Rajasthan High Court - Jaipur
Commissioner Of Income-Tax vs Golecha Firms (P.) Ltd. on 5 March, 1986
Equivalent citations: [1987]164ITR753(RAJ)
JUDGMENT G.K. Sharma, J.
1. The Commissioner of Income-tax, Jaipur, has filed this reference application under Section 256(2) of the Income-tax Act, 1961, arising out of the order of the Income-tax Appellate Tribunal, dated April 18, 1980.
2. The assessee, M/s. Golecha Firms (P.) Ltd., Beawar, was a private limited company. They filed a return declaring a loss of Rs. 560 for the assessment year 1978-79. The assessee-company was incorporated in order to acquire land for dairy and farming. It could not carry out any of the activities in the said business. The surplus money lying with it had been deposited with the firm, M/s. Ashoka Minerals, Beawar, and the interest accruing from it was shown in the profit and loss account, claiming the same to be income from business.
3. The Income-tax Officer did not agree with the assessee and was of the view that the assessee's business was not that of money-lending, although one of the objects was to lend and advance money on property, etc. The Income-tax Officer was of the view that this object was under the main object of the assessee-company which was incidental or ancillary to the attainment of the main object. The Income-tax Officer assessed the income from the interest as income from other sources.
4. Being aggrieved by the order of the Income-tax Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The appellate court confirmed the order of the Income-tax Officer and dismissed the said appeal. Against that order of the Appellate Assistant Commissioner, the assessee preferred a second appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal, vide its order dated April 18, 1980, allowed the expenditure of Rs. 8,000 as against the claim of Rs. 10,640 made by the assessee. Hence, the appeal of the assessee was partly allowed. The Commissioner of Income-tax, against the order of the Income-tax Appellate Tribunal, filed an application under Section 256(1) of the Income-tax Act, framing the following questions of law :
"Whether, on the facts and in the circumstances of the present case, the Tribunal was justified in holding that the expenditure to the extent of Rs. 8,000 can be considered to be incidental to the assessee's business and is allowable as deduction out of interest income earned upon deposits ? "
5. The Commissioner of Income-tax required the Income-tax Appellate Tribunal to draw up a statement of the case and refer the said question to this court.
6. The Income-tax Appellate Tribunal, after hearing both the sides and considering all the aspects, came to the conclusion that the finding of the Income-tax Appellate Tribunal was purely a finding of fact and no question of law arose out of its order. The application of the Commissioner of Income-tax was dismissed.
7. The Commissioner of Income-tax then moved the present reference application under Section 256(2) of the Income-tax Act before this court, alleging that a question of law arises out of the order of the Income-tax Appellate Tribunal.
8. Mr. Surolia, learned counsel for the petitioner, argued that the order of the Income-tax Appellate Tribunal is erroneous on the ground that the order has not dealt with properly the controversy involved in the matter, and that the order of the Income-tax Appellate Tribunal is based simply on the expenditure allowed during the previous year. He further added that it has not examined the various claims of expenditure as claimed by the assessee, nor has it given any valid justification for enhancing the expenditure from Rs. 1,008 to Rs. 8,000. It was further argued by him that the Income-tax Appellate Tribunal's order enhancing the deductible expenses is perverse and irrational. It was also contended by Mr. Surolia that the assessee was not carrying on its business of dairy and farming, but it had invested its surplus amount with a firm, on interest. According to him, it is not understandable as to how a huge expenditure of Rs. 8,000 would be incurred on a total income of Rs. 10,078. Mr Surolia also argued that the Income-tax Appellate Tribunal has erred in holding that no question of law arises out of its order. So, according to Mr. Surolia, a question of law as mentioned in the reference application filed before the Income-tax Appellate Tribunal arises for the consideration of this court.
9. The Income-tax Officer, while passing the assessment order, opined that in computing the income from other sources, only the expenses incurred by the assessee for earning this income, are to be allowed, and he further opined that the assessee has debited various expenses to his profit and loss account, e.g., managing director's salary, T.A., etc. He did not consider all these expenses necessary for earning the above income of Rs. 10,078 particularly, when the amount had been lying with one firm only throughout the year. He considered the expenditure of about 10% of the income earned as relating to the earning of the above income. Thus, income from interest was Rs. 10,078 and, according" to the Income-tax Officer, he estimated the expenses at Rs. 1,008.
10. Before the Commissioner of Income-tax (Appeals), it was argued by the non-petitioner-assessee that the Income-tax Officer should have allowed all the expenses claimed by the assessee. This argument was not accepted by the appellate court which was of the opinion that it was virtually not necessary to spend anything for earning the interest because the amount was lying invested for the last so many years with one firm and it did not involve any activity or expenditure worth the name on the part of the company to claim interest from that firm. Therefore, the expenditure claimed by the company could not be said to have been incurred for the purpose of earning interest. The Commissioner of Income-tax (Appeals) opined that the Income-tax Officer was quite fair and reasonable in allowing expenditure equal to 10% of the interest income.
