COMMISSIONER OF INCOME TAX Vs. VIJAYALAKSHMI MILLS LIMITED

JUDGEMENT

(1.) THE assessee in this case is a public limited company owning a spinning mill managed by a managing agency firm by name Balakrishna and Company, of which one V. L. Balakrishnan is a partner. In the previous year ending on December 31, 1956, the total purchases of cotton, both Karunguni and Cambodia, made by the assessee amounted to Rs. 20,15,779. THE said sum included purchases to the extent of Rs. 6,43,838 made from two persons, R. Krishnaswamy and K. Palani-swamy. THE purchases from the above two persons were at the rate of Rs. 980 and Rs. 871 per pothi for Cambodia and Karunguni, respectively. THE above rates represent the ceiling prices fixed for Cambodia and Karunguni cotton. But the rates at which Karunguni and Cambodia were purchased from some other persons were much less. THE assessee had also paid for the cotton purchased from some others at the ceiling rates and such purchases amounted to Rs. 1,57,208. On an enquiry by the Income-tax Officer as to how the ceiling rates had been paid for the cotton purchased from the above two persons, the assessee stated that the cotton purchased from the above two parsons really belonged to V. L. Balakrishnan, who is one of the managing partners of the managing agency firm, that as the provisions of the Companies Act prohibited purchases from the managing agents, the purchases had been routed through the above two persons, and that the cotton purchased from V. L. Balakrishnan was really of a higher quality than the cotton purchased from others and had in fact been used in the manufacture of a higher count of yarn. THE Income-tax Officer in the course of the assessment, found on evidence that Krishnaswamy and Palaniswamy from whom cotton had been purchased at the ceiling rates were merely name-lenders for V. L. Balakrishnan who was the director in charge of the mill, that the purchases were in fact effected from a ginning factory belonging to V. L. Balakrishnan, and that compared with the prices paid to the other dealers from whom cotton had been purchased, there has been an inflation in the prices of cotton purchased from the said V. L. Balakrishnan to the extent of Rs. 52,127. This amount was arrived at by the Income-tax Officer on the basis that there has been an inflation of Rs. 70 per candy of Karuuguni and Rs. 80 per candy of Cambodia. THE Income-tax Officer also found some other defects in the accounts maintained by the assessee. He, therefore, made an addition of a sum of Rs. 75,000 to the income disclosed by the books of account, by invoking the proviso to Section 13. of the Indian Income-tax Act, 1922.

(2.) THERE was an appeal to the Appellate Assistant Commissioner. He confirmed the finding of the Income-tax Officer that there was inflation in the price of cotton purchased from the said two persons, R. Krishnaswamy and K. Palaniswamy, name-lenders for V. L. Balakrishnan. He, however, disagreed with the Income-tax Officer as regards the other defects pointed out by him. He, therefore, held that the addition of Rs. 75,000 is not justified and that an addition of Rs. 40,000 would meet the requirements of the case.

(3.) WE are not, however, in a position to take the above finding given by the Income-tax Officer as conclusive of the question as to whether the director, V. L. Balakrishnan, did in fact get any benefit out of the purchase transactions and whether the disputed sum of Rs. 40,000 represented the actual benefit that arose out of the transactions. As a matter of fact, the Income-tax Officer has not given that finding based on any of the entries in the accounts of the assessee or on any enquiry made by him as to the actual benefit which has accrued to the director. He merely proceeds on the basis of the difference in prices paid for the purchase of cotton from the said director and from others. The difference in prices may be due to various circumstances such as the quality of cotton, the time of purchase or the market conditions. As a matter of fact, it has been found that the assessee had also purchased cotton at the ceiling rates from other dealers to the extent of Rs. 1,57,208. It is not, therefore, possible to infer from the mere payment of ceiling price for the cotton purchased from the director that the sum of Rs. 70 and Rs. 80 were actually paid to the director in excess for Karunguni and Cambodia respectively with a view to benefit him and to treat the said alleged excess price paid as the actual benefit received by the director as a result of the purchase transactions, and disallow the same under Section 10(2)(xv) on the ground that the said sum did not represent the actual expenditure incurred by the company wholly and exclusively for its business.