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Miscellaneous Case No. 191 of 1948, decided on 16th April 1959.
, S. 33‑Capital‑Computation "Borrowed money"‑Amount due to supplier of goods purchased by assessee‑Whether Capital‑Appellate Tribunal‑Proceedings- Nature of‑Remand‑Observation in order of remand‑Whether binding on Tribunal.
The word "capital" used in, the Excess Profits Tax Act connotes whatever is put into the business by the owners thereof either in the form of cash or in the form of property, whether the cash is given out of the assets already owned by the owners or as a result of borrowings or incurring of debts. The property also may either be given in the beginning as a contribution by the owner of the business or may subsequently be acquired by purchase. The price due in respect of goods purchased on credit from the supplier of goods, which form the stock‑in‑trade, cannot be said to be capital contributed to the business by the owners or capital employed in the business.
Held, that amount due from the assessee, which was a dealer in cloth, to the supplier towards the price of goods supplied on credit was only a debt and was not a loan which could be treated as "borrowed money" for the purpose of rule 2‑A of Schedule II of the Excess Profits Tax Act in computing the average amount of capital of the assessee. There was neither an act of lending nor acceptance whenever the assessee became indebted to the suppliers for the price of goods supplied to the assessee.
In an income‑tax proceeding, the provisions of the Evidence Act do not apply. A well‑known mercantile custom can always be relied upon by the Income‑tax Officer or the Appellate Tribunal.
Where by an order of remand the Appellate Tribunal does not dispose of the appeal before it finally and the appeal remains pending before it any observations made by the Tribunal in the order of remand do not bind it at the time when the Tribunal gives its final decision.
Shree Ram Mills Ltd. v. Commissioner of Excess Profits Tax (1953) 23 IT R 120 ref.
In compliance with the order of the High Court at Allahabad under section 66 (2) of the Income‑tax Act read with section 21 of the Excess Profits Tax Act, we hereby draw up a statement of the case and refer it to the High Court.
2. The assessee is a registered firm, its chargeable accounting period being from July 10, 1942 to July 8, 1943. The assessee was dealing in cloth manufactured by J. K. Cotton Spinning and Weaving Mills Co. Ltd. Prior to April 1, 1939, the sole selling agent of the J. K. Cotton Spinning and Weaving Mills Ltd. was Juggilal Kamlapat Kothi. The assessee used to get his supplies of cloth from these sole selling agents.
3. Prior to April 1, 1939, when J. K. Kothi was the sole selling agent the products of J. K. Cotton Spinning and Weaving Mills Co. Ltd, were sold through a limited number of dealers. Supplies of cloth to these dealers were made by the J. K. Kothi who used to pay or charge interest as the case may be on the out standing balances. 1n the accounts of the dealers J. K. Kothi was given credit for all cloth received and all payments were debited to their account. All these dealers combined themselves into a firm styled as Messrs Laxmi Co. This firm is the present assessee.
4. On and from April 1, 1939, Messrs Hari Shankar Gopal Hari, a firm consisting of six partners was appointed as the sole selling agents of the said J. K. Cotton Spinning & Weaving Mills Ltd. The six partners and their shares were as under;
| 1. L. Radha Krishna Singhania 0‑1‑0 2. Mr. P. D. Chandrana 0‑0‑6 3. L. Hari Shankar minor son of L. Lakshmipat Singhania 0‑4‑9 4. L. Gopal Hari minor son of Sir Podampat Singhania 0‑4‑6 5. L. Vijaypat minor son of Kailashpat Singhanta 0‑4‑9 6. L. Gopikishan Jaipuria 0‑0‑6 |
The three minor sons of the Singhania brothers were admitted to the benefit of the partnership.
5. Although Hari Sbankar Gopal Hari were appointed the sole selling agents they passed on all the agency functions to the J. K. Kothi, who were paid Rs. 2,000 per month for this service by the said Hari Shankar Gopal Hari. In other words although Hari Shankar Gopal Hari were appointed the sole selling agents they passed on the active carrying on of the business of selling agency to J. K. Kothi who were remunerated by payment of Rs. 2,000 per month (subsequently increased to Rs. 3,000 per month).
6. All accounts of the dealers, as also of the mill, were maintained by J. K. Kothi and the said Hari Shankar Gopal Hari did not maintain any account of either the dealer or the mill. The bills for goods sold by J K. Cotton Spinning and Weaving Mills Co. Ltd. were made out in the name of J. K. Kothi and not in the name of‑Hari Shankar Gopal Hari. In the account books of the assessee, the said J. K. Kothi was given credit for all goods purchased and money paid for the purchases debited to the said J. K. Kothi.
7. In the chargeable accounting period under consideration (July 10, 1942 to July 8, 1943), the account books of the assessee disclosed a total credit of Rs. 70,02,002 in the name of J. K. Kothi and total debit of Rs. 68,07,296 in its name. The balance at the end of the chargeable accounting period was Rs. 2,1 1,534 in favour of J. K. Kothi. This balance included a sum of Rs. 16,927 being interest charged by the said J. K. Kothi. In the beginning of the chargeable accounting period under consideration the ledger of J. K. Kothi in the books of the assessee showed a debit balance of Rs. 53,612 whereas at the end of that period Rs. 2,11,634 were due to the Kothi from the assessee firm.
