M/S.PREMIER BREVERIES LTD.KARNATAKA vs. COMMISSIONER OF INCOME TAX, COCHIN

Page 1 JUDGMENT Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURI ICTION CIVIL APPEAL NO. 1569 OF 2007 PREMIER BREWERIES LTD., KARNATAKA ... APPELLANT (S) VERSUS COMMISSIONER OF INCOME TAX, COCHIN ... RESPONDENT (S) WITH CIVIL APPEAL NO. 3214 OF 2011 WITH SLP(C) No. 10080 of 2014 J U D G M E N T PRAFULLA C. PANT, J.

Page 2 JUDGMENT Page 2 of 18 256(2) of the Income Tax Act, 1961 (as it then existed) (hereinafter for short ‘the Act’) the questions reframed by the High Court have been answered against the appellant- assessee and in favour of the revenue. The question decided by the High Court and relevant to the present appeal relates to the entitlement of the assessee to the benefit of disallowance of commission purportedly paid by the assessee to its commission agents for procurement of order for supply of liquor. Following the aforesaid judgment of the Kerala High Court, the Karnataka High Court had decided a similar question arising in Income Tax Appeal No. 12 of 1999 and Income Tax Appeal Nos. 42, 44, 46 and 47 of 2001, in a like manner i.e. against the assessee and in favour of the revenue. Aggrieved by the aforesaid orders of the High Court of Karnataka which pertains to different assessment years, Civil Appeal No. 3214 of 2011 and Special Leave Petition (C) No. 10080 of 2014 have been filed by the assessee. In view of the fact that the decision of the Karnataka High Court in I.T.A. No. 12 of 1999 had followed the decision of the Kerala High Court impugned in Civil

Page 3 JUDGMENT Page 3 of 18 Appeal No. 1569 of 2007 and the decision of the Karnataka High Court in the subsequent appeals before it (impugned in Civil Appeal No. 3214 of 2011 and Special Leave Petition (C) No. 10080 of 2014) essentially follows the decision rendered in I.T.A. No. 12 of 1999, it will be necessary first to deal with the issues arising in Civil Appeal No. 1569 of 2007 and depending on the decision therein the remaining appeals will have to be accordingly answered.

Page 4 JUDGMENT Page 4 of 18 And on that ground they sought deduction under Section 37 of the Act. Civil Appeal No. 1569 of 2007

Page 5 JUDGMENT Page 5 of 18 “(i) Whether, on the facts and in the circumstances of the case did the assessee discharge the burden of proof that lay on it in support of the claim for Rs. 7,75,602/-? (ii) Whether, on the facts and in the circumstances of the case, did the assessee discharge the burden of proof that lay on it in support of the claim for Rs. 22,72,192/-? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the payment to Golden Enterprises was only for business purpose or and was in business interest?” The questions reframed by the High Court were in respect of the payments made to M/s. R.J. Associates and one Golden Enterprises who, the assessee claimed, had rendered services as commission agents.

Page 6 JUDGMENT Page 6 of 18 thought it proper to reverse the findings and conclusions recorded by the learned Tribunal. Eventually, in the ultimate paragraph of its order the High Court after recording the conclusion that the “Tribunal has committed a grave error in not properly understanding the transaction entered into between the assessee and others” set aside the order of the an appeal under Section 260-A of the Act must be framed at the time of admission and should not be formulated after

conclusion of the arguments. Though the decision in M. Janardhana Rao (supra) is in the context of Section 260-A of the Act, it is urged that the same principles would apply to the exercise of juri iction under Section 256 of the Act (as it then existed) particularly as the juri iction under Section 256 is more constricted than under Section 260-A of the Act.

Page 9 JUDGMENT Page 9 of 18 as to perversity of the findings recorded by the Tribunal on facts was neither raised nor referred to the High Court for its opinion. The Tribunal is the final court of fact. The decision of the Tribunal on the facts can be gone into by the High Court in the reference juri iction only if a question has been referred to it which says that the finding arrived at by the Tribunal on the facts is perverse, in the sense that no reasonable person could have taken such a view. In reference juri iction, the High Court can answer the question of law referred to it and it is only when a finding of fact recorded by the Tribunal is challenged on the ground of perversity, in the sense set out above, that a question of law can be said to arise. Since the frame of the question was not as to whether the findings recorded by the Tribunal on facts were perverse, the High Court was precluded from entering into any discussion regarding the perversity of the finding of fact recorded by the Tribunal.”

