PREMIER BREWERIES LTD., KARNATAKAversusCOMMISSIONER OF INCOME TAX, COCHIN

                    [2015] 3 S.C.R. 365


       PREMIER BREWERIES LTD., KARNATAKA                       A

                             v.
       COMMISSIONER OF INCOME TAX, COCHIN

              (Civil Appeal No. 1569 of 2007)                  B

                    MARCH 10, 2015

    [RANJAN GOGOi AND PRAFULLA C. PANT, JJ.]

        Income Tax Act, 1961- s.256(2)- Scope of- Issue
                                                               c
regarding entitlement of assessee to the claim of deduction
uls 37 of the Act~ Income Tax Appellate Tribunal gave the
finding in favour of the assessee - Reference uls 265(2)
framing twelve questions - High Court reframed those o
questions and answering the same reversed the finding of
the Tribunal- On appeal, held: While hearing the reference,
High Court exercises advisory jurisdiction hence in exercise
of reference jurisdiction, order of Tribunal cannot be set aside
- However, in the present case, the judgment of the High E
Court shows that the questions arising in the reference had.
specifically been answered- Therefore, the error was of form
and not of su_bstance - The High Court was not at fault by
reframing the initially referred twelve questions because the
reframing did not disturb or reverse the primary facts as found F
by the Tribunal- The reframing of the questions were to the
effect of drawing legal inference from the already recorded
facts - Legal inference drawn from primary facts is eminently
a question of law- No fault can be found with the questions G
reframed or the answers provided.

       Dismissing the appeals and the Special Leave
Petition, the Court

                                                               H
                           365
366       SUPREME COURT REPORTS               [2015] 3 S.C.R.



A        HELD: 1. Setting aside the order of the Tribunal in
  exercise of the Reference Jurisdiction of the High Court
  is inappropriate. While hearing a Reference under the
  Income Tax Act, the High Court exercises advisory
  jurisdiction and does not sit in appeal over the judgment
B of the Tribunal. The High Court has no power to set aside
  the order of the Tribunal even if it is of the view that the
  conclusion recorded by the Tribunal is not correct. [para
  7] [372-A-C]
C      C.P. Sarathy Mudaliar vs. Commissioner of Income
       Tax, Andhra Pradesh 1966 Vol. LXll ITR 576- relied
       on.

         2. In the present case, the High Court while
D hearing the Reference made under Section 256 (2) of the
  Act had set aside the order of the Tribunal. Undoubtedly,
  in the exercise of its Reference Jurisdiction the High
  Court was not right in setting aside the order of the
  Tribunal. However, reading the ultimate paragraph of the
E order of the High Court it is found that the error is one of
  form and not of substance inasmuch as the question
  arising in the Reference has been specifically answered.
  [para 9) [373-D-F]

F     Sudarshan Silks & Sarees vs. Commissioner of
      Income Tax, Kamataka 2008 (6) SCR 456 = 2008
      (12) sec 458 - held inapplicable.

        3. A reading of the twelve questions initially
G framed, and subsequently reframed show that what was
  done by the High Court was to retain three out of twelve
  questions, as initially framed, while discarding the rest.
  Some of the questions discarded by the High Court were
H actually more proximate to the question of perversity of
PREMIER BREWERIES LTD., KARNATAKA v. COMM. OF 367
                INCOME TAX

the findings of fact recorded by the Tribunal, than the A
questions retained. The High Court did not disturb or
reverse the primary facts as found by the Tribunal.
Rather, the exercise performed by the High Court was
one of the correct legal inferences that should be-drawn
on the facts already recorded by the Tribunal. The B
questions reframed were to the said effect. The legal
inference that should be drawn from the primary facts is
eminently a question of law. No question of perversity
was required to be framed or gone into to ans~ver the C
issues arising. In fact, the questions relatable to
perversity were consciously discarded by the High
Court. Therefore, no fault can be found with the
questions reframed by the High Court or the answers
provided. [para 11-12) [376-G-H; 377-A; 378-E-G]         o
  M. Janardhana Rao vs. Joint Commissioner of Income
                           =
  Tax 2005 (1) SCR 874 2005 (2) SCC 324; Swadeshi
  Cotton Mills Co. Ltd. Vs. Commissioner of Income Tax
  1967 (63) ITR 57 and Lachminarayan Madan Lal vs.        E
  Commissioner of Income Tax West Bengal 1972 (86)
  ITR 439 - referred to.