8. The assessee claims that this amount is borrowed money and should be included in the computation of the average capital in the assessee's business during the chargeable accounting period under consideration. The records however do not show how this figure of Rs. 2,51,425 has been arrived at although the balance disclosed in the J. K. Kothi was Rs. 2,11,634. The computation of average capital is necessary as upon it depends the quantum of standard profit. If the average capital is found to have increased in the chargeable accounting period, the standard profit will be proportionately increased. This will result in reducing the quantum of excess profits liable to tax.
9. Average capital is computed according to Schedule 11 of the Act. Rule 2 (1) requires any trade debt to be excluded from the computation of average capital and the proviso to the rule runs as follows;
"The debts to be deducted under this sub-rule shall include any such sums in respect of accruing liabilities as are allowable as a deduction in computing profits for the purposes of excess profits tax ... ."
It is, therefore, necessary to see whether the said sum standing to the credit of J. K. Kothi is a debt within the meaning of the said proviso to rule 2 (1).
10. The Excess Profits Tax Officer however did not include this amount in the capital computation as in his opinion, it was a trading liability‑and not borrowed money. The Tribunal held, agreeing with the Department, that the amount is a trade debt within the meaning of the proviso to rule 2 (1).
11. The contentions of the assessee were;
(a) The said J. K. Kothi were their bankers and hence the amount standing to the credit was borrowed money and as such should be taken into consideration in the computation of average capital.
(b) The selling agency having been given to Hari Shankar Gopal Hari the said J. K. Kothi was not in a position to supply cloth but they agreed to finance the assessee in enabling to purchase cloth and interest was charged on outstandings.
(c) The Tribunal in its fourth remand order had conceded that the said J. K. Kothi would be considered as bankers subject to the fact that the said J. K. Kothi received interest from the assessee as bankers and did not pass on the said interest of Hari Shanker Gopal Hari.
(d) Since it is conceded by the Department that the interest was retained by J. K. Kothi, the finding should be that the said J. K. Kothi was banker to the assessee.
12. The contentions of the Department were as follows;
"J. K. Kothi was the sole selling agent of J. K. Cotton Spinning and Weaving Mills Co. Ltd. prior to April 1, 1939. Since that date the firm of Hari Shanker Gopal Hari was appointed the sole selling agent. This appointment was in form only. The said J. K. Kothi acted exactly as they used to do prior to April 1, 1939. The facts of the case abundantly prove that the said J. K. Kothi was the actual supplier of cloth to the assessee and as a consequence they must be treated as trade creditors and not as bankers."
13. When the appeal preferred by the assessee came up for hearing before the Tribunal, the Tribunal by its order dated 26th July, 1945, remanded the appeal to the Income‑tax Officer with a direction to make enquiries as to who were the selling agents of the J. K. Cotton Spinning and Weaving Mills Co. Ltd. during the chargeable accounting period and to state whether J. K. Kothi really acted as bankers to the appellant. In his remand report dated 12th September, 1945, the Income‑tax Officer stated that;
"During the chargeable accounting period ending July 8, 1943 Messrs Hari Shanker Gopal Hari were the sole selling agents of J. K. Cotton Spinning and Weaving Co. Ltd. in form only. Before their coming into existence on April 1, 1939, it was Messrs, Juggilal Kamlapat Kothi who were the selling agents of the said company as already stated. Even after their so called relinquishment of the agency, they continued to carry on the existing operations as heretofore. There was absolutely no change in the conduct of the business."
The Income‑tax Officer further observed "that Messrs Juggilal Kamlapat did not act as the assessee's bankers in the year in question". The Income‑tax Officer supplemented his remand report by a further report dated 24th September, 1945. The order of the Tribunal and the remand report of the Income‑tax Officer and its supplement form part of the case and are annexures A', B', and C', respectively. After these reports the appeal was again called up for hearing before the Tribunal when by its order dated 1st March, 1946, the Tribunal again remanded the case to the Income‑tax Officer with a direction that the Income‑tax Officer should examine the entries in the account books of the assessee relating to the purchases of cloth and corresponding entries in the books of Messrs Hari Shankar Gopal Hari relating to the sales of those very goods and report the result of the examination to enable the Tribunal to decide whether or not Messrs J. K. Kothi acted as bankers of the assessee. The Income‑tax Officer complied with this direction by submitting his second remand report as under;
(a) There are no entries whatever in the books of the so called selling agents Messrs Hari Shanker Gopal Hari.
(b) The bills for the goods sold by the manufacturing company are made out in the name of Messrs Juggilal Kamlapat and not Messrs Hari Shanker Gopal Hari.
(c) In the account books of the manufacturing company the sales of goods have been shown in the accounts of Messrs Juggilal Kamlapat and Messrs Hari Shanker Gopal Hari.
(d) Messrs Juggilal Kamlapat admittedly carried on the entire business operations of the sole selling agency.
