Income-tax---

----Reference---Failure by Tribunal to consider relevant materials gives rise to a question of law---Whether a particular agreement is colourable or sham transaction is finding of fact---Question which does not arise from order of Tribunal---No direction to refer will be given---Indian Income Tax Act, 1961, S.256(2).

The assessee-company entered into an agreement with A.P.J., to sell tea at various rates. It was in the form of a letter written by the director of the company to A.P.J. The Assessing Officer decided that it was not a genuine transaction. The Commissioner of Income-tax (Appeals) and the Tribunal upheld the genuineness of the agreement. The reference application was rejected by the Tribunal. The Revenue filed a petition under section 256(2) of the Income Tax Act, 1961:

Held, that, whether there was actual transfer or there was no such transfer was the issue. These points were vital in nature and it was necessary for the Tribunal to apply its mind on those points. Hence, the question, whether the findings of the Tribunal that the transactions between the assessee and A.P.J., could not be said to be not bona fide was based on relevant considerations and whether the decision based on such consideration was not tenable in law was a question of law to be referred:

Held also, that whether an agreement is a colourable or sham transaction is a question of fact.

CIT v. Govind Narain (1975) 101 ITR 602 (All.); CIT v. Prithvi Raj Daga (1986) 159 ITR 193 (Raj.); CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 and Venkateswara District Motor Service v. CIT (1965) 55 ITR 597 (Mys.) ref.

G. K. Joshi and U. Bhuyan for the Commissioner.

Dr. A. K. Saraf, K. K. Gupta and R. K. Agarwal for the Assessee.

JUDGMENT

D.N. BARUAH, J.---This application under section 256(2) of' the

Income Tax Act, 1961, is against the order dated October 24, 1994, passed by the Income-tax Appellate Tribunal, Gauhati, in Reference Application No.4/(Gau) of 1994 arising out of the Income-tax Appeal No. 403/ (Gau) of 1991, for the assessment year 1987-88 rejecting the application under section 256(1) of the Income-Tax Act, and praying for a direction to refer the questions mentioned the petition for opinion of this Court.

Facts in short may be stated as follows:

The assessee, Assam Frontier Tea Ltd. and the assessment involved in this present case relates to the year 1987-88. The assessee entered into a forward contract with another company Apeejay (Pvt.), to sell tea of different quantities at various rates pursuant to an agreement entered into by and between the assessee-company and Apeejay (Pvt.) Ltd. on November 1, 1985. This agreement was in the form of a letter issued by the director, the assessee company, to Apeejay (Pvt.) Ltd. As per the said agreement, the assessee-company agreed to sell 16,30,000 Kgs. of tea comprising the production of various tea gardens of the assessee-company, namely, Talup, Hokonguri, Khobong, Hapjan, Budlabeta, Kharjan, Pengaree and Budlepara Tea Estates. While making the assessment, the Assessing Officer held that the agreement was an arrangement to understate the assessee's sale proceeds and thereby to reduce the tax liability. According to him, the transaction between the assessee-company and the Apeejay (Pvt.) Ltd. was not a genuine transaction and also not a bona fide business deal. The Assessing Officer further observed that this agreement was made with an intention of reducing profits with a view to reduce tax liability and, accordingly, the Assessing Officer added Rs.34,$0,707. Being aggrieved by the assessment order, the assessee-company preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the agreement was like a forward contract for sale of tea irrespective of price fluctuation in the auction market. The assessee was bound to abide by and honour the said contract and, accordingly, he held that the Assessing Officer could not determine the notional income by bringing on record the evidence to support the same and the entire addition was deleted. The Revenue preferred the matter before the Income-tax Appellate Tribunal who held that the transaction between the assessee and the Apeejay (Pvt.) Ltd. could not be said to be not bona fide. The Tribunal, therefore, upheld the decision of Commissioner of Income-tax (Appeals).

An application under section 256(1) of the Income-Tax Act, 1961, was filed by the Revenue with a request to draw up a statement of the case and to refer the following questions for opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that the transactions between the assessee and the Apeejay (Pvt.) Ltd. cannot be said to be not bona fide is based on relevant consideration and whether the decision based on such consideration is not tenable in law?

(2) Whether, on the facts and in the circumstances of the case, the transactions between the assessee and the Apeejay (Pvt.) Ltd. based on the agreement, dated November 1, 1985, is not a sham transaction, and whether such agreement is not a colourable device used for reducing tax liability by the assessee? If so, whether the decision of the Tribunal based on such agreement is not tenable in law?

