P L D 1965 Supreme Court 114 (PLP)

S. A. RAHMAN, J.‑This is an appeal, by special leave, from an order of the High Court recorded under section 66 of the Income‑tax Act, 1922, on a reference made by the Income‑tax Appellate Tribunal, at the instance of the Commissioner of Income‑tax, Lahore. The question of law referred to the High Court was answered in the negative and the appellant, Brij Lal Jajoo, the assessee in the case, was granted A special leave to appeal on the ground that the reply of the High Court to the reference, went beyond the question of law referred, in so far as the High Court went into questions of fact which were concluded by the judgment of the Income‑tax Appellate Tribunal. The question referred to the High Court reads as follows: "Whether in the facts and circumstances of the case the Tribunal was right in coming to the conclusion that the special allowance covered by the agreement dated the 29th January 1953, fell within the purview of section 4 (3) (vi) of the Act, so as to be excluded from the assessee's total income?" The question arose in the following circumstances:‑ The appellant was assessed to income‑tax in respect of the assessment years 1950‑51, 1951‑52, 1952‑53, 1953‑54, 1954‑55, 1955‑56 and 1956‑57. The assessee is the Secretary of the Sutlej Cotton Mills, Okara. Besides his other emoluments, he was in receipt of what is described as a special allowance of Rs. 1,300 per mensem. The assessee claimed exemption to income‑tax in respect of this allowance, under section 4(3) (vi) of the Income‑tax Act. In completing the original assessment for the charge years 1950‑51, 1951‑52 and 1952‑53, the Income‑tax Officer appears to have first accepted his claim and excluded this allowance from the assessee's total income. Later, however, he issued a notice to the assessee under section 34 of the Act, with the previous approval of the Inspecting Assistant Commissioner and in consequence of the proceedings that followed, this allowance too was brought under assessment, in respect of the three years. The assessee appealed unsuccessfully to the Appellate Assistant Commissioner and to the Income‑tax Appellate Tribunal. For the remaining assessment years which are the relevant years for the purpose of this appeal, this special allowance was also included in the total income for the purpose of assessment. There was an appeal taken to the Appellate Assistant Commissioner which failed and a second appeal was then preferred to the Tribunal in respect of these years. The Tribunal upheld the orders of the subordinate authorities in respect of the first ten months of the account year, relevant to the assessment year 1953‑54. For the remaining two months of that year and for the assessment years 1954‑55, 1955‑56 and 1956‑57, however, the Tribunal held that the agreement dated the 29th January 1953, which the Sutlej Cotton Mills, Okara, had executed in favour of the assessee, entitled the latter to exemption of the special allowance of Rs. 1,300 per mensem, from income‑tax, as the terms of the agreement established that this allowance was made wholly for the purpose of expenses incurred necessarily for the performance of the duties of the assessee's office, as Secretary of the Mills. The agreement in question, it was observed by the Tribunal, had apparently been filed before the Income‑tax Officer who had, in point of fact, relied on it while making the original assessments for the earlier years. For the later years, however, no reference was made to this agreement by the subordinate officers. The reference application which was made to the Tribunal on behalf of the Income‑tax Commissioner is at pages 20‑22 of the record. It was urged in this application, inter alia, that in arriving at their conclusion that the allowance in question was not taxable, the Tribunal did not examine whether the agreement relied upon, disclosed a genuine state of affairs. In this connection, it was stressed that had the position stated in the agreement been a correct representation of facts, there was no reason for the assessee not to rely on this agreement when the assessments were made or the appeals were decided. According to the Income‑tax Commissioner, the record showed that the assessee had challenged the action of the Income‑tax Authorities merely on the ground "that the allowance being a payment for meeting high expenditure owing to unusual circumstances", was exempt from tax and the plea that the allowance was under the terms of the agreement, granted exclusively for the purpose of meeting expenses which he incurred wholly and necessarily in the performance of his office, was taken neither before the Income‑tax Officer nor before the Appellate Assistant Commissioner. In the alternative, it was submitted that even if it may be conceded, for the sake of argument, that the agreement was genuine one the requirements of section 4 (3) (vi) of tile Income‑tax Act were still not fulfilled. In respect of the first submission, the Tribunal in its statement of the case, forwarded to the High Court, remarked that the question of genuineness of the agreement in question was never agitated before the Tribunal and that both the parties proceeded on the common basis that the agreement represented a genuine and bona fide transaction. According to the Tribunal, the only point in issue before them was whether the special allowance, covered by the said agreement, came within the purview of section 4 (3)(vi) of the Act or not. The Tribunal added that they need not pursue this matter further since the applicant himself had not formulated any question as regards the genuineness or otherwise of the agreement. This view appears to us to be open to question. As mentioned above, the Commissioner of Income‑tax had specifically drawn attention to the fact that the Tribunal had assumed the genuineness of the agreement relied upon, without going into the matter. The question as framed, comprehended this aspect of the matter an it was not at all necessary that a separate question with regard to the genuineness of the transaction should also have been raised. Indeed, it would appear that there was an apparent inconsistency in the order of the Tribunal itself in so far as they had treated the allowance in question as a personal allowance for the previous years but had ruled that the same allowance which was continued, had acquired a different complexion because of the agreement of 1953. It does not appear that the assessee had made out a case that the nature of the allowance had changed in the year 1953. The continuity of the old allowance therefore, justified the raising of the question whether the agreement of 1953 represented a genuine state of affairs. Point is also lent to this aspect of the case by the fact that before the Income‑tax Officer and the Appellate Assistant Commissioner, the assessee did not apparently call in aid the agreement on which he relied before the income‑tax Appellate Tribunal. Indeed, on the contrary, he seems to have adhered to the explanation that the allowance was by way of personal compensation to him as he had to live at Okara without