11. From a perusal of the order of the Income-tax Officer and that of the Commissioner of Income-tax (Appeals), it is clear that the only point argued before the Income-tax Officer was as to how much expenditure was to be allowed. The assessee claimed all the expenses while the Income-tax Officer allowed only 10% of the income as expenditure. Before the appeal-late court, the assessee argued only on the quantum of allowable expenditure. It was argued there by the assessee that the Income-tax Officer should have allowed all the expenses claimed by it but this argument was not accepted by the appellate court. The appellate court also upheld the expenditure to the extent of 10% of the income. It was not argued by the assessee either before the Income-tax Officer or the appellate court that expenditure was not allowable at all. The only point argued was as to how much expenditure was allowable on the income. The Income-tax Officer too did not say that the expenditure was not allowable. He only decided that only 10% of the income was allowable as expenditure. It means that the Income-tax Officer was of the view that some expenditure was allowable. Before the appellate court, the Revenue did not file any appeal on the ground that the Income-tax Officer had erred in holding that the expenditure in the present case was allowable. The assessee went in appeal before the appellate court against the quantum of allowable expenditure. So, no appeal was preferred on this legal aspect by the Revenue as to whether expenditure was allowable or not. It was the assessee only who preferred appeal and that too on the quantum of expenditure to be allowed to him. The appellate authority, in its judgment, only discussed the fact of quantum of expenditure to be allowed to the assessee and the appellate authority, agreeing with the judgment of the Income-tax Officer, dismissed the appeal of the assessee. Thus, there was no question before the appellate court as to whether expenditure on this income was allowable or not. While referring to this fact, we mean to say that the Income-tax Officer was of the opinion that some expenditure on the income of the interest of the assessee was allowable. Against this opinion of the Income-tax Officer, the Revenue did not file any appeal before the Commissioner of Income-tax (Appeals). It means that the Revenue also conceded and agreed with the decision of the Income-tax Officer that the expenditure on the income of the interest was allowable. Had it felt any grievance against the order of the Income-tax Officer, the Revenue should have filed an appeal before the appellate court that the Income-tax Officer should not have deducted the expenditure incurred on the income of the interest.
12. After the judgment of the Appellate Commissioner, the assessee further went in appeal before the Income-tax Appellate Tribunal. The Revenue did not prefer any appeal against the order of the Commissioner of Income-tax (Appeals). The assessee preferred the appeal on the ground that the quantum of expenditure which was allowed by both the lower courts was very low. Even in that appeal before the Income-tax Appellate Tribunal, the Revenue did not raise any cross-objection to the effect that actually, the Income-tax Officer as well as the appellate court had erred in allowing the expenditure incurred on the income of the interest. So, the position was that the Revenue did not file any appeal against the decision that the expenditure on the income by way of interest was allowable. The Revenue did not object before the Tribunal in the appeal filed by the assessee on this aspect. The order of the Income-tax Appellate Tribunal is very clear and the relevant para 4 of the said order reads as under :
"I have heard the parties and perused the entire evidence on record. In view of Clause (3) of the memorandum of association, it is clear that the assessee company was within its power to advance money on interest. It is correct that this was not the main object of the company, but it was one of the objects of the company. In the past, the assessee-company earned interest and also claimed expenses. The Income-tax Officer, as discussed above, in the immediately preceding year allowed expenditure of Rs. 8,296 out of the claim of Rs. 9,096. That order of the Income-tax Officer is final. In the year of account, the Income-tax Officer himself allowed the expenses to the tune of 10% of the whole claim. It means that, in principle, the learned Income-tax Officer agreed that the expenses are of allowable nature. So, the only dispute that remains is the quantum of the expenditure which may be allowable to the assessee. In the year of account, the assessee earned interest of Rs. 10,078. In the immediately preceding year interest income was earned at Rs. 9,096. In the year of account, the expenditure was allowed on Rs. 10,640 as compared to the claim of Rs. 9,096 in the immediately preceding year. In this year, the Income-tax Officer allowed the claim of expenditure to the extent of Rs. 1,008 as compared to the claim of Rs. 8,296 which was allowed by the Income-tax Officer."
