ORDER
G.L. Garoo, A.M.
The appellant has filed appeal against the order passed by the Commissioner (Appeals) vide A. No. CIT(A)/IT/BTI/104/85-86, dated 6-8-1990, and taken following grounds in the appeal:
“(1) The learned Commissioner (Appeals) has erred in law and facts in upholding that there is interlacing and inter-locking of funds between the two concerns. Finding is without proper appreciation of true nature of transactions.
(2) The learned Commissioner (Appeals) has erred in law and facts in upholding that payment to Agriculturists belonging to trust have been made by the assessee-firm. Finding is incorrect.
(3) The learned Commissioner (Appeals) has erred in law and facts in holding that cases decided by Tribunal, Amritsar Bench, Amritsar, quoted and referred by assessee during hearing did not have the similarities with the facts of assessee’s case.
(4) The learned Commissioner (Appeals) has erred in law and facts by not taking into consideration the factum of non-compliance of directions under section 144A. ”
2. The assessing officer has observed that part of Arhat received by the appellant was credited in the books of account of Gulab Singh & Co., Gulab Singh & Co. is a trust floated by Joginder Singh S/o Gobind Singh of Ludhiana on 10-8-1982 which has been settled with corpus of Rs. 5,000 and Pritam Singh was appointed trustee, for the benefit of relatives of the partners of the firm Sewa Singh & Co. The assessing officer recorded statement of Pritam Singh on 9-12-1985. Pritam Singh is having 25 per cent share with Sewa Singh & Co. as well as he is also trustee of the alleged trust. It is also a matter of fact and record that the trustee is doing business in the same premises in which Sewa Singh & Co. is carrying on business. The accounts books are also written by the trustee and one Bahadur Singh, who derives salary from Sewa Singh & Co. The market committee licence has been obtained in the name of Gulab Singh & Co. The assessing officer was of the opinion that there was interlacing and inter-locking between these two parties and he relied on the judgment of Honble Punjab and Haryana High Court in the case of R.N. Oswal Hosiery & Mahabir Woollen Mills v. CIT (1968) 70 ITR 843 (P&H). The assessing officer observed that allegedly business transaction of Gulab Singh & Co. was to the tune of Rs. 34,68,400 could not be undertaken with trust fund of Rs. 5,000. He has also observed that the payments were made by the appellant company and only routed through Gulab Singh & Co. The matter was also referred under section 144A of the Income Tax Act, to the Inspecting Assistant Commissioner who gave following directions to the assessing officer:
“2. The case was accordingly fixed for hearing on 3-2-1986 when A.K. Mangal Advocate appeared on behalf of the assessee Sewa Singh & Co. He was supplied with a copy of your reference under section 144A dated 3-1-1986. The case was accordingly adjourned to 13-2-1986, at Jalandhar, on his request. Further application was received from Mr. Mangal wherein he stated that the case may be adjourned after 25-1-1986 due to disturbed conditions prevailing in the State. The case was accordingly fixed on 25-2-1986 when Mangal appeared again and filed copy of account of Sewa Singh & Co. in the books of Gulab, Singh & Co., Kotkapura. Its perusal showed that there are number of adjustment entries with Sewa Singh & Co. Kotkapura. The assessee also filed the aforesaid copy of account with you. In order to verify the nature of these adjustment entries, he was asked to file detailed of such adjustment entries in the books of Gulab Singh & Co. and of Zamidars in the books of Gulab Company and Sewa Singh & Co., relating to the aforesaid adjustment entries. He was also asked to give copy of the same to you for comments. The case was adjourned for 4-3-1986. None appeared on the said date, instead an application was received from him for adjournment after 15-3-1986.
3. Keeping in view the facts as reported by you in your letter and after going through the nature of adjustments entries details of which should be obtained by you from the assessee, you should complete the assessment on merits.”
3. The assessing officer observed that the details of entries are on record and have been perused by him and he, therefore, made addition regarding the income of Gulab Singh & Co. amounting to Rs. 42,475. The matter was adjudicated upon by the Commissioner (Appeals). The Commissioner (Appeals) has given following findings :
“2.3. I have given due consideration to the arguments of the learned counsel and my findings are as under :
(a) The reliance placed by the learned counsel on various trust cases as mentioned above is of no help since in all these cases the main point was whether the income belongs to the trust or the parent firm, but there was no funds. The addition in the present case has been made mainly on the ground that there is interlacing and inter-locking of funds.
(b) The admitted fact is that Gulab & Co. did not have independent premises and the entire business was done by Pritam Singh, trustee who operated from the business premises of Sewa Singh & Co. It may be mentioned that Pritam Singh is also a partner in Sewa Singh & Co. with 25 per cent share. No doubt, the agriculturists are at liberty to sell their produce to whichever concern they think fit, but it is seen that payment on account of produce sold through Gulab & Co. was made invariably by Sewa Singh & Co. as and when it received the payments from the market. Thus, business to the tune of Rs. 17,88,677 was carried out through Sewa Singh & Co. The accounts of Gulab Singh & Co. have also been written by Bahadur Singh who is a paid employee of Sewa Singh & Co.