                 Case Law Reference

  2005 (1) SCR 874             referred to      para 6    F

  1966 Vol. LXll ITR 576       relied on        para 7

  2008 (6) SCR 456             held inapplicable para 8
                                                          G
  1967 (63) ITR 57             referred to      para 11

  1972 (86) ITR 439            referred to      para 11

      CIVILAPPELLATE JURISDICTION: Civil Appeal No.
                                                          H
368         SUPREME COURT REPORTS                    [2015] 3 S.C.R.


A     1569 of 2007 etc.

            From the Judgment and Order dated 31.03.2005 of the
      High Court of Kera la at Ernakulam in I. T. R. No. 58 of 1997.

B                                  WITH

      C.A. No. 3214 of2011 & SLP (C) No. 10080 of2014

         Mohan Parasaran, S. Guru Krishnan Kumar, K ..
  Radhakrishnan,A. Raghunath, Srikala Gurukrishna Kumar, A.
C Prasanna Venkat, S. R. Setia, Rupesh Kumar, Vikash Malhotra,
  Anil Katiyar, B. V. Bala ram Das for the Appearir:ig Parties.

            The Judgment of the Court was delivered by

D           PRAFULLA C. PANT, J. 1. Civil Appeal No. 1569 of
   2007 is directed against the judgment and order dated
   31.03.2005 of the High Court of Kerala by which in exercise of
   jurisdiction under Section 256(2) of the Income Tax Act, 1961
   (as it then existed) (hereinafter for short 'the Act') the questions
E reframed by the High Court have been answered against the
   appellant-assessee and in favour of the revenue. The question
   decided by the High Court and relevant to the present appeal
   relates to the entitlement of the assessee to the benefit of
   disallowance of commission purportedly paid by the assessee
F to its commission agents for procurement of order for supply
   of liquor. Following the aforesaid judgment of the Kerala High
   Court, the Karnataka High Court had decided a similar question
   arising in Income Tax Appeal No. 12 of 1999 and Income Tax
G" Appeal Nos. 42, 44, 46 and 47 of 2001, in a like manner i.e.
   against the assessee and in favour of the revenue. Aggrieved
   by the aforesaid orders of the High Court of Karnataka which
   pertains to different assessment years, Civil Appeal No. 3214
   of 2011 and Special Leave Petition (C) No. 10080 of 2014
H have been filed by the assessee. In view of the fact that the
PREMIER BREWERIES LTD., KARNATAKA v. COMM. OF 369
       INCOME TAX [PRAFULLA C. PANT, J.)

decision of the Karnataka High Court in LT.A. No. 12of1999 A
had followed the decision of the Kerala High Court impugned
in Civil Appeal No. 1569 of 2007 and the decision of the
Karnataka High Court in the subsequent appeals before it
(impugned in Civil Appeal No. 3214 of2011 and Special Leave
Petition (C) No. 10080 of 2014) essentially follows the decision B
rendered in LT.A. No. 12of1999, it will be necessary first to
deal with the issues arising in Civil Appeal No. 1569 of 2007
and depending on the decision therein the remaining appeals
will have to be accordingly answered.
                                                                 c
       2. Succinctly, the appellants are engaged in the
manufacture and sale of beer and other alcoholic beverages.
Certain States like Kerala and Tamil Nadu had established
marketing corporations which were the exclusive wholesalers
of alcoholic beverages for the concerned State whereby all
                                                                  0
manufacturers had to compulsorily sell their products to the
State Corporations which, in turn, would sell the liquor so
purchased, to the retailers. It is pleaded by the appellants that
manufacturers of beverages containing alcohol have to engage E
services of agents V{hO would co-ordinate with the retailers
and State Corporations to ensure continuous flow/supply of
goods to the ultimate consumers. And on that ground they
sought deduction under Section 37 of the Act.
                                                                 F
       Civil Appeal No. 1569 of 2007

