L.G. Ramamurthi and Others vs The Commissioner of Income Tax

Ramaprasada Rao, J.—In the reference which arises out of three appeals by three different Assessees, which were dealt with together by a common order passed by the Appellate Tribunal, Madras, the following common question of law has been referred to us for an answer thereon:

Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the income derived by the minor children from gifts made to them by their uncles is includible in the total income of the Assessee Hindu undivided family.

As the question involves a retrospect of the facts relating to the income tax proceedings made on the Assessees during and after the assessment year 1958-59 it is necessary to notice them notwithstanding the fact that the years of assessment in question are 1961-62 and 1962-63. In fact, the facts are common and the Tribunal states a consolidated statement of the case.

Four divided brothers called L.G. Balakrishnan and his brothers constituted themselves as partners of a firm. The share income of each of the partners was admittedly accounted for and assessed as the income of the respective Hindu undivided families of which each of the brothers was the kartha. The partnership is a registered firm and secured recognition as such under the Indian income tax Act, 1922. During the assessment year 1958-59, each of the partners constituting the firm of L.G. Balakrishnan and Brothers made a gift of a substantial sum to the minor daughter or son of his other brother who in turn, by way of cross gift secured a like or a larger amount of gift in favour of his own son from his other partner brother. The modus-operandi adopted is not in dispute. One of the brothers (partner of the firm), who has a capital account of his own, would withdraw a certain amount which he wanted to gift over to the minor child of his other brother and make a credit entry in the name of such a minor in the books of account. His capital account is debited and the minor's new account is credited with the said amount. He would also pay Gift Tax on the basis of a voluntary return submitted by him. The minor is also subjected to wealth tax taking into consideration the above credit in the

book. Interest was paid by the firm on the credit balances in favour of the respective minors. The same procedure was adopted during the next assessment year 1959-60 when two amongst the partners make cross gifts to their respective children When these transactions were scrutinised by the Revenue for the assessment year, 1958-59, it was held that u/s 16(3)(a)(iv) of the Indian income tax Act, 1922, hereinafter referred to as the Act, the gifts which were admittedly cross gifts would attract tax on the basis that an individual secured and incurred an indirect benefit in favour of his child or children as the case may be, and that, therefore, such income arising from the respective credit entries in favour of the minor children should be added on to the income of their father and assessed accordingly. It should, however, be noted that no contention was specifically raised that the Assessee-father was the kartha of an undivided Hindu family and that, therefore, it was the Hindu undivided family which should, for all purposes, be considered to be the donor and not an individual. It so happened, however, that this Court in L. G. Balakrishnan Vs. Commissioner of Income Tax, Madras, was of the view that the gift by one of the brothers to the minor child of his other brother and securing back by way of cross gift a gift of a like sum to his own child was an indirect transfer of the assets of the first brother to his own minor son and the interest accruing thereunder was rightly included in his total income u/s 16(3)(a)(iv) of the Act. The decision was rendered again without noticing the admitted fact that the Assessee before them was a Hindu undivided family. The assessment year which was noticed by this Court in L. G. Balakrishnan Vs.

Commissioner of Income Tax, Madras, , was 1958-59. For the assessment years 1959-60 and 1960-61, the above principle was applied and the assessments were confirmed by the Appellate Assistant Commissioner. On further appeals preferred by the Assessee the Appellate Tribunal held that the provisions of Section 16(3)(a)(iv) are not applicable to the case of a Hindu undivided family and that even treating these transactions as cross gifts, the interest income of the minor children are not includible in the total income of the respective Hindu undivided families. It so happened, however, that for the assessment years under review, in the instant reference, namely 1961-62, and 1962-63 the income tax officer, completed the assessment by including the interest in the total income of the family. This time the assessment was made not by invoking the provisions of Section 16 as above, but en the ground that the alleged gifts made by each brother to the other brother's child was not genuine and was only a part of a general scheme to evade tax. The Assessee was successful before the Appellate Assistant Commissioner. On a further appeal preferred by the Department the Tribunal accepted the contention of the Revenue that the gifts were sham and should be treated as non est in the eye of law and that the funds which stood nominally in the names of the various minors were really the moneys of the family and, therefore, the interest income was includible in the respective assessments of the Hindu undivided families. After considering the background of the assessments of the family the Tribunal observed as follows:

From the facts set out earlier it would have been seen that from the capital of the family, a sum of Rs. 50,000 is taken away and shown as gifted to a minor child of the kartha of another family and the gifted money being deposited with the firm of L.G. Balakrishnan and Brothers. This process is repeated in the case of the second and third brothers until the circle is completed. In the end, the integrity of the family funds stands as before it started its circulating journey and in the same way as all the members continue to be the members of the respective family....

The plea of the learned Counsel for the assesses is that the amounts had been subjected to gift tax, etc., cannot avail in these proceedings as it is only here that we have to consider the true and correct nature of these transactions. Even if a gift tax had been levied, the question here is whether the fund which earned income is the fund of the family or not. At the first stage it was certainly a gift but by successive stages indicated earlier the fund had come back to the coffers of the family.

In this view, the Tribunal agreed with the Revenue and allowed the appeals.

On the basis of the above common order of the Tribunal in the three appeals in question of the three brothers, the question above quoted was referred by the Tribunal u/s 256(1) of the income tax Act, 1961, at the instance of, the Assessee.

In this reference the Revenue's firm stand is that the Assessees were assessed during the assessment years not by invoking Section 16(3)(a)(iv) of the earlier Act. The Assessee's contention, however, is that it should be deemed to be u/s 16 and an argument also was addressed initially on that basis. But, as the Revenue made it clear that they were not relying upon Section 16 of the earlier Act, it is not necessary for us to consider the impact of Section 16 for answering the question.

The vexed question whether the question referred either at the instance of the Assessee or the Revenue or otherwise for an answer by the Tax Court is wide or otherwise has often posed variegated problems depending upon the same being all-pervading and exhaustive or upon its being limited and circumscribed. Normally, there is, of course, no difference in cases where the poser is complete and all comprehensive in the sense, it covers, all questions, whether of fact or of law or mixed questions of law and fact. The confrontation, however, evades analysis if it is couched in a language, prima facie all-embracing, but effectually only high-lighting one or more particular aspects or facts arising from the Tribunal's order. It is while facing the latter form of a question, difficulties have arisen, whether answer could be rendered by this Court, on matters not covered by the question. Particularly it becomes difficult, if the question is couched in unambiguous language which touches one aspect and, hovers, round a particular finding of fact rendered by the Tribunal. If the question is thus and simple and explicable one, and if other questions could have been framed and asked for being referred in the manner provided in the Act, then the poser assumes importance, as a virtual embargo is imposed on the tax Court, not to answer other questions though arising out of the order, if they have not been asked for and referred. This salient rule of prudence is deduced because, a person cannot take advantage of his lethargy or indigence. If only the Assessee or the Revenue is alert when they seek a reference they could have prompted the Tribunal or even the Tax Court to include proper and appropriate questions for securing an answer. If they fail to do so, then they cannot by a clever battle of manoeuvring seek the assistance of the High Court to do that which it ought not to do. If the Court does exceed its jurisdiction, it will be committing an error apparent. It is by now well settled that the High Court, exercising its advisory jurisdiction in answering references is not a Court of appeal and it ought not to engage itself as if done by an appellate Court exercising jurisdiction under common law. The Tax Court is bound by the findings of fact rendered by the appellate Tribunal, for the latter is constituted under the statute as the sole fact finding authority. It, therefore, follows that the obligation of the Court while answering a reference is to base its decision on the findings of the appellate Tribunal and to answer the questions arising therefrom in the light of those facts found by them. The only exception which has been carved out in this matter is when the tax Court is satisfied to the core that the finding of the appellate Tribunal is unsustainable because there is no evidence to support the said finding or on the other ground that such finding is perverse or unreasonable. Even in such cases the Assessee should, as indicated earlier be alert in invoking the statutory machinery under the income tax Act, when he seeks for a reference and should ask for a reference of a specific question that there was no evidence or that the finding is perverse or unreasonable. If the findings of fact are not challenged by a specific question, then this Court on reference cannot by a priori considerations canvass the propriety or regularity of such findings which have become final in the eye of revenue law. If the party who is aggrieved by the finding which according to him was rendered by the Tribunal on no material or which according to him is unreasonable, he is bound to expressly raise the question about the validity of such findings of fact and file an application u/s 66(1) to that effect; if he fails to do it, he is not entitled to urge before the High Court that the finding is vitiated for any reason.