The order of the Tribunal and the second remand report of the Income‑tax Officer form part of the case and are annexures D' & E'. Thereafter the appeal came up for hearing for the third time when by its order dated 8th October, 1946, the Tribunal again remanded the case to the Income‑tax Officer for the third time. It was then alleged that after the selling agency of the J. K. Spinning Mills was acquired by Hari Shanker Gopal Hari, J. K. Kothi agreed to finance the asses see company in respect of cloth purchases and in pursuance of the agreement J. K. Kothi did in fact finance the assessee company from time to time. It was stated that the interest was charged on outstandings and a smaller rate of interest allowed on deposits. It was also urged that to this extent, at least', there was a variation in the eventual dealings between the assessee company and J. K. Kothi after the change of selling agency. The Tribunal therefore directed the Income‑tax Officer to examine the abovementioned contentions and to submit his report. The Income‑tax Officer submitted his third remand report on January 2, 1947. The order of the Tribunal and the remand report of the Income‑tax Officer form part of the case and are annexures F' & G'. The appeal was thereafter called on for hearing for the fourth time when the tribunal by its order dated 20th March, 1947, remanded the case to the Income‑tax Officer for a report. In paragraph 3 of the order of the Tribunal it observed;
"It is therefore necessary to ascertain by reference to the books of J. K. Kothi as to how the interest received by them from the appellants were ultimately dealt with in their accounts, i.e. whether it was handed over to Hari Shankar Gopal Hari. If the interest is not handed over to them though J. K. Kothi are the agents of Hari Shankar Gopal Hari, so far as the appellants are concerned, they must have acted as their bankers only. It has been stated at one stage previously that J. K. Kothi are also bankers to Hari Shankar Gopah Hari. The Income‑tax Officer must therefore once again call for the books of J. K. Kothi as also the books (if any) of Hari Shankar Gopal Hari and verify this point. He must also ascertain by reference to correspondence, statements etc., whether as alleged by the appellants a change was effected in the rate of interest to be paid to the appellants on their credit balance as from a date in early 1939, and whether J. K. Kothi handed over or account ed for to Hari Shankar Gopal Hari the interest earned by them from the appellants".
In pursuance of this order, the Income‑tax Officer submitted his fourth remand report on 14th July, 1947. In his remand report the Income‑tax Officer stated that it was conceded that the interest charged by J. K. Kothi from the assessee is not passed on to Hari Shankar Gopal Hari. The Income‑tax Officer further observed as under;
"As already stated in the preceding sub‑paragraph, the entries as made by J. K. Kothi in the account of Hari Shankar Gopal Hari and vice versa, i.e., credit of selling agency com mission and debit of remuneration to the utter exclusion of all entries relating to sale of cloth and realisation of their proceeds and absence of any adjustment of interest in respect of the same proves that J. K. Kothi are not at all bankers to Hari Shankar Gopal Hari and that they are merely agents carrying on cloth business on behalf of Hari Shankar Gopal Hiri in return for which they get (i) remuneration of Rs. 2,000 and subsequently Rs. 3,000 per month and (ii) kept interest received from cons tituents". The order of the Tribunal and the remand report of the Income‑tax Officer form part of the case and are annexures H' and I'.
14. Thereafter the appeal was called on for hearing for the fifth and the last time and the Tribunal passed its final order on 29th July, 1947. The Tribunal held that the amount of Rs. 2,51,425 was only a trade liability and not a loan from a bank carrying on a banking business. The order of the Tribunal forms part of the case and is annexure J'. This is a finding of fact. The only question that can, therefore, arise out of the order of the Tribunal is whether there was any evidence before the Tribunal in arriving at the finding. What was raised before their Lordships of the High Court is whether observations of the Tribunal in its earlier order calling for a remand report were intended to be final and conclusive and were not a mere obiter dicta. We therefore refer the following question of law to the High Court;
"(1) Whether on the facts and in the circumstances of the case there was evidence to hold that the amount of Rs. 2,51,425 represented trade debt from J. K. Kothi and as such would be excluded in the computation of the average capital of the assessees for the relevant chargeable accounting period
(2) Whether the observation of the Tribunal contained in its remand order dated 20th March, 1947, as also the observations in the other preceding orders were merely in the nature of obiter dicta and did not amount to giving any findings of fact relevant for the decision of the appeal or were binding on the Tribunal when it finally decided the matter‑ on July 29, 1947
15. The draft statement of the case was sent to the parties. There is no dispute as to facts stated.
Satish Chandra for the Assessee.
Gopal Behari for the Commissioner.
Solicitors : Solicitor of Inland Revenue : J. W. Ridsdale.
‑In this reference under section 21 of the Excess Profits Tax Act, 1940, read with section 66 (2) of the Income‑tax Act, 1922, the following two questions have been referred for the opinion of this Court;
"(1) Whether, on the facts and in the circumstances of the case, there was evidence to hold that the amount of Rs. 2,51,425 represented trade debt from J. K. Kothi and as such would be excluded in the computation of the average capital of the assessee for the relevant chargeable accounting period
(2) Whether the observation of the Tribunal contained in its remand order dated 20th March, 1947, as also the observations in the other preceding orders were merely in the nature of obiter dicta and did not amount to giving any findings of fact relevant for the decision of the appeal or were binding on the Tribunal when it finally decided the matter on July 29, 1947"
The Tribunal submitted these questions for opinion of this Court with a statement of case drawn up by the Tribunal on the 8th May, 1952. The reference came up for hearing before a Bench of this Court and that Bench on 18th November, 1954, summarised the findings of fact which were ascertained from the statement of the case and the appellate order of the Tribunal. The findings of fact, that were summarised, were 16 in number. The order of the Court mentions that, out of these 16 findings of fact, there was a dispute about the correctness of four findings of fact which were numbered in the summary of facts in the order of this Court as Nos. 5, 6, 7 and 11. Consequently, the case was sent back to the Tribunal to check the accuracy of the facts as they were set out in that order of the Court and to give clear findings on matters which were in dispute. The Tribunal was given the liberty to take further evidence if it found it necessary to do so. When the case went back before the Tribunal, it appears that no further evidence was given by either party. The Tribunal, therefore, proceeded to record its findings on the four disputed facts referred to above. The Tribunal, by the order of this Court was further directed to prepare a summary of the accounts kept in the books of Messrs J. K. Kothi, of the assessee and of the company relating to the cloth supplied, the payments made by Messrs J. K. Kothi and the deposits made by the assessee during the relevant chargeable accounting period from 10th July, 1942, to 8th July, 1943. There was also a direction to the Tribunal to prepare a detailed report of the amounts of interest, paid by Messrs J. K. Kothi to the assessee and by the assessee to Messrs J. K. Kothi including the dates of payment. In response to this direction of the Court, the Tribunal has sent to this Court, in addition to findings on those four disputed items, a summary of certain accounts and a report on the relevant facts and circumstances. As a result, the facts on the basis of which the reference has now to be decided, stand as follows;
(1) That J. K. Cotton Spinning and Weaving Mills Limited (hereinafter called "the company") is a company which manufactures cloth ;
(2) That J. K. Kothi were the sole selling agents of cloth manufactured by the company up to the 1st of April, 1939, upon which date Messrs Hari Shankar Gopal Hari were appointed the sole selling agents ;
3. That on the 8th of April, 1939, an agreement was entered into between Messrs Hari Shankar Gopal Hari and Messrs J. K. Kothi which provided inter alia.