       3. The claim made by the assessee in the facts noted
above was disallowed by the Assessing Officer by order dated
29.01.1993. The said order of the Assessing Officer was G
confirmed by the Commissioner of Income Tax (Appeals) by
order dated 29.10.1993. The assessee had moved the learned
Income Tax Appellate Tribunal, Cochin Bench against the
aforesaid orders. The learned Tribunal took the view that the
assessee was entitled to claim for deduction. The said view H
370             SUPREME COURT REPORTS                     [2015] 3 S.C.R.



A     of the learned Tribunal has been reversed by the High Court in
      the Reference made to it under Section 256 (2) of the Act.

      4. We have noticed that in the Reference made to the High
      Court by the learned Tribunal under Section 256(2) as many
B     as 12 different questions were framed and referred. The High
      Court reframed the questions in the following manner.

            "(i) Whether, on the facts and in the circumstances of
                 the case did the assessee discharge the burden
c                of proof that lay on it in support of the claim for Rs.
                 7,75,602/-?

            (ii) Whether, on the facts and in the circumstances of
                 the case, did the assessee discharge the burden
o                of proof that lay on it in support of the claim for Rs.
                 22,72,192/-?

        (iii) Whether, on the facts and in the circumstances of
       1
        '     the case, the Tribunal is right in law and fact in
E             holding that the payment to Golden Enterprises was
              only for business purpose or and was in business
              interest?"

          The questions reframed by the High Court were in
F   respect of the payments made to Mis. R.J. Associates and
    one Golden Enterprises who, the assessee claimed, had .
    rendered services as commission agents.

         · 5. Though one item of claim for deduction pertained to
G the corporate management charges paid by the assessee to
  U.B. Limited and an issue pertaining to the said claim was
  one of the twelve questions initially framed in the Reference,
  in the questions reframed by the High Court, the said question
  does not find any mention. Be that as it may, the High Court
H on the reasons recorded in its order dated 31.03.2005 thought
PREMIER BREWERIES LTD .. KARNATAKA v. COMM. OF 371
       INCOME TAX [PRAFULLA C. PANT, J.)

it proper to reverse the findings and conclusions recorded by A
the learned Tribunal. Eventually, in the ultimate paragraph of
its order the High ~ourt after recording the conclusion that the
"Tribunal has committed a grave error in not properly
understanding the transaction entered into between the
assessee and others" set aside the order of the Tribunal and B
upheld the order of the Commissioner (Appeals) and answered
the questions in favour of the revenue by holding that the
assessee had not discharged the burden so as to entitle it to
deduction under Section 37 of the Act. Aggrieved, this appeal C
has been filed by the assessee.

        6. Three propositions have been advanced before us
on behalf of the contesting parties. The first is whether the High
Court could have reframed the questions after the conclusion D
of the arguments and that too without giving an opportunity to
the assessee. The answer to the above question, according
to the appellant, is to be found in M. Janardhana Rao vs.
Joint Commissioner of Income Tax1 wherein this Court has
held that questions of law arising in an appeal under Section E
260-A of the Act must be framed at the time of admission and
should not be formulated after conclusion of the arguments.
Though the decision in M. Janardhana Rao (supra) is in the
context of Section 260-A of the Act, it is urged that the same
principles would apply to the exercise of jurisdiction under F
Section 256 of the Act (as it then existed) particularly as the
jurisdiction under Section 256 is more constricted than under
Section 260-A of the Act.

       7. The second issue raised is the jurisdiction of the High G
Court to set aside the order of the Tribunal in the exercise of
its Reference Jurisdiction. The point is no longer res integra
having been settled in C.P. Sarathy Muda/iar vs.
Commissioner of Income Tax, Andhra Pradesh2 wherein
                                                                 H
1 (2005) 2 sec 324
372         SUPREME COURT REPORTS                  (2015) 3 S.C.R.