his family who resided in India. The recital in the statement of the case by the Tribunal that both parties had assumed the genuineness of the agreement in question and proceeded on that hypothesis, is not borne out by anything in 'the appellate judgment of the Tribunal. In that judgment no admission of the Income‑tax Commissioner is recorded to the effect that he was accepting the bona fides o C the agreement of 1953. It is true that the Tribunal does not seem to have considered it necessary to go into the question o bona fides of the agreement and confined its order to its effect merely. But it does not follow that the Income tax' Commissioner's position had been rightly apprehended in this connection. It is in the light of these circumstances that the opinion off file High Court in the present case has to be scrutinized. The learned Judges who heard the reference, after setting out the! relevant facts, proceeded to observe as follows: "On the statement of the facts of the case in the order of the Income‑tax Authorities including the Tribunal, it becomes obvious that the assessee's case was not in conformity with the purpose and object of the allowance as is stated in the agreement. Therefore, the question of the exact purpose for which the allowance was made, directly arises. The Tribunal does not appear to have noted the difference between the assessee's case and the terms of the agreement." The learned Judges also criticised the assertion of the Tribunal to the effect that it was never agitated before them that the agreement did not disclose a genuine state of affairs. Their approach to the case would be clear from the following quotation from their judgment:‑ "As the question which has been framed for our opinion is "whether on the facts and the circumstances of the case the special allowance received by the assessee is taxable", we have to find what the precise facts and circumstances of the case are, in order to decide whether the special allowance is taxable or not. These facts are that before the relevant period the Income‑tax Authorities as well as the Tribunal came to the conclusion that the exact nature of the grant was not known and that the suggestion made in general terms that the grant was made to meet extraordinary expenditure, did not bring the case within the purview of section 4 (3) (vi) of the Act. The contention of the assessee before the Appellate Assistant Commissioner was that the special allowance was allowed to the assessee to compensate him for the extra cost of living and hardship involved by his living separately from his family in Pakistan, which involved extra expenditure. The Tribunal also adopted it as the explanation of the assessee, when it stated that the allowance was made "to meet the extraordinary expenditure owing to abnormal circumstances". The assessee did not contend before the Tribunal that this case was wrongly stated by the Appellate Assistant Coin missioner. Therefore, from the facts stated in the order of the Appellate Assistant Commissioner and of the Appellate Tribunal, the facts that emerge are that the allowance was given to compensate the assessee for the so‑called hardship and the extra expenditure involved by his stay in Pakistan. In the context of these facts, we have to decide whether the special allowance is not taxable under section 4 (3) (vi) of the Income‑tax Act." The learned Judges then quoted section 4 (3) (vi) of the Act and concluded that in their opinion an allowance of the kind under consideration would not fall within its ambit, as it was not paid to the assessee for being spent wholly, necessarily and exclusively for the performance of duties on behalf of the Mills. They recognized that it was not necessary for the assessee to prove, once it was found that the allowance was for the purpose visualized by the section, that the assessee had actually expended the grant for that purpose. They then referred to the case of the assessee before the subordinate Income‑tax Authorities and answered the reference in the negative. In the end, however, they made it clear that if the conclusion could be reached that' the allowance in question was genuinely made for the purpose stated in the agreement, it would be covered by the statutory exemption. Before recording that answer they also said that they could not give effect to the contention raised oil behalf of the assessee that the agreement applied, as this was not his case before the Income‑tax Authorities and that they therefore were not called upon to decide whether the agreement represented a genuine arrangement or was not a device to benefit Mr. Brij Lal ,lajoo in order to help him to avoid the incidence of income‑tax. The grievance of the appellant is that the High Court travelled beyond its province under section 66 of the Income‑tax Act, in going into the facts and basing their opinion on tile facts so found by them, while at the same time disclaiming any intention to go into the genuineness of the agreement relied upon by the assessee. If further facts were required to be found, beyond those stated by the Tribunal in its statement of the case, it is contended, the High Court could have referred the case back to the Appellate Tribunal to make such additions thereto or alterations therein, as were necessary, under sub section (4) of section 66 of the Act. Under subsection (1) of that section, it is urged, only a question of law arising out of the order of the Tribunal, could be referred to the High Court. We consider that the criticism has some force in so far as the learned Judges recorded an unqualified answer in the negative, to the question referred. The position as it emerges from the facts recited above, is that a question of fact did arise for consideration of the Tribunal as to whether the agreement of 1953 was a genuine transaction or not, but it was unfortunately left undecided. The Tribunal could have either remanded the case to the lower authorities for determination of this question or could have, before deciding the appeal, called for further evidence themselves, through the Income‑tax Officer. Neither course was adopted by them. In the circumstances, an essential question of fact on which the answer to the question of law raised in the case, depended, was left undetermined. The answer to be returned by the High Court in these circumstances .should have been a qualified one. It is clear that if the agreement is not genuine, the claim made to exemption under section 4(3) (vi) of the Act could not be sustained. But if it is genuine and governs the situation, the answer might be different. We consider that the proper opinion on the question referred to the High Court should have been that the answer to the question is in the negative unless, on proper inquiry to be made, the agreement is found to be genuine in character and to effectively govern the situation. We therefore partially allow the appeal and declare that the answer to the reference, returned by the High Court, will stand modified in the above sense. In the circumstances, we make no order as to costs in this Court. A. H. Order accordingly.