that those contracts had been entered into at Gwalior with three local brokers—Lashkar Trading Company, Banwarilal Shivkumar and Meghraj Mundra—and that the contractual terms expressly provided for delivery of the goods and payment of prices at Gwalior. Accordingly, the appellant maintained that the Rs 27,30,094 consisted of settlement differences payable in Gwalior, that the profits therefore accrued wholly at Gwalior, and that, as a result, the sum should not be subject to taxation under the Act.
The Revenue Department opposed this view, contending that the contracts which generated the Rs 27,30,094 profit had in fact been concluded by the appellant’s managing agents with the firm of Jwaladutt Kishanprasad located in Bombay, and that the profits had consequently accrued in Bombay, making them taxable under the Act. Both parties agreed that, in the final analysis, the sum of Rs 27,30,094 received by the appellant could be traced back to the firm of Jwaladutt Kishanprasad and had been received from that firm. The appellant, however, submitted that this tracing did not resolve the question of the place of accrual. According to the appellant’s description, the sequence of dealings was as follows: the appellant placed its orders for the purchase or sale of cotton with the three Gwalior brokers mentioned above; each broker, in turn, placed corresponding orders for the same quantity of cotton with the firm of J. R. Pillani in Gwalior; this firm was a branch office of Jwaladutt Kishanprasad of Bombay and conveyed the orders received from the brokers to its head office in Bombay. The appellant argued that because the contractual chain originated in Gwalior and the settlement differences were paid to the appellant via the local brokers, the profit did not accrue in Bombay and therefore should not be subject to tax under the Act.
In the transactions that gave rise to the profit of Rs 27,30,094, the appellant argued that the contracts attracting tax were not concluded directly with Jwaladutt Kishanprasad of Bombay. The appellant maintained that, although the sum could ultimately be traced to that firm, the amount was actually due from the three Gwalior brokers and not from the Bombay firm. Consequently, the appellant contended that the profit did not arise in British India and therefore should not be subject to tax under the Act. The appellant explained that after the contracts were settled on the clearing day, the Bombay firm of Jwaladutt Kishanprasad transmitted the payable monies to its Gwalior branch, J. R. Pillani, Gwalior. That branch then passed the money to the brokers, who finally paid the amounts owed to the appellant under their respective agreements. According to the appellant, if these factual assertions were correct, the entire sum of Rs 27,30,094 would be exempt from taxation because no part of it would have accrued or arisen within the territory of British India. Thus, the central issue for the Court was whether the appellant’s version of the facts had been properly established.
The Income‑Tax Officer, in an order dated 23 March 1948, held that the forward contracts had been entered into by the appellant’s managing agents in Bombay, that the profits had accrued in Bombay, and that the three Gwalior brokers were merely dummy parties intended to conceal the true nature of the dealings. This finding was affirmed by the Appellate Assistant Commissioner on appeal on 14 November 1949. Dissatisfied, the appellant appealed to the Appellate Tribunal, which on 26 July 1950 remanded the matter for a fresh investigation into the role of the various intermediaries that formed the chain of contracts—from the appellant’s agreements with the Gwalior brokers to the ultimate payments made by the brokers to the appellant. Following the Tribunal’s directive, the Appellate Assistant Commissioner took new evidence, examined seven witnesses, and, after a detailed analysis, reported on 17 August 1951 that the forward contracts had actually been executed with Jwaladutt Kishanprasad by G. D. Birla and R. D. Birla, either personally or by telephone in Bombay, and that the contract notes involving the three brokers were fabricated. The Tribunal, upon rehearing, issued an order on 28 February 1952 confirming the Commissioner’s conclusions. The appellant then applied under section 66(1) of the Act for a referral of certain questions to the Court, but the Tribunal dismissed the application on 13 June 1952, deeming the issues to be pure questions of fact. Subsequently, the appellant sought a similar referral from the High Court of Bombay under section 66(2) of the Act, an application that was also rejected.
In this matter the appellant first applied to the Tribunal for an order directing it to refer certain questions to the Court. That application was dismissed by Chief Justice Chagla and Justice Bhagwati on 6 August 1952. Against that dismissal the appellant filed Civil Appeal No 204 of 1954, for which leave was granted by this Court. In addition, anticipating any further difficulty, the appellant also obtained special leave to appeal the Tribunal’s earlier order dated 28 February 1952; that appeal is recorded as Appeal No 163 of 1958.
