Shri Kanhaiyalal Lohia vs The Commissioner Of Income-Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeals Nos. 347 to 350 of 1960

Decision Date: 17 July 1961

Coram: M. Hidayatullah, S.K. Das, J.C. Shah

In the matter styled Shri Kanhaiyalal Lohia versus The Commissioner of Income‑Tax, West Bengal, the Supreme Court delivered its judgment on 17 July 1961. The judgment was authored by Justice M Hidayatullah, who sat with Justices S K Das and J C Shah. The official citation of the decision is 1962 AIR 1323 and 1962 SCR (2) 839, and it is referenced in several citator entries including F 1962 SC1326 (5), F 1962 SC1621 (115), and RF 1963 SC 835 (2). The case concerned an appeal arising under the Income‑Tax Act, 1922 (Eleventh Amendment), specifically sections 66(1), 66(2) and 66(a), and dealt with the procedural question of whether an appeal from an order of the Tribunal could bypass a High Court decision.

The appellant, Shri Kanhaiyalal Lohia, had supported his brother and nephew for many years while they were not engaged in any work. In 1943 he made a monetary gift of approximately Rs 7,60,000 to them, a sum that required him to overdraw his bank account and incur interest on the borrowed amount in order to raise the funds. In addition to this gift, the appellant transferred portions of his business enterprises to the two relatives. He explained that these transfers and gifts were intended to establish the brother and nephew in independent business ventures. The Income‑Tax Officer examined the gifts and concluded that they were not bona‑fide, consequently assessing the income of all the transferred businesses as belonging to the appellant.

To support his case, the appellant produced letters from various businessmen attesting to the legitimacy of the transactions. One such businessman, identified only as “M ,” was examined by the Income‑Tax Officer without prior notice to the appellant. Later, the appellant’s counsel obtained a copy of M’s statement and requested that M be summoned for cross‑examination. When the date for cross‑examination arrived, neither the appellant nor the witness appeared. The appellant consequently filed a petition under section 66(1) of the Income‑Tax Act before the Tribunal, seeking to refer several questions of law to the High Court. The Tribunal referred only one of the questions and declined to refer the remaining questions.

In the High Court, the sole question referred by the Tribunal was decided against the appellant, an admission made by his own counsel. The appellant also moved the High Court under section 66(2) of the Act, asking that the remaining questions be referred, but the High Court rejected this application. Instead of appealing the High Court’s two orders, the appellant chose to file appeals against the Tribunal’s orders. In support of his position, the appellant relied on two earlier Supreme Court decisions, namely Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income‑Tax and Baldev Singh v. Commissioner of Income‑Tax, arguing that an appeal to the Supreme Court was nevertheless competent.

The Supreme Court held that the appellant’s appeals were incompetent, relying on the precedents set in Chandi Prasad Chokhani v. State of Bihar and The Indian Aluminium Co., Ltd. v. Commissioner of Income‑Tax. The Court further stated that an appeal against a High Court order that decided a referred question, or against a refusal to call for a statement, could be brought before the Supreme Court only under section 66(a) of the Income‑Tax Act when the High Court decides the question, or under Article 136 of the Constitution when the High Court refuses to call for a statement. Accordingly, a direct appeal to the Supreme Court bypassing the High Court’s decisions was not permissible.

The Court observed that a petition filed under section 66(A) of the Income‑Tax Act could be referred to the High Court when the High Court decides the question that has been referred. Likewise, a petition could be taken to the Supreme Court under article 136 of the Constitution when the High Court refuses to call for a statement. The Court emphasized that a decision of the High Court could not be appealed directly to the Supreme Court; an intermediate step was required before a matter could reach the apex court.

The Court further held that in the present case there was no violation of the principles of natural justice and that the factual circumstances did not resemble those in Baldev Singh’s case, which might have justified an appeal. The Court explained that when a witness is examined by the Income‑Tax Officer without the presence of the assessee, but a copy of the witness’s statement is subsequently provided to the assessee and the assessee is given an opportunity to cross‑examine the witness, the requirements of natural justice are satisfied. The Court relied upon the precedents set in Chandi Prasad Chokhani v. State of Bihar (1962) 2 S.C.R. 276 and Indian Aluminium Co., Ltd. v. Commissioner of Income‑Tax (Civil Appeal No. 176 of 1959, decided 24 April 1961). It also referred to the earlier authorities of Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income‑Tax (1955) 1 S.C.R. 941 and Sardar Baldev Singh v. Commissioner of Income‑Tax, Delhi and Ajmer (1961) 1 S.C.R. 482 for guidance on the principles involved.

