COMMISSIONER OF INCOME TAX Vs. RAJASTHAN WOOL AGENCIES

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur ("the Tribunal" herein), has referred the following question of law for the opinion of this court:

(2.) THE assessee is a partnership concern. THE assessment year under consideration is 1974-75. THE relevant previous year ended on March 31, 1974. In the previous year, the assessee derived income from adat and dealing on own account in wool. THE assessee's income in commission account was Rs. 1,23,222. A gross profit of Rs. 8,431 was shown from the dealings on account of sale of Rs. 11,93,226. THE Income-tax Officer at the time of the scrutiny noticed a payment of Rs. 42,000 to : (1) M/s. Minerva Hosiery Mill Pvt. Ltd., and (1) M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. THE amount of Rs. 42,000 represented the amount paid as damages for non-performance of contracts which are said to have been orally entered into with the aforesaid parties for supply of wool tops. THE details of the aforesaid oral contracts were supplied by the assessee to the Income-tax Officer. According to the contracts, the assessee had agreed to supply 30,000 kgs. of wool tops to M/s. Minerva Hosiery Mills Pvt. Ltd. and 22,000 kgs. of wool tops to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd. in December, 1972. THE supply was to be made from December, 1972, to June, 1973, in 5 or 6 instalments at the fixed rate of Rs. 24.47 per kg. THE assessee, in fact, supplied 2,753 kgs. to M/s. Minerva Hosiery Mills Pvt. Ltd. and 9,140 kgs. to M/s. Swadeshi Manufacturing Syndicate Pvt. Ltd., up to March, 1973. In April, 1973, both the aforesaid parties were informed by the assessee that it will not be possible for it to supply the remaining contracted quantity. That gave rise to a dispute between the parties. THE dispute, however, was amicably settled in March, 1974, and the compromise agreements were drawn up according to which the assessee paid a sum of Rs. 42,000 by cheque to the aforesaid two parties. THE Income-tax Officer by his order dated November 30, 1976, disallowed the sum of Rs. 42,000 on the ground that it is not an allowable deduction under Section 37 of the Income-tax Act, 1961 ("the Act" hereinafter). He also opined that the nature of the transactions appeared to be colourable in view of the fact that the profit and loss did not belong to the assessee but to the parties to whom goods were supplied by the assessee. He observed as under :

(3.) WE have heard Mr. B.R. Arora, learned counsel for the Revenue, and also Mr. B.L. Purohit, learned counsel for the assessee.