13. From a perusal of the above order of the Income-tax Appellate Tribunal, it is clear that the entire argument before it was on the quantum of expenses to be allowed. In principle, the Income-tax Officer agreed that the expenses were of allowable nature. The Revenue did not file any appeal against this principle enunciated by the Income-tax Officer. Before the Income-tax Appellate Tribunal, the Revenue did not file any objection to this effect also. It means that the Revenue accepted the decision of the Income-tax Officer and that of the appellate court that some expenses were of allowable nature.
14. Mr. Surolia, learned counsel for the petitioner, argued that the point as to whether the expenses were allowable or not, was argued by the Revenue before the Income-tax Appellate Tribunal, as in para. 4 of the Income-tax Appellate Tribunal's judgment, it has mentioned that, in principle, the Income-tax Officer agreed that some expenses were of allowable nature. According to him, by this sentence, it means that this point was argued before the Income-tax Appellate Tribunal.
15. We do not agree with the contention of Mr. Surolia. The entire judgment of the Income-tax Appellate Tribunal is only with regard to the facts of this case. From a perusal of the judgment of the Income-tax Appellate Tribunal, it is clear that the entire controversy before it was only with regard to the quantum of expenditure which might be allowed to the assessee. It was not at all argued there that these expenses were not allowable in law, otherwise, there would have been some decision on this aspect, by the learned Income-tax Appellate Tribunal. It was also asked of Mr. Surolia, learned counsel for the Revenue (petitioner) to file any document to prove that this legal point was argued before the Income-tax Appellate Tribunal, but, he was unable to show us any such document. Therefore, it is not correct to say that this legal question as to whether expenses to the assessee were allowable or not, was raised and argued before the Income-tax Appellate Tribunal, by the Revenue. The entire argument there was based on the quantum of the expenditure and that point has been decided by the learned Income-tax Appellate Tribunal. The said decision is completely based on the facts of the case. No law point was involved before the Income-tax Appellate Tribunal in the matter.
16. Mr. Surolia also argued that in the application filed under Section 256(1) of the Income-tax Act by the Revenue, before the Income-tax Appellate Tribunal, this legal point was raised. According to him, the reference application under Section 256(1) of the Income-tax Act before the Income-tax Appellate Tribunal was in two parts, one relating to the quantum of expenditure allowable to the assessee and, the other, as to whether this expenditure was allowable as deduction out of the income of interest earned upon the deposits. So, no doubt, in the said application, this legal point Was formulated. Now, according to Mr. Surolia, as this legal point was formulated, it cannot be said that the point was not raised before the Income-tax Appellate Tribunal.
17. We have considered also this argument of Mr. Surolia and we do not agree with this contention. In this regard, Sub-sections (1) and (2) of Section 256 of the Income-tax Act are to be looked into. According to Sub-section (1), the Appellate Commissioner may require the Income-tax Appellate Tribunal to refer to the High Court any question of law arising out of such order and, subject to the other provisions contained in this section, the Income-tax Appellate Tribunal shall draw up a statement of the case and refer it to the High Court. So, the important ingredient of this section is where a question of law arising out of such order means out of the order of the Income-tax Appellate Tribunal, and then only, an application under Section 256(1) of the Income-tax Act is maintainable. The words " arising out of such order " are very significant. It means that the order of the Income-tax Appellate Tribunal is the base order and in that order, it is to be seen as to whether any question of law arises or not. In the present case, the order of the Income-tax Appellate Tribunal, is annexure 3 dated April 18, 1980. The entire order was perused. There was only an argument on the point of quantum of expenditure which was raised by the Revenue in the reference application under Section 256(1), and there was no argument advanced on behalf of the Revenue as to whether the expenditure was allowable or not. Had this legal point been argued, the Income-tax Appellate Tribunal would have passed some order. But, as this point was not at all argued, nor was any objection raised on behalf of the Revenue, so, the order of the Income-tax Appellate Tribunal, annexure 3, has no mention on this legal aspect. The entire order is based on the fact which relates to the quantum of expenditure to be allowed to the assessee. So, no question of law arises out of the order of the Income-tax Appellate Tribunal. The question formulated by the Revenue in its application under Section 256(1) of the Income-tax Act, is not a question which arises out of the order of the Income-tax Appellate Tribunal. It can be said that the first part of the application regarding the extent of expenditure to be allowed to the assessee, arises out of the order of the Income-tax Appellate Tribunal. But, the second part regarding as to whether expenditure was allowable as a deduction earned, does not arise out of the order of the Income-tax Appellate Tribunal. Hence, the application under Section 256(1) of the Income-tax Act, was not at all maintainable. The Income-tax Appellate Tribunal, while disposing of the said application, has held that the finding of the Income-tax Appellate Tribunal is purely a finding of fact and no question of law arises therefrom. The decision of the Income-tax Appellate Tribunal is perfectly correct and no question of law arises out of the order of the Income-tax Appellate Tribunal, annexure-3 dated April 18, 1980.