The judgment was rendered in the civil appellate jurisdiction concerning Civil Appeals Nos. 347 to 350 of 1960. These appeals were filed by special leave against the judgment and order dated 18 January 1953 of the Income‑Tax Appellate Tribunal, Calcutta Bench, in Income‑Tax Appeals Nos. 7062‑7064 and CPTA No. 548 of 1951‑52. Counsel for the appellants comprised representatives for the deceased appellant, while counsel for the respondent represented the tax authority. The judgment was delivered on 17 July 1961 by Justice Hidayatullah.

The appeals, which were consolidated, were brought by the estate of Kanhaiyalal Lohia, who had died while the appeals were pending. The estate was represented by the executors appointed under his will. The appellants challenged an order dated 8 January 1953 of the Income‑Tax Appellate Tribunal (Calcutta Bench) that had been issued in proceedings initiated by the tax Department against an earlier order of the Appellate Assistant Commissioner. The Tribunal had set aside the order of the Appellate Assistant Commissioner and restored the assessment made by the Income‑Tax Officer.

Kanhaiyalal Lohia had filed petitions under section 66(1) of the Income‑Tax Act before the Tribunal, raising several questions. One of those questions was referred to the High Court of Calcutta and read as follows: “Whether, in the circumstances of this case where the Income‑Tax Officer, District III (2), separately assessed the business carried on in the name of Brijlal Nandkishore as belonging to a partnership firm consisting of Brijlal and Nandkishore, the Income‑Tax Officer, Non‑Companies E.P.T., District, can also assess the income from the same business in the hands of the assessee?” The High Court answered this question against the appellant. Subsequently, the appellant filed an application under section 66(2) seeking to have the remaining questions referred to the High Court, but that application was rejected. The appellant did not file any appeal against the High Court’s order refusing to direct the Tribunal to state a case or against the decision on the question that had been referred.

In these appeals, which challenged the decision of the Income‑Tax Appellate Tribunal, the Court asked the counsel for the appellants how the appeals could be sustained in light of the recent decisions rendered by this Court in Chandi Prasad Chokhani v. State of Bihar (1) and Indian Aluminium Co. Ltd. v. Commissioner of Income‑tax (2). Counsel, identified only as the advocate for the appellants, relied upon the authorities in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income‑tax West Bengal (1) and Sardar Baldev Singh v. Commissioner of Income‑tax Delhi and Ajmer (2), and highlighted that in those cases the Court had entertained appeals from the Tribunal’s order, while also conceding that such appeals were permissible only when special circumstances existed. He asserted that the present matter presented such special circumstances and therefore the appeals should be entertained. The Court indicated that it would examine the appeals from this perspective because, absent the existence of special circumstances, the appeals would be incompetent, as dictated by the aforementioned recent rulings. The factual backdrop involved Shri Kanhaiyalal Lohia, a prosperous jute dealer whose head office was situated in Calcutta, and who lived with his wife, his brother Brijlal Lohia, and Brijlal’s son Nandkishore Lohia; he owned no other issue and his properties were self‑acquired, and he had always been assessed as an individual. He maintained his books according to the Ramaswami year, and in the return for the account year 14 April 1943 to 1 April 1944 (assessment year 1944‑45) he disclosed that he had closed in mid‑1943 the purchasing centres in East Bengal that were held in the name of Nandkishore, and that he had made a gift of Rs 5,11,101 to his brother on 12 July 1943 and a gift of Rs 2,50,000 to his nephew on 30 September 1943. He reported income from the East Bengal business only up to the date of its closure. Subsequently, Brijlal and Nandkishore formed a partnership, operating under the trade name “Brijlal Nandkishore,” taking over the East Bengal purchasing centres, opening bank accounts in that name, and becoming members of both the Baled Jute Association and the Jute Baler’s Association, while trading in their own names. A partnership deed was executed on 5 August 1953. Both Lohia’s individual business and the partnership’s activities fell within the jurisdiction of the same Income‑Tax Officer. During the assessment of the partnership, notices were served under sections 22(2) and 34, and the partnership applied for, and obtained, registration under section 26A of the Income‑Tax Act. The partnership was also assessed for the fiscal years 1945‑46 and 1946‑47, while the assessment of Shri Kanhaiyalal Lohia was completed by the same officer.

