JAYARAM MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) JAYARAM Mills Ltd., Rajapalayam, referred to in this judgment as the assessee, is a public limited company carrying on business in the manufacture and sale èof cotton cloth called gadas. In assessing its income under the Indian Income-tax Act for the assessment year 1952-53, the Additional Income-tax Officer, Virudhunagar, included a sum of Rs. 26,000 as part of the income earned by the assessee by sale of gadas. This was objected to by the assessee on the ground that the amount did not represent profits in its hands but has income earned by a trust called Raja Charity Trust. The officer overruled this contention and taxed the said amount as income in the hands of the assessee. Appeals preferred by the assessee to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal were unsuccessful. On an application to this court under section 66(2) of the Act the following question was directed to be referred by the Tribunal along with the statement of the cas :

(2.) THE facts leading up to the assessment can be quite briefly stated. THE assessee purported to sell 69 bales of gadas to the Raja Charity at the following rate : 26 bales at Re. 1 per yard; 17 bales at Rs. 1-1-0 per yard; 10 bales at Rs. 1-3-0 per yard and 16 bales at Rs. 1-5-0 per yard. One Sri Kandaswami acted on behalf of the trust in this transaction which was on April 20, 1951. On the same day the trust claims to have sold the identical goods to one Moolchand Narayandas of Mathurai at the following rate : 26 bales at Rs. 1-4-0 per yard; 17 bales at Rs. 1-5-0 per yard; 10 bales at Rs. 1-7-0 per yard and 16 bales at Rs. 1-9-0 per yard. THE sum of Rs. 26,000 represents the difference between the price at which the assessee purported to sell the gadas to the trust and the price for which the trust is supposed to have sold to Moolchand Narayandas. THE short question is whether there was really a sale by the assessee to the trust and then by the trust to Moolchand Narayandas or there was really in effect and in substance a sale by the assessee to Moolchand, the trust having been deliberately interposed so as to make it appear that the profit arising out of the transaction was earned only by the trust. THE Income-tax Officer holding that the sum of Rs. 26,000 was really profit earned by the assessee observed thu :