K.RAVINDRANATHAN NAIRversusCOMMISSIONER OF INCOME TAX, ERNAKULAM

A                         K. RAVINDRANATHAN NAIR
                                           11.

              COMMISSIONER OF INCOME TAX, ERNAKULAM

                               NOVEMBER 30, 2000

B      [S.P. BHARUCHA, DORAISWAMY RAJU AND RUMA PAL, JJ.]


          Income Tax Act, 1961: Section 37

          Income Tax-Business Expenditure-Deduction of---AY 1972-73-
C Processing of cashew nuts in 10 units-Four of the 10 units situated in one
    State-Two out of the four units owned by assessee and the other two taken
  . on lease-Lock-out declared in four units due to labour problems-
    Subsequently, settlement arrived at-Assessee agreed to pay 5 days ' wages
   for service rendered up to lock-out-Accordingly, assessee incurred certain
D expenditure-Tribunal found that all the 10 units constituted one business
    and allowed the said expenditure as deduction-Validity of-Held : Jn the
    circumstances of the case, the expenditure incurred by the assessee is a
    business expenditure-Hence, assessee is entitled to its deduction.

          The appellant-assessee, an individual, carried on the business of
E   processing cashew nuts in ten units. Four of these units were situated in one
    State. Of these four units, the assessee owned two and two were taken on
    lease. Due to labour problems the assessee declared a lock-out in all these
    four units. Subsequently, the assessee entered into a settlement with the trade
    unions representing the workmen of the units in the State and agreed to pay
F   them for the periods of their service up to the date of the lock-8Ut, five days'
    wages for each year of service. Accordingly, the assessee incurred certain
    expenditure on this account.

         The assessee made a claim for deduction of the said sum during the
    Assessment year 1972-73 under Section 37 of the Income Tax Act, 1961. The
G   Income Tax Officer disallowed the claim. In appeal the Income Tax Appellate
    Tribunal allowed the claim. However, the High Court answered the reference
    against the assessee. Hence this appeal.

         Allowing the appeal, the Court

H                                        244
                    K.R. NAIR v. C.I.T. [BHARUCHA, J.]                      245
      HELD : l. The Tribunal said that it was satisfied that all the I 0 units      A
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 five
days' wages and the business. Since a part of the business had been affected
by labour disputes, for the industrial health of the business as a whole, it was    B
thought just and necessary that the industrial dispute in that one part of the
business was stopped. This was the purpose for which the payment was made
and it was, therefore, incurred for the purposes of the business. (247-D-El

      2.1. The High Court overlooked the cardinal principal that it is the
Tribunal which is the final fact finding authority. A decision on fact of the       C
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. (248-B, q
                                                                                    D
      2.2. Having regard to the finding that the units in the State and the other
units outside the State formed one business, the expenditure must be held to
have been incurred in regard to such business. (248-F)

      2.3. Upon the facts found by the Tribunal, there is no getting away from
the fact that the expenditure incurred by the assessee was a business               E
expenditure and that the assessee was entitled to its deduction under Section
37 of the Income Tax Act, 1961. (248-GI

        CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4475-4476 of
1998.
                                                                                    F
        From the Judgment and Order dated 30.7.84 of the Kerala High Court
in I. T.R. Nos. 229/79 and 74 of 1980.

     S. Ganesh, Pratap Venugopal, P.S. Sudheer and K.J. John for the
Appellant.                                                                          .
      K.N. Shukla, S.W.A. Qadri, S.K. Dwivedi, Bipul Kumar and Ms. Sushma           G
Suri for the Respondent.

        The Judgment of the Court was delivered by

      BHARUCHA, J. We are concerned in these appeals from a decision of
a Division Bench of the High Court ofKerala, with the Assessment Year 1972-         H
      246                     SUPREME COURT REPORTS [2000) SUPP. 5 S.C.R.

 A    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
B             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
C     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
D    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, I 07 was made in
     this behalf.
E
           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
F    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
G 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
H    Revenue considered the decision of the Tribunal on facts to be perverse; in
                    K.R. NAIR v. C.I.T. [BHARUCHA, J.]                      247
other words, that it could not reasonably have been arrived at on the              A
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.
                                                                                   B
       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             C
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   D
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, I07 and the business. Because a part of the business had been        E
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              F
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   G
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          H
    248                      SUPREME COURT REPORTS [2000] SUPP. 5 S.C.R.

A 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
                                                                                        \
B   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 q1se, there was no such question before
C   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
D 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
E   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.
F
           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.

G         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.

H V.S.S.                                                          Appeals allowed.