Mr. Swaminathan with his usual persuasion maintains that the question as framed in the instant case and referred to us is wide enough to take into its compass all questions of fact and law arising under the order of the Tribunal. Reliance is placed upon Mrs. Sarojini Rajah Vs.

Commissioner of Income Tax, Madras, There the question was comprehensive enough. It read "whether on the facts and in the circumstances of the case, the disallowance of the loss of Rs. 42,534 resulting from the sale of Rs. 32,000 shares held by the Assessee in ... is lawful?" In the light of the facts of that case, this Court, to which one of us was a party, came to the conclusion that as the subject before the Tribunal was as to the propriety of the disallowances of the loss, necessarily, the enquiry embraced the character of the stock holding and the genuineness of the sales of the shares. Reliance was also placed on Commissioner of Income Tax, Gujarat Vs. A. Raman and Company, . On the basis of that decision it was urged that the law does not oblige an Assessee to disclose income which he could have earned and, that the Assessee is entitled to avoid tax liability by so arranging his commercial affairs that charge of tax is distributed and in tax laws considerations of morality are alien for the purpose and as such the process adopted by the Assessees in this case ought to be deemed to be an attempt to avoid tax liability by legitimate means. But this overlooks the fundamental principle that if it is made to appear by a camouflage that the income which belonged to the Assessees had been earned by some other persons then it is irrefutable that such income can be brought to tax in the hands of the Assessee. Such is the case here. In the question to be answered the poser is whether the Tribunal is justified in holding, etc. Justification pre-supposes the availability of material to decide. Therefore, it cannot be said that this is a case in which the Tribunal gave a finding without material. In fact, the application made by the Assessee for reference which was noticed by us, though not on the record does not expressly say so. Therein the Assessees'' case is that the assumption of the Tribunal and the inferences drawn by the Tribunal are opposed to the material evidence in the case. This does not mean that there is no material. We are not satisfied that the conclusion arrived at by the Tribunal is not flowing from the facts on record, but arrived at by ignoring facts.

At this stage it is convenient to consider the scope of the jurisdiction of the High Court in a Tax reference, having particular regard to the answers to be rendered on the questions referred. It is by now well settled that the High Court ought not to embark upon a re-appraisal of the material considered by the Tribunal and disturb pure findings of fact arrived at by the Tribunal. There is only one exception to this rule and that is when such a finding has been given without any evidence to support it and when it is ex facie perverse and unreasonable. It is not possible for the High Court to differ from the Tribunal on a question of fact even if it would come to a conclusion other than that arrived at by the Tribunal. The Supreme Court in SREE MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF Income Tax, MADRAS., was of the view that when a finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact; when a conclusion has been reached on an appreciation of a number of facts established by the evidence, whether that is sound or not, must be determined not by considering the weight to be attached to each single fact in isolation, but by assessing the cumulative effect of all the facts in their setting as a whole. If this principle is borne in mind, the Tribunal in this case considered the primary facts which revolved round the scheme or device adopted by the Assessees and ultimately when they found that the money came back to the minor son of each of the Assessees by way of a cross gift, they came to the conclusion after appraising the over-all picture and taking into consideration their cumulative effect that the money came back to the coffers of the joint family. May be, one view is that the money came back to be owned by the minor who is a coparcener of the family and, therefore, it did not literally come back to the Hindu undivided family. But this cannot be said to be the only view that is possible. In such circumstances, the High Court cannot review the finding given by the Tribunal as the other inference drawn by it is also possible and certainly not perverse or unreasonable.