(a) that Messrs J. K. Kothi would collect all the outstanding bills of Messrs Hari Shankar Gopal Hari and guaranteed fulfil ment of all the obligations of that firm, and
(b) that Messrs J. K. Kothi would receive from Messrs Hari Shankar Gopal Hari by way of remuneration a sum of Rs. 2000 (an amount which was later on raised to Rs. 3,000).
(4) That the assessee, Messrs, Laxmi & Co., were the sole dealers in cloth manufactured by the company.
(5) That there was no agreement between Messrs J. K. Kothi and the assessee about the beginning of April, 1939, or at any later time as contended. Messrs J. K. Kothi made supplies of cloth to the assessee by virtue of an arrangement entered into with Messrs Hari Shankar Gopal Hari. The assessee paid for these cloth supplies to Messrs J. K. Kothi. The assessee used to pay cash from time to time as advance for future supplies of cloth as is customary between the supplier and purchaser of cloth. Interest at the rate of 6 per cent. was paid on the credit balances of Messrs J. K. Kothi in the books of the assessee and at the rate of 3 per cent. reduced later on to 1 per cent. on the debit balances of Messrs J. K. Kothi in the books of the assessee by virtue of trade custom.
(6) That the assessee did not take delivery of the cloth directly from the company but took delivery of the cloth from Messrs J. K. Koihi.
(7) That detailed bills for cloth supplied to Messrs J K. Kothi were made out in the name of Messrs J. K. Kothi and that Messrs J. K. Kothi made payment of these bills to the company. Messrs J. K. Kothi, in its turn, supplied goods to the assessee and made out a bill by way of entries in the sarkhat bahi. The assessee paid for these supplies in cash‑
(8) That interest at the agreed rate of 6 per cent. was, in fact, paid by the assessee to Messrs J. K. Kothi on the difference between the price of cloth supplied and the amount deposited.
(9) That all interest received by Messrs J. K. Kothi from the assessee was retained by it and not made over to Messrs Hari Shankar Gopal Hari.
(10) That during the accounting period (10th July, 1942 to 8th July, 1943) the amounts deposited by the assessee never exceeded the price of cloth supplied and, consequently, no payment of interest was made by Messrs J. K. Kothi during this period.
(11) That the interest paid by Messrs J. K. Kothi to the assessee was not debited to the account of Messrs Hari Shankar Gopal Hari.
(12) That all commissions received by Messrs J. K. Kothi from the company for the cloth supplied to the assessee was credited in the books of Messrs J. K. Kothi as commission payable to Messrs Hari Shankar Gopal Hari and the remunera tion of Messrs J. K. Kothi of Rs. 2,000, which was sub sequently raised to Rs. 3,000, was adjusted against that amount.
(13) That though proper entries were made in the books of account of the assessee and of Messrs J. K. Kothi in respect of the price of cloth supplied and of the deposits made, there were no similar entries in the books of account of Messrs Hari Shankar Gopal Hari.
(14) That the accounts between Messrs J. K. Kothi and the assessee started with a deposit of Rs. 101 made by the assessee followed by another deposit of Rs. 2,000 ; and the first three deliveries of cloth were of 18 bales on 10th July, 1942, of 60 bales on 14th July, 1942, and of 35 bales on 17th July 1942 ; and
(15) That Rs. 2,51,425 was the average difference for the whole year and Rs. 2,11,634 was the difference on the last day of the according period, i.e., 8th July, 1943, between the value of the cloth received by the assessee and the amount of the deposits made by it. .
