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Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

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.

1. Civil  Appeal No. 1569 of 2007 is directed against the  

judgment and order dated 31.03.2005 of the High Court of  

Kerala  by  which  in  exercise  of  jurisdiction  under  Section

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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

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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.   

2. Succinctly,  the  appellants  are  engaged  in  the  

manufacture and sale of beer and other alcoholic beverages.  

Certain States like Kerala and Tamil  Nadu had established  

marketing  corporations  which  were  the  exclusive  

wholesalers of alcoholic beverages for the concerned State  

whereby  all  manufacturers  had  to  compulsorily  sell  their  

products to the State Corporations which, in turn, would sell  

the liquor so purchased, to the retailers.  It is pleaded by the  

appellants  that  manufacturers  of  beverages  containing  

alcohol  have to engage services of  agents who would co-

ordinate with the retailers and State Corporations to ensure  

continuous flow/supply of goods to the ultimate consumers.

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And on that ground they sought deduction under Section 37  

of the Act.

Civil Appeal No. 1569 of 2007

3. The  claim  made  by  the  assessee  in  the  facts  noted  

above  was  disallowed  by  the  Assessing  Officer  by  order  

dated 29.01.1993.  The said order of the Assessing Officer  

was confirmed by the Commissioner of Income Tax (Appeals)  

by order  dated 29.10.1993.  The assessee had moved the  

learned  Income  Tax  Appellate  Tribunal,  Cochin  Bench  

against the aforesaid orders.  The learned Tribunal took the  

view that the assessee was entitled to claim for deduction.  

The said view of the learned Tribunal has been reversed by  

the High Court in the Reference made to it  under Section  

256 (2) of the Act.

4.  We have noticed that in the Reference made to the  

High Court by the learned Tribunal under Section 256(2) as  

many as 12 different questions were framed and referred.  

The  High  Court  reframed  the  questions  in  the  following  

manner.

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“(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.

5. Though one item of claim for deduction pertained to the  

corporate management charges paid by the assessee to U.B.  

Limited and an issue pertaining to the said claim was one of  

the twelve questions initially framed in the Reference, in the  

questions  reframed  by  the  High  Court,  the  said  question  

does not find any mention.  Be that as it may, the High Court  

on  the  reasons  recorded  in  its  order  dated  31.03.2005

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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  

Tribunal and upheld the order of the Commissioner (Appeals)  

and  answered  the  questions  in  favour  of  the  revenue  by  

holding that the assessee had not discharged the burden so  

as  to  entitle  it  to  deduction under  Section 37 of  the Act.  

Aggrieved, this appeal has been filed by the assessee.

6. Three propositions have been advanced before us on  

behalf of the contesting parties. The first is whether the High  

Court  could  have  reframed  the  questions  after  the  

conclusion of the arguments and that too without giving an  

opportunity  to  the  assessee.  The  answer  to  the  above  

question, according to the appellant,  is to be found in  M.  

Janardhana Rao vs. Joint Commissioner of Income Tax1  

wherein this Court has held that questions of law arising in  1 (2005) 2 SCC 324

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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 jurisdiction under Section 256 of the Act (as it  

then existed)  particularly  as the jurisdiction under Section  

256 is more constricted than under Section 260-A of the Act.

7.     The second issue raised is the jurisdiction of the High  

Court to set aside the order of the Tribunal in the exercise of  

its Reference Jurisdiction. The point is no longer res integra  

having  been  settled  in  C.P.  Sarathy  Mudaliar  vs.  

Commissioner of Income Tax, Andhra Pradesh2 wherein  

this Court has taken the view that setting aside the order of  

the Tribunal in exercise of the Reference Jurisdiction of the  

High Court  is  inappropriate.  This  Court  had observed that  

while  hearing a Reference under the Income Tax Act,  the  

High Court exercises advisory jurisdiction and does not sit in  

appeal over the judgment of the Tribunal. It has been further  2 1966 Vol. LXII ITR 576

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held that the High Court has no power to set aside the order  

of the Tribunal even if it is of the view that the conclusion  

recorded by the Tribunal is not correct.  

8. The third question that has been posed for an answer  

before us is with regard to the correctness of the manner of  

exercise of jurisdiction by the High Court in the present case.  

Learned counsel for the assessee has elaborately taken us  

through the judgment of the High Court to contend that the  

evidence on record has been re-appreciated with a view to  

ascertain  if  the  conclusions  recorded  by  the  Tribunal  are  

correct.  The  manner  of  exercise  of  jurisdiction,  in  the  

absence of any question of perversity of the findings of the  

learned Tribunal has been assailed before us. Reliance has  

been placed on para 16 of the judgment of this Court in the  

case of Sudarshan Silks & Sarees vs. Commissioner of  

Income Tax, Karnataka3 which is in the following terms.