During the assessment for the year 1945‑46, the Income‑tax Officer of the Non‑Companies Income‑Tax cum Excess Profits Tax District issued a notice under section 22(4) of the Income‑Tax Act on 24 August 1949, directing that the accounts of the head office in Calcutta and of the branches operating under the name “Brijlal Nandkishore” be produced. Kanhaiyalal Lohia complied with the notice by presenting the partnership’s books of account, bank statements, the registration certificate of “Brijlal Nandkishore”, and documentary evidence showing the firm’s membership in two jute associations. He also filed letters from four persons, one of whom was Sri A.L. Mazumdar, and the Income‑tax Officer recorded a statement from Sri Mazumdar without giving any prior notice to Kanhaiyalal Lohia. Kanhaiyalal Lohia objected to the taking of a statement in his absence, but the officer apparently disregarded his protest. On 31 March 1950 the assessment was completed, and the officer pooled the income of the “Brijlal Nandkishore” branches, which were under the direct control of the partnership, with the income of Kanhaiyalal Lohia. The officer concluded that the alleged gifts were not genuine but merely colourable transactions, relying heavily on the statement of Sri A.L. Mazumdar that had been recorded when Kanhaiyalal Lohia was not present. Kanhaiyalal Lohia appealed this assessment before the Appellate Assistant Commissioner, submitting two additional letters from prominent businessmen. The Appellate Assistant Commissioner accepted those letters, held that the gifts were proved and were bona‑fide, and consequently directed that the income of “Brijlal Nandkishore” be excluded from Kanhaiyalal Lohia’s assessment. The order of the Appellate Assistant Commissioner was pronounced on 27 December 1951.

The Department challenged that order by filing an appeal before the Appellate Income‑tax Tribunal, Calcutta Bench, which on 8 January 1953 held that the gifts had not been proved by unimpeachable evidence and that the income of “Brijlal Nandkishore” should remain included in the assessment. Applications under sections 66(1) and 66(2) were then filed, the former to the Tribunal and the latter to the High Court. The Tribunal referred one of the questions to the High Court but declined to refer the remaining questions. The High Court considered the reference under section 66(2) but did not grant relief; it adopted the Tribunal’s view and answered the referred question in favour of the Department, thereby upholding the inclusion of the partnership’s income. Before the High Court, Kanhaiyalal Lohia’s counsel, Dr Pal, admitted that he could not persuade the Court to answer the referred question against the Department, and it appears that the Department conceded that the assessment of “Brijlal Nandkishore” would be cancelled. Consequently, Kanhaiyalal Lohia filed the present appeals against the Tribunal’s order dated 8 January 1953. The Supreme Court has previously observed in Chandi Prasad, Chokhani v. State of Bihar (1) and Indian Aluminium Co., Ltd. v. Commissioner of Income‑tax (2) that the two cases in which it interfered with appellate orders of a Tribunal were of a special kind. In the Dhakheshwari Cotton Mills case (3) a breach of natural‑justice principles was found to be sufficient to permit an aggrieved party to approach this Court under article 136.

