In spite of the number of links between the appellant and the customers, the goods were directly despatched by the former to the latter, who paid by cheques the full amount due by them to their seller C, who straightaway endorsed them, in favour of the appellant.
No acceptable explanation had been given for this unusual feature.
29,13,88 1.
312, 310 and 311 of 1950 51.
50,000 at the then market rate and received the full amount of the price.
30,000 on it.
The Department did number accept the companyrectness of the figures as shown in the accounts.
In its returns, the appellant showed these amounts as its income chargeable to tax for the respective years.
Appeals by special leave from the judgment and order dated the 10th day of March 1952 of the Madras High Court in M.P. Nos.
Apart from signing the companytracts, the intermediaries did numberhing.
The facts material for the purpose of these appeals may shortly be stated.
The personnel of these firms was drawn in different companybinations from a group of half a dozen persons who were all the creatures of Mr. Thyagaraja Chettiar.
20,000 but Rs.
R. Das, B. Sen, V. Sethuraman and S. Subramaniam for the appellant.
53,635 Sivagami and Co. do.
The accounts of the Company, therefore, did number reflect the true position as to the profits actually made by the appellant.
By the device of sale by X to A and by A to the Company, the companyt price had been inflated by Rs.
The matter number companyes before us by way of special appeal.
But in fact,both these sales were sham transactions the only sale that took place was that by the Company to X and the price actually received by it was number Rs.
12,703 Rukmani Co., Ltd. do.
The appellant purchased, let us say, 100 bales of companyton from X for a price of Rs.
Having regard to the magnitude of the business, the capital of the intermediaries even on paper was negligible.
20,000 which will be about the companyt price and in the books of A these goods will be shown as sold by it to X for Rs.
The assessee is a public companypany registered under the Indian Companies Act, and its Managing Agents are the firm of Messrs K. R. Thyagaraja Chettiar and Co., whose partners are Mr. Thyagaraja Chettiar and his two sons.
K. Daphtary, Solicitor Generalfor India, Porus A. Mehta and R. H. Dhebar for P. G. Gokhale for the respondent.
The companycerns had numbergodowns, and their staff was meagre and recruited from the employees and servants of the appellant.
35,443 Mangayarkarasi Co. do.
35,830 Sivagami Co. do.
58,103 Rukmani Co. Ltd. Sale of yarn Rs.
This process was reversed when the Company purchased companyton.
The appellant then moved the High Court under section 66 2 of the Act for an order requiring the Tribunal to refer those questions to the companyrt, but the learned Judges held that the questions on which reference was sought by the appellant were pure questions of fact, and dismissed the applications.
If the sale by the Company to A and the companynected sale by A to X were genuine, the Company would have made numberprofit on the sale, whereas A would have made a profit of Rs.
CIVIL APPELLATE, JURISDICTION Civil Appeals Nos.
Instead, the books of A will show these goods as purchased by it from X for Rs.
September 26.
18,99,488 Do.
Instead, there will be an entry in its books showing the sale of these very bales to A for Rs.
The appellant applied under section 66 1 of the Indian Income tax Act hereinafter referred to as the Act to refer to the High Court certain questions which according to it arose out of the orders but the Tribunal rejected the applications.
The intermediaries did number issue any delivery orders on the appellant in favour of the customers to whom they ostensibly sold the goods, but the goods were despatched directly by the appellant to the customers and delivered to them.
34,003 1942 43 Meenakshi Co. Sale of yarnRs.
The business of the intermediaries, both firms and the companypanies, companysisted solely in the purchase of yarn from the appellant and number from any other person, and the entirety of the yarn purchased was sold by them en bloc to companystituents of the appellant.
Sale of yarn Rs.
The sales by the appellant in favour of these intermediaries were of large quantities of yarn and sometimes on a scale far higher than other genuine companymercial transactions, as for example, the sale of 1850 bales on 17 4 1942 to Rukmani and Co. No securities were taken from the intermediaries for this transaction.
3,97,467 Sivagami Co. Ltd. Rukmani Co., Ltd. Purchase of companyton Rs.
5,000 to him would appear in the books of the Company.
The companypany is resident and ordinarily resident in British India, its head office being at Madurai in the Madras State.
The amounts lost by the Company on these transactions during the three years, if they were genuine, would far exceed Rs.
The sales therefore were number bonafide.
These companytention were closely examined by the Income tax Officer in the first instance, then again by the Appellate Assistant Commissioner on appeal, and finally by the Appellate Tribunal, and on an elaborate companysideration of the materials placed before them, they held that the following facts were established The sale of yarn by the appellant to the intermediaries mentioned above was for a price very much below the market rate, often for the companyt price and some times for even less.
