LACHMINARAYAN MANDAL LAL vs. COMMISSIONER OF INCOME-TAX, WEST BENGAL

CIVIL APPEAL No. 20/1969Supreme Court[1973] 2 S.C.R. 20713 September 1972Bench: 3 JudgesAuthor: K.S. HEGDE, P. JAGANMOHAN REDDY, HANS RAJ KHANNA8 pages
AI SummaryDismissed

What were the facts?

The assessee, a registered firm engaged in manufacturing and selling aluminium utensils, claimed a deduction of Rs. 31,684/- for the assessment year 1963-64 as selling agency commission paid to M/s. Eastern Sales Corporation. This commission was claimed under Section 37 of the Income Tax Act, 1961. The selling agency firm was primarily a partnership of the wives and minor sons of the assessee firm's partners. The selling agency agreement was dated March 26, 1962, while the selling agency firm was established on April 13, 1962. Both firms shared the same business address, and the selling agency firm lacked its own godown or transport vehicles. The Income Tax Officer rejected the deduction, but the Appellate Assistant Commissioner allowed it. The Income Tax Appellate Tribunal reversed the AAC's order, finding the selling agency arrangement to be a "make-believe" device to minimize tax liability. The High Court declined to call for a statement of case from the Tribunal.

What did the Supreme Court hold?

The Supreme Court held that the assessee, by adopting a device, made it appear that income belonging to it had been earned by another person, bringing it within the scope of taxation in the assessee's hands, as per *Commissioner of Income-tax, Gujarat v. A. Raman & Co.*. The mere existence of a selling agency agreement or payment of commission does not obligate the Income Tax Officer to accept it as exclusively for business purposes. The officer retains the power to consider relevant factors and determine deductibility under Section 37. The Court found that the Tribunal did not rely on irrelevant evidence and its inferences were rationally arrived at, distinguishing the cited cases. Therefore, the Tribunal was justified in not stating a case for the High Court under Section 256(1), and the High Court was justified in not calling for a statement of case under Section 256(2). The appeal was dismissed.

What were the issues?

1. Whether the Tribunal misconstrued or misunderstood the selling agency agreement and the partnership deed, thereby raising a question of law. 2. Whether the Tribunal ignored oral evidence, vitiating its conclusions and raising a question of law. 3. Whether any question of law arose from the Tribunal's order that necessitated stating a case for the opinion of the High Court under Section 256(1) of the Income Tax Act, 1961. Assessee's Contentions: The assessee argued that the Tribunal's order was perverse, based on a misconstruction of documents and ignoring oral evidence. They relied on cases like *Dhirajlal Girdharilal v. Commissioner of Income-tax, Bombay*, *Commissioner of Income-tax, West Bengal-II v. Rajasthan Mines Ltd.*, and *Commissioner of Income-tax, Punjab v. Indian Woollen Textile Mills* to support the claim that a question of law arose. Revenue's Contentions: The revenue contended that the Tribunal's findings were rationally arrived at based on the evidence and that the selling agency arrangement was a device to divert income. They relied on *Commissioner of Income-tax, Gujarat v. A. Raman & Co.* and *Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax, U.P.* to argue that the Income Tax Officer is not bound by the mere existence of an agreement and payment of commission.

Which sections of the Income-tax Act were involved?

Section 37,Section 256(1),Section 256(2)

AI-generated summary — verify with the full judgment below

• , • J A B c D LACHMINARAYAN MADAN LAL V; COMMISSIONER OF INCOME-TAX, WEST BENGAL . ! ' .

Septenlber 13, 1972 [K .. s. HEGDE, P. JAGANl\IOHAN REDDY AN~ H. R. KHAN:-0.~, JJ.J Income Tax Act, 1961, s. 31-Item. of expenditure laid out or expand- e,/ who//.v and exclusively. for tire purpose of tire business-ccPaymena of. selling agency commirsio~Power oj ·the Income Tax Officer. to decide whether Selling Agency agreement is a genuine business arrangentent- Section 25&--Tribunal not stating a case for the opinion of the High Court and High Court not calling for a state1nent of case-Whether justified. . The assessee is a registered firm of three partners who are l>rothers, ·each having I/3rd share and is engaged in the manufacture and sale of aluminium utensils.

In. the assessment year 1963·64, the assessee c)aimed to have paid Rs. 31,684/- to l\I/s. Eastem Sales Corporation a. selling_ agency commission and claimed deduction of· the same under section· 37 of the Act· a. an item of expenditure laid out or expanded.

The selling agency firm was principally a partnership firm of -the wives and minor sons of the partners' assessee firm.

The selling agency_ a

The order continues below.

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