The above principle has been reiterated in many other decisions of the Supreme Court vide A. Vs. THOMAS AND CO. LTD. v. COMMISSIONER OF Income Tax., and Commissioner of Income Tax, Madras Vs. M. Ganapathi Mudaliar, . In the latter case, the Court made it clear that whilst the High Court should not act as an appellate Court, it should not consider whether the finding given by the Tribunal was justified on the material available. Sikri, J., speaking for the Court Observed at page 629:

It seems to us that in answering the questions revenued to it, the High Court has unwittingly acted as all appellate Court. What it had to consider was whether there was any material to support the finding of the Tribunal, and not whether the finding was justified.

This is in all fours with the instant case. Even the Privy Council in Griffiths v. J.P. Harrison (Watford), Ltd. [1965] 53 ITR 328 (P.C.) elucidated the proposition in a slightly different way. The learned Law Lords said: (h.n.)

In considering whether there was evidence on which the Special Commissioners could find, as they did, that this was not a trading transaction, the question to be considered is whether the contrary conclusion was the true and only reasonable one.

it, therefore, follows that if an alternate conclusion is plausible, then the finding is not perverse or unreasonable. We are also satisfied that such funneling back of the assets into the joint family though ostensibly through the minor, is absolutely an artificial transaction made with the intent to avoid tax and is, therefore, bound to be characterised as a sham one which need not be taken notice of by the Revenue.

One other question which crops up is whether the question referred is all embracing and comprehensive and whether there is any lapse on the part of the Assessee or the Department, as the case may be, in seeking a reference of a question to this Court for an answer. If the material on which the conclusion is based are to be reviewed by this Court for any reason whatsoever, then a specific question should be framed and a reference asked for on that aspect and it would be indeed so if the question involved is tied up with facts. It may be different when the question is a pure question of law. As pointed out by the Supreme Court in Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., Such a question of law might involve more than one aspect, requiring to be tackled from different standpoints ... and it would be an over-refinement of the position to hold that such aspect of a question is itself a distinct question for the purpose of Section 66(1) of the earlier Act.

In that case the Court was confronted with a question of law which was raised before the Tribunal and dealt with by it and it was also pointed out that the contention raised for the first time in the High Court was within the scope of the question as framed by the appellate Tribunal and was really implicit therein. we are not, however, impressed with the contention that in so far as this case is concerned, any such implication is there in the question and that the contention of Mr. Swaminathan, that there is no material or that the material on record is insufficient to come to the conclusion is one of the aspects of the question raised in the present case. The principle has been once again clearly stated in India Cements Ltd.

Vs. Commissioner of Income Tax, Madras, .

... it seems to us that, in a reference, the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge those findings first by an application u/s 66(1). If he has failed to file an application u/s 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for one reason or the other.

In this case the assesses failed to apply for a reference to challenge the findings given by the Tribunal but have indeed applied to this Court for an answer on the question whether the conclusion on such findings which have become final is justified. This cannot obviously be answered by this Court without regard to the conclusion of the Tribunal which cannot be said to be perverse or unreasonable.

In Hazarat Pirmahomed Shah Saheb Roza Committee Vs. Commissioner of Income Tax, Gujarat, ) the relevant facts are as follows. The Tribunal found that the original purposes of the Wakf was confined to the maintenance of the roza and the mosque and celebration of festive occasions and, therefore, the Wakf was established for a wholly religious purpose. At the hearing of the reference the High Court has interfered with the finding of the Tribunal on this point. The High Court considered that the maintenance of madraasas and the library must be taken to be one of the original purposes of the Wakf and the finding of the Tribunal that the Wakf was wholly for a religious purpose must be overruled. In such circumstances the Supreme Court said that the High Court had no justification for interfering with the findings of the Tribunal on the point. It reiterated the principle laid down in India Cements Ltd. Vs. Commissioner of Income Tax, Madras, and Commissioner of Income Tax, Madras Vs. M.