We may mention that in this summary of facts given by us above, items Nos. 1 to 4 are the same as items Nos. I to 4 mentioned in the order of this Court dated 18th November, 1954. In place of items Nos. 5, 6 and 7 as they were entered in that order of this Court, we have substituted the findings now received from the Tribunal on these items which are contained in the order of the Tribunal dated 13th September, 1955. Items Nos. 8, 9 and 10 are again the same as items of the same number in the order of this Court dated 18th November, 1954, whereas items Nos. 11 to 15 are identical with items Nos. 12 to 16 in the order of this Court dated 18th November, 1954. As regards the item which was number 11 in the order of this Court dated 18th November, 1954, the Tribunal had been directed to ascertain facts in respect of it but, in the order dated 13th September, 1955, the Tribunal has recorded no finding of fact on this item. The reason given by the Tribunal for not recording any finding on this item is that the Tribunal considered it unnecessary to express any view on the point raised as the dealings in the chargeable accounting period 1945‑46 will have no bearing on the determination of the true character of the dealings between the assessee and Messrs J. K. Kothi during the period, 10th July 1942, and th July, 1943. This refusal by the Tribunal to record any finding in respect of this fact was brought to our notice by learned counsel for the assessee but learned counsel was unable to show that the view of the Tribunal that no finding on this point was necessary was incorrect. The chargeable accounting period 1945‑46 was a subsequent period during which owing to control of cloth distribution, supplies were made by the company directly to the dealers and the distributors of cloth got from the company only a commission on the sales effected to the dealers. Dealings in this chargeable accounting period were, therefore, of a special nature and we think that the Tribunal made no mistake at all in coming to the opinion in these circumstances that the dealings during that chargeable accounting period would not be relevant to the determination of the nature of the dealings in the chargeable accounting period 1942‑43, with which we are concerned in this reference. The reference has, there fore, to be answered on the basis of the 15 facts which have now been summarised by us above.
Before we proceed to express our opinion on the questions which have been referred to us, we may take notice of the argu ments of learned counsel for the assessee that tile findings of fact recorded by the Tribunal on items Nos. 5, 6 and 7 are vitiated and should not, therefore, be accepted by us. All these three items deal with questions of fact and the Tribunal was the final authority to give findings on those questions of fact. Learned counsel's contention was that the findings on items Nos. 6 and 7 were vitiated by an error of law when the Tribunal recorded these findings relying on the statements of Sanwal Ram who has an interest in the assessee firm, being a partner in the firm. It was urged by learned counsel that, when recording a finding on items Nos. 6 and 7, the Tribunal based its view on the statement of Sanwal Ram whereas, when dealing with the evidence of Sanwal Ram at the time of discussing item No. 5, the Tribunal held that no reliance could be placed on Sanwal Ram's statement. Learned counsel's submission, therefore, is that the finding recorded on the basis of Sanwal Ram's statement, which became irrelevant on the ground of being unreliable, must not be accepted as correct by us. Having looked at the order of the Tribunal dated 13th September, 1955, we are unable to see any force in this submission. It is true that, when finally recording the finding on item No. 6: the Tribunal said that the finding was being recorded on a consideration of facts and circumstances mentioned earlier in that order. Amongst facts and circumstances mentioned earlier was the statement of Sanwal Ram. Subsequently, however, the Tribunal proceeded to elaborate its consideration of the facts and circumstances on which the finding on item No. 6 was based. The Tribunal summarised those facts and circumstances which it had, in fact, taken into account in order to record its finding on item No. 6 and, in the summary of facts, there is no mention at all of Sanwal Ram's statement. In fact, in this summary, they have, in the last sentence, given the reason which led them to record that finding. That reason is given in the following words;
"In fact, the entries in the sarkhat bahi taken together with the entries in the books of the company lead to this inevitable inference".
Thus the Tribunal came to the finding given by it on item No. 6 on the view that the entries in the sarkhat bahi taken together with the entries in the books of the company could lead to that inference only and to no other inference. It could not be urged by learned counsel that the entries in the sarkhat bahi or the entries in the books of account of the company were inadmissible evidence or were irrelevant for the purpose of giving the finding. As long as the finding was based on this relevant and material evidence, the earlier mention of Sanwal Ram's statement becomes immaterial, because the final conclusion is not based on that statement at all. The most favourable interpretation in favour of the assessee, in these circumstances, could be that the Tribunal, having arrived at the finding on the basis of the entries in the sarkhat bahi and the entries in the books of the company, sought to strengthen its conclusion by reference to the statement of Sanwal Ram also. Even if this was so, the finding would not be vitiated because the finding was recorded independently of Sanwal Ram's statement on the basis of other relevant evidence and facts, which the Tribunal held were sufficient to justify that finding. When recording the finding on item No. 7 or item No. 5, no reliance was placed on the statement of Sanwal Ram. In fact, when the finding on item No. 5 was recorded, Sanwal Ram's statement was specifically ignored on the ground that, in this case, there was the statement of Sanwal Ram as against the oral evidence tendered on behalf of the assessee and the nature of the two was such that it was not safe to rely on either Sanwal Ram's statement or on the oral evidence given on behalf of the assessee. This opinion expressed by the Tribunal related to a question of weight to be attached to the evidence before it and thus it raises no question of law which could be gone into by this Court.