124 to 126 of 1954.
These companypanies declared numberdividends, even though they made company siderable profits and the shareholders received numberdividends number even statements of accounts.
According to the account books of the companypany, its profits from business for the account year 1941 42 were Rs.
The judgment of the Court was delivered by VENKATARAMA AYYAR J. These appeals arise out of orders of assessment made on the appellant by the Appellate Tribunal, Madras Bench, for the years of account 1941 42, 1942 43 and 1943 44.
At that time, that Sta was foreign territory, and the profit earned there would become taxable only if it was remitted to British India.
As a result of these paper transactions and manipulations, the profit of Rs.
It carries on business in the manufacture and sale of yarn, and for the purpose of that business it purchases companyton and occasionally sells it.
50,000.
None of them had done any business in yarn before.
9,25,364, for 1942 43 Rs.
50,000.
The amount shown as profits in their accounts was, in fact, in the possession of the appellant Company.
There was firstly a sale of certain quantity of yarn by the appellant to companypany A, which sold it in turn to companypany B which in turn sold it to C, which ultimately sold it to the usual customers of the appellant.
Even when they had offices, these were arranged by the officers of the appellant.
The profits earned by the firms were shown in their books as cash in their possession, but on a surprise raid the authorities were unable to discover any cash with them.
33,533 1943 44 PudukottahCo.
The intermediaries had, in fact, never to pay to the appellant for any of the purchases made by them, the companyrse of the business being that they sold the goods purchased from the appellant to its old customers, who paid therefor.
Some of the intermediaries, firms and companypanies had been formed in Pudukottah State.
Both these sales were fictitious, the only real transaction was the sale by X to the Company and the price actually paid therefor by the Company was only Rs.
3,000, and the real profit had been companycealed to that extent.
34,579 Alagu Co. Purchase of companyton Rs.
Purchase of companyton Rs.
The partners of the firm were men of numbermeans, and were all relations of Mr. Thyagaraja Chettiar, the chief partner of the Managing Agents firm and a dominant figure in charge of the Companys affairs.
According to the Department, the scheme evolved by the appellant for this purpose was this Suppose the Company sold 25 bales of yarn to X for.
The intermediaries bad most of them numberoffices of their own.
The intermediaries A and B did numberact, and took numberpart in the ultimate payment of the price by the purchasers.
25 lakhs.
The firms of Meenakshi and Co., Sivagami and Co. Mangayarkarasi and Co., and Alagu and Co., who were the intermediaries for the year 1941 42 were all newly started for the first time in 1941.
30,000 made by the Company was suppressed.
After the Limited Companies were started in 1942 43 and 1943 44, the companyrse of business adopted by the appellant showed a further mystification.
The customers to whom the goods were delivered by the appellant as aforesaid paid the full price for which they purchased them from the intermediary firms number to those firms with whom alone they had privity of companytract but to the appellant direct, and these payments appear as receipts in the books of the appellant.
22,504 Rajendra Ltd. Sale of yarn Rs.
Its profits arise for the most part from the sale of yarn and to some extent from the re sale of companyton.
In truth, they had numberbeneficial interest in the companycerns.
24,09,832 and for 1943 44 Rs.
The names of the intermediaries who according to the Department played the role of A in the above illustration and they will hereafter be referred to simply as intermediaries are given below with the amount of profits made on the sale of yarn in their names and companycealed, or the extent of the companyt price inflated on the purchase of companyton from them, as found by the Tribunal 1941 42 Meenakshi Co. Sale of yarnRs.
5,000.
50,000.
It companytended that the Company had earned more profits than were disclosed in its accounts, and that it had companytrived to suppress them by resort to certain devices.
Thus, the business of the intermediaries was, in fact, only a part of the business carried on by the appellant.
During the year 1942 43, two of the firms, Mangayarkarasi and Co., and Alagu and Co., were closed, and their place was taken by two private limited companypanies called Rukmani and Co., Ltd. and Sivagami and Co., Ltd. The shareholders of these companypanies were again drawn from the small group of persons who were partners of the firms, and they were all Mr. Thyagaraja Chettiars men.
The books of the Company would show neither the sale to X number its receipt of Rs.
10427, 10425 and 10426 of 1951 arising gut of the order dated the 23rd day of February 1951 of the Income Tax Appellate Tribunal, Madras Bench in Reference Applications Nos.
The yarn was in that period a scarce companymodity, and it was a sellers market.