Ganapathi Mudaliar, and observed that in the absence of a specific reference challenging firstly the findings of fact by a regular application for the purpose, then it is not open to him to urge before this Court that the findings are to be disturbed or that the conclusion arrived at is not justified. It is obligatory on the part of the High Court, while hearing a reference, to confine itself to the facts as found by the Appellate Tribunal and answer the question of law in the context of those facts- vide Commissioner of Income Tax, West Bengal III Vs. Imperial Chemical Industries (India) (P.)

Ltd.,

Mr. Swaminathan, however, referred to us the comment at page 1011 of Kanga and Palkhivala's income tax, sixth-edition, volume I wherein the learned author expressed the view that there was a need to reconsider the position on the Court's jurisdiction in income tax references. A discussion on this aspect is equally outside the purview of this Court.

It, therefore, follows that as there is no specific question in this case raised by the Assessees challenging the findings of fact, it is not open to this Court, in hearing a reference, to undertake such an investigation. As already stated, there is virtually an embargo on this Court to do any such

thing. In fact, the Supreme Court in Commissioner of Income Tax, Madras Vs. M. Ganapathi Mudaliar, specifically laid down that the Court exercising its advisory jurisdiction in hearing a reference is not expected to find whether a conclusion is justified, unless of course, there is totality of absence of material and the contrary view is the only reasonable view. In the light of the catena of decisions cited and as the Assessees have not raised a specific question challenging the findings on which the conclusion has been based, the question has to be answered against the Assessees.

One other limb of argument which has arisen and which is closely allied with the problem posed is whether there was at all any material for the Tribunal to conclude that the transaction involved was a sham transaction. Another question raised is whether the revenue is bound to be consistent in their stand throughout in the matter of the assessment of specified Assessee in the sense that they are estopped from changing their attitude and modus operandi in the matter of the treatment of the Assessee while making him exigible to tax in one assessment year, when on the same facts he escaped such tax in another or previous assessment year.

We shall now take up the question whether there was absolutely no material on record for the Tribunal to come to the conclusion that it was a sham and colourable transaction indulged in by the Assessee to avoid tax. Mr. Swaminathan would say that if indeed the transaction is a sham one, then there is no provision under the taxing acts to bring it into the net of taxation. This overlooks the fundamental characteristic of a sham transaction which Isaacs, J., characterises in Jaques v. Federal Commissioner of Taxation 34 C.L.R. 328, 358 as a transaction which is inherently worthless and needs no enactment to nullify it. Gifts and cross gifts in the instant case are parts of the same transaction devised to circumvent the exigibility to tax and the scheme has been assiduously maintained by the Assessees throughout. It may be an unreal transaction or appearances or reality may be maintained. But the only question, as pointed out by the Supreme Court in Commissioner of Income Tax, Bombay City II Vs.

Keshavji Morarji and Another, is what is material is not the unreality of the cross transactions, nor whether the appearance of reality is attempted to be maintained, but whether the transfers are part of the same transaction adopted with a view to evade the implications of law. In that case the Court was considering Section 16(3)(a) of the Indian income tax Act, 1922. The above pronouncement, however, in our view, is of general application.