A   this Court has taken the view that setting aside the order of the
    Tribunal in exercise of the Reference Jurisdiction of the High
    Court is inappropriate. This Court had observed that while
    hearing a Reference under the Income TaxAct, the High Court
    exercises advisory jurisdiction and does not sit in appeal over
B · the judgment of the Tribunal. It has been further held that the
    High Court has no power to set aside the order of the Tribunal
    even if it is of the view that the conclusion recorded by the
    Tribunal is not correct.
c            8. The third question that has been posed for an answer
  before us is with regard to the correctness of the manner of
  exercise of jurisdiction by the High Court in the present case.
  Learned counsel for the assessee has elaborately taken us
  through the judgment of the High Court to contend that the
0
  evidence on record has been re-appreciated with a view to
  ascertain if the conclusions recorded by the Tribunal are
  correct. The manner of exercise of jurisdiction, in the absence
  of any question of perversity of the findings of the learned
E Tribunal has been assailed before us. Reliance has been
  placed on para 16 of the judgment of this Court in the case of
  Sudarshan Silks & Sarees vs. Commissioner of Income
  Tax, Kamataka 3 which is in the following terms.

F      "16. In the present case, the question of.law referred to
       the High Court for its opinion was, as to. whether the
       Tribtmal was right in upholding the findings of the CIT
       (Appeals) in canceling the penalty levied under
       Section 271(1)(c). Question as to perversity of the
G      findings recorded by the Tribunal on facts was n'either
       raised nor referred to the High Court for its opinion. The
       Tribunal is the final court of fact. The decision of the
       Tribunal on the facts can be gone into by the High Court
       in the reference jurisdiction only if a question has been
H   2 1966 Vol. LXll ITR 576
    3 c2008J 12 sec 458
    PREMIER BREWERIES LTD., KARNATAKA v. COMM. OF 373
           INCOME TAX [PRAFULLA C. PANT, J.]

      referred to it which says that the finding arrived at by the   A
      ·Tribunal on the facts is perverse, in the sense that no
      reasonable person could have taken such a view. In
      reference jurisdiction, the High Court can answer the
                                                        a
      question of law referred to it and it is only when finding
                                                                     B
      of fact recorded by the Tribunal is challenged on the
      ground of perversity, in the sense set out above, that a
      question of Jaw can be said to arise. Since the frame of
      the question was not as to whether the findings recorded
      by the Tribunal on facts were perverse, the High Court
                                                                     c
      was precluded from entering into any discussion
      regarding the perversity of the finding of fact recorded
      by the Tribunal."

             9. In the present case, the High Court while hearing the
    Reference made under Section 256 (2) of the Act had set aside D
    the order of the Tribunal. Undoubtedly, in the exercise of its
    Reference Jurisdiction the High Court was not right in setting
    aside the order of the Tribunal. However, reading the ultimate
    paragraph of the order of the High Court we find thatthe error E
    is one of form and not of substance inasmuch as the question ·
    arising in the Reference has been specifically answered in
    the following manner.

      "We therefore set aside the order of the Tribunal and
                                                                     F
      uphold that of the Commissioner (Appeals) and answer
      the questions in favour of the Revenue by holding that
      the assessee had not discharged the burden that it is
      entitled to deductions under Section 37 of the Income
      TaxAct. Reference is answered accordingly."                    G
•
            The reliance placed on behalf of the appellant-
    assessee on Sudarshan Silks & Sarees (supra) therefore
    is of no effect.
                                                                     H
374          SUPREME COURT REPORTS                      [2015] 3 S.C.R.



A           10. The twelve questions referred to the High Court
      under Section 256(2) of the Act may now be set out below:

        1) W~ether, on the facts and in the circumstances of
           the case and also in view of the prohibition of outside
B          service by KSBC, was the Tribunal right in law and
           fact in allowing the expenditure of RS. 7, 75,602/- by/
           and/ deleting the addition of Rs. 7, 75,602/-?