The appellant was represented by counsel who, for convenience, identified himself simply as the learned counsel for the appellant. He pointed out that the two appeals arise from the same factual and legal controversy and therefore he would present a single argument applicable to both. Consequently, the judgment rendered below is intended to decide the issues common to both Civil Appeal No 204 of 1954 and Appeal No 163 of 1958.
At the very beginning the Court had to consider whether any question of law arose from the Tribunal’s order. Only if a legal question existed could the Tribunal’s decision be taken up by this Court under section 66 of the Act. Put differently, if the Tribunal’s decision was purely factual and depended on the assessment of evidence, the Court would not intervene under Article 136 of the Constitution, which limits appellate interference to legal errors.
The specific dispute before the Court was whether the amount of Rs 27,30,094 that the appellant received as profit in the financial year 1942‑1943 should be treated as taxable under the Act. That issue, in turn, hinged on determining the place where the forward contracts that generated the profit were entered into. The appellant maintained that the contracts were concluded in Gwalior, whereas the Tribunal had found that they were concluded in Bombay. The determination of the place of contract formation is a factual enquiry; therefore, the Tribunal’s finding on that point would ordinarily not be open to challenge in these proceedings.
The appellant’s counsel did not dispute that the question is factual, but he argued that a factual finding can be considered erroneous in law when it is unsupported by any evidence or when it is perverse. The Court referred to its recent decision in Meenakshi Mills v. Commissioner of Income‑Tax, which set out the following principles: (1) when the point for determination is a pure question of law, such as the construction of a statute or a title document, the Tribunal’s decision may be referred to the Court under section 66(1); (2) when the point involves a mixture of law and fact, the Tribunal’s factual finding is final, but the legal effect of that finding may be reviewed by the Court; (3) a factual finding may be attacked under section 66(1) as a legal error if it is unsupported by evidence or is perverse; and (4) even if a finding is derived by inference from other basic facts, it remains a factual finding and its character does not change.
The Court observed that an inference drawn from other basic facts does not change its nature as a finding of fact. The counsel for the appellant, Mr. Kolah, argued that the Tribunal’s finding was legally erroneous because it was unsupported by any evidence and, even if some evidence existed, the finding was perverse. He maintained that this argument fell squarely within proposition number three of the earlier cited authority, which permits an appellate court to examine a finding of fact when it is unsupported or perverse. Consequently, the Court deemed it necessary to scrutinise the record not to decide whether the Tribunal had correctly interpreted the evidence or reached a proper conclusion, but solely to determine whether any evidence existed to support the Tribunal’s finding and whether the finding could, on the basis of that evidence, be reasonably arrived at.
From this standpoint, the Court posed the specific question: what evidence supported the Tribunal’s conclusion that the forward contracts generating profits of Rs 27,30,094 were entered into in Bombay rather than in Gwalior? The Tribunal’s answer relied on the direct testimony of Mr J R Pillani, which was said to be corroborated by circumstantial evidence. Mr Pillani was identified as the proprietor of two firms: Jwaladutt Kishanprasad in Bombay and J R Pillani in Gwalior. The Court noted that his testimony was crucial because the determination of whether the appellant’s contracts were executed in Gwalior or Bombay depended, to a considerable extent, on the authenticity of the transactions of these two linked firms.
According to Mr Pillani’s evidence, the forward contracts in question were executed with the Bombay firm Jwaladutt Kishanprasad by G D Birla and R D Birla, sometimes in person and sometimes over the telephone. He further stated that the profits earned from these contracts were initially paid to Cotton Agents Ltd., a Birla concern in Bombay. Subsequently, it was deemed advisable not to make any further payments in Bombay; therefore, Cotton Agents Ltd. returned the amounts to the Bombay firm, which then, under the direction of the Birlas, transferred the sums to Mr J R Pillani in Gwalior.
Mr Pillani also testified that at the outset of the transactions, the parties’ names had not been fixed. Consequently, when the contracts were first recorded in the books of Jwaladutt Kishanprasad, the party columns were left blank, and only later was the name of J R Pillani, Gwalior, entered. The Court observed that if this testimony is accepted—as it had been by the Income‑Tax authorities—then the contracts must be regarded as having been concluded in Bombay, and the subsequent insertion of J R Pillani’s name would appear to be a device intended to conceal that fact. Finally, the Court noted that the counsel for the appellant was highly critical of this evidence and contended that it contradicted all other evidence in the case, was worthless, and was demonstrably false in material particulars.
