CASE NO.: Appeal (civil) 4475-4476 of 1998 PETITIONER: K. RAVINDRANATHAN NAIR RESPONDENT: COMMISSIONER OF INCOME TAX, ERNAKULAM DATE OF JUDGMENT: 30/11/2000 BENCH: S.P. BHARUCHA & DORAISWAMY RAJU & RUMA PAL JUDGMENT:
JUDGMENT
2000 Supp(5) SCR 244
The Judgment of the Court was delivered by
BHARUCHA, J. We are concerned in these appeals from a decision of Division
Bench of the High Court of Kerala, with the Assessment Year 1972-73, the
previous year of which ended for the assessee on 30th September, 1971. The
question that was referred to the High Court and which it answered in the
negative and against the assessee reads thus :
“Whether on the facts and in the circumstances of the case, the assessee is
entitled to claim deduction of Rs. 4,18,107 under Section 37 of the Income-
tax Act?”
The assessee, an individual, carried on the business of processing cashew
nuts in ten units. Four of these units were situated in Kerala. Of these
four units, two were owned by the assessee and two were taken on lease. In
October, 1969, the assessee faced labour problems in Kerala, consequent
upon which he ordered a lock-out of the four units there. On 9th March,
1970, the assessee leased out the two units which he owned in Kerala to a
private limited company whose only two shareholders were the assessee and
his wife. The agreement in this behalf provided that the workmen employed
in the two units would have continuity of service. At about the same time
the lessee surrendered the two units in Kerala which he had taken on lease.
On 21st November, 1970, the assessee entered into a settlement with the
trade unions representing the workmen of the units in Kerala and agreed to
pay them for the periods of their service upto the date of the lock-out
five days’ wages for each year of service. An aggregate payment of Rs.
4,18,107 was made in this behalf.
The payment having been made in the course of the previous year relevant to
the Assessment Year 1972-73, the assessee made a claim for the deduction of
the said sum of Rs. 4,18,107 under Section 37 of the Income Tax Act, 1961.
The Income Tax Officer disallowed the claim. In appeal, the claim was
allowed. The Tribunal upheld the decision in appeal. From out of the order
of the Tribunal, the question afore-stated was referred to the High Court.
The High Court, by the judgment and order under appeal, answered the
question against the assessee. The assessee is here by special leave.
It needs to be noted that the Revenue had sought the reference of six
questions. The Tribunal had disallowed its application insofar as it
related to five questions on the basis that the one issue, that was covered
by the question quoted above, had been split up into six questions. The
Revenue did not file an application before the High Court under Section
256(2) seeking the reference of the rejected five questions. It is
necessary to make a point of this because none of the six questions
proceeded upon the basis that the Revenue considered the decision of the
Tribunal on facts to be perverse; in other words, that it could not
reasonably have been arrived at on the materials placed before the
Tribunal. Alternatively, assuming that one or more of the questions did
proceed upon that basis, the Revenue accepted the fact that they were not
referred and did not carry the matter to the High Court. There was,
therefore, no challenge by the Revenue to the facts found by the Tribunal
before the High Court.
As we read the judgment of the Tribunal, it extensively analysed the
documents placed before it and came to the conclusion that the ten units
run by the assessee constituted a single business, that the four units in
Kerala did not constitute a separate business and that, therefore, the
payment that was made was not on account of closure of business, which
would not be allowable under Section 37. The Tribunal found, on the basis
of the accounts placed before it, that only one set of accounts were
maintained for all the ten units. It found that there was one central
financing system, that all the units were financed by banks and that these
accounts were operated from the head office and that the cashew was
purchased for processing by the head office for all the units together. It
was also found that there was unity of management and control. Accordingly,
the Tribunal said that it was satisfied that all the units were fully
inter-linked and inter-laced so that the inevitable inference was that all
these units were one business alone. The Tribunal went on to hold that the
facts were sufficient to establish a nexus between the payment of Rs.
4,18,107 and the business. Because a part of the business had been affected
by labour disputes, for the industrial health of the business as a whole,
it was thought just and necessary that the industrial dispute in that one
part of the business be stopped. This was the purpose for which the payment
was made and it was, therefore, incurred for the purpose of the business.
The Tribunal noted, correctly, that it was for the assessee to decide how
he would conduct his business. For the purposes of continuing his business,
he had to reduce the number of units from ten to six. Any incidental
expense in reducing those units was an expenditure incurred in the course
of conducting the business and allowable under Section 37.
The High Court, surprisingly, threw out all the findings of fact that were
reached by the Tribunal. It did so because, in the High Court’s view, the
Tribunal had misdirected itself in law in arriving at these findings. This
was because, according to the High Court, the Tribunal had overlooked or
ignored a clinching document and because it had wrongly cast the burden of
proving the facts on a party. It is difficult to appreciate what that
document was that the Tribunal had supposedly overlooked or how the High
Court was entitled to look at it if it had not been placed before the
Tribunal. It was erroneous to say that any burden had been incorrectly cast
by the Tribunal because the Tribunal had evaluated all the material that
was put before it, regardless of who had put it on the record.
The High Court overlooked the cardinal principle that it is the Tribunal
which is the final fact finding authority. A decision on fact of the
Tribunal can be gone into by the High Court only if a question has been
referred to it which says that the finding of the Tribunal on facts is
perverse, in the sense that it is such as could not reasonably have been
arrived at on the material placed before the Tribunal. In this case, there
was no such question before the High Court. Unless and until a finding of
fact reached by the Tribunal is canvassed before the High Court in the
manner set out above, the High Court is obliged to proceed upon the
findings of fact reached by the Tribunal and to give an answer in law to
the question of law that is before it.
The only jurisdiction of the High Court in a reference application is to
answer the questions of law that are placed before it. It is only when a
finding of the Tribunal on fact is challenged as being perverse, in the
sense set out above, that a question of law can be said to arise.
The only argument, fairly, that has been raised before us by the Revenue is
that this expenditure could not be said to have been incurred in the course
of the business because the four Kerala units in respect of which the
expenditure was incurred had been shut down by the assessee. This argument
would be acceptable if the Tribunal had found that these four units
constituted a separate business. Having regard to the finding that these
and all the other units outside Kerala formed one business, the expenditure
must be held to have been incurred in regard to such business.
Upon the facts found by the Tribunal, there is no getting away from the
fact that the expenditure of Rs. 4,18,107 that was incurred by the assessee
was a business expenditure and that the assessee was entitled to its
deduction under Section 37.
In the result, the civil appeals are allowed. The impugned judgment and
order is set aside. The question is answered in the affirmative and in
favour of the assessee.
No order as to costs.