The second point urged by learned counsel for the assessee to challenge findings on items Nos. 6 and 7 was that it had been found as a fact that Messrs J. K..Kothi derived no profit from their supplies of cloth to the assessee and this was a relevant consideration which has not been taken into account by the Tribunal. It appears to us that the question whether Messrs J. K. Kothi derived any profit or not depending on the extent of sales to the assessee could not be relevant for purposes of arriving at a finding whether, in fact, the actual supplie3 to the assessee were being made by Messrs J. K. Kothi or by some one else, such as the company or Messrs Hari Shankar Gopal Hari. Messrs J. K. Kothi might have considered it fit to make supplies without having any interest in the actual profits because of their relations with Messrs Hari Shankar Gopal Hari or of their arrangement with them. It is not necessary that the benefit to the actual supplier must depend on the supplies made by him Messrs J. K. Kothi were not doing the work gratis. They were receiving the payment of Rs. 2,000 per mensem. Then there is the circums tance that, subsequently, this amount of Rs 2,00 per mensem was raised retrospectively to Rs. 3,000 per mensem. This may itself provide an explanation why Messrs J. K. Kothi worked as suppliers without any interest in the profits. They could anticipate that, if the profits were large, they would succeed in getting their remuneration raised retrospectively. While such possibilities exist, the fact that the benefit of Messrs J. K. Kothi, at the time when they made the supplies, was not proportionate to the profits earned on the supplies would not, in any way, show that the supplies were not being made by Messrs J. K. Kothi but were being made by someone else. The factor relied upon by learned counsel would, therefore, appear to be one which had no bearing on the question which the Tribunal was called upon to decide.
The third and the last point raised by learned counsel to challenge the finding on items Nos. 6 and 7 was that the Tribunal paid no consideration to the arrangement which had been arrived at between the company, Messrs J. K. Kothi and Messrs Hari Shankar Gopal Hart with regard to the bills being made out in the name of Messrs J. K. Kothi. It was urged that the nature of the arrangement, under which the bills were made out in the name of Messrs J. K. Kothi, was a relevant consideration showing whether the supplies to the assessee were being made by Messrs J. K. Kothi or were made by Messrs Hari Shankar Gopal Hari. Again, it is to be noticed that that arrangement between the company, Messrs J. K. Kothi and Messrs Hari Shankar Gopal Hari was equally consistent with the case on these items put forward by the other side. The case on behalf of the Department was that, though there was such an arrangement, the actual suppliers were Messrs J. K. Kothi and not Messrs Hari Shankar Gopal Hari. Under the arrangement, no doubt, Messrs Hari Shankar Gopal Hari had become the sole selling agents, yet the supplies to the assessee, who was the sub‑selling agent, were continued to be made by Messrs J. K. Kothi. It could be that the actual suppliers were Messrs J. K. Kothi and not Messrs Hari Shankar Gopal Hari and the effect of the arrangement was to constitute Messrs J. K. Kothi the suppliers and not merely agents of Messrs Hari Shankar Gopal Hari. On the other hand,' the case of the assessee was that Messrs J. K. Kothi were not suppliers of cloth to the assessee at all. It is, however, significant that at no stage was any specific case put forward on behalf of the assessee as to who were the actual suppliers of cloth to the assessee. In this case, there were four remands by the Tribunal to the Excess Profits Tax Officer for recording findings on disputed questions and then again, there was remand by this Court to the Tribunal to take further evidence, if necessary, and record its findings on these facts. At none of these various stages did the assessee put forward the case that the actual supplies of cloth to the assessee were made either directly by the mills or by Messrs Hari Shankar Gopal Hari. The assessee only relied on the statement made on behalf of Messrs J. K. Kothi that they had not supplied any cloth. That statement the Tribunal found to be unreliable and of no evidentiary value. In these circumstances, the Tribunal found that the remaining evidence led to the inference that the supplies were made to the assessee by Messrs J. K. Kothi and we agree with the Tribunal that there was sufficient material to justify that view. This point also does not vitiate the finding of fact recorded by the Tribunal on these items.
On item No. 5, the finding recorded by the Tribunal is challenged by learned counsel on two grounds. One ground is that the Tribunal committed an error in relying on a custom about payment of interest between the supplier of goods and the purchaser of goods on amounts standing to the credit or debit of each other in the books of account from time to time. In an income‑tax proceeding, the provisions of the Indian Evidence Act do not apply. A well known mercantile custom can always be relied upon by the Income‑tax Officer and the Tribunal. The custom, according to the Tribunal, was that, often enough, the supplier of goods gave goods to the purchaser on credit and charged interests on amounts outstanding against the purchaser. At the same time, the purchaser may make advance deposits against future supplies in which case he would receive interest on the amount standing to his credit with the supplier for being used for future supplies. On behalf of the assessee emphasis was laid on the fact that during the chargeable accounting period in question, the rate of interest payable to Messrs J. K. Kothi by the assessee on amounts standing to the credit of Messrs J. K. Kothi was higher whereas the rate of interest payable to the assessee by Messrs J. K. Kothi in respect of amounts standing to tae credit of the assessee was lower. Reference was made to the fact that at a time when Messrs J. K. Kothi were themselves the sole selling agents the rate of interest, which was payable between Messrs J. K. Kothi and the assessee, on credits or debits in favour of or against each other was uniform, whereas, later on, when the firm, Messrs Hari Shankar Gopal Hari, became the sole selling agents, the rates of interest were varying as mentioned above. It was urged that the Tribunal was not entitled to rely on any custom with regard to the varying rate of interest payable between the‑ supplier and the purchaser. Having gone through the order of the Tribunal, we find that the custom, which was relied upon by the Tribunal, was that mutual payment of interest between the supplier and the purchaser on sums standing in the accounts to their credit or debit was to be made with the qualification that the rate of interest on amounts in favour of the supplier and the rate of interest on amounts standing to the credit 'of the purchaser need not be uniform and would be determined by agreement between the parties. Though this is not to be found in so many words in the order of the Tribunal, this is clear from the fact that the Tribunal has accepted the correctness of the rates at various times which were put forward on behalf of the assessee. The Tribunal, no doubt, held that there was no evidence of any specific agreement between the assessee and Messrs J. K. Kothi which might have taken place after the 1st of April, 1939, when Messrs J. K. Kothi ceased to be the sole selling agents of the company but otherwise the Tribunal accepted fixation of the rates of interest by agreement between the assessee and Messrs J. K. Kothi. In doing so, we do not consider that the Tribunal committed any error of law which would vitiate the finding recorded by it.