The counsel for the appellant argued that the statement made by Mr. Pillani conflicted with all other evidence in the case, that it was completely worthless, and that it was demonstrably false in material particulars. He contended that the evidence contained serious infirmities, that the Tribunal had given it little or no consideration, and that, as a result, the Tribunal’s order was fundamentally flawed because it was based on misdirections and omissions. The Court proceeded to examine these contentions. The most significant issue centred on Mr. Pillani’s allegation that, during the early stages of the dealings, profits were paid into the account of Cotton Agents Ltd., Bombay, and only later were those profits credited to J. R. Pillani of Gwalior. In order to follow Mr. Kolah’s argument on this point, the Court noted that J. R. Pillani operated two separate businesses in Bombay: a cotton business carried on in the name of Jwaladutt Kishanprasad and a share‑trading business carried on in his own name. The Court then referred to an abstract of transactions extracted from the accounts of Jwaladutt Kishanprasad that were recorded in the name of J. R. Pillani, Gwalior. The abstract listed entries such as a credit of Rs 2,52,576 on 29‑1‑1943, a debit of Rs 2,00,000 to Cotton Agents Ltd., Bombay on 4‑2‑1943, a debit of Rs 2,28,250 on 5‑2‑1943, a debit of Rs 2,50,000 to Cotton Agents Ltd., Bombay on 5‑2‑1943, a credit of Rs 5,65,500 to J. R. Pillani, Bombay on 1‑3‑1943, a debit of Rs 5,66,000 from J. R. Pillani, Bombay (with Rs 5,65,000 of this amount paid to Cotton Agents Ltd. by J. R. Pillani, Bombay), a credit of Rs 4,62,750 to J. R. Pillani, Gwalior on 3‑3‑1943, and a cheque issued by Cotton Agents Ltd., Bombay on 11‑3‑1943 in favour of J. R. Pillani, Bombay for Rs 9,50,000, which was then credited to Jwaladutt Kishanprasad. The Court highlighted that the entry concerning Rs 9,50,000 was crucial. If that sum represented profits from cotton transactions, it would strongly corroborate Mr. Pillani’s claim that the profits were first paid to Cotton Agents Ltd., Bombay, and only later transferred to J. R. Pillani, Gwalior after appropriate adjustments. Consequently, the appellant’s cross‑examination sought to demonstrate that the Rs 9,50,000 had no connection with cotton contracts. During that examination, Mr. Pillani was asked whether J. R. Pillani, Bombay, maintained a current account with Cotton Agents Ltd.; he replied in the negative. Thereafter, Mahadeo Singhji, a director of Cotton Agents Ltd., was examined and he asserted that the Rs 9,50,000 had been paid to the credit of the current account that J. R. Pillani, Bombay, held with the company, and that the amount did not represent profits from cotton contracts. Mr. Kolah then forcefully argued that this testimony disproved the narrative that the money was first paid to Cotton Agents Ltd. and subsequently transferred to J. R. Pillani, Gwalior, and that Mr. Pillani’s evidence on this point was plainly false, a point that the Tribunal had failed to address in its order.