18. Now, coming to Sub-section (2) of Section 256 of the Income-tax Act, which says that if, on an application made under Sub-section (1) of Section 256, the Appellate Tribunal refuses to state the case on the ground that no question of law arises, the assessee or the Commissioner, as the case may be, may apply to the High Court, and the High Court, may, if it is not satisfied with the correctness of the decision of the Appellate Tribunal, require the Appellate Tribunal to state the case and refer it to the High Court. So, an application under Section 256(2) of the Income-tax Act is maintainable only when an application made by a party under Sub-section (1) of Section 256, has been refused by the Appellate Tribunal. In the present case, Mr. Surolia argued that the application under Section 256(1) of the Income-tax Act was moved before the Income-tax Appellate Tribunal which rejected the said application and refused to refer the case. So, according to Mr. Surolia, the Revenue is competent to come before this court under Section 256(2) of the Income-tax Act. There is no dispute about this aspect that if an application under Section 256(1) of the Income-tax Act is rejected or refused by the Income-tax Appellate Tribunal, then, the party may come to this court under Section 256(2) of the Income-tax Act. But, the question remains as to whether a proper application was submitted before the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act. As observed above, no question of law arises out of the order of the Income-tax Appellate Tribunal, annexure 3, dated April 18, 1980, and, as such, the application under Section 256(1) was not at all maintainable. The Income-tax Appellate Tribunal has correctly held that the entire matter was purely a finding of fact and it has correctly refused to refer the matter to this court. Hence, in our considered opinion, the present application under Section 256(2) of the Income-tax Act, is also not maintainable.
19. The High Court, while hearing a reference application under Section 256(2) of the Income-tax Act, does not exercise any appellate or revisional jurisdiction over the Income-tax Appellate Tribunal. It only acts as an advisory body and that too on a reference application which comes before it under Section 256(1) and (2) of the Income-tax Act.
20. In CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC), a reference was made under Section 66 of the Income-tax Act, 1922. The said Section 66 is analogous to Section 256 of the present Income-tax Act. While dealing with that section, it was observed by their Lordships of the Supreme Court as under (at pp. 591 and 592 headnote):
" The power of the court to issue a direction to the Tribunal under Section 66(2) of the Income-tax Act is in the nature of a mandamus and it is well-settled that no mandamus will be issued unless the applicant had made a distinct demand on the appropriate authorities for the very reliefs which he seeks to enforce by mandamus and that had been refused. Thus, the power of the court to direct a reference under Section 66(2) is subject to two limitations--the question must be one which the Tribunal was bound to refer under Section 66(1) and the applicant must have required the Tribunal to refer it. The form prescribed under Rule 22A of the Income-tax Rules for an application under Section 66(1) shows that the applicant must set out the questions which he desires the Tribunal to refer and that, further, those questions must arise out of the order of the Tribunal. It is, therefore, clear that under Section 66(2), the court cannot direct the Tribunal to refer a question unless it is one which arises out of the order of the Tribunal and was specified by the applicant in his application under Section 66(1).
(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.
A question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that Section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act."
21. Therefore, in view of the above observations of their Lordships of the Supreme Court, it is clear that this court cannot direct the Income-tax Appellate Tribunal to refer a question of law, unless it is one which arises out of the order of the Income-tax Appellate Tribunal and was specified by the applicant in his application under Section 256(1). No doubt, the petitioner mentioned in his application under Section 256(1) this legal issue, but, it does not arise out of the order of the Income-tax Appellate Tribunal dated April 18, 1980. Unless the question which is required to be referred by the Income-tax Appellate Tribunal arises out of its order, no reference application can be maintained. Only because of the fact that the Revenue raised this plea in their application under Section 256{1) of the Income-tax Act, it does not authorise the Revenue to formulate a question of law, as they have done. This question could be formulated if the Income-tax Appellate Tribunal had decided it in its order. As we have discussed above, this legal issue was not raised before the Income-tax Appellate Tribunal by the Revenue, nor is there any decision on it. So, the matter which has now been referred to this court does not arise out of the order of the Income-tax Appellate Tribunal. As such, the present application filed by the Revenue under Section 256(2) of the Income-tax Act, is not maintainable.
22. We need not go into the details about the point with regard to quantum of expenditure allowed to the assessee. This is purely a question of fact, and on this question of fact, no reference can be made. The finding of fact is that the order of the Income-tax Appellate Tribunal is final on this aspect and no interference can be made on a finding of fact.
23. Under these circumstances, the present reference-application under Section 256(2) of the Income-tax Act, is hereby dismissed.