The last point urged by learned counsel was that the Tribunal did not examine the question of law whether the suppliers of cloth to the assessee were in law Messrs Hari Shankar Gopal Hari even though the actual supplies were being made to the assessee by Messrs J. K. Kothi. It appears to us that this question did not arise because, at no stage did the assessee come forward with the case that supplies of cloth to the assessee by Messrs J. K. Kothi were made on behalf of Messrs Harishankar Gopal Hari. On behalf of the Department the case set up was that Messrs J. K, Kothi supplied goods to the assessee on their own behalf. On behalf of the assessee, there was partial contest on this question by raising the point that Messrs J. K. Kothi were not suppliers at all but there was no contention or suggestion that the suppliers were Messrs Hari Shankar Gopal Hari. Further, there was no evidence on this point. Whatever arrangement had been arrived at between Messrs Hari Shankar Gopal Hari, Messrs J. K. Kothi and the company, it related to financial arrangements: including making out of bills but there was no‑mention at all as to who was to be the actual supplier of the goods to the assessee, to the sub‑selling agent or to any other person to whom the goods were supplied through the selling agent. While no specific case was put forward, the Tribunal took notice of the fact that the assessee had failed to show any correspondence which would show that supplies to it were being made by Messrs Hari Shankar Gopal Hari or the mills whereas the documentary evidence inevitably led to the inference that the supplies were being made by Messrs J. K. Kothi. It was in these circumstances that the 'tribunal proceeded to record its finding on item No. 5 as mentioned above. We do not, therefore, think that any finding of fact recorded by the Tribunal is vitiated by any error of law.
We have now to proceed to examine what should be the answer to the first question on the facts and in the circumstances which have been summarised by us above. On these facts and circumstances, it is clear that, Messrs J. K. Kothi were supplying goods to the assessee on credit and, whenever goods were supplied, the account of the assessee with Messrs J. K. Kothi was debited with the price of the goods supplied. The amounts, which were outstanding against the assessee in the books of Messrs J. K. Kothi, were amounts representing the price of goods by the assessee to Messrs J. K. Kothi, that cash was appropriated towards those outstandings. If the amount paid exceeded the outstandings, that amount was shown to the credit of the assessee and on that amount the assessee received interest. That amount was paid as advance in respect of future supplies. The amounts, which, in the account books, thus appeared as due from the assessee to Messrs J K. Kothi from time to time represented price of goods supplied. The amounts due from the assessee to Messrs J. K. Kothi may be held to be debts due from the assessee to Messrs J. K. Kothi but the debts were not of the nature created by a loan so as to be held to be "borrowed money". The derivative "borrowing" of the word "borrowed" as used in rule 2‑A of Schedule II of the Excess Profits Tax Act came up for interpretation before the Supreme Court in Shree Ram Mills Ltd. v. Commissioner of Excess Profits Tax ((1953) 23 I T R 120). In that case, the managing agents left their commission lying with the assessee. The assessee contended that this constituted a "borrowing" within the meaning of rule 2‑A of Schedule II, Excess Profits Tax Act. The Commissioner of Income‑tax urged that it was a " debt " within the meaning of rule 2. The Supreme Court held that they agreed with the High Court that it was a "debt" and not a "borrowing". The Supreme Court further proceeded to say that at bottom this was a question of fact though, of course, the money so left could, by a proper agreement between the parties, be converted into a loan but, in the absence of an agreement, mere inaction on the part of the managing agents could not convert the money due to them, and not withdrawn, into a loan. A loan imports a positive act of lending coupled with an acceptance by the other side of the money as a loan." It is this last sentence used by their Lordships which is of great importance. The word "borrow" used in rule 2‑A of Schedule II of the Excess Profits Tax Act was interpreted by their Lordships of the Supreme Court as indicating a transaction of a loan which imported a positive act of lending coupled with the acceptance by the other side of the money as a loan. In the case before us, whenever the assessee became indebted to Messrs J. K. Kothi, there was no act of lending money by Messrs J.K. Kothi to the assessee, nor was there any acceptance by the assessee of that money as a loan. The actual nature of the transaction was the supply of goods on credit to the assessee by Messrs J. K. Kothi and thereupon the assessee accepted the liability to pay the price of those goods to Messrs J. K. Kothi in future together with interest on that amount of price. Such a transaction could not be a transaction of loan and no question of borrowing of money arose. Con sequently, rule 2‑A of Schedule II of the Excess Profits Tax Act relied upon by the assessee does not apply. The average amount due from the assessee to Messrs ‑J. K. Kothi during the relevant chargeable accounting period can at best be treated as a debt which had to be deducted when computing the average amount of capital in accordance with rule 2 of Schedule II of the Excess Profits Tax Act.