It was observed that the Tribunal made no reference in its order to the claim that the evidence alleging falsity was inaccurate, even though the claim had been raised. The record showed that J. R. Pillani indeed possessed a current account with Cotton Agents Ltd., and that a sum of Rs 9,50,000 had been credited to that account. When this fact was placed before him, he explained that the account, although appearing to be a current account, was actually maintained in connection with dealings in shares and was not a conventional current account. The earlier denial by Pillani that he had any such account could therefore be regarded as either an inaccuracy or an outright falsehood; however, the Court considered whether that discrepancy was material to the issue at hand. The point of relevance, the Court held, was whether the credited amount of Rs 9,50,000 related to cotton transactions or to the share business. Evidence demonstrated that two payments – Rs 2,00,000 on 4 February 1943 and Rs 2,50,000 on 5 February 1943 – were made to Cotton Agents Ltd. by Jwaladutt Kishanprasad, not by J. R. Pillani of Bombay, and these payments were clearly linked to cotton contracts rather than to share dealings. In addition, two later payments – Rs 5,65,000 on 1 March 1943 and Rs 4,62,750 on 3 March 1943 – were made by Jwaladutt Kishanprasad in favour of J. R. Pillani of Bombay, who in turn transferred those amounts to Cotton Agents Ltd. The chronology thus suggested that the original transactions were between Jwaladutt Kishanprasad and Cotton Agents Ltd.; from 1 March 1943 they were routed through J. R. Pillani of Bombay; and on 11 March 1943 both Cotton Agents Ltd. and J. R. Pillani of Bombay were removed from the chain, with J. R. Pillani of Gwalior entering the picture. These facts permitted the Tribunal to reasonably conclude that the transactions occurred as described by Pillani. The appellant also argued that the accountant of Jwaladutt Kishanprasad, Gaurishanker Narandas, did not corroborate Pillani’s version. The Court found this contention inaccurate. The accountant initially testified that the relevant entries in the books were left blank, but later the name of J. R. Pillani of Gwalior was entered. He further stated that certain payments had been made to Cotton Agents Ltd., received back through J. R. Pillani of Bombay, and subsequently forwarded to J. R. Pillani of Gwalior. When cross‑examined later, he clarified that his testimony was based on information supplied by J. R. Pillani rather than on his own personal knowledge, yet he reiterated that he had observed the blank entries being filled in subsequently. In this respect, the accountant’s evidence lent support to the version put forward by Pillani.
The argument that profits transferred by Jwaladutt Kishanprasad from Cotton Agents Ltd. to J. R. Pillani, Gwalior, should have appeared in the accounts of the latter, that those accounts were kept with the Income‑Tax Commissioner, that they were under departmental control and had been withheld, and that the Tribunal had failed to refer to this circumstance, was found to lack substance. Even if it were assumed that the entries in those withheld accounts would have shown that the transactions occurred as the appellant claimed, such an assumption would not alter the essential finding. If the appellant’s arrangement with Jwaladutt Kishanprasad was indeed the one described in the deposition of J. R. Pillani, then the books of the Gwalior firm would naturally have been kept in accordance with that arrangement, and the existence of such entries would, by itself, add little to the enquiry. In this connection, it was noted that, according to Pillani, the Gwalior branch was actually operated by employees of the Birla group, a statement that the Appellate Assistant Commissioner had accepted as true.
Having addressed the appellant’s criticisms of the direct and positive evidence that supported the Tribunal’s finding that the contracts were concluded at Bombay, the Court turned to the other side of the issue and examined the evidence presented to show that the agreements were made in Gwalior. The Income‑Tax authorities had established several factual points. First, the three brokers whose names appeared on the contracts did not, given their limited financial means, seem capable of handling transactions of the large magnitude involved. These brokers had no prior experience in cotton futures before the present contracts, nor did they engage in such activity thereafter. According to the authorities, the brokers possessed no bank accounts, and a sum of approximately Rs 30 lakhs was purportedly paid to them in cash by J. R. Pillani, Gwalior, after which the same amount was handed over in cash to the appellant. The brokers produced no accounts to substantiate their dealings, and the statements (ankdas) they eventually produced were discovered to have been freshly drafted at a late stage. When the appellant’s manager, Durgaprasad Mandalia, was questioned about the securities he held as security for the massive transactions entered into with persons of such modest means, he replied that the counterparties were “men of character.” In a similar line of questioning, Sagarmal Dingliwala, the manager of J. R. Pillani, Gwalior, responded that “this business was of Jiyajeerao Cotton Mills, Ltd.” The appellant, in reality, had genuine large‑scale transactions with Cotton Agents Ltd., Gwalior, yet when Durgaprasad Mandalia was asked why these transactions were not routed through that firm, he could not provide a satisfactory explanation. He was likewise unable to explain why the appellant did not deal directly with J. R. Pillani, Gwalior. The learned Solicitor‑General suggested that if the appellant’s purpose in creating contracts in Gwalior was to conceal its dealings with Jwaladutt Kishanprasad behind a “veil,” such a strategy could not be effectively achieved by merely placing the contracts in the name of J. R. Pillani, Gwalior, because that veil would be too thin to disguise the true nature of the contracts.
