Commissioner of Income Tax vs Mahajan International

S.S. Sodhi, J.—The Commissioner of Income Tax, Rohtak, seeks in this petition u/s 256(2) of the Income Tax Act, 1961, the reference of two questions. These are :

"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal has been right in law, in confirming the order of the Commissioner of Income Tax (Appeals) in deleting the inclusion of Rs. 32,10,140 made in the total income of the assessee on account of capital gains ? and

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in allowing a further sum of Rs. 27,383 u/s 35B of the Income Tax Act, 1961 ?"

The matter here pertains to the assessment year 1977-78.

The facts relevant to the issues raised are that, on December 31, 1976, the assessee-firm was sold as a going concern along with all its assets and liabilities to Messrs. Panipat Food Limited. The total sale consideration was Rs. 20,21,767.68 out of which a sum of Rs. 4,50,000 was said to be the value of the goodwill. The Inspecting Assistant Commissioner, by his order of February 6, 1981, by invoking the provisions of Section 52(2) of the Income Tax Act, 1961, determined the fair market value of the assessee-firm sold under the agreement of December 31, 1976, to be Rs. 69,27,000. As a consequence, he proceeded to work out, on that basis, capital gains to be Rs. 32,10,140 which was then included in the total income of the assessee-firm.

On appeal, however, the Commissioner of Income Tax (Appeals) held that this addition of Rs. 32,10,140 was not exigible to tax. This view was later upheld by the Tribunal, following the decision of the Supreme Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, .

A plain reading of K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , would show that the first question clearly stands concluded thereby. It was held by the Supreme Court that Sub-section (2) of section 52 of the Act can be invoked only where the consideration for the transfer has been understated by the assessee, or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such an understatement or concealment is on the Revenue. It was also observed that Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15 per cent, difference between the fair market value of the capital asset, as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied. If, therefore, the Revenue seeks to bring a case within Sub-section (2), it must show not only that the fair market value of the capital asset as on the date of transfer exceeds the full value of the consideration declared by the assessee by not less than 15 per cent, of the value so declared, but also that the consideration has been understated and that the assessee has actually received more than what is declared by him. These are two distinct conditions which have to be satisfied before Sub-section (2) can be invoked by the Revenue and the burden of showing that these two conditions are satisfied rests upon the Revenue.

Such thus being the settled position in law, no occasion arises for referring the first question, as formulated.

Turning to the second question pertaining to weighted deduction u/s 35B of the Income Tax Act, there can be no escape from the conclusion that this does indeed raise a question of law. It will be seen that the Tribunal had declined to refer it on the ground that it stands concluded by the decision of the Special Bench of the Tribunal in the case of v. Hem Chand and Co. The Tribunal clearly fell into an error in declining the reference on this ground. It would be pertinent, in this behalf, to refer here to the judgment of this court in CIT v. Bhagat Brothers [1987] 165 ITR 660, where the court specifically held that the Tribunal is not justified in declining a reference pertaining to section 35B of the Act on the ground that it stood concluded by the decision of the Special Bench of the Tribunal in J. Hem Chand and Co.

Turning to the relevant factual position, it will be seen that the asses-see had claimed deduction u/s 35B under various heads like salary of staff, handling exports, rent for office premises, printing and stationery and telephone and telex charges. These were partially allowed. Further, the Tribunal, after recording a finding that 98 per cent, of the total turnover of the assessee related to export, held that 90 per cent, of such expenditure qualified for weighted deduction u/s 35B of the Income Tax Act, 1961. It was on this basis that one-third of such additional claim, which worked out to Rs. 27,373, was then allowed by the Tribunal as weighted deduction. As mentioned earlier, this clearly raises a question of law which requires to be referred.

Counsel for the assessee, on his part, sought to contend that the finding recorded under the second question was one of fact and, therefore, did not qualify for being referred. Support, for this was sought from three judgments of the High Court of Delhi ; these being Commissioner of Income Tax, Delhi-I Vs. Indian Aluminium Cables Ltd. (No. 2), Commissioner of Income Tax, Delhi (Central-I) Vs. Raunaq International Ltd., and Commissioner of Income Tax, Delhi-I Vs. Jay Engineering Works, . A reading of these rulings would show that neither of them fits in with the facts of the present case and they do not, therefore, provide any binding judicial precedent. What was held there was that apportionment of various items of expenditure to exports was a question of fact. The position here is, however, quite different. The controversy is not with regard to the extent to which expenditure under different heads related to exports, but, whether, after making such apportionment and allowing deductions accordingly, the assessee was further entitled to weighted deduction to the extent of Rs. 27,383 u/s 35B of the Act.

This petition is consequently hereby partly allowed and a mandamus is issued to the Tribunal to draw up a statement of case and refer the second question. This matter is disposed of accordingly. There will, however, be no order as to costs.