There is, however, one other aspect from which this question may be examined. That aspect is‑whether the amounts, which from time to time became due from the assessee to Messrs J. K. Kothi, could at all be treated as capital employed in the business by the assessee. These were not amounts which were thrown by the assessee into the business as his own contribution or by partners of the firm of the assessee. These amounts really represented liabilities which accrued from time to time against the assessee on account of receiving stock‑in‑trade on credit and the liabilities used to be reduced whenever any cash payments were made by the assessee towards them. The price of the goods received by the assessee company payable to Messrs J. K. Kothi was clearly deductible when calculating the profits for purposes of the Excess Profits Tax Act. As an example, if the assessee had received goods worth one lakh of rupees on credit resulting in an entry show ing one lakh of rupees as the sum due from the assessee to Messrs J. K. Kothi and had thereafter sold Rs. 40,000 worth of goods receiving the sale proceeds in cash, it could not be contended that the amount of one lakh of rupees, no part of which may have been repaid out of the sale proceeds, was capital as well as the sum of Rs. 40,000 which would then be held to be cash received by the assessee in its own hands. It appears to us that the word "capital" used in the Excess Profits Tax Act must connote whatever is put into the business by the owners thereof either in the form of cash or in the form of property, whether the cash is given out of the assets already owned by the owners or as a result of borrowings or incurring of debts. The property also may either be given in the beginning as a contribution by the owner of the business or may subsequently be acquired by purchase. Taking this to be the nature of the capital, the price due in respect of goods purchased on credit from the supplier of goods, which formed the stock‑in‑trade, cannot be said to be capital contributed to the business by the owners or capital employed in the business. In this light, we have to hold that these sums, which were outstanding against the assessee in favour of Messrs J. K. Kothi, never formed the capital of the business at all and so no question of deducting those sums in computation of the average amount of capital could arise. The question of the amounts being admissible deductions could only arise if they could first be treated as capital. If the amounts are excluded on the ground that they are not capital at all, the question of deductions need not be examined and, in our opinion, this average sum claimed as capital by the assessee has been rightly disregarded when computing the average amount of capital employed in the relevant chargeable accounting period by the assessee as it did not represent, at any stage, the capital employed in the business. For these reasons, the first question referred to us by the Tribunal must be answered in the affirmative.
The second question, as framed by the Tribunal, is, in our opinion, very vague, because the Tribunal, in that question, refers to one observation of the Tribunal contained in its remand order dated 20th March, 1937, and to all the observations in the other preceding orders. The question, when framed, should have referred to the particular observation in respect of which our opinion was sought. In these circumstances, Shri Satish Chandra, learned counsel for the assessee, drew our attention to the appellate order of the Tribunal, in paragraph 5 of which the Tribunal had made a reference to an observation which had occurred in the remand order passed by the Tribunal on 20th March, 1947, which was to the following effect;
"If the interest is not handed over, then though J. K. Kothi are the agents of Messrs Hari Shankar Gopal Hari, so far as the appellants are concerned, they must have acted as their bankers only.
Shri Satish Chandra urged that we should express our opinion with reference to this observation which had been made by the Tribunal in its remand order 20th March, 1947. The question raised is whether that observation was merely in the nature of obiter dictum and‑ did not amount to giving any finding of fact relevant for the decision of the appeal which would have been binding on the Tribunal when it finally decided the matter on 29th July, 1947. It appears to us that this particular observation really contains no statement of fact at all nor any decision on any question of law. It is some expression of opinion on the basis of a hypothesis. The observation begins by referring to the possibility that the interest is not handed over and then the opinion is expressed that, if it is not so, then Messrs J. K. Kothi must have acted as bankers of the assessee even though they were agents of Messrs Hari Shankar Gopal Hari. Such an opinion based on an assumption is not a finding which would be binding at any stage.
There is, however, the further fact that the remand order of 20th March 1947, as well as the other remand orders were made by the Tribunal in one single appeal pending before it for purposes of obtaining reports from the Excess Profits Tax Officer. 1n none of these remand orders the appeal was finally disposed of. That appeal remained pending before the Tribunal until it was finally decided by its judgment dated 29th July, 1947. Any observations made by the Tribunal, when sending the case to the Excess Profits Tax Officer for report on facts could not, therefore, bind the Tribunal at the time when it gave its final decision. It is true that the provisions of the Code of Civil Procedure do not apply to income‑tax proceedings but we may take notice of the fact that the remand orders made by the Tribunal were similar in nature to the remand orders made by an appellate Court governed by the Code of Civil Procedure under Order XLI, rule 25 of the Code. They were not remands of the nature envisaged by Order XLI, rule 23 of the Code of Civil Procedure. It is now a well established principle that, if, an appellate Court remands a case under Order XLI, rule 25 of the Code of Civil Procedure, it continues to remain seized of the case during the period that the remand order is given effect to and only gives its decision subsequently when the finding or report called for in the remand order has been received and considered. In these circumstances, the view expressed at an earlier stage of .the case, which has not yet been decided by the appellate Court, do not bind that appellate Court when giving its final decision. On that analogy, in the present case, the Tribunal, when giving its final judgment on the 29th of July, 1947, could not be bound by any observations or findings which may have been recorded at the time of making any of the earlier remand orders. By none of these remand orders had the Tribunal ceased to exercise jurisdiction in the appeal, so that it remained open to the Tribunal to reconsider its views when finally deciding the appeal. This expresses our opinion on the second question.
As a result, the reference is answered in accordance with our views expressed above. Let the record be returned with this opinion to the Tribunal. The Department will be entitled to its costs from the assessee which we fix at Rs. 500.
Reference answered accordingly.
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