“16. In  the  present  case,  the  question  of  law  referred to the High Court for its opinion was, as to   whether  the Tribunal  was right  in  upholding the   findings  of  the  CIT  (Appeals)  in  canceling  the   penalty  levied  under  Section 271(1)(c).  Question  

3 (2008) 12 SCC 458

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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 jurisdiction  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 jurisdiction,  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.”

9. In the present case, the High Court while hearing the  

Reference made under Section 256 (2) of the Act had set  

aside the order of the Tribunal.  Undoubtedly, in the exercise  

of its Reference Jurisdiction the High Court was not right in  

setting aside the order of the Tribunal.  However, reading the  

ultimate paragraph of the order of the High Court we find  

that the error is one of form and not of substance inasmuch

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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.   

10. The twelve questions referred to the High Court under  

Section 256(2) of the Act may now be set out below :

1) Whether, on the facts and in the circumstances of  the  case  and  also  in  view  of  the  prohibition  of  outside service by KSBC, was the Tribunal right in  law  and  fact  in  allowing  the  expenditure  of  RS.  7,75,602/-  by/and/  deleting  the  addition  of  Rs.  7,75,602/-?

2) 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. 7,75,602/-

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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

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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?

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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/-        

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11.  A  reading  of  the  questions  initially  framed  and  

subsequently  reframed  show  that  what  was  done  by  the  

High  Court  is  to  retain  three  out  of  twelve  questions,  as  

initially  framed,  while  discarding  the  rest.   Some  of  the  

questions discarded by the High Court were actually more  

proximate to the question of perversity of the findings of fact  

recorded  by  the  learned  Tribunal,  than  the  questions  

retained.  From a reading of the Order of the High Court it is  

clear that the High Court examined the entitlement of the  

appellant assessee to deduction/disallowance by accepting  

the  agreements  executed  by  the  assessee  with  the  

commission  agents;  the  affidavits  filed  by  C.  Janakiraman  

and Shri A.N. Ramachandra Nayar, husbands of the two lady  

partners of RJ Associates and also the payments made by  

the  assessee  to  RJ  Associates  as  well  as  to  Golden  

Enterprises. The question that was posed by the High Court  

was whether acceptance of the agreements, affidavits and  

proof of payment would debar the assessing authority to go  

into the question whether the expenses claimed would still  

be allowable under Section 37 of the Act.  This is a question

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which the High Court held was required to be answered in  

the facts  of  each case in  the light  of  the decision of  this  

Court  in  Swadeshi  Cotton  Mills  Co.  Ltd.  Vs.   

Commissioner  of  Income  Tax4 and  Lachminarayan  

Madan  Lal  vs.  Commissioner  of  Income  Tax  West  

Bengal5. In  fact  the  High  Court  noted  the  following  

observations of this Court in Lachminarayan (supra) :

“The mere existence of  an  agreement  between  the assessee and its selling agents or payment of  certain amounts as commission, assuming there  was such payment, does not bind the Income Tax  Officer  to  hold  that  the  payment  was  made  exclusively  and  wholly  for  the  purpose  of  the  assessee’s  business.  Although  there  might  be  such  an  agreement  in  existence  and  the  payments might have been made. It is still open  to the Income tax Officer to consider the relevant  facts  and  determine  for  himself  whether  the  commission said to have been paid to the selling  agents or any part thereof is properly deductible  under Section 37 of the Act.”    

12. There  were  certain  Government  Circulars  which  

regulated, if not prohibited, liaisoning with the government  

corporations  by  the  manufacturers  for  the  purpose  of  

obtaining supply orders.  The true effect of the Government  

4 1967 (63) ITR 57 5 1972 (86) ITR 439

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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

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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.

13. For  the  aforesaid  reasons,  Civil  Appeal  No.  1569  of  

2007 has to fail and it is accordingly dismissed.

Civil Appeal No.3214 of 2011 and SLP(C) No.10080 of  2014    

14. In the light of the above, Civil Appeal No.3214 of 2011  

and SLP (C) No.10080 of 2014 are also dismissed.      

…....…………………………J.                    [RANJAN GOGOI]

      ……....………………………J.                     [PRAFULLA C. PANT]

NEW DELHI,

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MARCH  10,  2015.