        2)    Whether, on the facts and in the circumstances of
c            the case, did the Tribunal have any materials to show
             that the above expenditure of Rs. 7,75,602/- was
             wholly and exclusively for the assessee's business?

        3) Whether, on the facts and in the circumstances of
D            the case, did the assessee discharge the burden of
             proof that lay on it in support of the claim for
             Rs.7,75,602/-?

        4)    Whether, on the facts and in the circumstances of
E            the case, the Tribunal is right in law and fact in
             allowing the expenditure of Rs.22, 72, 192/- by/and/
             deleting the addition of Rs.22, 72, 192/-?

        5)    Whether, on the facts and in the circumstances of
             the case, did the Tribunal have any materials to s.how
F
             thatthe above expenditure of Rs. 22,72, 192/-was
             wholly and exclusively for the assessee's business?

        6)    Whether, on the facts and in the circumstances of
             the case, did the assessee discharge the burden of
G
             proof that lay on it in support of claim for Rs.
             22, 72, 192/-?

        7)    Whether, on the facts and in the circumstances of
             the case, the Tribunal is right in law and fact in holding
H
PREMIER BREWERIES LTD., KARNATAKA v. COMM. OF 375
       INCOME TAX [PRAFULLA C. PANT, J.]

      that:                                                    A
       "the engagement of Golden Enterprises for carrying
      out certain support services was in the business
      interest" and is not the above finding also based on
      surmised and conjectures like "that two sales officers   B
      of UB Group stationed at Madras did not do or at
      any rate could not have done any.sub line service at
      the unit level" wrong, unreasonable and unsupported
      by materials?
                                                               c
 8)    Whether, on the facts and in the circumstances of
      the case is the increase in sales noted in paragraph
      10 (page 18) of the order of the Tribunal based on
      the increase in the quantum or increases in price
      and ifthe increase in sales is based on an increase      D
      in price is not the same an irrelevant consideration
      and the order vitiated?

 9)    Whether, on the facts and in the circumstances of
      the case, should not the Tribunal have considered        E
      the contention of the Revenue that "ultimately Golden
      Enterprises has in turn appointed one Abhinava
      Agencies for doing such work and therefore Golden
      Enterprises did not have the necessary infrastructure
      to do the services" in its correct prospective without   F
      side treching the issue by observing ''what happened
      between Golden Enterprises and Abhinava
      Agencies is not of the concern of the
      assessee .... "and is not the above finding wrong and
                                                               G
      lacks prospective when the case behind entrustment
      with Golden Enterprises was for lack of infrastructure
      with the assessee?

 10) Whether, on the facts and in the circumstances of
                                                               H
376        SUPREME COURT REPORTS                      [2015] 3 S.C.R.


A          the case and reason behind entrustment by the
           assessee with Golden Enterprises being for lack of
           infrastructure with the assessee, will such an
           assessee entrust the job to the one who lacks
           infrastructure and to the one who in turn entrust to
8          another agency and are not the order and the
           findings, without adverting to the above aspects,
           wrong and hence vitiated?

       11) Whether, on the facts and in the circumstances of
c          the case, the Tribunal is right in law and fact in holding
           that "considering the need for such services and the
           opportunity cost of having a regular marketing force,
           the payment to Golden Enterprises was only for
           business purposes and was in business interest"
D
           and are not above findings wrong, unreasonable,
           unsupported by materials and based on surmise and
          conjectures?

      12) Whether, on the facts and in the circumstances of
E         the case,

           i) The assessee is entitled to claim any deduction
           under the head corporate and management charges?