(3) Whether, on the facts and in the circumstances of the case and in view of questions Nos. 1 and 2 above, the decision of the Tribunal upholding the Commissioner of Income-tax (Appeals) order deleting addition of Rs. 34,80,707 is justified?"

The Tribunal, however, rejected the prayer for referring the said questions on the ground that no question of law arose in respect of the aforesaid three (3) questions. Hence, the present petition.

We have heard Mr. G. K. Joshi, learned standing counsel for the Revenue, assisted by Mr. U. Bhuyan, and Dr. A K. Saraf, learned counsel for the assessee, assisted by Mr. K. K. Gupta.

According to Mr. Joshi, learned standing, counsel for the Revenue, all these three questions involved questions of law and the Tribunal ought to have referred those three questions for opinion of this Court. So far as the first question is concerned Mr. Joshi has drawn our attention to the judgment of the Tribunal specially in sub-paragraph (3) of paragraph 4, wherein the Tribunal specifically mentioned that the Senior Departmental Representative and the Departmental Representative in a written submission urged that the Assessing Officer made the addition of Rs. 34,80,707 on the following amongst other grounds:

"(i) The sale was made in terms of the assessee's agreement, dated November 1, 1985, referred to above.

(ii) Actual transfer of goods from the assessee company to allied company did not take place.

(iii) Tea was sent to the warehouse in the name of the assessee company. "

Mr. Joshi, learned standing counsel for the Revenue, submits that there was non-consideration of materials and therefore it is a question of law.

Dr A. Saraf, learned counsel for the assessee, on the other hand fairly concedes that non-consideration of the relevant materials may give rise to a question of law. However, this Court before giving a direction must be prima facie satisfied that there was really some non-consideration of the material facts. This Court may not give a direction without being satisfied about the existence of such grounds, namely, non-consideration of certain materials. In this connection, Dr. Saraf, has drawn our attention to a decision of the Mysore High Court in Venkateswara District Motor Service v. CIT (1965) 55 ITR 597. In the said decision, the Mysore High Court has held thus (page 604): "If in an application under section 66(2) of the Indian Income-tax Act, 1922 (which is in pari materia similar to section 256(2) of the Income-Tax Act, 1961), it is asserted that the conclusion reached by the Tribunal does not properly flow from the material on which it depended, it would be the duty of the High Court to decide whether what is asserted is prima facie supportable. It is only then that a question of law can arise".

Mr. Joshi, learned standing counsel for the Revenue, fairly concedes the said legal proposition.

We find sufficient force in the submission of Dr. Saraf. We are also in respectful agreement with the decision of the Mysore High Court (see (1965) 55 ITR 597). It is true that each and every assertion that a question of law is involved will not enable a Court to give direction to the Tribunal for referring the said question to the Court without the Court being prima facie satisfied about the existence of the basis of the said assertion.

Bearing in mind the above proposition of law, we are to see whether the contention of the petitioner that there is a prima facie case for giving a direction to the Tribunal to refer the above questions whether exists or not In this connection, Mr. Joshi, learned standing counsel appearing on behalf of the Revenue, has drawn our attention to paragraphs 4(1) and 4(2) of the judgment where the submission made by the learned Senior Departmental Representative is reflected. Mr. Joshi has also drawn our attention to sub paragraph (3) of paragraph 4 of the judgment wherein the Tribunal noted that the Assessing Officer made an addition of Rs.34,80,707 the ground that the actual transfer of tea from the assessee-company the allied company did not take place. Tea was sent to the warehouse the name of the assessee. As per the agreement invoices of tea were apposed to be sent to the buyers but the tea continued to remain in the ware house, was thereafter straightaway sold by the brokers. According to Mr. Jo shi, these are the sufficient materials which the Tribunal ought to have taken into consideration before arriving at the decision. Mr. Joshi admitted that the Tribunal though noted did not decide those matters.

Dr. Saraf, on the other hand, submits that these observations were made by the Assessing Officer, not by the appellate authority or the Commissioner of Income-tax (Appeals) and, therefore, it is not necessary on the part of the Tribunal to consider those contentions. Dr. Saraf has further submitted that even then the points were considered in paragraph 8 of as judgment, it was not necessary on the part of the Tribunal to decide those contentions. Dr. Saraf has also drawn our attention to the second paragraph of paragraph 8 of the said judgment. We have gone through the said submission.

