Premier Breweries Ltd vs. CIT (2015) 372 ITR 180 (SC)
Business Expenditure – The High Court rightly reversed the order of the Tribunal allowing the claim of deduction of commission paid to agents to co-ordinate with the retailers and State Corporation which were exclusive wholesalers of alcoholic beverages based on primary facts.
The appellants were 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 manufactures had to compulsorily sell their products to the State Corporations which, in turn, would sell the liquor so purchased, to the retailers. It was pleaded by the appellants that manufacturers of beverages containing alcohol had 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. And on that ground they sought deduction u/s. 37 of the Act.
The claim made by the assessee in the facts noted above was disallowed by the Assessing Officer. The said order of the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals). 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 was reversed by the High Court in the Reference made to it u/s. 256(2) of the Act.
Before the Supreme Court, three propositions were advanced on behalf of the appellants. The first was 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, was to be found in M. Janardhana Rao vs. Joint CIT (237 ITR 50) wherein the Supreme Court had held that questions of law arising in an appeal u/s. 260A of the Act must be framed at the time of admission and should not be formulated after conclusion of the arguments.
The second issue raised was the jurisdiction of the High Court to set aside the order of the Tribunal in the exercise of its reference jurisdiction. According to the appellants, the point was no longer res integra having been settled in C.P. Sarathy Mudaliar vs. CIT (62 ITR 576) wherein the Supreme Court had taken the view that setting aside the order of the Tribunal in exercise of the reference jurisdiction of the High Court was inappropriate. It had been 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 had been further held that the High Court had 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.
The third question that had been posed for an answer before the Supreme Court was with regard to the correctness of the manner of exercise of jurisdiction by the High Court in the present case, namely, that the evidence on record had been re-appreciated by the High Court with a view to ascertain if the conclusions recorded by the Tribunal were correct. Reliance had been placed on paragraph 16 of the judgment of the Supreme Court in the case of Sudarshan Silks and Sarees vs. CIT (300 ITR 205, 213).
The Supreme Court noted that in the present case, the High Court while hearing the reference made u/s. 256(2) of the Act had set aside the order of the Tribunal. The Supreme Court held that undoubtedly, in the exercise of its reference jurisdiction the High Court was not right in setting aside the order of the Tribunal. The Supreme Court, however, on reading the ultimate paragraph of the order of the High Court found that the error was one of form and not of substance inasmuch as the question arising in the reference had 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 Supreme Court observed that a reading of the questions initially framed and subsequently reframed showed that what was done by the High Court was 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 questions of perversity of the findings of fact recorded by the learned Tribunal, than the questions retained. The Supreme Court held that from a reading of the order of the High Court it was 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 R.J. Associates and also the payments made by the assessee to R.J. 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 u/s. 37 of the Act. This was a question which the High Court held was required to be answered in the facts of each case in the light of the decision of the Supreme Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT (No.1) (63 ITR 57) and Lachminarayan Madan Lal vs. CIT (86 ITR 439, 446). The High Court had noted the following observations 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 Incometax 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.”
The Supreme Court held that 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 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 u/s. 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 u/s. 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 was one of the correct legal inferences that should be drawn on the facts already recorded by learned tribunal. The questions reframed were to the said effect. the legal inference that should be drawn from the primary facts, as consistently held by the Supreme Court, was eminently a question of law. No question of perversity was required to be framed or gone into to answer the issues arising. the questions relatable to perversity were consciously discarded by the High Court. The Supreme Court, therefore, could not find any fault with the questions reframed by the high Court or the answers provided.