F          ii) Should not the Tribunal have disallowed the entire
           claim for Rs. 14,36,200/-

         11. A reading of the questions initially framed and
  subsequently reframed show that what was done by the High
G Court is to retain three out of twelve questions, as initially
  framed, while discarding the rest. Some of the questions
  discarded by the High Court were actually more proximate to
  the question of perversity of the findings of fact recorded by
  the learned Tribunal, than the questions retained. From a
H
PREMIER BREWERIES LTD., KARNATAKA v. COMM. OF 377
       INCOME TAX [PRAFULLA C. PANT, J.]

reading of the Order of the High Court it is clear thatthe High A
Court examined the entitlement of the appellant assessee to
deduction/disallowance by accepting the agreements
executed by the assessee with the commission agents; the
affidavits filed by C. Janakiraman and ShriA.N. Ramachandra
Nayar, husbands of the two lady partners of RJ Associates B
and also the payments made by the assessee to RJ Associates
as well as to Golden Enterprises. The question that was posed
by the High Court was whether acceptance of the agreements,
affidavits and proof of payment would debar the assessing C
authority to go into the question whether the expenses claimed
would still be allowable under Section 37 of the Act. This is a
question which the High Court held was required to be
answered in the facts of each case in the light of the decision
of this Court in Swadeshi Cotton Mills Co. Ltd. Vs. o
Commissioner of Income Tax' and Lachminarayan
Madan Lal vs. Commissioner of Income Tax West
Bengaf'. In fact the High Court noted the following observations
of this Court in Lachminarayan (supra):
                                                                   E
   "The mere existence of an agreement between the
   assessee and its selling agents or payment of certain
   amounts as commission, assuming there was such
   payment, does not bind the Income Tax Officer to hold
   that the payment was made exclusively and wholly for            F
   the purpose of the assessee's business. Although there
   might be such an agreement in existence and the
   payments might have been made. It is still open to the
   Income tax Officer to consider the relevant facts and
   determine for himself whether the commission said to            G
   have been paid to the selling agents or any part thereof
   is properly deductible under Section 37 of the Act."

        12. There were certain Government Circulars which
4 1967 (63) ITR 57                                                 H
5 1972 (86) ITR 439
378         SUPREME COURT REPORTS                  [2015] 3 S.C.R.



A   regulated, if not prohibited, liaisoning with the government
    corporations by the manufacturers for the purpose of obtaining
    supply orders. The true effect of the Government Circulars
    along with the agreements between the assessee and the
    commission agents and the details of payments made by the
B assessee to the commission agents as well as the affidavits
    filed by the husbands of the partners of M/s. R.J. Associates
    were considered by the High Court. The statement of the
    Managing Director of Tamil Nadu State Marketing Corporation
C Ltd. (TASMAC Ltd.), to whom summons were issued under
    Section 131 of the Act, to the effect that M/s. Golden
    Enterprises had not done any liaisoning work with TASMAC
    Ltd. was also taken into account. The basis of the doubts
    regarding the very existence of R.J. Associates, as entertained
o   by the Assessing Officer, was also weighed by the High Court
  · to determine the entitlement of the assessee for deduction
    under Section 37 of the Act. In performing the said exercise
    the High Court did not disturb or reverse the primary facts as
    found by the learned Tribunal. Rather, the exercise performed
E is one of the correct legal inferences that should be drawn on
    the facts already recorded by the learned Tribunal. The
    questions reframed were to the said effect. The legal inference
    that should be drawn from the primary facts, as consistently
    held by this Court, is eminently a question of law. No question
F of perversity was required to be framed or gone into to answer
    the issues arising. In fact, as already held by us, the questions
    relatable to perversity were consciously discarded by the High
    Court. We, therefore, cannot find any fault with the questions
G reframed by the High Court or the answers provided.

             13. For the aforesaid reasons, Civil Appeal No. 1569
      of 2007 has to fail and it is accordingly dismissed.

      Civil Appeal No.3214 of 2011 and SLP(C) No.10080 of
H
PREMIER BREWERIES LTD., KARNATAKA v. COMM. OF 379
       INCOME TAX [PRAFULLA C. PANT, J.]

                                                                  A

      14. In the light of the above, Civil Appeal No.3214 of
2011 and SLP (C) No.10080 of 2014 are also dismissed.

Kalpana K. Tripathy                  Appeals and SLP dismissed.   B