Similarly, Mr. Joshi has also drawn our attention to sub paragraph (3) of paragraph 4 and subsequent clauses (iii) and (vi) of the aforesaid sub-paragraph (3) of paragraph 4 of the Tribunal's order. We find that prima facie these were not at all discussed by the Tribunal at the time of passing of the order. Accordingly, in our opinion, this point of question No. l is referable under section 256 of the Act and, as such, this is to be referred to the Court for opinion.

Dr. Saraf has also submitted in this connection that the Income-tax Officer or the Tribunal is only required to consider and apply his mind to a particular subject-matter or a particular source of income from the point of view of its taxability or non-taxability and not to any incidental facts connected with it. In this connection, he drew our attention to the decision of the apex Court in CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443, wherein the apex Court held that "consideration" does not mean "incidental" or "collateral" examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection". Dr. Saraf relying upon the aforesaid decision has urged before us that it is only the subject matter of tax that should be considered but not inference of facts. According to him, these above points referred by the Assessing Officer are incidental inferences of facts, therefore, there is no necessity on the part of the Tribunal to consider this matter. We are afraid we cannot agree with Dr.Saraf in this connection. In this case whether there was an actual transfer or there was no such transfer was the issue. In our opinion, these points are vital in nature and, therefore, it is necessary for the Tribunal to apply its mind on those points. Accordingly, we reject the contention of Dr. Saraf on this point. In our opinion, question, No. 1 is a question of law and the same should be referred to this Court for opinion.

Regarding question No. 2, Mr. Joshi, learned standing counsel for the Revenue, vehemently argued before us that along with the agreement annexed with the additional affidavit as in Annexure "1" is not an agreement in a proper sense. According to him, it is not in the proper form.- He submitted that this agreement should be rejected inasmuch as it is not in a proper form. There was no clause regarding mode of payment and there was no provision for interest. Although the transaction was more than Rs.3 crores only a sum of Rs. 59,701 was received by the assessee-company in the relevant year and it was shown in the accounts of the relevant year. Mr. Joshi further submits that this cannot be a business tactics. No businessman will defer payment to the next year. To this, Dr. Saraf has drawn our attention to a decision of the Rajasthan High Court in CIT v. Shri Prithvi Raj Daga (1986) 159 ITR 193. In the said decision, the Rajasthan High Court held that (headnote): "the question whether the sale of immovable property is genuine or a colourable transaction is a question of fact and no question of law would arise from the decision of the Tribunal on this question".

Dr. Saraf has also relied upon a decision of the Allahabad High Court in the case of CIT v. Govind Narain (1975) 101 ITR 602, wherein the Allahabad High Court dealing with a similar question, held that (headnote): "the finding that the deed was genuine and not sham was a finding of fact and the Tribunal was justified in allowing the claim of partial partition .

It is true that whether a particular document is a colourable or sham transaction is a finding of fact and no question of law arises. We have examined the document. The director, Frontier Tea Limited, the assessee company wrote a letter to Apeejay (Pvt.) Ltd. Making the offers for sale of about 16,30,000 Kgs. of tea at the price and quantity mentioned in the said letter and also incorporating certain terms and conditions and Apeejay (Pvt.) Ltd. accepted the same. In our opinion, this becomes a valid contract. We do not find anything wrong in it. There may be clauses for prescribing the mode of payment, or penalty or the provision for interest. In the absence of those provisions the document cannot be rejected as not genuine.

In the view of the aforesaid discussion, we are of the opinion that no referable question of law arises in this case and question No.2 is a question of fact, and, accordingly, we are not inclined to give any direction to the Tribunal to refer question No.2.

In view of our decision in respect of questions Nos. 1 and 2, in our f opinion, question No.3 does not arise at all from the order of the Tribunal at this stage. We are not inclined to give any direction to the Tribunal to refer question No.3 also. Accordingly, we partly allow this petition directing the Tribunal to refer question No. 1 to this Court for opinion.

The annexures to the additional affidavit filed by the Department on May 27, 1996, shall form part of the statement of the case.

Considering the entire facts and circumstances of the case, however, we make no order as to costs.

A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal.

M.B.A./1261/FCOrder accordingly.