We have seen in the instant case that the Assessees, for a considerable time in the past and during the assessment years, were attempting to forge a scheme of action to avoid tax liability as far as they could. They escaped the clutches of law earlier because of the view taken by this Court in L. G. Balakrishnan Vs. Commissioner of Income Tax, Madras, . But as we shall presently consider the Revenue has the right to bring to tax income which is attributable to the Assessees but which they have by clever manoeuvring avoided to be so brought in to the net of taxation. It is open for the Revenue to probe into such a scheme and find whether it is a sham transaction in the sense that it could be treated as inoperative in the eye of law. As pointed out by the Supreme Court in SREE MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF Income Tax, MADRAS., an inference from the facts of a case that the transaction is a benami transaction does not involve the application of any principles of law to the facts established in the evidence and is a pure question of fact which cannot be made the subject of reference u/s 66 of the Act. Here the Tribunal came to the conclusion that by the device adopted the moneys came back to the coffers of the joint family. It also put in on the ground that the integrity of the family funds-stood as before it started its circulating journey and ultimately the Tribunal would say that there had been no change in the state of affairs at all and concluded that all the transactions were sham. A sham transaction and a benami transaction are governed by certain essential common principles, though the word benami is occasionally used inaccurately to refer to a sham transaction as well. Applying, therefore, the principle of the Supreme Court in SREE MEENAKSHI MILLS LIMITED Vs. COMMISSIONER OF Income Tax, MADRAS., it follows that the finding of the Tribunal that it is a sham transaction is final and the conclusion rendered by them was on material placed before them and it cannot be lightly brushed aside as an improper and an unreasonable conclusion.

The only aspect which remains, therefore, for consideration is whether the Revenue can change their plank from one assessment year to the other and whether they are not estopped or whether the reasoning rendered during the previous assessment year is not res judicata. It is sufficient to notice two decisions of the Supreme Court on this question which emphatically lay down that no question of estoppel would arise, nor the principle of res judicata be invoked in assessment proceedings, as each assessment is independent by itself and each assessment year is an independent unit by itself. In The New Jahangir Vakil Mills Co., Ltd. Bhavnagar Vs. The Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Ahmedabad, the Supreme Court observed that it was well settled that in matters of taxation there would be no question of res judicata. In M.M. Ipoh and Others Vs. Commissioner of Income Tax, Madras, the Court said:

The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment; the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive.

The last contention of Mr. Swaminathan is that as the donors were subjected to the levy of Gift Tax and the donees were assessed under the Wealth Tax, it is not open to the Revenue to treat the credits in favour of the respective minors as that of the donors or the joint family concern.

This argument is apparently based on the principle against double taxation. In Hood Barrs v. C.I.R. (No. 3) 29 T.C. 209, 239 a similar question was considered by the Court of Appeal. There one Stella received certain dividends which she handed over to her father of his firm. She was assessed upon those dividends which she included in her surtax return and it was said that as Stella had been assessed Revenue were irrevocably committed to that decision and could not assess another because that would amount to double taxation. Upjohn, J., speaking for the Court said:

I am entirely unable to accept that argument. It was said that Stella, if she was a nominee, would be entitled when she handed over the dividends to her father to deduct the amount she had to pay insure-tax. In my judgment, that is quite wrong. If you are a nominee for another and you receive dividends of source, they suffer deduction of income tax at source and you deduct that. However, you do not include the dividends in your surtax return because the income is not yours but that of your beneficiary, If you do include them that is your fault....

If, therefore, the donor paid Gift Tax or the donee was subjected to Wealth Tax, they made themselves exigible to tax voluntarily and that was an error on their part. The Revenue can certainly overlook such errors committed by the Assessee on his own volition and bring to tax income which is exigible to tax in the hands of the Assessee. This has been done in the instant case.

Before leaving this reference we have to point out that no argument was addressed before us on the question noted out by the Revenue before the Appellate Tribunal under the Hindu Law and about the competency of a Hindu joint family to make a gift to a stranger.

Whilst, therefore, accepting the findings of fact noticed by the Tribunal in their order and which have been challenged by specific questions and after noticing the Tribunal's order and their reasoning, we are satisfied that the Tribunal is justified in law in holding that the income derived by the minor children from gifts made to them by their uncles is includible in the total income of the Assessee's Hindu undivided family. We, therefore, answer the question for decision in the affirmative and against the Assessee. Tax Case is answered accordingly with costs.