Page 10 JUDGMENT Page 10 of 18 as the question arising in the Reference has been specifically answered in the following manner. “We therefore set aside the order of the Tribunal and uphold that of the Commissioner (Appeals) and answer the questions in favour of the Revenue by holding that the assessee had not discharged the burden that it is entitled to deductions under Section 37 of the Income Tax Act. Reference is answered accordingly.”

The reliance placed on behalf of the appellant-assessee on Sudarshan Silks & Sarees (supra) therefore is of no effect.

Page 11 JUDGMENT Page 11 of 18 was wholly and exclusively for the assessee’s business? 3) Whether, on the facts and in the circumstances of the case, did the assessee discharge the burden of proof that lay on it in support of the claim for Rs.7,75,602/-? 4) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in allowing the expenditure of Rs.22,72,192/- by/and/deleting the addition of Rs.22,72,192/-? 5) Whether, on the facts and in the circumstances of the case, did the Tribunal have any materials to show that the above expenditure of Rs. 22,72,192/- was wholly and exclusively for the assessee’s business? 6) Whether, on the facts and in the circumstances of the case, did the assessee discharge the burden of proof that lay on it in support of claim for Rs. 22,72,192/-? 7) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that: “the engagement of Golden Enterprises for carrying out certain support services was in the business interest” and is not the above finding also based on surmised and conjectures like “that two

Page 12 JUDGMENT Page 12 of 18 sales officers of UB Group stationed at Madras did not do or at any rate could not have done any sub line service at the unit level” wrong, unreasonable and unsupported by materials? 8) Whether, on the facts and in the circumstances of the case is the increase in sales noted in paragraph 10 (page 18) of the order of the Tribunal based on the increase in the quantum or increases in price and if the increase in sales is based on an increase in price is not the same an irrelevant consideration and the order vitiated? 9) Whether, on the facts and in the circumstances of the case, should not the Tribunal have considered the contention of the Revenue that “ultimately Golden Enterprises has in turn appointed one Abhinava Agencies for doing such work and therefore Golden Enterprises did not have the necessary infrastructure to do the services” in its correct prospective without side treching the issue by observing “what happened between Golden Enterprises and Abhinava Agencies is not of the concern of the assessee….”and is not the above finding wrong and lacks prospective when the case behind entrustment with Golden Enterprises was for lack of infrastructure with the assessee?

Page 13 JUDGMENT Page 13 of 18 10) Whether, on the facts and in the circumstances of the case and reason behind entrustment by the assessee with Golden Enterprises being for lack of infrastructure with the assessee, will such an assessee entrust the job to the one who lacks infrastructure and to the one who in turn entrust to another agency and are not the order and the findings, without adverting to the above aspects, wrong and hence vitiated? 11) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that “considering the need for such services and the opportunity cost of having a regular marketing force, the payment to Golden Enterprises was only for business purposes and was in business interest” and are not above findings wrong, unreasonable, unsupported by materials and based on surmise and conjectures? 12) Whether, on the facts and in the circumstances of the case, i) The assessee is entitled to claim any deduction under the head corporate and management charges? ii) Should not the Tribunal have disallowed the entire claim for Rs. 14,36,200/-

Page 14 JUDGMENT Page 14 of 18

Page 16 JUDGMENT Page 16 of 18 Circulars along with the agreements between the assessee and the commission agents and the details of payments made by the assessee to the commission agents as well as the affidavits filed by the husbands of the partners of M/s. R.J. Associates were considered by the High Court. The statement of the Managing Director of Tamil Nadu State Marketing Corporation Ltd. (TASMAC Ltd.), to whom summons were issued under Section 131 of the Act, to the effect that M/s. Golden Enterprises had not done any liaisoning work with TASMAC Ltd. was also taken into account. The basis of the doubts regarding the very existence of R.J. Associates, as entertained by the Assessing Officer, was also weighed by the High Court to determine the entitlement of the assessee for deduction under Section 37 of the Act. In performing the said exercise the High Court did not disturb or reverse the primary facts as found by the learned Tribunal. Rather, the exercise performed is one of the correct legal inferences that should be drawn on the facts already recorded by the learned Tribunal. The questions reframed were to the said effect. The legal

Page 17 JUDGMENT Page 17 of 18 inference that should be drawn from the primary facts, as consistently held by this Court, is eminently a question of law. No question of perversity was required to be framed or gone into to answer the issues arising. In fact, as already held by us, the questions relatable to perversity were consciously discarded by the High Court. We, therefore, cannot find any fault with the questions reframed by the High Court or the answers provided.

[RANJAN GOGOI] ……....………………………J.

[PRAFULLA C. PANT] NEW DELHI,

Page 18 JUDGMENT Page 18 of 18 MARCH 10, 2015.