The Court observed that the appellant could not hide its true contractual relationship by merely placing the transactions in the name of J. R. Pillani, Gwalior, because that company was merely a branch of the appellant and therefore the concealment would have been too thin to mask the actual substance of the agreements. The Court accepted that this observation carried considerable weight. When the manager of the appellant, Durgaprasad Mandalia, was questioned as to why the orders were not placed directly with Cotton Agents Ltd., Bombay, or with J. R. Pillani, Bombay, he replied that the appellant’s policy was to avoid conducting any business in British India. Counsel for the respondent, Mr Kolah, argued that arranging business in a manner that evaded taxation did not in itself constitute any impropriety. The Court rejected that contention, holding that while every individual has the right to structure his affairs so as to minimise tax liability, such arrangements must be genuine and not a sham or fictitious device. Consequently, the issue before the Court was whether the contracts entered into with the three brokers were authentic transactions or merely a façade designed to evade tax.
The Court then turned to the accounts produced by the appellant. It noted that the transactions with the three brokers had been recorded in a ledger called the Kherij Khata, which the appellant claimed was used for parties with only minor dealings whose accounts were settled promptly. The Court found this description untenable because the transactions were neither minor nor settled in a short period; they extended over several months and involved numerous settlements, with the alleged payments to the brokers not made until 15 March 1943. Moreover, there were no regular ledgers kept in the names of the brokers, and the entries in the Kherij Khata were merely journal entries. Owing to these deficiencies, the Income‑Tax authorities declined to assign any monetary value to the entries. Mr Kolah further contended that the contracts between the appellant and the three brokers expressly identified the parties as principals dealing with other principals, contained clauses for delivery and payment at Gwalior, and therefore should be upheld as valid. The Revenue, however, pointed out that the contracts stipulated that the business must be conducted in accordance with the rules and bye‑laws of the East India Cotton Association, Bombay, and specifically invoked bye‑law No. 44‑A, which declared that any contract made subject to those bye‑laws would be deemed wholly executed in Bombay, with delivery of goods also required to occur in Bombay. On this basis, the Income‑Tax Officer concluded that the contracts had been fabricated to support the appellant’s stated position. Additionally, Mr Kolah argued that the testimony of the Birla parties would have been material to determine whether the contracts were settled in Bombay as the Revenue alleged, and he complained that the order of remand directing that their evidence be taken had not been acted upon, characterising this omission as a serious procedural irregularity.
The petitioners argued that the failure to take the evidence of the Birla parties was a serious irregularity, and they cited the portion of the order of remand that directed that “the managing director of the assessee company or rather the person responsible for ordering these transactions on behalf of the assessee company should also be similarly examined.” The Court interpreted this direction as indicating that all individuals connected with the multiple links in the chain of contracts and the series of payments should be examined in order to uncover the true facts. In that context, the managing director was specifically mentioned as the person most likely to have entered into the transactions. Durgaprasad Mandalia, who was the manager of the appellant company, gave testimony that he had routed the present transactions through brokers, and that testimony was taken into consideration. The Court observed that nothing prevented the Birla parties from giving their evidence if they so desired, and there was no record of any objection in the lower court that their evidence had been omitted. Consequently, the petitioners’ contention regarding the omission of Birla evidence was found to be without substance. The Court then noted that it had examined all the submissions raised on behalf of the appellant in considerable detail. It clarified that it was not acting as a court of appeal on factual determinations, but rather was reviewing the record to see whether any misdirection or failure to give direction had occurred that could have affected the outcome. Finding none, the Court held that the Tribunal’s finding could not be attacked. The petitioners further contended that even if the contracts with the brokers were sham, the result would merely substitute J. R. Pillani of Gwalior in their place, and that the contracts would still have been concluded at Gwalior. However, the appellant had not pleaded that the brokers were nominal parties and that the contracts were with J. R. Pillani; instead, it maintained that it had no privity of contract with J. R. Pillani and that its contracts were only with the brokers. Another submission was that the contracts should be taken to have been concluded at Bombay by the Birlas and not by the appellant, a proposition directly opposite to the appellant’s own position that the contracts were entered into with the brokers at Gwalior. Because the profits were actually received by the appellant, the Court regarded this latter contention as wholly untenable. In conclusion, the Court dismissed both appeals. It ordered that the respondent be awarded costs in Civil Appeal No. 204 of 1954, while each party was to bear its own costs in Civil Appeal No. 163 of 1958, and it affirmed that the appeals were dismissed.