In the case cited as Dhakeshwari Cotton Mills (1955) 1 S.C.R. 941, the Court had held that a breach of the principle of natural justice was sufficient to permit an aggrieved party to approach this Court against an appellate order of the Tribunal under Article 136. The Court also observed, in Baldev Singh’s case (1962) 2 S.C.R. 276, that an appeal could be entertained against a Tribunal’s appellate order when the limitation to pursue other remedies was barred without any fault on the part of the assessee. The underlying principle in those decisions was that a circumstance which could not be corrected by the procedure of stating a question of law on the statements of the case might provide a ground for invoking the jurisdiction of the Court under Article 136. However, that principle did not apply where a question of law could be raised and answered either by the High Court or on appeal before this Court. An appeal against a High Court order deciding a referred question, or against a refusal to call for a statement, could be brought before this Court under Section 66A when the High Court decided the question referred, and under Article 136 when the High Court refused to call for a statement. In the present matter, the order of the High Court on the referred question was not presented before this Court through the ordinary procedure prescribed in the Indian Income‑Tax Act, apparently because counsel conceded that he could not claim that the question would be answered in favour of the assessee, and because the Department indicated that the assessment of “Brijlal Nandkishore” would be cancelled. The order refusing to call for a statement on questions other than the one referred was also not challenged before us. The party attempting to invoke the ratio of Dhakeshwari Cotton Mills case argued that the examination of Sri A. L. Mazumdar in the absence of Kanhaiyalal Lohia violated the principles of natural justice. The statement of Sri A. L. Mazumdar, taken on March 28, 1950, recorded that he was questioned about his knowledge of an alleged gift recorded in the books of Kanhaiyalal Lohia in favour of Brijlal and Nand Kishore. He responded that he could not recall events distinctly but could say that the gifts to Brij Lal or Nand Kishore were not made in his presence as alleged, and that Kanhaiyalal had told him his brother and nephew were idle, prompting the proposed gift to engage them. He further stated that the partnership deed was most probably drawn up by him and that the gift was reported to have been made before he took up the drafting of the deed. The Court noted these details while evaluating whether a breach of natural justice had occurred.

According to the record, the draft of the deed was prepared after Kanhaiyalal Lohia repeatedly expressed his intention to separate his brother and nephew. He told the witness that he wanted to create a distinction between them. When the firm was formed, Brijlal approached the witness and asked whether a partnership deed between father and son could be drawn up. The witness stated that this was the only information he possessed regarding the matter. The Court observed that the statements made by Sri Mazumdar contradicted the account given by Kanhaiyalal Lohia and consequently impaired Mazumdar’s credibility. The order sheet reveals that Mr B. Sen Gupta obtained a copy of Mazumdar’s statement and indicated his wish to cross‑examine the witness; however, when the opportunity to do so arose, Mr Sen Gupta failed to appear. The order sheets dated 29 and 30 March 1950 clearly record his absence. In the Court’s view, these circumstances do not demonstrate any violation of the principles of natural justice, and therefore the appellants cannot rely on the decision in Dhakeshwari Cotton Mills case to claim such a breach.

The appellants argued before the Court that the Tribunal’s finding was perverse and that, when the total circumstances were examined, the gifts in question were genuine and had been acted upon. The matter fell within the jurisdiction of the Appellate Tribunal, cited as (1) (1955) 1 S.C.R. 941, which is the final fact‑finding authority in such disputes. The Court held that the Tribunal acted within its powers when it refused to accept the evidence offered and that, based on the surrounding facts, the Tribunal’s conclusion was not perverse. Historically, Kanhaiyalal Lohia had supported his brother and nephew for several years, and there was no indication that he had previously made even a modest gift to enable them to become independent. In 1943, however, he allegedly decided to provide them with a substantial sum of approximately Rs 7,60,000, a figure that required him to overdraw his bank accounts and incur interest charges. The Court found no rational explanation for such a large‑scale assistance that placed Kanhaiyalal Lohia in debt. When this circumstance is considered together with Mazumdar’s repeated statements that the brother and nephew were idle and of no use, the transactions appear to have been motivated by a desire to reduce Kanhaiyalal Lohia’s assessable profits. Accordingly, the evidence supported the Tribunal’s conclusion that the transaction was a sham. The Court further noted that no special circumstances existed that would permit the appellants to approach this Court against the Tribunal’s decision, especially after the High Court had already ruled on the question and declined to call for a statement of the case from the Tribunal on matters the Tribunal had refused to refer to the High Court.

The Court observed that the instant appeals fell squarely within the legal principles articulated by this Court in the earlier authorities of Chandi Prasad Chokhani v. State of Bihar and Indian Aluminium Co., Ltd. v. Commissioner of Income‑tax. Referring to those precedents, the Court deemed the present appeals to be legally incompetent. Consequently, the Court ordered that the appeals be dismissed. In addition, the Court directed that costs be awarded against the appellants, to be borne by a single party. The final order recorded that the appeals were dismissed. The authorities relied upon were cited as follows: (1) Chandi Prasad Chokhani v. State of Bihar, (1962) 2 S.C.R. 276; and (2) Indian Aluminium Co., Ltd. v. Commissioner of Income‑tax, Civil Appeal No. 176 of 1939, decided on April 24, 1961.