(c) The interlacing and inter-locking of funds is very clear from the examination of the copy of account of Sewa Singh & Co. as appearing in the books of Gulab Singh & Co. The copy of account pertains to the period 6-9-1982, to 31-3-1983. The copy of account for the period upto 2-11-1982, would show that Sewa Singh & Co. had extended credit facility to Gulab & Co. to the extent of Rs. 8,32,602. The relevant extract from the copy of account is reproduced below :
“Gulab Company, Kotkapura
Assessment year 1983-84 (1-4-1982 to 31-3-1983)
Copy of account of Sewa Singh & Co., Kotkapura in the books of Gulab
Company, Kotkapura.
Date
Credit
Debit
6-9-1982
Binola Bill Sewa Singh & Co.
1,300.00
–
8-9-1982
Cash
–
2,500.00
14-9-1982
Cash
–
2,000.00
20-9-1982
Cash
1,200.00
–
23-10-1982
Adjustment with Sewa Singh & Co.
2,13,171.60
–
25-10-1982
-do-
1,04,289.02
–
27-10-1982
-do-
9,754.00
–
27-10-1982
-do-
80,603.84
–
27-10-1982
Adjustment with Sewa Singh & Co.
1,19,236.86
–
28-10-1982
-do-
27,709.32
–
29-10-1982
State Bank of Patiala, KTP
10,000.00
–
29-10-1982
Adjustment with Sewa Singh & Co.
–
964.24
29-10-1982
-do-
64,506.09
–
30-10-1982
-do-
70,576.44
–
30-10-1982
Cash
2,400.00
–
1-11-1982
Adjustment with Sewa Singh & Co.
89,016.16
–
2-11-1982
Cash
1,500.00
–
2-11-1982
Adjustment with Sewa Singh & Co.
36,378.56
–
8,32,602.00
5,464.24
Gulab & Co. subsequently adjusted the amount after the payment was received from the market. Thus, it is clear that Gulab & Co. carried out the business mainly with the funds of Sewa Singh & Co., and the finding of the Income Tax Officer that there was interlacing and inter-locking of funds between the two concerns is based on solid reasons.
In view of the foregoing discussion, addition of Rs. 44,173 is upheld.”
4. The learned counsel of the appellant pleaded that the direction under section 144A were not carried out by the assessing officer.
He filed a copy of the direction alongwith the written submission made by the appellant before the Inspecting Assistant Commissioner. The learned counsel of the appellant submitted that Gulab & Co. is not discretionary trust which came into existence on 10-8-1992 and, therefore, both are different and independent. He has further submitted that no expenses of any type are overlapping and both units are independent units. The learned counsel has also filed copy of assessment order of Asa Singh Maninder Singh, Kotkapura, where assessment has been made on trust under similar circumstances by the same officer. He has also filed copy of order of Inspecting Assistant Commissioner dated 2-5-1986, in the case of Guru Nanak Trading Co. Kotkapura. The learned counsel also relied on the decision of the Tribunal, Amritsar Bench in the case of ITO v. Yash Trading Co. in ITA Nos. 616 & 617(Asr)/1985 for the assessment years 1983-84 and 1984-85. The decision by the Bench relates to the legality of creating the trust.
The learned counsel of the appellant also cited the order of the Tribunal Amritsar Bench in the case of Behari Lal Prakash Chand & Singla Trading Co., Kotkapura, in ITA Nos. 195 to 198 (Asr)1985. This case deals with beneficiary trust and firm. In this case, the revenue tried to treat the trust as invalid and benami on behalf of Behari Lal and Prakash Chand.
5. We have gone through the material on record as well as copies of the account of Gulab & Co. viz., Sewa Singh & Co. It is not the case of revenue that the trust is not a valid trust. In fact, the authorities below are of the opinion that there is interlacing and inter-locking of funds and diversification of income earned by the appellant-company which has been diverted to the Gulab & Co. The case law cited cannot be strictly applied, on the facts and circumstances of the case of the appellant. So far as the non-compliance of the direction under section 144A is concerned, the appellant did not avail reasonable opportunity given by the Inspecting Assistant Commissioner. However, the Inspecting Assistant Commissioner directed the assessing officer to look into the copy of accounts and decide the issue accordingly. The Commissioner (Appeals) has also adjudicated upon the nature of entries and discussed in his decision on the issue. We have perused the copy of account of the appellant and copy of account of Gulab & Co. It is abundantly clear that the main income of Gulab & Co. is from Dami i.e., commission. In the interest income, there is loss of very petty amount of Rs. 3,857. If one will examine the statement of Gulab & Co. filed at pp. 41 and 43 of the paper-book, it is clear that the payments are adjusted with Sewa Singh & Co. The commission business requires investment of funds whereby the goods on commission are sold on credit and the payments are made to the parties on whose behalf sale of goods is made. The commission business is also based on the goodwill and reliability of commission agent. In fact, both goodwill, reliability and finances are under control of Sewa Singh & Co. Sewa Singh & Co. has done nothing but to pass on various entries and routed through various transactions and thus quietly gave colour of business transactions made by the appellant trust. All main ingredients required for earning income were property of Sewa Singh & Co. In order to create a separate taxable unit where income will pass on to minor children and wives of the partners various transactions were recorded in the books of account of the trust. The facts clearly show that the income was diverted and applied in the trust for the benefit of partners through children and wives.
6. We are, therefore, of the opinion that the authorities below have correctly analysed the situation and profits reflected in the books of Gulab & Co. are nothing but diverted and earned by Sewa Singh & Co. Therefore, appeal filed by the appellant is dismissed.